Wage growth will soon strengthen in line with improvements in productivity

It’s become deeply unfashionable to presume any of the present weakness in wage growth is merely cyclical (and thus temporary) rather than structural (and thus lasting). Sorry, my years of economy-watching tell me it’s never that simple.

It’s the mark of an amateur – a journalist who prefers sexy stories to boring stories that are more likely to be true; a youngster who believes all they’re told on social media – to believe the established patterns of the past have no bearing on the present.

Note, I’m not denying the likelihood that a significant part of the problem may arise from deep, structural causes requiring correction by judicious government intervention.

What I’m saying is it’s far too soon to conclude no part of the weakness is temporary. We’ll know the truth of the matter only with hindsight.

We know the importance of “confidence” in driving the business cycle, but it doesn’t just apply to businesses and consumers. It also applies to workers negotiating pay rises.

There’s a chance that, with all the union movement’s exaggerated talk of an ever-rising tide of “precarious employment”, organised labour has spooked itself into accepting lower pay rises than it needs to.

As Reserve Bank governor Dr Philip Lowe keeps hinting, one day workers will decide to contest bosses’ claims that they couldn’t possibly afford more than a 2 per cent pay rise.

For another thing, it’s surprising the wage-rise pessimists have failed to take heart from the Fair Work Commission’s decision in June to raise not just the national minimum wage, but the whole structure of award minimums, by 3.3 per cent.

This compares with a rise last year of just 2.4 per cent.

It’s true that only about a quarter of employees are directly affected by this decision, but many more are affected indirectly because the “individual arrangements” by which their wages are set consist merely of a set margin above their award rate.

And why would the supposedly more industrially powerful workers on enterprise agreements settle for another 2 per cent rise when, all around them, weaker workers were getting 3.3 per cent?

But there’s a more technical argument that a period of weak wage growth was just what was needed as part of our transition from the decade-long resources boom. With that transition close to completed, it shouldn’t be long before wage growth strengthens.

As Professor Ross Garnaut warned in 2013 in his book, Dog Days, the big fall in the nominal exchange rate that (eventually) followed the collapse in mining commodity prices wasn’t all that was needed to restore the international price competitiveness of our export and import-competing industries.

We also needed the nominal depreciation to become a “real” depreciation, with the costs faced by Australian firms rising much more slowly than the average of costs faced by firms in our major trading partners’ economies.

Garnaut doubted we could achieve the high degree of wage restraint need to make the depreciation stick but, as former top econocrat Dr Mike Keating pointed out in a recent blog post, that’s just what’s happened.

Keating says you’d expect that, over the medium to longer term, real wages, the productivity of labour and “real net national disposable income” per person (a version of gross domestic product that’s adjusted for swings in our terms of trade) would each grow by about the same amount.

Between 2002 and 2012, the period of the resources boom, real wages grew faster than productivity, though by less than the strong growth in the real national income measure.

But Keating notes that, following the 2012 peak in the resources boom, these relationships were reversed, with real national income actually falling between 2012 and 2016. Real wages then needed to rise by less than productivity, which is just what’s happened.

“My judgement is that equilibrium between productivity, [real] wages and real net national disposable income per person has now been restored,” Keating concludes – implying there’s now scope for real wages to grow in line with improvements in productivity.

This fits with the Reserve Bank’s conclusion in its May statement on monetary policy that, as measured by comparing our “nominal unit labour costs” (nominal wage growth versus the change in labour productivity) with those of our trading partners, our real exchange rate has fallen to about its post-float average. This wouldn’t have changed much since May.

So there’s been a sound economic justification – the need to restore our industries’ international price competitiveness – for our weak wage growth over the past three or four years.

But that need has now been satisfied, allowing us to hope for a return to real wage growth.