Australia’s reservoir of workers is starting to run low and that might just get you a pay rise

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Think of Australia’s labour force as a reservoir.

Historically, as things heat up and the level in the reservoir falls, employers have seen it topped up by a steady inflow of migrant workers, both short and long term.

But that tap is currently turned off, with Australia’s borders closed.

So now that the economy is well and truly heating up, the reservoir’s level (effectively, the unemployment rate) is dropping fast.

If that keeps happening, employers will eventually have to offer higher wages or better conditions (or both) to attract scarce workers away from their rivals.

It’s one continuing effect of COVID-19 that’s well and truly got the attention of Reserve Bank governor Philip Lowe.

Dr Lowe observed recently that local employers could not “tap global labour markets” at the moment for an extra source of workers.

At least not like they used to.

And it’s seeing wage pressures slowly building in small pockets of the economy, because the ability to hire workers from foreign labour markets, which has been suppressing wages locally for years, is not an option for employers.

So wage dynamics have shifted a tiny bit in some sectors in the past 12 months.

But how long will it take for wages to pick up broadly?

Well, Dr Lowe talked a little about that this week.

Speaking after the RBA’s board meeting on Tuesday, he said borders would probably have to stay closed for another 18 months to two years before wage dynamics became “quite different”.

That is, before wage dynamics genuinely shifted in workers’ favour.

And he doubts we’ll get to that point.

He said he’s working under the assumption that borders would gradually be reopened over the next year, “particularly for workers who have skills that are in short supply”.

So he’s assuming employers will get their wish and there won’t be any broad-based wage increases brought on by our borders remaining shut.

He also said when borders reopened, some of the nascent wage pressures that had started to build in some sectors of the economy would “come out of the system.”

However, he also said he really wants to see economic conditions improve to the point where wages and inflation pick up noticeably in Australia.

So what does that mean?

Should Australians expect to go back to the long, slow grind of wage pressures hopefully building, just over the horizon, but never quite materialising, like we experienced in the years before the pandemic era?

Dr Lowe didn’t say it this week, but that outcome will depend on lots of things, including the state of the global economy in coming years, and the willingness of Australia’s governments to keep stimulating demand.

But overall, he said, he thought it would be good for the economy generally if borders reopened sooner rather than later.

“It will be good news at the individual level [because] people will be able to go and catch up with family and friends and travel internationally again, but it’s also important for businesses,” he said this week.

“We hear reports from businesses we talk to that one of the reasons they’re not investing at the moment is they can’t get the skilled workers from overseas to put in place new capital equipment or test it out, so it’s affecting business investment.”

We’ll also have to keep our eye on the dollar.

Australia’s currency could be entering a period where it will be noticeably weaker than other countries’ currencies.

Why?

Because, according to Dr Lowe, Australia will probably lag other developed nations in moving away from record-low borrowing costs, because the RBA wants to keep interest rates exceptionally low to encourage economic activity and jobs growth.

He said he was determined to reach the RBA’s 2-3 per cent inflation target, and that would require getting wages growth back above 3 per cent.

“We want to make sure that happens and we’ll keep the monetary stimulus going until it does,” he said.

“Because the inflation and wage outcomes have been lower in Australia than in other places, we’re going to keep the stimulus going probably longer than the other countries.”

So what’s that mean?

It means if the level of interest rates in Australia is going to remain lower than in other countries, and for a long period, it could put downward pressure on the value of the dollar for an extended amount of time.

A weaker dollar would benefit Australia’s exporters, but not its importers (nor anyone planning to travel overseas when borders finally reopen).

It would also make it cheaper for tourists to visit Australia.

By business reporter Gareth Hutchens (Original ABC Article)