How to really fix Australia's low wage growth challenge

By David Robertson. Published at Oct 4, 2019, in Features

The lack of wages growth remains the missing link between Australia’s growing economy and building household wealth, so how can we fix it?

Recent income tax cuts are a good short-term policy response as they will work to tackle the effects of bracket creep, increase disposable income and encourage retail spending. Meanwhile, lower interest rates should encourage credit growth. However, there are limits to the effectiveness of monetary policy, especially as we get closer to a zero-base rate.

In some respects, we shouldn’t be surprised by stable wages. Low levels of inflation, low outright interest rates and a relatively slow pace of economic growth have helped create this. However, low wages are also a strong indicator of stagnant productivity. Why?

The simplest explanation is spare capacity in labour markets. Wages typically rise in tight job conditions, when employers struggle to access suitable labour. But, when there is spare capacity - as there is now due to technological disruption and global trends - workers feel less empowered to bargain for higher wages, as evidenced by current underemployment rates, which have been rising as unemployment has fallen.

In 2017, the RBA had estimated an unemployment rate around five percent for “full employment”, but recently it revised its estimates down to around 4.5 percent. Therefore, the intent of the recent rate cuts is to lift employment and drive wages growth. However, to avoid a more permanent state of low inflation and stagnant wages - which Japan has experienced for decades - we need fiscal stimulus, structural reform and a range of initiatives to drive productivity growth.

Fiscal stimulus can be delivered by tax cuts, but more lasting and compelling fiscal support can best be delivered by Government investment in infrastructure. As the RBA noted recently, the Australian Government can now borrow at its lowest rate since Federation - 118 years ago! Given our AAA credit rating and the arrival of a sooner than expected budget surplus, this seems an obvious solution.

At the same time, structural reform can help drive more permanent increases to productivity and wages. Educational reforms have delivered excellent results around the world, and the pace of technological change makes this even more compelling today. Investment in human capital, healthcare and the creation of more efficient energy markets should be top priorities.

Australia needs all levels of government to embrace initiatives to support the jobs market, boost productivity and promote sustainable population growth in regional areas.

This strategy will be more effective than rate cuts alone, which - by themselves - risk perpetuating low inflation, low economic growth and low wages growth, for longer.

David Robertson is Head of Economic and Market Research, Bendigo and Adelaide Bank.

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