High on the RBA’s agenda these days is Australia’s levels of household indebtedness. But debt is only one-half of this equation; the other is income growth.
Speaking at the Australian Industry Group in Melbourne on Thursday (14 June), RBA governor Philip Lowe noted that over recent times, wages growth around the 2 per cent mark has become the norm in Australia.
“Some time back, the norm was more like 3 to 4 per cent. This downward shift in the rate of wages growth is clearly evident in the wage price index as well as in the more volatile measure of average hourly earnings in the national accounts,” Mr Lowe said.
“There are both cyclical and structural explanations for why this change has taken place.”
From the cyclical perspective, Mr Lowe says there is still spare capacity in the labour market.
“The unemployment rate has been around 5.5 per cent for a year now. While we can’t be definitive about what constitutes full employment, most conventional estimates for Australia are that it means an unemployment rate of around 5 per cent,” the RBA governor said.
“It is possible, though, that we could do better than this, especially if we approach the 5 per cent mark at a steady pace, rather than too quickly.”
According to the RBA governor, in a number of other countries, estimates of the unemployment rate associated with full employment are being revised lower as wage increases remain subdued at low rates of unemployment.
“We have an open mind as to whether this might turn out to be the case here in Australia, too. Time will tell.”
Broader measures of underutilisation suggest another source of spare capacity in the labour market, Mr Lowe said. He noted that around one-third of workers work part-time, with most of these people wanting to work part-time for personal reasons.
However, of those working part-time, around one-quarter would like to work more hours than they do; on average, they are seeking an extra two days a week.
“If we account for this, these extra hours are equivalent to around 3 per cent of the labour force,” Mr Lowe said.
“This suggests an overall labour underutilisation rate of 8.75 per cent, compared with the 5.5 per cent traditional unemployment rate measure based on the number of unemployed people.”
Another cyclical element that has impacted labour force data is the mining boom, or rather the unwinding of it, which saw a number of highly paid jobs disappear.
However, according to Mr Lowe, this doesn’t fully explain what’s going on in the Australian jobs market.
“Some structural factors also appear to be at work, with perhaps the most important of these related to competition and technology,” the governor said.
Mr Lowe is optimistic that the diffusion of new technology will boost aggregate productivity and lift our real wages and incomes.
“Advances in information technology, in artificial intelligence and in machine learning have the potential to reshape our economies profoundly and lift average living standards in ways that are difficult to envisage today.
“But the adoption and the diffusion of these new technologies is a gradual process; it takes time. While it is taking place, the benefits of new technologies are accruing unevenly across the community.
“In my view, this is one of the key structural factors at work.”