On Wednesday the Bureau of Statistics will release the latest wages data. It will, as with the GDP figures due next month be massively affected by the lockdowns in the south-eastern states. But the problem of low wages goes well beyond temporary lockdown.
Amid all the talk of rising inflation and the likelihood of the Reserve Bank increasing interest rates, one thing has frequently been overlooked – the RBA is as concerned about rising wages as it is about prices.
When announcing the latest decision on monetary policy on Melbourne Cup day, the RBA noted that “wages growth at the end of 2023 is expected to be running at 3%. While this is higher than it is now, it is still below the average over the two decades to 2015.”
And the pertinent point is that 3% wages growth is not enough to warrant the RBA lifting interest rates. Because if wages are growing at just 3%, inflation is likely to still be in the lower part of the RBA’s target range of 2% to 3%.
If you want to know what wages growth the Reserve Bank is after we need only refer to governor Philip Lowe’s own comments to the House economics committee in 2018.
It is a level of wages growth not seen since 2012 – through the entirety of the Abbott-Turnbull-Morrison period of government.
The target is 3.5%.
This not a random number Lowe plucked out of the air. It is based on a solid economic principle that wages should grow at the level of inflation plus the growth of productivity.
As Lowe told the committee in 2018: “I think wages in Australia should be increasing at three point something. The reason I say that is that we are trying to deliver an average rate of inflation of 2.5%. I’m hoping labour productivity growth is at least one per cent – and I’m hoping we can do better than that – but 2.5 plus one equals 3.5.”
If the graph does not display please click here
Because inflation is targeted and remains relative stable, this means the key to wages growth is productivity.
The problem is that while this is a nice theory, over the past decade or so (and even back to the mining boom) wages have grown by less than the combination of productivity and inflation growth:
If the graph does not display please click here
In the past decade, inflation has risen 20% and market-sector productivity (ie excluding education, health and public administration) has increased 15%. But in that time private sector wages have only gone up 25%.
In effect that has covered inflation growth, but workers have not been adequately rewarded for their increased productivity:
If the graph does not display please click here
So when we have low productivity growth there is little prospect of improved wages growth for workers.
On Monday the Bureau of Statistics released its latest estimates for industry-level multifactor productivity. Multi-factor productivity basically examines how effectively labour makes use of new machinery and other “capital” investments.
The story of 2019-20 is not good. Smashed by the bushfires and then the pandemic, multifactor productivity fell in 11 out of 16 market-sector industries:
If the graph does not display please click here
But while a large part of that was due to the pandemic, which drastically reduced output while notionally keeping people employed, the problem is 2019-20 was not just a one-off.
While it was the worst for over a decade, the number of industries each year producing multifactor productivity growth has now been low for three years. The last time a majority of the 16 market-sector industries increased productivity was in 2016-17:
If the graph does not display please click here
This highlights that we have a massive wage crisis in this country that is a factor of two aspects – the first is slowing productivity growth. The second is that workers are not getting rewarded for the productivity growth they do produce.
The Reserve Bank wants wages to grow at 3.5% each year. But unless productivity growth increases and the industrial relations system rewards workers appropriately, that will not happen.
