Last month the Reserve Bank of Australia dedicated its major annual conference to low wages growth. We all know it by now: the big problem in the Australian economy is a tremendous shortfall in wages growth. So, the RBA flew in experts from around the world to dissect the issue forensically.
Many hypotheses were put forward; too many, in fact. And the long summary of proceedings was this: we don’t have a clue what’s causing low wages growth.
That’s not a non-story. That’s a hell of a story. The implication here is as clear as it is terrifying: if we don’t know the cause of low wages growth, we are ill-equipped to address it.
How bad is this problem?
After years of wages lifting 4% annually on average, we’re stuck in a terrible rut. Wages go up by 2% now, if we’re lucky.
The only thing preventing negative inflation-adjusted wages growth in recent years is the fact inflation is also at record lows. Dismal wages growth is a big problem — Australia took on a record level of household debt in the past decade. Take a look at it:
Historically, debt has proved quite easy to pay off. Sums that seem large when borrowed grow less staggering each year as wages growth compounds. For example, a two-person household that borrows a spine-tingling $150,000 for a mortgage in 1990 might find themselves earning that much in a single year by 2010.
But such wage-inflation debt relief seems unlikely to arrive any time soon. Wages are growing very slowly in nominal terms, leaving us to deal with a very substantial household debt situation the hard way.
Wages growth also keeps Australians spending. Household consumption represents 57% of Australia’s GDP. If consumption stalls or sinks, the whole economy sinks or stalls with it. That would put people out of a job, and a negative feedback loop between lack of wages growth and the lack of consumption would turn into a vicious whirlpool draining the life from the economy.
The big shrug
Is this caused by a lack of demand in the economy? Poor productivity growth? Low inflationary expectations? Migration? Automation? All these may or may not be the answer, the RBA is unsure.
The wrap up from the conference contains this nugget of a sentence, which encapsulates the overarching uncertainty rather well:
As noted by John Simon, Head of Economic Research at the RBA, in his concluding statements, there is clearly not enough evidence to single out one cause “beyond reasonable doubt”; even on a “balance of probabilities” standard of proof it would be challenging.
It is possible we will unlock the mystery of low wages growth later, after it has ended. Alternatively we may never figure it out. Wage stagnation could be a side effect of a multiplicity of factors each subtracting a little from wages growth — none of them sufficient to be considered a major culprit.
While the answer is not in, the RBA thinks they can rule out a few suspects. Papers presented at the conference tended to suggest that declining trade union membership and the rise of the gig economy are unlikely to be the cause of declining wages. Of course, and in keeping with the overall theme of doubt and uncertainty, the conclusions of those papers were disputed.
One thing that is clear is that low wages growth is not a peculiarly Australian phenomenon. The UK and the US are also experiencing the kind of wages growth that gets called “tepid”, despite unemployment rates that are at record lows.
Can interest rates help?
The RBA would dearly love to spark wages growth in the Australian economy.
Several months ago the bank said the “natural” rate of unemployment was 4.5% and it would be necessary to reduce unemployment below that level to cause wages growth. It cut rates, which might make you hope it now expected unemployment to fall to that level.
However, following its most recent board meeting this week, RBA governor Philip Lowe suggested the unemployment rate would be above that key level for years to come.
“The unemployment rate is expected to decline over the next couple of years to around 5%,” said Lowe. “Wages growth remains subdued and there is little upward pressure at present, with strong labour demand being met by more supply.”
At this gloomy juncture the only hopeful thought to hold in mind is that uncertainty cuts both ways. The bank’s grim outlook could be unwarranted.
After all, it might be as wrong about wages growth on the way back up as it was on the way down.