Experts back Reserve Bank governor Philip Lowe’s wage caution

Leading economists have backed Reserve Bank governor Philip Lowe’s warning of a potential 1970s-style price spiral.

ACTU secretary Sally McManus says there is room in corporate budgets for bigger pay rises to maintain workers’ living standards.

Leading economists have backed Reserve Bank governor Philip Lowe’s warning of a potential 1970s-style price spiral, but said it was too early to tell whether this year’s 5.2 per cent minimum wage increase would drive more ambitious pay claims.

Dr Lowe on Tuesday said wages growth of about 3.5 per cent over the longer term was consistent with the bank achieving low and stable inflation while keeping the jobless rate around its 48-year lows of below 4 per cent.

“We can have increases in some parts of the labour market bigger than that for a short period of time,” he said.

Reserve Bank governor Philip Lowe. Picture: Getty Images

“But if wage increases become common in the 4 and 5 per cent range … then it’s going to be harder to return inflation to 2.5 per cent. There, we’re in a world where the economy will have to slow more, and perhaps the unemployment rate would need to rise.”

ACTU secretary Sally McManus, however, said there was clearly room in corporate budgets for bigger pay rises to maintain workers’ living standards.

“Wage claims are always considered in the context of cost-of-living increases and broader economic conditions.

“But with profits at record ­levels, productivity high and ­labour’s share of GDP at an all-time low, working people cannot continue to see real pay cuts after a decade of record low wage growth under the previous government,” Ms McManus said.

Economists echoed Dr Lowe’s comments that there was no issue with the minimum wage umpire’s decision, but the risk was that oversized pay claims became entrenched in future negotiations between workers and employers, fuelling a wage-driven inflationary spiral.

Employment Minister Tony Burke. Picture: AAP

Westpac chief economist Bill Evans said: “For me, the issue (with the 5.2 per cent minimum wage decision) is, OK, you had this couple of years of negative real wages growth – nothing wrong with a catch-up.

“What you don’t want to do is entrench the psychology of 5s in the system – and that is what happened in the 70s.”

Mr Evans said there were 4.1 million Australian workers on two or three-year collective bargaining agreements.

“Some of those (agreements) would have been struck last year, and when they do mature, they will slot into bigger numbers,” he said.

Mr Evans said the central bank would be hoping that these re­negotiated outcomes would be for pay increases of about 3.5 per cent because “anything well above that is where you have the issue”.

Barrenjoey chief economist Jo Masters said a worker receiving a big pay rise this year would ­struggle to accept a much lower increase next year, even if the economic backdrop had changed significantly.

“What we do know is that when medium-term inflation expectations rise and that starts to get reflected in wage growth, it’s very hard to put that back,” Ms Masters said.

“The economics tells you that you really need businesses and individuals alike to look through the supply shock, because it’s going to be very hard for real wages not to fall this year,” she said.

“But the hope is that if you don’t spruik consumer demand by too much through wage increases, you get to demand matching ­supply and inflation moderates towards 2.5 per cent, which is consistent with 3.5 per cent wages – and that’s where everyone ­benefits.”

Ms Masters said the surest way to obtain sustainable real wage growth was by boosting ­productivity.

Employment Minister Tony Burke on Wednesday said his government’s recent submission to the Fair Work Commission for a wage increase to keep up with a 20-year high inflation rate of 5.1 per cent was premised on addressing the falling living standards among some of the country’s lowest paid workers.

Mr Burke said “we have never said or implied that there’d be an ongoing matching at wherever headline inflation was”.

“But we will always be mindful of what the impact is for the ­people who have the least resources, as you’d expect,” he said.