Reserve Bank of Australia governor Philip Lowe tackled the problem of low wages growth being seen in Australia and other countries in a major speech today in Sydney.
To set the scene he shared this chart, which rams home the collapse in wages growth in recent years.
In trying to explain it, Lowe said there was “no single answer”, but did offer some reasons: globalisation, technology, and people feeling less secure about the world.
Here’s an excerpt (emphasis added in bold):
Part of the story in Australia is that our labour market has some spare capacity and we are unwinding some of the effects on wages of the mining investment boom. But this isn’t the whole story, and neither spare capacity nor a mining boom explain low wages growth in some other advanced economies.
Another part of the story, particularly overseas, is slower productivity growth. In the United States, for example, low growth in wages is being matched with low productivity growth. In Australia, productivity growth has also slowed somewhat. Here, however, the slowing in earnings growth has been more pronounced than that in productivity. The result has been a decline in labour’s share of national income.
None of these reasons alone appears sufficient to explain the weakness in wage growth. This suggests that there is something else going on, and that it has a global dimension.
Many workers in advanced economies feel like they face more competition. A basic principle of economics is that when you face more competition, you are less inclined to put your price, or as a worker, your wage, up.
This perception of greater competition is coming from two sources. The first is globalisation. One of the positives of globalisation is that it increases the size of market that a firm can tap. At the same time, though, globalisation increases the number of competitors that can tap your market; it increases competition. The second source is changes in technology. In some industries, advances in technology have led workers to worry about the competition from robots. At the same time, advances in technology have made more areas of the economy subject to international competition; there are fewer truly non-traded industries any more.
Perhaps as a consequence of this extra competition – or perhaps as a consequence of other forces within our societies – many workers in advanced economies feel that the world is less secure – less secure economically and less secure politically. This means that security is valued more highly. With a greater premium on security, it’s plausible that workers are less inclined to take a risk by seeking larger wage increases.
The full speech is here.