Wage dynamics in Australia have been permanently changed by foreign labour

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Reserve Bank governor Philip Lowe says the ability of Australia’s employers to “tap” global labour markets for foreign workers may have permanently changed wage dynamics in Australia.

He also says if interest rates remain low for years, government spending will have to play a bigger role in the next downturn, because conventional monetary policy will be a diminished force.

Speaking to the Economic Society of Australia on Thursday, Dr Lowe said with Australia’s labour market becoming more “flexible” in recent decades, employers had found it easier to import workers from overseas.

He said that partly explained why wages were less likely to increase when there was an increase in demand for labour.

He said the ability to hire foreign workers to overcome bottlenecks and to fill specific gaps where workers were in short supply had helped businesses to operate effectively, and that was a good thing.

“This benefit was clearly evident during the resources boom, and there are a wide range of businesses in industries that have benefited from hiring foreign workers,” he said.

“Without this ability, output in Australia would have been lower.”

However, he said the ability to source workers from overseas “dilutes” upward pressure on wages in some parts of the economy and it was possible there were “spillovers” from that phenomenon to the rest of the labour market.

“This hiring can [also] dilute the incentive for businesses to train workers to do the required job,” Dr Lowe said.

Do not conflate immigration with foreign workers

Dr Lowe said it was important to distinguish between the role that foreign workers were playing in local labour markets and the impact immigration was having on the economy more broadly.

He said immigration added to both the supply of, and demand for, labour in the economy, and the precise balance between their extra labour supply and extra labour demand was difficult to determine and depended on specific circumstances.

He said the picture was clearer, however, when it came to firms sourcing labour from overseas to perform specific roles in Australia.

He said at the time of the 2016 census there were roughly 430,000 people working in Australia on temporary visas, and some industries relied more heavily on those workers than others.

In the food trades, workers on temporary visas filled around 18 per cent of jobs, while in the hospitality sector they filled around 13 per cent of jobs.

He said most of those workers were either on temporary visas for skilled workers or were student visas.

In contrast, in the farm sector, it was more common for workers to be on working holiday visas.

Dr Lowe said if you thought about it conceptually, the ability that employers had to “tap into the global labour market” for workers that were in short supply was “flattening the supply curve” for those kinds of workers.

“A flat supply curve means that a shift in demand has only a small effect on prices, or in this case, wages,” Dr Lowe said.

“In my view, this is one of the factors that has contributed to wages being less sensitive to shifts in demand than was once the case.”

This is a topic the RBA (and other economists) have been talking about more in recent months.

With Australia’s international borders closed, a large experiment is being run with the labour market.

Hundreds of thousands of foreign workers have left Australia in the last 18 months and businesses are complaining about labour shortages — even though the national unemployment rate is still 5.1 per cent and the underemployment rate is 7.4 per cent.

Dr Lowe said there were small pockets of wage growth in some sectors of the economy at the moment but employers generally were still reluctant to lift wages to attract workers.

He said many were holding out for borders to reopen.

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

And he is working under the assumption that borders will 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.

For that reason, he said it will probably take a few years before wage pressures build to the point where inflation is sitting comfortably within the 2 to 3 per cent band, and that’s why he’ll be keeping interest rates at exceptionally low levels for the next few years.

How long will it take for wages to pick up?

He had sobering news on that point.

He said the last time wages growth in Australia was above 3 per cent was “a decade ago,” and in that time the rate of growth had ground down slowly to 1.5 per cent.

He said there were “powerful” structural factors at work, including the psychological factor of employers still being obsessed with cost-cutting.

“I don’t see those factors going away quickly,” he said.

“They were there for a decade. They’re fundamental. They’re global.

“And because we don’t see them turning around quickly, the grind higher in wages will be slow and if wages growth is still running with a 2 in front of it [in coming years] it’s going to be very difficult for us to deliver an inflation rate [of] around 2.5 per cent.

“That process is going to take time to work through,” he said.

Government spending will need to be bigger in future downturns

On another topic, Dr Lowe said he would really like to see the economy improve to the point where inflation was sitting in the 2 to 3 per cent band, and interest rates returned to more normal levels.

However, he said there was a possibility interest rates would not lift much from their currently exceptionally low levels by the time the next downturn occurred.

He said in such a scenario, government spending (ie fiscal policy) would have to play a larger role in supporting the economy than it did this time because monetary policy would have relatively little ammunition.

“I know Treasury are thinking about the mechanisms and approaches to make that effective because we all know there are challenges here in using fiscal policy in a counter-cyclical sense,” he said.

He said it was probable the RBA would have to keep purchasing Australian government bonds in future downturns too — a phenomenon once considered extraordinary — given how much global economic dynamics had changed in recent years.

“Quantitative easing will have an ongoing role but I think it’d be unwise to rely on that as the main instrument of macro-economic management,” he said.

By business reporter Gareth Hutchens (Original ABC Article)