The Labour Market and Monetary Policy

Dr Phillip Lowe gave a speech on Australia’s labour market this week in which he covered:
- Trends in employment in Australia,
- Recent wage outcomes, and
- Potential implications for monetary policy.
Australian Employment Trends

Over the past 15 years Australian unemployment has fluctuated within a 2 percentage point band. This is much less than many other advanced economies and reflects Australia’s relative stability over that period. Currently, the Australian unemployment rate is about 0.5% above full employment and there is also a degree of underemployment. These factors are combining to keep wages growth subdued.
There are two major medium trends active in the Australian economy. Firstly, there has been significant growth in part time employment. Since the 1960s the share of part time employment has grown three fold to almost one third of the economy. This is partially due to individuals pursuing part time work to allow for education, caring for others and leisure time. However, it is also partially down to a lack of demand from employers for full time workers, with around a quarter of part time workers wishing to work more hours. This underemployment represents inefficiency in the labour market, which is not represented in the unemployment statistics.
The second major trend in Australia’s labour market is the growth of employment in services. Almost 80% of Australians are employed in the services sector, compared to only 50% in the 1950s. This trend is expected to continue in the future, with Dr Lowe forecasting that Australia’s next wave of growth will be driven by services. Therefore, Dr Lowe argued that it is in our national interest to lift productivity growth in these industries through investment into new technologies and human capital.
Recent Wage Outcomes

In addition to these two ongoing trends, slow growth in wages is a current issue in the Australian labour market. The wage price index grew by just 1.9% last year, the lowest rate of increase since measurement began in 1977. To evidence how low this rate is, the average annual rate of wages growth from the 1990s until a few years ago was 4%. Low wages growth in recent years has dampened expectations of future income growth, which in turn has reduced consumption, weakening growth. Furthermore, debt obligations are staying higher for longer than originally expected.
This issue is not limited to Australia, with many advanced economies facing low wages growth despite having unemployment levels near full employment. Domestically, the Australian labour market still has some spare capacity. Additionally, the effects of the mining boom on wages are waning and there has been slower productivity growth in recent years. However, these factors alone are not enough to account for the slow growth in wages, suggesting a more widespread, global cause. One reason hypothesised by Dr Lowe was workers in advanced countries perceiving greater competition in the labour market. This competition is being caused by globalisation and advances in technology. Globalisation has opened many markets to competition from overseas and some businesses have chosen to move their production facilities to countries with cheaper labour costs. Advances in technology are also increasing the risk of capital-labour substitution.
These factors, combined with the current economic and political instability prevalent in much of the world are causing individuals to value job security more highly. Consequently, employees are less willing to take risks by asking for higher pay. This hypothesis is supported by the fact that the share of employed people changing employers is around the lowest in recent decades.
A gradual pickup in wages growth would be a positive development for the Australian economy, particularly if it was backed by improvements in productivity. The RBA forecasts that this will happen and these forecasts underpin their assumption that inflation will return to around the midpoint of the target band in the coming years.
Monetary Policy Implications
Historically, monetary policy has usually been required to contain wages growth and inflationary pressures, however no advanced economy is currently facing this problem. Whilst some economists have forecast a rapid pickup in inflation, the RBA views this as unlikely, with Dr Lowe believing that the more likely outcome is that
“wage growth picks up gradually as the demand for labour strengthens.”
It is also possible that wages growth remains persistently low for some time and if this were to happen it would indicate a flattening of the Phillips Curve.
A flatter Phillips Curve means that monetary easing or stimulus is unlikely to have a major effect upon inflation. Further monetary stimulus may also push asset prices higher and encourage more borrowing, which poses a medium term risk to financial stability. Australia is fairly well placed to deal with this because the medium term inflation target is flexible and allows for financial stability concerns to be taken into account. Currently, the RBA is particularly concerned with the high level of household debt in Australia as it is rising faster than incomes. Consequently, the RBA has not sought to stimulate a rapid lift in inflation.
Some central banks around the world are beginning to raise interest rates, however, Dr Lowe said that
“this has no automatic implications for monetary policy in Australia”
as domestic interest rates are already higher than most other advanced economies. Finally, Dr Lowe reiterated the RBA’s commitment to delivering an average rate of inflation of 2–3% over the medium term.

