Australian wage growth remains subdued underscoring importance of RBA “flexibility”

Stephen Miller

The June wage price index fell slightly short of market expectations coming in at annual increase of 1.7% compared with a market consensus forecast of 1.9%. Having said that, the annual rate of growth was close to the RBA projection outlined in its recent Statement on Monetary Policy (SoMP). Private sector wage growth grew at an annual rate of 1.9%, still marginally below pre-pandemic rates of growth of a little above 2%. The ABS reported growth was generally subdued, with small pockets of wage pressure emerging for jobs with particular skill requirements.

The key takeaway from these numbers is that despite impressive gains evident in employment growth and on the unemployment rate before the recent lockdowns, any pivot toward a more ‘hawkish’ tone from the RBA is, at the very least, some way off.

Indeed, these numbers underscore the emphasis placed by the Governor and Board on “flexibility” in the wake of the decision to taper weekly bond purchases from $5 billion to $4 billion. And a reversal of that decision may still be on the agenda for a time yet even if, judging by the August RBA Board meeting minutes, the Board and Governor believed threshold for a reversal had not been met at that time. Those minutes stated that the “…the outlook for the economy is for a resumption of strong growth in 2022 [and] that any additional bond purchases would have their maximum effect at that time, with only a marginal effect at present, which is when the extra support might be required ”.

However, “flexibility” offers the wherewithal for the Board and Governor to change course if the circumstances warrant. It could be that domestic lockdowns last longer and/or the course of the delta variant globally crimps or even reverses the strong bounce-back to date (a scenario increasingly embraced by global financial markets). The articulation of that flexibility is in my mind a key differentiator between the RBA and a number of other central banks who have appeared to foreshadow policy rate increases in 2022, or even earlier as in the case of the RBNZ. The RBNZ was on a course of a policy rate increase as soon as yesterday, before stepping back from the precipice. The Bank of Canada, the Norges Bank have foreshadowed rate rises in 2022 and the Fed’s ‘dot plot’ admits that possibility.

By contrast, the RBA remains of the view that the conditions for any increase in the policy rate “will not be met before 2024”. Given the uncertainties ahead, the RBA has done well in avoiding any such undertaking and in defining a process that allows it to quickly “flick the switch” and increase bond purchases.

To be fair even if it didn’t articulate the virtues of flexibility in an ex-ante sense, the RBNZ certainly adopted it with its decision yesterday to eschew an increase in the policy rate in the wake of a small COVID outbreak in NZ and the attendant imposition of a nationwide lockdown. That was despite the RBNZ reiterating a view “that their least regrets policy stance is to further reduce the level of monetary stimulus”. And that stance appears consistent with the RBNZ mandate that includes house price inflation and in an economy where the unemployment rate is around 4% and consumer price inflation (even on a ‘trimmed mean’ basis) is running at, or a little above, 3%.

Aside: Why not increase public sector wages as a ‘pace-setter’ for the private sector?

There have been calls largely from public sector unions and one or two academics for Federal and State governments to lead the way with wage increases.

That appears to be not only misguided through a confusion of cause and effect but potentially risks reversing any ‘green shoots’ of increasing private sector wages and reversing gains to date in private sector employment. If that is not enough, public sector ‘pace-setting’ is distributionally questionable given that public sector wages are on average higher than those in the private sector.

What the RBA is trying to do is target an unemployment rate that is consistent with some notion of full employment. That would cause wage and price inflation ‘naturally’.

To implement higher wages by fiat – or by having the public sector act as some sort of ‘pace-setter’ – risks pricing labour at a level the private sector is unwilling to pay, thereby causing more private sector unemployment and snuffing out private sector inflationary trends.

Centralised wage-setting – which is in effect what is meant by public sector ‘pace-setting’ – irrespective of the state of the labour market(s), was a feature of the Australian scene until the 1980s, when it was modified, and later substantially abandoned by the Hawke-Keating governments. The motivation for doing so was avoidance of precisely the sort of outcomes described above – massive unemployment associated with centralised fiat implementation of pace-setting wage increases that many employers couldn’t pay.

To cast public sector wage increases as ‘fiscal support’ would only compound the litany of missteps in applying fiscal support over the years. There are a number of superior delivery mechanisms for fiscal support which can be tailored to meet distributional requirements as well. These include:

• across-the-board tax cuts
• targeted wage subsidy programs
• targeted welfare / income support.

Of course we’ve seen some or all of the above measures applied at various stages, (albeit, in some cases, with some questionable design features that diminished their efficacy).

Coming up: Australian employment / unemployment

The Australian July labour force data to be released today will show the early impacts of the Sydney lockdown. In that context any interpretation of the impact nay be difficult. Some commentators say the market is looking for a sharp reversal of the impressive employment gains so far in 2021 with a circa 45-50k decline in employment expected and an increase of one tenth in the unemployment rate to 5% or even a bit above that.

A much worse report will likely excite talk again of the RBA taking advantage of that “flexibility” to adjust weekly bond purchases up from the current schedule of $4 billion to take effect from September.

By Stephen Miller, investment strategist