Finance Finance News Wages growth outlook gets worse and Parliament has the solution

Wages growth outlook gets worse and Parliament has the solution

Philip Lowe RBA on money
Parliament have multiple solutions to wage stagnation, but all are 'politically debatable'. Photo: AAP
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Reserve Bank governor Philip Lowe says Australia has a range of options available to lift the country’s stagnant wages, but they are at the mercy of the government.

Mr Lowe says Australia’s economy is doing “OK”, but a range of policy changes – including an increase in Newstart payments – could greatly improve the country’s performance.

“We’re looking at 5 per cent unemployment, 2 per cent inflation, growth around trend and a budget balance,” the RBA boss told the House of Representatives Standing Committee on Economics on Friday.

“Are we happy with being OK or do we aspire to do something better?” he asked.

“I hope as an Australian we can do the latter, but if we don’t I think things will be OK.”

But while the RBA believes boosting economic performance and finally setting wage growth in motion is possible, Mr Lowe said the ability to make those changes fall “completely out of the area of the central bank” and instead are at the mercy of Parliament.

“It’s really up to governments across the country, whether they want to do that or whether they can live with growth being kind of OK, and wage growth being as it is,” he said.

Low demand holding wages down

Mr Lowe said weak wages growth has been driven in part by low demand for goods and services throughout the economy as people choose to save their money rather than spend or invest.

Part of the solution to lifting wages is to bolster this “aggregate demand”, and Parliament already has a range of options to achieve this, including a lift to the Newstart rate, he said.

“Would an increase in Newstart lift aggregate demand? I think the answer to that is yes because the payments are low and they haven’t been increased in real terms in a number of years,” Mr Lowe said.

“I think if people who got Newstart got more money, they would spend it so aggregate demand would rise,” he explained.

“But it would cost the budget money … government has to decide where best to spend its scarce resources.”

Wages outlook worsens

The Reserve Bank’s latest statement on monetary policy – released separately to Mr Lowe’s grilling before the standing committee – warned there will be little improvement in wages until 2020, despite previously forecasting growth to pick up at the tail end of 2019.

Wages growth was expected to continue to lift modestly over the year ahead, the statement said.

“However there is limited upward pressure stemming from current labour market conditions and the majority of surveyed firms … now anticipate little change in wages growth over the next year,” it warned.

The statement also noted that employment growth has been “stronger than can be explained” by the usual indicators, and could possibly slow more rapidly than expected, in turn putting more pressure on wages growth.

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