Michael Pascoe: Once more for the dummies – we need higher wages

The Reserve Bank has raised interest rates enough, Michael Pascoe writes.

The Reserve Bank has raised interest rates enough, Michael Pascoe writes. Photo: TND

Sure, bad news sells, but was it really necessary to sell the best news on wages in many years as bad news?

The verdict on Wednesday’s Wage Price Index (WPI) rise to 3.1 per cent growth for the latest year was close to uniform: The fastest wages growth in nearly a decade was bad – it allegedly meant the economy was “running hot” and would require more interest rate rises by the Reserve Bank.

Guess what? The RBA won’t be lifting interest rates because wages growth is starting with a three. I have that in writing from the Deputy Governor.

Similarly, Thursday’s announcement of our unemployment rate returning to 3.4 per cent – the lowest in nearly half a century – wasn’t met with celebration, with champagne corks popping and fireworks, but with more doom and gloom about the need to end such nonsense and force unemployment back up.

Um, OK, unfortunately, that is the Reserve Bank’s official policy, wanting the unemployment rate to start with a four.

For a long time during the 20-teens – Australia’s lost decade –  the RBA’s official desire was to see the WPI starting with the three we have just managed. And the higher seasonally-adjusted private sector WPI of 3.4 per cent would have been no bad thing either.

Having finally got what it had been wishing for, we’re being told the RBA wants to squeeze the life out of wage growth.

But the RBA isn’t actually saying that, and it shouldn’t. Even annualising the September quarter growth to 4 per cent is a desirable outcome for the economy, never mind the individuals dealing with falling living standards.

Low wage growth

That the latest WPI was the “highest in nearly a decade” doesn’t mean it was high, just that growth over the past decade was low.

Sure, the business lobby doesn’t like stronger wages growth – the business lobby only likes stronger profits growth. Years of wage suppression as official policy have delivered that.

This September 7 Australian Bureau of Statistics graph shows profits’ share of factor income at its highest level since the ABS started calculating it, while the compensation of employees’ share is at its lowest.

Michael Pascoe

The compensation of employees’ share is at its lowest. Source: ABS

And the sector absolutely turbo-charging profit growth is mining – which just happens to be the lobby group most actively campaigning against the Federal Government’s industrial relations changes that are designed to give workers back a little of the bargaining power they have lost.

This graph from the RBA underlines the mining sector’s astounding profitability as it stuffs its collective pockets with unimagined excess windfalls.

Michael Pascoe wages

The mining sector’s astounding profitability. Source: ABS


Immediate caps on gas and coal prices

This single picture makes a better argument than any thousand words for immediate price caps on domestic gas and coal prices, as well as enforced preferencing of the domestic market.

And such direct action by government would do much more to lower inflation than the RBA pushing up interest rates further.

Remember, rising interest rates are inflationary – they are just not measured as part of the Consumer Price Index (CPI).

Monetary policy is an extremely blunt instrument.

Unlike monetary policy’s dubious transition mechanism to squeeze down inflation by inflicting iniquitous pain on parts of the population, government intervention to lower energy prices would actually do the job more efficiently and fairly.

Too bad the government is fluffing about before doing what it must eventually do, meaning the RBA is being pushed to keep bashing people.

The excess rent collectors in the energy sector will of course scream, but they have no credibility in the present circumstances.

At this stage I should declare a conflict of interest about the December RBA board meeting.

I have a small bet with a neighbour about interest rates, made some months ago when the market seemed to be predicting a cash rate nudging 4 per cent. I bet that the cash rate would not hit 3 this year.

The consensus forecast is that I will be wrong, that the RBA will add another 25 points on December 6, making it 3.1 per cent.

Most forward indicators are showing the inflation drivers are starting to turn down. If the Government walked its talk on energy prices, that would definitely be the case.

RBA struggles with wage predictions

And the present level of wages growth isn’t a problem. Inflation is more than double the headline wages growth – wages are lagging, not leading.

As the RBA has struggled to find some way of predicting what wages might be going to do (forecasting wages growth has been a total failure over the past decade), it has started publishing as many indicators as it can find of the state of play.

Michael Pascoe

The CBA wage indicator has proven closest to the WPI pin. Source: ABS

The CBA wage indicator has proven closest to the WPI pin, while the bank’s own business liaison is pointing higher.

A speech by the RBA deputy governor, Michele Bullock, last week, showed the businesses the bank liaises with are on the higher side of the game.

“Since the middle of the year, close to half of firms reported realised wage increases of 3-5 per cent, with a further quarter of firms reporting increases above 5 per cent,” Ms Bullock said.

“New and timely data on wages outcomes for enterprise agreements from the Fair Work Commission shows that average wage increases in newly lodged enterprise agreements were a touch stronger in the September quarter, compared with approved agreements in the June quarter.”

And then the money shot:

“Despite the stronger pick-up, aggregate wages growth remains moderate so far and wage growth expectations generally remain consistent with the inflation target.”

There. Wage growth is not driving up interest rates. Rent seeking, weather and international factors beyond Australia’s control are doing it.

So, how about it, Guv? You don’t need to lift rates next month other than to bow to the markets that are calling for it. Let me win my little bet.

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