Workers getting ready to shout “show me the money”
Growth in people’s salaries has been too slow for too long.
It was way back in 1996 in the movie Jerry Maguire that Rod Tidwell – played by Cuba Gooding Jr – first shouted out the phrase “Show me the money”.
Before long, his agent Jerry Maguire – played by Tom Cruise – was shouting the phrase along with him, earning himself the right to remain Tidwell’s agent.
Now the time is fast approaching for all Australian workers to start shouting the phrase to their bosses, chiming in along with our own Reserve Bank governor Dr Philip Lowe who has long been cheering on some Australian wage growth, which he wants to see maintain 3%.
Wage growth has been too slow for too long
The problem is that wages growth has been far too slow for the RBA’s liking, with unemployment falling but not yet enough to get wages rising enough to push inflation closer to the RBA target range of 2% to 3%.
Exactly how low unemployment will need to get before wages start to rise is an open question but in pre-pandemic United States unemployment was down to a tiny 3.5%, the lowest level since 1969, and still wage growth was just beginning to lift and inflation remained soft.
It has been a similar story here with unemployment in NSW falling to just 4% in early 2019, with no evidence of a big spike in wages growth or inflation.
Then the pandemic hit and all bets were off as large slabs of the economy closed down and jobs were shed rapidly.
That suggests Australian unemployment may also need to go very low before wage growth hits acceptable levels and starts to feed through into inflation.
At the moment wage growth is stuck at a miserly 1.4%, so it is going to take a significant shift for that number to more than double to hit the RBA’s sweet spot.
Still, the numbers are heading the right way, with February’s unemployment numbers falling from 6.3% to 5.8% as the bounce-back from the pandemic continued, with the March figure falling by another 0.2% to 5.6%, with the end of JobKeeper the only uncertainty from here on.
That trend should help drive an uptick in wage growth if the employment market continues to tighten and employers are forced to offer a bit more to attract the right person to fill a role.
Low unemployment essential to kick start wage rises
As unemployment falls, skills shortages begin to develop and the cost of labour rises as the pool of people wanting jobs decreases.
One change that might continue to help produce a tight job market is the lack of international travel, which has greatly slowed the flow of migrants and international students into Australia, which is likely to drive some skill shortages.
We have seen this phenomenon in low skilled areas such as fruit picking which are often filled by student and backpacker labour and it is possibly sending ripples further up the employment value chain as well.
Still, there are few economists predicting that the job market will tighten enough to produce wage growth of 3% for years, due to the slow pace of many wage gains as they grind through the industrial award system.
Where are unions when you need them?
Other trends which weaken the pressure for wage gains include the much weaker position and coverage of the union movement, greater job competition through offshoring and greater use of labour replacing technology.
All are contributing to a lowering of the rate of unemployment required before we get levels of wage growth even approaching what Dr Lowe has prescribed.
However, the economic consensus is that it will take a really sustained period of low unemployment to get wages growth anywhere near the 3% Dr Lowe is targeting.
Which means that if that target remains, interest rates really might be held lower for much longer.