Australia's bank chief warns low wages growth will hurt econ­omy

The Guardian Australia - - Headlines - Gareth Hutchens

Australia could be­come mired in a low-wage, low-in­fla­tion en­vi­ron­ment if in­comes keep grow­ing at near record-low lev­els, the Re­serve Bank gover­nor has warned.

In a speech that will dampen ex­pec­ta­tions of strong wages growth in com­ing years, RBA gover­nor Philip Lowe said he was still try­ing to fig­ure out why coun­tries such as Australia were not ex­pe­ri­enc­ing the tra­di­tional in­crease in wages growth in re­sponse to tight­en­ing labour mar­kets.

He said he still be­lieved wages could even­tu­ally start grow­ing at an an­nual rate of 3% again, rather than the cur­rent low of 2%, but it will be a process that could take years.

“We are still try­ing to un­der­stand fully why things look dif­fer­ent in so many coun­tries and how per­sis­tent it will be,” he told the Aus­tralian In­dus­try Group on Wed­nes­day.

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“Part of the story is likely to be changes in the bar­gain­ing power of work­ers and an in­crease in the sup­ply of work­ers as the global econ­omy be­comes more in­te­grated.

“But an­other im­por­tant part of the story lies in the na­ture of re­cent tech­no­log­i­cal progress … the ben­e­fits of new tech­nolo­gies are ac­cru­ing un­evenly across the com­mu­nity.”

In April, Lowe had told a busi­ness au­di­ence in West­ern Australia that the econ­omy’s painful run of record low wages growth may have fi­nally troughed, and that wages could be ex­pected to grow more quickly from this point.

But on Wed­nes­day he cau­tioned that the process could take time.

He said per­sis­tently slow wages growth was con­tribut­ing to per­sis­tently weak in­fla­tion, and if wages growth re­mained near its cur­rent rate for an “ex­tended pe­riod”, the rate of in­fla­tion could fail to av­er­age at the mid­point of the RBA’s tar­get in com­ing year.

“Wages growth of 2% and rea­son­able labour pro­duc­tiv­ity growth are un­likely to make for 2.5% in­fla­tion on a sus­tained ba­sis,” he said.

“Some pick-up in wages growth would be a wel­come devel­op­ment. It would help de­liver a rate of in­fla­tion con­sis­tent with the tar­get, it would help with the debt sit­u­a­tion and it would add to our sense of shared pros­per­ity.

“[But] this pick-up is ex­pected to be only grad­ual given both the spare ca­pac­ity that still ex­ists in our labour mar­ket and the struc­tural fac­tors at work,” he said.

Given the dif­fi­cult task of fully un­der­stand­ing cur­rent wage dy­nam­ics, Lowe said Australia needed to fo­cus on lift­ing ed­u­ca­tion and re­search lev­els, and im­prov­ing worker-re­lated train­ing, be­cause that was his­tor­i­cally a way to boost pro­duc­tiv­ity.

“Ul­ti­mately, the ba­sis for sus­tained growth in real wages is that we be­come more pro­duc­tive as a na­tion,” he said.

“The re­cent pro­duc­tiv­ity data are dif­fi­cult to in­ter­pret. De­spite a pos­i­tive out­come in the most re­cent quar­ter, there has been no net in­crease in mea­sured labour pro­duc­tiv­ity over the past two years.”

Lowe said the de­sign of the tax sys­tem, the pro­vi­sion and pric­ing of in­fra­struc­ture, and Aus­tralian busi­ness cul­ture around in­no­va­tion were also im­por­tant el­e­ments in the pro­duc­tiv­ity de­bate.

“We need to keep all these ar­eas on the radars of both govern­ment and busi­ness if we are to build on the cur­rent pros­per­ity that we cur­rently en­joy,” he said.

Pho­to­graph: Dean Lewins/AAP

The gover­nor of the Re­serve Bank of Australia, Philip Lowe, says Australia could fall into a low in­fla­tion trough.

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