Money The RBA doesn't sound very confident about the outlook for Australian wages

01:56  16 may  2018
01:56  16 may  2018 Source:   businessinsider.com.au

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Australia ’s latest wage report will be released tomorrow. For a central bank that needs faster wage growth to help achieve its policy objectives, the Reserve Bank of Australia ( RBA ) doesn ’ t sound all that confident it will happen.

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  The RBA doesn't sound very confident about the outlook for Australian wages © Provided by Business Insider Inc

For a central bank that needs faster wage growth to help achieve its policy objectives, the Reserve Bank of Australia (RBA) doesn't sound all that confident it will happen.

That was clear to see in a speech delivered today by RBA deputy governor Guy Debelle, in which he all but admitted the risks for the bank's wage growth outlook are currently to the downside.

"The experience of other countries with labour markets closer to full capacity than Australia's is that wages growth may remain lower than historical experience would suggest," Debelle said in a speech delivered to the CFO Forum in Sydney.

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Seasonally adjusted, private sector wages rose 1.9 per cent and public sector wages grew 2.3 per cent through the year to March quarter 2018. There's still no sign of a wage pickup in Australia From businessinsider.com.au | May 15, 2018. The RBA doesn ' t sound very confident about the outlook

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Clearly, Debelle has been keeping a close eye on wage developments in the likes of the United States, United Kingdom and Japan where unemployment has fallen below levels where it typically leads to faster wage and inflationary pressures, known as the non-accelerating rate of unemployment, or NAIRU, for short.

Despite tight labour market conditions in those nations, wage pressures have not responded anywhere near the levels that would have normally been seen in the era before the financial crisis.

That's a troubling scenario for Australia where unemployment still sits at 5.5%, above the 5% NAIRU level estimated by the RBA.

As some other commentators have noted, given recent evidence from abroad, Australia's NAIRU level could be significantly below 5%, casting doubt as to just how quickly wages will pick up even if unemployment continues to edge lower.

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Today I would like to talk about the Bank 's outlook for the economy. We had been concerned that our forecast may have been a little optimistic, but are now more confident in it. Bishop J and N Cassidy (2017), ‘Insights into Low Wage Growth in Australia ’, RBA Bulletin , March, pp 13–20.

In particular, I'd like to talk about some of the questions we grapple with as we consider the outlook for the domestic economy. While our forecasts for wage growth and inflation are also unchanged, there are some positive signs that make us a bit more confident that the expected pick-up in wage growth

Adding further doubt on the prospects for a pick-up in wage pressures, Debelle pointed to the chart below that shows the percentage of Australian firms estimating they will offer pay increases in excess of 3% per annum has fallen in recent years.

a screenshot of a cell phone© Provided by Business Insider Inc

"In Australia, 2% seems to have become the focal point for wage outcomes, compared with 3–4% in the past," he says.

"Work done at the Bank shows the shift of the distribution of wages growth to the left and a bunching of wage outcomes around 2% over the past five years or so."

As such, Debelle said "there is a risk that it may take a lower unemployment rate than we currently expect to generate a sustained move higher than the 2% focal point evident in many wage outcomes today".

Again, an admission that unemployment may need to fall below 5%, perhaps significantly so, before wage pressures begin to accelerate.

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"One continuing source of uncertainty is the outlook for household consumption," Dr Lowe said. "Gradual" has become an oft repeated word in the RBA 's rates statement as inflation remains stubbornly below the bank 's two-to-three per cent target band and wages fail to revive despite

Reserve Bank of Australia ( RBA ) governor Philip Lowe has a message for Australian workers. After years of declining wage growth, it looks like that trend has finally turned the corner and wage growth looks set to accelerate.

The longer low wage growth outcomes persist, the more likely it is they become the norm, rather than the exception. Indeed, it could become entrenched.

As RBA governor Philip Lowe said earlier this year, it would likely take wage growth to hold at around 3.5% per annum for a period of time in order to bring inflation back to within the bank's 2-3% medium-term target.

By continually offering low pay increases, it reinforces the low inflation landscape that's been seen in Australia in recent years, an outcome that will filter back into wage negotiations in the future, keeping the linkage between low wage growth and low inflation in place.

While Debelle says recent data on wage growth, along with industry liaison suggesting pockets of wage pressures are emerging and a greater percentage of firms expecting to offer faster pay increases, offers some assurance that wages growth has troughed, the question that remains is how fast will wage growth pick up?

Based on recent trends both at home and abroad, it's unlikely to be much given the current set of circumstances.

Given the degree of uncertainty that exists, Australia's wage price index for the March quarter, out tomorrow, measuring growth in ordinary hourly pay rates, comes at an opportune time.

Unfortunately for workers, the RBA and treasury officials who are also anticipating a strong pick-up in wages in the coming years to help boost fiscal revenues, it's unlikely to deliver much good news. At least, according to economists.

The median forecast looks for a quarterly increase of 0.6%, leaving the annual rate unchanged at 2.1%.

While that will reinforce the view that wage growth has now bottomed, another undershoot, as has been seen frequently in recent years, would be a troubling outcome.

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<p>The RBA declined to comment on an ongoing matter.</p>With wage growth in Australia crawling around the slowest pace on record, Reserve Bank of Australia (RBA) Governor Philip Lowe recently called on workers to demand fatter pay hikes.

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