In the minutes of the Monetary Policy Meeting of the Reserve Bank Board, held on October 5th, Board members express uncertainty about Australia’s wage growth over the coming months.
When comparing Australia’s wage inflation to other developed countries, members noted that reports of labour shortages caused by COVID-19 had not yet impacted wages. The minutes state, “The recent lockdowns and earlier reports of labour shortages had not appeared to affect most firms’ expectations for wages growth, which were generally returning to around pre-pandemic norms.”
Labour market
While Australia’s labour market is more robust in 2021 than was observed throughout 2020, restrictions on movement and activity saw the RBA report total hours worked declined by four per cent when comparing August to July. In NSW, this number was much higher, at thirteen per cent.
In other countries, wage inflation has grown under the pressure of a reduced workforce; however, no such change has yet occurred in Australia.
The comparatively slow wage growth has been attributed to Melbourne and Sydney’s extended lockdowns, theoretically as the two most populous cities reopen, Australia may experience a sharp increase in wage demands in the period ahead. However, when reviewing individual wage data, the RBA predicts the likelihood of a sharp increase in wage pressure to be low.
The minutes state, “Overall, there were few indications from disaggregated (separate) wages data or from the Bank’s liaison program to suggest that aggregate (total) wages growth was likely to accelerate sharply in the period ahead.”
The RBA reported in August signs that firms in NSW were preparing to ramp up hiring efforts when lockdowns eased. Members of the Board noted that due to the slow wage growth, Australia’s underlying inflationary pressures are low compared to other developed nations.
Overall, the members of the board state in the minutes that, “While it was possible that underlying inflationary pressures in Australia could build more quickly than currently envisaged, the central forecast scenario was still that domestic inflation would pick up only gradually over the medium term.”
Overseas
When looking at the conditions overseas, members recognised vast differences in the economic reaction of advanced nations to the pandemic. The US and UK have both seen labour market pressure lead to wage growth, which in turn has led to overall inflation. However, it is worth considering that these nations were experiencing similar labour market conditions before the pandemic.
The minutes state, “Some economies that were experiencing a pick-up in wages growth, such as the United States and the United Kingdom, were also those that had experienced relatively fast wages growth and higher inflation prior to the pandemic.”
Across the Tasman Sea, New Zealand has experienced somewhat similar pre-pandemic as well as post-pandemic conditions. Despite this, wage growth has been picking up. In New Zealand’s case, the NZ Reserve Bank has attributed wage growth to its economy now functioning at full capacity.
The minutes state, “In New Zealand, wages growth had also picked up in prior months, which was consistent with the Reserve Bank of New Zealand’s assessment that spare capacity had largely been absorbed.”
The Eurozone and Canada have experienced moderate wage growth conditions, similar to those observed in Australia. It is hypothesised that the slow growth is the result of their economies functioning below capacity.
The minutes state, “The more modest wages growth in Canada and the euro area was consistent with ongoing spare capacity in labour markets in these economies.”
Members decision
Previously, the RBA were criticised for their continued use of strong monetary policy and decisions. In the past months, prominent economists and senior researchers have voiced their concerns that the persistent low cash rate and purchasing on government bonds and securities would lead to significant inflation should the labour market be put under pressure causing wage growth.
With no such growth observed, the Board decided to maintain the record low cash rate and quantitative easing measures.
The Board decided upon the following policy settings:
- Maintain the cash rate target at 10 basis points and the interest rate on Exchange Settlement balances of zero per cent
- Maintain the target of 10 basis points for the April 2024 Australian Government bond
- Continue to purchase government securities at the rate of $4 billion a week until at least mid February 2022.
Read more:What the RBA’s latest monetary policy announcement means for small business
Read more: NSW labour market continues to strengthen despite volatile economy
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