Wages rebound will take some time

The Australian, October 25, 2017

Treasury Secretary John Fraser has told parliament he remains confident wage growth will eventually accelerate as unemployment falls, but he also stressed that it “will take some time.”

“Just as wages slowed in response to the period of slower growth and slack in the labour market in recent years, we expect that a period of stronger growth and falling unemployment will lift wages in the next few years,” Mr Fraser, who also sits on the board of the Reserve Bank of Australia, said.

“This process will take some time and this is reflected in our forecast profile for wages,” he added.

“As the cyclical constraints that have weighed on the economy recede, wages growth will accelerate. This will be assisted by inflation and inflationary expectations moving higher,” he said.

Mr Fraser’s comments came just ahead of today’s release of third-quarter inflation data, which were expected to show price pressures are rising, but only slowly, with record-low wage growth a significant headwind.

Australia has experienced rapid job growth this year, but plenty of spare capacity remains in the labour market, and wage growth is expected to remain weak for some time yet, keeping interest rates low.

The RBA has kept its benchmark interest rate on hold at a record-low 1.5 per cent for over a year, with most economists expecting it could remain sidelined until late 2018. The RBA has signalled it has no wish to follow the hawkish lead of other central banks such as the US Federal Reserve and the Bank of Canada.

RBA board member Ian Harper told The Wall Street Journal in a recent interview that the central bank remains cautious in the absence of wage growth.

Mr Harper’s comments followed news that retail sales slumped in the third quarter, fanning concerns about consumer spending and gross domestic product growth.