Yesterday, RBA assistant governor (economic) Christopher Kent gave a speech titled “Cyclical and Structural Changes in the Labour Market”.
It was a detailed speech which looked at the supply and demand of labour and the development of the workforce in Australia over recent years. The message Kent left the audience with was that Australia was likely to have persistently high unemployment over the next few years.
The Bank’s latest forecasts are for employment growth to pick up gradually over the next two years. The unemployment rate is expected to remain elevated over that period, declining from later in 2015 when we anticipate GDP growth to be picking up to an above-trend pace.
But there is another message in the speech – it is one about the competitive position of the Australian economy in comparison to its global peers and it is a message that says if the Aussie dollar doesn’t fall then perhaps wages need to adjust.
Kent said that Australia had become less competitive because the Aussie dollar made the cost of doing business in Australia relatively more expensive than Australia’s competitors.
But business is already adjusting to the high Aussie dollar by squeezing productivity gains out of the workforce.
Equally however, on the downside for workers, or those seeking work, increasing productivity hurts new employment because “over the past couple of years, it has meant that the growth in output that we’ve seen has been achieved with relatively moderate growth in employment.”
Looking ahead, Kent said it was preferable that the Aussie dollar fell to adjust and help make Australian workers more competitive once again.
The slowing in wage growth across all industries has meant that firms have experienced relatively slow growth in their labour costs. This is more striking after accounting for the growth in the productivity of labour, which as I’ve already noted has picked up somewhat compared with the pace we had become accustomed to over much of the 2000s. Over the past year and a half, the growth in nominal wages has been matched by growth in labour productivity. As a result, there has been no increase in the cost of labour required to produce a unit of output.
In turn, slower growth in labour costs is having a beneficial effect on international competitiveness.
Kent is highlighting the fact that while a lower Aussie dollar is the preferable way for the economy to adjust to a fall in the terms of trade, there is another way – perhaps less palatable to the population but another way non-the-less. Australians either need to become more productive, slow wages growth or a combination of both.
Adjustment via slower wage growth and stronger productivity growth may not contribute as much nor as quickly to a real depreciation as might be expected from a decline in the nominal exchange rate. However, it is still preferable to the alternative of little or no adjustment in the growth of unit labour costs, which would come at the expense of more unemployment and the associated economic and social costs.
You can read Kent’s full speech here.