Daily Commentary BY THE CURVE TEAM –

RBA: It Is All About Wages

16th of August, 2017

Minutes to an RBA meeting that follow the release of their quarterly Statement on Monetary Policy are usually overlooked, as they are seen as being superseded by what is revealed in the SoMP. That wasn’t the case with the minutes from the August meeting, which contained a key theme that is likely to drive the outlook for monetary policy in Australia.

The RBA’s quarterly statement outlined a wide array of risks to the outlook for monetary policy and a case could be made for any number of those to hold the key to the outlook. However what is clear from the minutes released yesterday is that the outlook for wages holds critical importance.

One of the main reasons for this is that wage outcomes are linked to a number of the risks around inflation and growth. If wage growth remains weak, it will keep a lid on inflation. It will also act as a handbrake on consumption, which is turn affects businesses and the outlook for non-mining investment. It also impacts financial stability as referenced by the RBA’s constant mentioning of the risks that rising debt to income ratios pose on the outlook.

Low wage outcomes have not been confined to Australia with the problem being a phenomena globally, even in the US where jobs growth has been robust for some time. Interestingly, a piece of research from the San Fransisco Fed has shed some light on why wage growth might not actually be as low as it appear.

At the core of the research, it indicates that it is turnover in the workforce that is holding back wages. More specifically, high paid boomers are leaving the workforce and being replaced by younger, less experienced workers. According to the paper:

“Simply stated, new entrants to full-time work, whether they are entering for the first time, re-entering from periods of involuntary or voluntary non-employment, or moving from part-time to full-time work, are more likely to make below-average wages”.

I have included the chart from the research below, on which the authors say “Wage growth for continuously full-time employed workers (blue dashed line) has been rising and is currently in line with rates seen at the previous economic peak in 2007”. Importantly the add that “aggregate wage growth (black line) continues to be held down by the entry of new and returning workers to full-time employment, who generally earn less than workers who are leaving full-time employment”.

Whether or not this is something that is at play in Australia is uncertain. Either way, how the wage story evolves over the months and years ahead will be critical to the monetary policy debate. The latest update on wages is due out this morning when the ABS releases the Wage Cost Index for Q2.

David Flanagan

Director - Interest Rate Markets