“Low wage growth means Australians aren't reaching into their pockets at the shops, Prime Minister Malcolm Turnbull believes.” [Sky News, 6 October 2017]
For years Liberal and Nationals state and federal politicians, along with the business sector, have been insisting wages need to be kept low in the ‘new’ economy.
They got their wish and then began to complain that consumers, who through their spending account for more than half of Australia’s GDP, weren’t spending with gusto anymore.
Apparently not one of these wage scrooges had stopped to consider that government economic policy leading to weaker consumer spending would impact on the national economy.
Now economists are beginning to point out the relationship between cause and effect.
Financial Review, 18 October 2017:
Australia's biggest domestic economic risk is a "skewed consumer cycle" and the government may need to step in with a policy on wages, Commonwealth Bank of Australia chief economist Michael Blythe says.
Normal wage growth is around 3.5 per cent per annum, according to the Reserve Bank of Australia, but Mr Blythe noted that wages are now growing at around 2 per cent per annum, "if you're lucky".
"There's a disconnect between slow wage growth and other economic fundamentals such as the employment rate, which are approaching levels that the Reserve Bank considers normal for a robust economy," he said.
"Given the usual economic fundamentals, like the unemployment rate, you would be expecting to see wages growth faster than it is right now. There's a market failure here, in a way, and governments are there to sort out market failures."……
In Australia, the risk is that low wage growth contributes to changing consumer behaviour.
Amid talk of higher official rates in 2018, Australians are already carrying very high levels of debt. Moreover, workers are concerned about job security, even as households face big increases in energy bills. All of which add up to a "pretty difficult mix", Mr Blythe said.
"Consumer spending is 56 per cent of GDP, so if it[s] underperforming it is a drag on the rest," he said.
To date, households have been running down savings rates, Mr Blythe noted, but "there's a limit to how far you can go on that front and what that tells you is we need to get some more income".
The income story consists of wages, interest rates, taxes and social welfare payments.
But of those four factors, wages are really the only "swing variable" as interest rate cuts or tax cuts are unlikely to occur any time soon and social welfare payments are under pressure from winding back the budget deficit, Mr Blythe said.
Some of the traditional mechanisms that have delivered wages increases in the past aren't delivering the same outcomes in the current environment. Tightening labour markets normally deliver higher wages. As the unemployment rate falls, wage growth tends to come through
.
"But we've been expecting that for a few years now and that hasn't happened," said Mr Blythe. "There's a fair amount of slack in the labour market, it seems, even though the headline unemployment rate has been falling."
Mr Blythe said that this indicates there's a high degree of underemployment in the economy. "When the economy works some of that off I think you'll get a wage response," he said.
However, he believes that low income growth has already changed consumer behaviour.
"Consumers seem to be less responsive to good news and the risk is they overreact to the bad news coming through…..
"So it's an indication that not all the good news is flowing through and if you were to get a negative shock, for example oil were to go up, you would quite likely see consumers cut back their spending more aggressively than they normally would."
"This kind of skewed consumer cycle remains a risk to the broader outlook I think. It's the main domestic risk we talk about when we look at the economy."
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