Lunatic RBA wrong again on Aussie wages

In June, economists lashed the Reserve Bank of Australia (RBA) for relying on business liaison, rather than actual data, to claim that Australian wage growth was strong. It then used this liaison “evidence” to justify aggressive interest rate hikes.

The RBA’s reliance on liaison represented a sharp U-turn, given it previously said that it would be “patient” on lifting interest rates, and would not hike rates until annual wage growth surpassed 3%. This 3% target, the RBA claimed, would signal that underlying inflation was “sustainably” within its target band, rather than temporarily imported on the back of supply-side shocks.

The RBA has gotten wage growth forecasts horribly wrong over the prior decade, continually predicting a wage breakout only to see actual wages crater:

RBA wage growth forecasts

RBA wage growth forecasts always too bullish.

History seems to be repeating, with the RBA’s reliance on liaison once again giving it false signals on wages.

As we know, the ABS’ wage price index rose by a soggy 2.35% in the year to March:

Australian wage growth

Wage price index disappointed again.

The national accounts also showed that Australia’s real unit labour cost (ULC), which according to the Australian Bureau of Statistics “are an indicator of the average cost of labour per unit of output produced in the economy” and “are a measure of the costs associated with the employment of labour, adjusted for labour productivity”, collapsed 6.3% below their pre-pandemic level in the March quarter and have fallen for the better part of 35 years:

Real unit labour costs

Business labour costs have fallen sharply.

Thus, wages in Australia have actually been disinflationary given the falling ULC.

More recent wages data also contradicts the RBA’s liaison.

The CBA’s wage tracker, which leads the ABS’ labour price index ands is derived from CBA accounts, shows that wage growth remains sluggish, growing only by around 2.5% in the year to July:

CBA wage tracker

CBA: wage growth yet to accelerate.

NAB’s economics team has also done a similar analysis using its own bank accounts, and also shows that wage growth was only around 2.5% in the June quarter:

The NAB is getting real-time data on whether its customers’ wages are going up, down or sideways…

It’s the first time the bank has used its customers’ data in this way. So, it began with the deposit account data of roughly a million customers, and its computer models whittled that down to 250,000 customers that has straightforward, measurable wage or income deposits.

Its results are remarkably consistent with the ABS’s results on wage growth.

That is, NAB’s analysis has found wage growth increased 2.5 per cent in the three months to June — up 0.1 per cent on the ABS’s measure for the March quarter. In other words, wage growth, it reckons, is barely budging.

This is contradictory to what the Reserve Bank is reporting.

Official confirmation will be receive later this month when the ABS releases its wage price index for the June quarter.

However, the way the evidence is stacking up, the RBA will again be proven to be too bullish on wage growth, thanks to its over-reliance on its business liaison program.

Unconventional Economist
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Comments

  1. A mate of mine recently had this experience. He received around 2.5% increase and once he complained was immediately offered a $5K one off bonus. However, employer went to great lengths to explain its a “one off bonus” and don’t tell anyone else in the Company about the bonus.

    • pfh007.comMEMBER

      After 10 years of wages going nowhere fast most employees have NO lived experience of having bargaining power.

      I found it strange before covid how reluctant staff were to ask for salary reviews etc even as unemployment was falling.

      The problem was just that it had been so long that few of them had any real experience of how it works or how to do it.

      Lack of experience explains most of what we are seeing but I can tell that is changing fast.

      One of the more peculiar things I am seeing is staff leaving for relatively small increases without ever having raised the issue of salary with their existing employer. Why? Because they don’t know how as they have never had those conversations with the current employers.

      All these pecker head economists insisting that their ‘data’ is not showing any change in the labour market as a result of unemployment reaching 3.5% for the first time since 1974 in an environment of 6% inflation tells you everything you need to know about the economics profession. Clueless.

      Of course it would be wonderful if we could reach full employment without ANY upward pressure on wages but that is just fanciful.

      In any event we would still need higher interest rates as with inflation at the level it is we have negative real interest rates so loads of fuel still going on the fire.

      • drsmithyMEMBER

        One of the big reasons will also because the only relatively low-risk way someone has of figuring out their “worth”, is applying for another job and being offered a higher salary. Most don’t make any attempt to negotiate that offer either, I’ll wager.

        Standardised job titles and freely available, regularly published national salary information would help immensely with wage negotiations. Which is of course why most employers do everything they can to obfuscate it and typically try to strongly discourage employees from discussing remuneration.

        Or just do what the Norwegians do and make everyone’s tax returns publicly available…

        • pfh007.comMEMBER

          Yep, all those measures would be a great idea as unemployment falls further. Nothing wrong with informed workers making employers work harder. For similar reasons a higher vacancy rates makes landlords work harder.

          I don’t know what is wrong with the data but we have been fighting off certain companies offering significant increases for basic admin. Wages have risen significantly circa 10%+ min as a result. I think it will take a while for news of what 3.5% means to spread widely amongst workers. Usually they need to hear it first hand from family or friends.

  2. Jumping jack flash

    The “transitory” inflation from that gargantuan and highly suspiciously timed stimulus will eventually flow into wages of course, that was the entire point for it originally [and they also raised minimum wages to ensure it!], but the current actions of central banks all over the Earth mean it will quickly dissipate.

    Nevertheless I’ve seen some stupidly high wages in routine STEM jobs at the moment, but I’m sure that other areas aren’t nearly as lucky as that. For instance, cleaners’ wages certainly haven’t been raised, and those are also in very short supply.

    I have also noticed STEM jobs and wages dropping off over the last week or so.

    165K plus super for coding a website, obviously for selling something that will soon have no demand for it? Permanent role, too.

    Grab it while you can I guess.
    Pay the windfall to the mortgage gods.

    • I'll have anotherMEMBER

      The banks data is likely uncorrected for dozens of systematic errors and the precision is probably poor at a 95% C.I.

      That’s why the RBA should rely on ABS data, no business lobby group mate talks, or bank data for that matter.

  3. pfh007.comMEMBER

    “..economists lashed the Reserve Bank of Australia (RBA) for relying on business liaison, rather than actual data,..”

    Being lashed by an economist? The idea of economists being licensed to lash anyone is a fascinating idea?

    Do they hand out M-16’s to inmates in an asylum? I don’t think so and I bet they don’t give them lashes either.

    Have a read of this

    https://www.rba.gov.au/education/resources/explainers/nairu.html

    “..There are different ways to estimate the NAIRU, using various statistical models. While the true value of the NAIRU cannot be known, and any estimate has a range of uncertainty around it, research by the Bank pointed to the NAIRU for Australia being below 5 per cent prior to the COVID-19 pandemic.[1]..”

    Funny thing is don’t recall for “years” before covid, teams of lash weilding economists wandering Martin Place and flogging RBA employees for insisting that NAIRU was close to 5% and not below 3.5% because that appears to be what is being now asserted.

    Where were they demanding loads of monetary and fiscal stimulus to push unemployment hard beyond 3.5% because a tight labour market is nooooooooo problem?

    Where were they demanding that the borders be closed until unemployment reached those heading heights because a tight labour market was nooooooooo problem?

    Silent as monks because bondage enjoying bank economists have never given two hoots about unemployment as a nice buffer stock of serfs keeps the other serfs in line.

    Now suddenly after all those years of mainstream neoliberal economists insisting that inflation would only be kept under control if unemployment was kept at least at 5% they now reckon inflation will go nowhere if unemployment drops well below 3.5% and even if it gets as low as below 3%.

    Of course very low unemployment having no impact on wages and inflation would be a marvellous if true but coming from the ‘lash’ lovers it smells of fermented product from the rear of a bovine.

    It is fantastic that the paid parrots of debt peddler economics department are now HUGE fans of a NAIRU below 3.5% but as Harry Styles might sing.

    “You know its not the same as it was….as it was…as it was…”

    • Jumping jack flash

      “…they now reckon inflation will go nowhere if unemployment drops well below 3.5% and even if it gets as low as below 3%.”

      That’s not an entirely silly idea but once again the problem is that the bulk of our “productivity” is anything but productive. Lets sell more imported items for markup? Lets provide more services? It doesn’t do all that much.

      And especially at the same time they’re trying to deflate the stimulus demand bubble using increased interest payments and limiting debt growth.

      They started on the path to kick off monumental amounts of inflation and now for whatever reason they changed their minds. It will take a while for the inflationary “energy impulse” to dissipate and turn around from the opposing force they’re applying to it now.

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