Extract from ABC News
Analysis
By business reporter David Taylor
The Reserve Bank made an admission this week: its policies, so far, aren't achieving their key targets.
"Despite the strong recovery in the economy and jobs, inflation and wage pressures are subdued," RBA governor Philip Lowe noted in his Monetary Policy Decision statement on Tuesday.
What does "subdued" mean? Take your pick: depressed, soft or restrained.
In other words, broadly speaking, the prices of goods and services in the economy are barely budging, and very few Australians are enjoying fatter pay packets.
This is despite the Reserve Bank pushing interest rates to all-time lows and flooding the economy with hundreds of billions of dollars in new money.
Something's amiss here, especially when economic figures from the Bureau of Statistics show the economy is now bigger than it was pre-pandemic, and the unemployment rate has fallen around 2 percentage points since its peak in July last year.
However, the prices of stocks and property are rising, and at a fair clip too.
It's worthwhile asking the question: if the Reserve Bank's policies have so far not achieved what it wants to see – inflation consistently rising between 2 and 3 per cent, and wage growth north of 3 per cent, will they ever lead to tangible benefits for most Australians, or will only a select few ultimately gain from them?
And this isn't just a problem that's arisen since the pandemic. It's been going on for years.
Wage growth isn't budging
There was some upward pressure on wages in both the public and private sectors at the turn of the century.
Wage growth then began to stagnate.
Since the early part of last decade, wage growth has been abysmal.
Pay packets took another blow during the pandemic as the unemployment rate soared and many pay packets in both the private and public sectors were frozen or cut in size.
Alison Pennington is a senior economist with the Centre for Future Work – a branch of the left-leaning Australia Institute thinktank.
She says the forces holding wage growth down are strong and are likely to remain in place for some time.
Ms Pennington also notes that there's been a "collapse of collective bargaining coverage".
This is an important point because collective bargaining is a key mechanism for many workers to physically sit down with their boss and ask for a pay rise in a coordinated way.
Centre for Future Work research from 2018 showed the number of private sector employees covered by Enterprise Agreements (EA) had dropped by 34 per cent since end-2013 (peak year), a decline of 662,461 employees.
There have also been significantly fewer industrial disputes since a surge in the late 1980s and early 1990s.
There's an obvious conclusion to draw here: more workers are now fighting for higher pay on their own, and are not getting very far in that regard.
The 'tight' labour market argument
In recent years the Reserve Bank and the Coalition have argued there's likely to be upwards pressure on wage growth as the unemployment rate falls.
Indeed, earlier this year Treasurer Josh Frydenberg made a commitment to try and drive the headline unemployment rate down to between 4.5 and 5 per cent.
The belief is that the Non-Accelerating Inflation Rate of Unemployment (NAIRU), is somewhere in this unemployment ballpark.
That is, below NAIRU (say 4.5 per cent, for example), inflation and wage pressures will begin to build.
But since the height of the pandemic, the unemployment rate has fallen from 7.4 per cent to 5.5 per cent (nearly 2 percentage points) and neither inflation, nor wage growth, have moved materially in that time.
They've remained "subdued". Whether going below the NAIRU shifts the dial remains to be seen.
Some economists argue the key to fattening pay packets is to drive the underemployment rate (which factors in those looking for work and who want more work) down significantly.
It's currently 7.8 per cent.
But even if you achieve a significantly lower underemployment or unemployment rate, it's not necessarily an indication of a tighter labour market – a market with fewer available workers and which logically puts them in a better bargaining position for higher pay.
This is because, as we saw in the most recent unemployment figures, a lower participation rate, all things being equal, can produce a lower unemployment rate.
Put another way, if more job seekers give up on the search for work altogether, they will drop out of the employment statistics.
It
leads to a situation where the official unemployment rate falls but
there are more people on the employment sidelines – hardly a recipe for
more wage bargaining power.
What would achieve meaningful growth in wages?
The current state of play is that, in most sectors, it's very difficult to achieve a pay rise.
So, what could change that?
Economist Alison Pennington has some ideas.
ACTU Secretary Sally McManus is currently lobbying for a 3.5 per cent rise in the minimum wage for the upcoming Fair Work Commission minimum wage decision.
Ms Pennington would also like to see the scope of collective bargaining expanded to "include multi-employer, sectorial or industry bargaining."
"I would lift wage caps of public sector workers", Ms Pennington says.
"I would close the regulation loopholes on dodgy employment forms.
"And I would support pro-active pay equity measures, because it's clear that there's systematic underpayment of hundreds of thousands of women in the workforce at the moment."
Follow the money
But while wages and consumer prices are generally going nowhere, there are big inflation pressures in other parts of the economy, notably in asset markets like shares and housing.
And the share market kept setting both new intra-day and closing record highs on multiple days during the week.
There are literally hundreds of billions of extra new dollars in the economy and much of it seems to be making its way into financial markets.
Let's just state a few facts.
The Reserve Bank is currently not fulfilling part of its charter, which requires it to pursue full employment and also maintain stable prices through modest inflation of 2-3 per cent per annum.
It's pulled the trigger on a range of extraordinary policies over the past 12 months and none of them have yet made a significant dent into lifting either inflation or wage growth.
Financial markets, on the other hand, are roaring ahead, which is seeing stock and property values continuing to soar.
Labour market reforms may help lift wages "materially", but is there something else we're missing?
Equity Economics Lead Economist Angela Jackson points to decisions about how capital or money is allocated.
She says rock bottom interest rates are encouraging allocators of capital or money (investment firms and company bosses) to seek returns in share and property markets.
Firms, broadly speaking, she says, are not reinvesting in their own productivity – which has in the past generated higher worker wages.
"Labour's share of the total income pie has been falling since the 1960s and 1970s and [asset] income has been rising," says Dr Jackson.
"This issue is set to get worse without a major rethink of how we determine wages."
This week's National Accounts showed a big lift in business spending on plant and machinery in the March quarter – a sign bosses may now be looking to boost their firm's productivity.
Recent history tells us, though, workers are unlikely to see the financial rewards from this unless there is some radical change from the status quo.
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