Why productivity growth matters

Wages growth was robust in the December quarter, the Reserve Bank of Australia Board noted in minutes from its monetary policy meeting a fortnight ago. While growth in labour costs per unit of output remained “very high”, the current level of wages growth remained consistent with the inflation target of 2-3 per cent, with an important caveat: only on the assumption that productivity growth increased to around its long-run average. There could be “implications for monetary policy” if productivity did not pick up as assumed, the board noted. In other words, improving productivity will help hold down inflation and therefore interest rates.

The board did not explicitly consider lifting the cash rate from 4.35 per cent at its March meeting, the minutes reveal, because recent economic data had given it confidence “still high” inflation was tracking lower. That is welcome relief for home and business borrowers who have been “under the pump”, as Jim Chalmers says, as a result of 13 increases in rates since May 2022. For some borrowers, the board noted, the pain of higher rates will arrive later this year as more fixed-rate loans roll on to higher rates. Analysts believe the minutes point to a lowering of interest rates by the board by November, or possibly September. But for their part, board members agreed it was not yet possible “to either rule in or out future changes in the cash rate target”, as Patrick Commins reports. A risk remained, the board noted, that inflation would take longer than expected to return to target – if aggregate demand exceeds supply for longer than expected or productivity growth did not increase sustainably.

To that end, productivity growth needs to be baked in, as much as possible, to upcoming decisions on the minimum wage, award rates and, especially, new financial year enterprise bargaining agreements. The ACTU is pushing for a 5 per cent rise in the minimum wage, well above inflation that rose 3.4 per cent during the year to January. In the current economic climate, that claim, which has some ambit built in, is not responsible. As Ewin Hannan reports, the Council of Small Business Organisations Australia, representing 2.5 million small businesses that employ five million people, is lobbying for a sensible 2-3 per cent minimum wage rise, in line with the RBA’s inflation target. With inflation on the wane, employment strong and lower interest rates in the offing, the economy is on the right track. That is a good reason to keep wages growth steady and affordable, and promote productivity and economic growth.