Wages may soon rise if employers can’t ‘tap global markets’ for workers, says RBA boss

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Reserve Bank governor Phil Lowe says Australia’s closed international borders are having a huge impact on the labour market.

He said since employers could not “tap global labour markets” for workers like they used to, before the pandemic, Australia was starting to see pockets of wage increases in the economy.

“What used to happen before the pandemic is if there was a shortage in the labour market for a particular skill, firms could go overseas and tap the global labour market,” Dr Lowe said.

“That meant that if there was very strong demand for workers with a particular skill, the price, the wage, didn’t really move very much because you could go and get workers overseas.”

Dr Lowe said Australia’s level of immigration wasn’t necessarily the issue at the moment, it was the inability of employers to import workers from overseas to fill roles where there are labour shortages.

“And we’re starting to hear reports of wages moving for some of those jobs,” he said.

Employers don’t want to lift wages

Speaking in Toowoomba in Queensland on Thursday, Dr Lowe said the labour market was clearly tightening.

Within an hour of his speech, new data showed the national unemployment rate fell from 5.5 per cent to 5.1 per cent in May, after an extra 115,200 people found employment last month.

Economists said the decline in the unemployment rate was remarkable.

“What a result!” wrote EY chief economist Jo Masters.

“No doubt there are areas of the economy still recovering, but on the whole this result clearly signals a shift from recovery to expansion.

“Such strong momentum in the labour market should continue to support the economic recovery and eventually translate into a lift in wages growth and in turn standards of living.”

However, Dr Lowe said, despite the emergence of pockets of wage growth in the economy, employers were still broadly trying to avoid lifting wages.

“Notwithstanding these signs of a tightening labour market, wages growth and inflation remain subdued,” he said.

“It is noteworthy that even in those pockets where firms are finding it hardest to hire workers, wage increases are mostly modest.”

Businesses remember the mining boom days

Dr Lowe said there was a “broader dynamic” at play in Australia’s economy.

He said many employers could still remember the resources boom in the early 2000s, when the Australian dollar was worth more than the US dollar for a substantial amount of time.

He said many businesses complained then that the cost of doing business in Australia, including labour costs, left them uncompetitive.

“This experience has left a lasting imprint on many businesses and it has reinforced the narrative about the importance of cost control,” he argued.

“This has become the predominant mindset of many businesses.

“This mindset can be helpful in making businesses more efficient, but it also has the effect of making wages and prices less responsive to economic conditions.”

Earlier this month, the minutes of the Reserve Bank board meeting included similar comments from RBA officials.

“Firms facing labour shortages [are] citing a preference for non-wage measures to attract and retain staff, such as one-off bonuses and more flexible working arrangements,” the minutes observed.

“Some firms were also opting to ration output because of labour shortages, rather than pay higher wages to attract new workers.”

Hold out until borders reopen

On Thursday, Dr Lowe said many firms were even trying to hold out until borders reopened.

“Firms are saying ‘well we don’t want to bid up the cost base now, because perhaps towards the end of the year there’ll be a way to get workers to come back in with skills that we really need’,” he said.

If that didn’t happen, he added, and borders were still closed a year from now, we would see more upward pressure on wages and inflation.

“It’s one of the uncertainties,” he said.

“How long will it be before we can once again tap global labour markets?”

Give money to people, and they spend it

Speaking about the economic recovery more broadly, Dr Lowe said the “main driver” of Australia’s remarkable recovery had been the rebound in consumption.

He said that rebound in consumption that was largely due to government spending.

“Turns out that if you give people a lot of money, and allow them to spend it, most of us spend it,” he said.

“What we’ve seen in Australia [is] the government give large amounts of money to both households and businesses, and once the health situation improved sufficiently … we found ways to spend most of that money.

“People kept their jobs, so they’re not worried about unemployment, so uncertainty declined and we’ve spent a lot of that money … and that’s a large part of the economic recovery.”

Why are job vacancies surging while the unemployment rate falls?

According to Commonwealth Bank economist Gareth Aird, the fact that hundreds of thousands of short-term foreign workers have also left Australia helps to explain why job vacancies are at record levels.

“Those industries that have a higher concentration of foreign workers, like hospitality, have an incredibly high number of vacancies,” Mr Aird wrote in a note to clients.

“Job vacancies have surged for all skill levels. The labour market will tighten very quickly from here.

“A lift in wages growth is the inevitable consequence of a tight labour market as firms are forced to pay more to attract workers.”

By business reporter Gareth Hutchens (Original ABC Article)