Dismay at RBA as wages growth goes backwards

RBA governor Philip Lowe. Picture: Getty Images

The person most disappointed with Wednesday’s sluggish wages growth figure is surely the Reserve Bank Governor. Real wages are now going backwards at 2.7 per cent.

Until he raised the cash rate by 25 basis points earlier this month, Philip Lowe and his board was doing everything it could think of to encourage wages to rise — from the setting the cash rate to near zero to governor’s own frequent jawboning. Many in the markets and other economists believe he resisted a rise in the cash rate for too long.

The valiant hope was that the ongoing fall in unemployment, currently sitting at 4.0 per cent would create enough tension in the jobs market to stir wages growth.

Yet despite the growing anecdotal evidence of rising pay packets, the lift from 2.3 per cent to 2.4 per cent for wages over the year to March was meagre.

After all the effort, this is the result. And the window to deliver robust wages growth through monetary settings has gone.

Previously the RBA had suggested it would wait until wages growth was 3-4 per cent before raising rates. But on May 3 the bank clearly felt compelled to begin a tightening cycle.

Inflation has risen to 5.1 per cent in Australia and internationally it is already much higher than that. This inflation pressure almost guarantees another rate rise next month from the RBA.

It is academic to ask whether increases in wages would be moving faster if record low rates had continued.

A far more relevant question is what happens to wages if Labor is elected on Saturday?

What Labor sees is that the Phillips Curve governing the economic relationship between the unemployment rate and wage rates is no longer working. It may be because of giant leaps in technology or because enterprise bargaining agreements lock in wage rates for longer periods.

Whatever the reason, there is a cost of living crisis with real wages going backwards. This justifies urgent intervention and productivity is a second order issue.

The intervention came last week when Anthony Albanese put Labor’s support behind a 5.1 per cent minimum wage rise to match inflation.

Back on May 3, RBA minutes reveal that the board agreed while waiting for the wages data released on Wednesday would be useful, “the recent evidence on wages growth from the Bank’s liaison and business surveys was clear”.

HSBC chief economist Paul Bloxham offers two explanations for RBA thinking. The first is that the bank has reduced its emphasis on the wages price index, although he notes that under questioning the Governor later indicated that this was not the case.

The second option is that the shock first quarter inflation figure overruled the need to see a sufficient lift in wages growth before moving on interest rates. Inflation trumps wages once more.

Within Wednesdays quarterly wages growth read of 0.7 per cent, Bloxham notes particular weakness in retail, accommodation and food services at 0.3 per cent. “This is interesting, given the very strong sales growth of late and the ongoing revival of travel and hospitality. It could be that the wages momentum has only really started to get going in the past couple of months” he says.

Down on the retail shop floor, there are just not enough workers. Paul Zara, head of the peak retail lobby group the ARA says in retail alone, he is 29,000 jobs short with no prospect of regaining the overseas workers and students support.

On Wednesday the ARA backed calls to make employment income exempt from the age pension income test, which could lure older Australians back into the workforce.