Next Investors logo grey

How to really fix Australia's low wage growth challenge


Published 04-OCT-2019 12:02 P.M.


2 minute read

Hey! Looks like you have stumbled on the section of our website where we have archived articles from our old business model.

In 2019 the original founding team returned to run Next Investors, we changed our business model to only write about stocks we carefully research and are invested in for the long term.

The below articles were written under our previous business model. We have kept these articles online here for your reference.

Our new mission is to build a high performing ASX micro cap investment portfolio and share our research, analysis and investment strategy with our readers.

Click Here to View Latest Articles

The lack of wages growth remains the missing link between Australia’s growing economy and building household wealth, so how can we fix it?

Recent income tax cuts are a good short-term policy response as they will work to tackle the effects of bracket creep, increase disposable income and encourage retail spending. Meanwhile, lower interest rates should encourage credit growth. However, there are limits to the effectiveness of monetary policy, especially as we get closer to a zero-base rate.

In some respects, we shouldn’t be surprised by stable wages. Low levels of inflation, low outright interest rates and a relatively slow pace of economic growth have helped create this. However, low wages are also a strong indicator of stagnant productivity. Why?

The simplest explanation is spare capacity in labour markets. Wages typically rise in tight job conditions, when employers struggle to access suitable labour. But, when there is spare capacity - as there is now due to technological disruption and global trends - workers feel less empowered to bargain for higher wages, as evidenced by current underemployment rates, which have been rising as unemployment has fallen.

In 2017, the RBA had estimated an unemployment rate around five percent for “full employment”, but recently it revised its estimates down to around 4.5 percent. Therefore, the intent of the recent rate cuts is to lift employment and drive wages growth. However, to avoid a more permanent state of low inflation and stagnant wages - which Japan has experienced for decades - we need fiscal stimulus, structural reform and a range of initiatives to drive productivity growth.

Fiscal stimulus can be delivered by tax cuts, but more lasting and compelling fiscal support can best be delivered by Government investment in infrastructure. As the RBA noted recently, the Australian Government can now borrow at its lowest rate since Federation - 118 years ago! Given our AAA credit rating and the arrival of a sooner than expected budget surplus, this seems an obvious solution.

At the same time, structural reform can help drive more permanent increases to productivity and wages. Educational reforms have delivered excellent results around the world, and the pace of technological change makes this even more compelling today. Investment in human capital, healthcare and the creation of more efficient energy markets should be top priorities.

Australia needs all levels of government to embrace initiatives to support the jobs market, boost productivity and promote sustainable population growth in regional areas.

This strategy will be more effective than rate cuts alone, which - by themselves - risk perpetuating low inflation, low economic growth and low wages growth, for longer.

David Robertson is Head of Economic and Market Research, Bendigo and Adelaide Bank.



General Information Only

S3 Consortium Pty Ltd (S3, ‘we’, ‘us’, ‘our’) (CAR No. 433913) is a corporate authorised representative of LeMessurier Securities Pty Ltd (AFSL No. 296877). The information contained in this article is general information and is for informational purposes only. Any advice is general advice only. Any advice contained in this article does not constitute personal advice and S3 has not taken into consideration your personal objectives, financial situation or needs. Please seek your own independent professional advice before making any financial investment decision. Those persons acting upon information contained in this article do so entirely at their own risk.

Conflicts of Interest Notice

S3 and its associated entities may hold investments in companies featured in its articles, including through being paid in the securities of the companies we provide commentary on. We disclose the securities held in relation to a particular company that we provide commentary on. Refer to our Disclosure Policy for information on our self-imposed trading blackouts, hold conditions and de-risking (sell conditions) which seek to mitigate against any potential conflicts of interest.

Publication Notice and Disclaimer

The information contained in this article is current as at the publication date. At the time of publishing, the information contained in this article is based on sources which are available in the public domain that we consider to be reliable, and our own analysis of those sources. The views of the author may not reflect the views of the AFSL holder. Any decision by you to purchase securities in the companies featured in this article should be done so after you have sought your own independent professional advice regarding this information and made your own inquiries as to the validity of any information in this article.

Any forward-looking statements contained in this article are not guarantees or predictions of future performance, and involve known and unknown risks, uncertainties and other factors, many of which are beyond our control, and which may cause actual results or performance of companies featured to differ materially from those expressed in the statements contained in this article. S3 cannot and does not give any assurance that the results or performance expressed or implied by any forward-looking statements contained in this article will actually occur and readers are cautioned not to put undue reliance on forward-looking statements.

This article may include references to our past investing performance. Past performance is not a reliable indicator of our future investing performance.