It would be unfortunate if Reserve Bank governor Philip Lowe’s comments on the factors behind Australia’s weak wage growth are used to oppose a quick return to a significant immigration program once the nation’s borders opens.
To the contrary, shortages in labour and materials are now providing a supply-side handbrake on the recovery. Reopening the borders and resuming international people flows, once the majority of Australians are vaccinated, will be critical to extending the recovery from last year’s COVID-19 recession.
The idea that immigration costs local jobs or depresses Australian wages is an old furphy.
As former Reserve Bank board member Warwick McKibbin tells The Australian Financial Review: “Real wage growth is driven by productivity. Skilled immigrants raise economy-wide productivity.”
Australia’s modern immigration program is mostly skills-based. Skilled immigrants bring expertise, innovation and drive to the economy.
With a high wage floor and a solid welfare state, unskilled workers also are needed, frankly, to do the jobs that locals are loath to do, such as fruit picking.
Dr Lowe’s speech to the Economics Society this week was titled “The Labour Market and Monetary Policy”. It was very much in the context of the Reserve Bank’s plan to maintain near-zero interest rates and continue buying government bonds in order to generate enough demand to push the jobless rate towards 4 per cent, bid up wages, and get inflation back into target range of 2 per cent to 3 per cent.
It is good that increased competition makes business less inclined to jack up wages or prices not sustained by increased productivity.
But this is all about reviving inflation so that the central bank can then increase its nominal cash rate rate in time for the economy’s next downturn.
By itself, monetary policy cannot do anything to increase real wages. That all depends on productivity.
It may be true, as Dr Lowe says, that the pre-pandemic scope to draw upon foreign workers, including foreigners studying here, to fill labour shortages may have contributed to “wages being less sensitive to shifts in demand than was once the case”.
But, as with the resources boom of a decade ago, this is mostly a good thing.
As Dr Lowe says, it adds to potential labour supply – just as wider availability of childcare has helped drive the continued sharp rise in female labour participation.
It is good that increased competition from greater integration in global product markets makes business less inclined to jack up wages or prices not sustained by increased productivity.
The Reserve Bank’s own chart pack tells the real story of weak wages growth. Australian wages grew consistently by 3 per cent to 4 per cent a year from the 1990s to the end of the resources development boom almost a decade ago.
With inflation at 2 per cent to 3 per cent, the productivity reforms of the 1990s and then the China-fuelled export boom of the 2000s allowed real wages to grow steadily ahead of productivity growth and made all Australians more prosperous.
As productivity has weakened, that has left Australia with a high-cost economy that is now burdened by higher government debt.
Ironically, the worker shortages that have followed the extended closure of the international borders may generate the wage inflation that Dr Lowe is seeking.
But such hopefully cyclical wage inflation will not make most workers better off. It may make them worse off.
As Dr Lowe says, turning off the tap of foreign labour would also mean “less investment, less confident business, less output, lower capital stock and a less dynamic economy”.