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RBA swallowing business bunkum on wages

In a nation rife with duopolies and oligopolies, businesses are telling the Reserve Bank they can’t increase wages because of intense competitive pressure.

Funny thing about genuine intense competitive pressure: it tends to squeeze profits. According to measures from the NAB business conditions survey to the national accounts, profits are growing nicely.

Indeed, the latest NAB business survey has profitability growing strongly. The bank reports business conditions are solid across all major industry groups with the exception of retail. And even in retail, NAB says there’s been some improvement with conditions “neutral” in January.

Rather than “intense competitive pressure”, it looks more like employers are resisting real wage rises to further lift profits, to pay bigger dividends and earn senior executives bigger bonuses. They’re squeezing down pay rises because they can.

The RBA’s quarterly statement on monetary policy last week pointed to wages growth being even lower than the headlines’ low wages price index.

Assistant governor Luci Ellis went over some of that ground in a speech on Tuesday and added what the bank has been told by its business community liaison, repeating without criticism the claim that “competition makes us do it”.


The RBA notes some signs of the labour market tightening in the NAB business survey, indicating suitable labour is becoming increasingly difficult to find.

“So far, though, the response to that difficulty has not been to pay people more to ensure they stay, or poach them from elsewhere,” Dr Ellis said.

“Instead, we hear that firms are increasingly using other creative ways to attract and keep staff without paying across-the-board wage rises. These include everything from hiring bonuses, to offering extra hours, to increasing perks and workplace conditions.

“Their reasons for doing so stem from the competitive landscape, or at least how it is perceived. Even when facing strong demand and rising cost pressures, firms seem reluctant to raise their prices. This is a theme from our liaison with the business community. They appear to believe that competition is so intense that they would lose too much business if they did so. So they are especially reluctant to grant wage rises, because this would increase one of their most important costs.”

Hence the previously reported trend of new enterprise bargaining agreements to offer even smaller wage increases.

What continues to be missing from RBA commentary is recognition of the cult of cost-cutting in the C suite. Since the GFC ended the boom times, cost minimisation has been a key to executive success, not investment. Competition in much domestic business is not enough to suppress profit growth, but it is enough to minimise price and wages growth.

What is happening in the real world is a degree of price signalling within industries. HR associations and recruitment firms conduct and circulate surveys of wages movements so that everyone knows what everyone is paying for labour.

There’s no prize for any HR director to be caught paying more than the industry average for talent, so they tend not to. Maybe businesses aren’t explaining that to the RBA.

Watch what happens to a company’s share price when it announces a round of cost-cutting redundancies – a lift that’s recorded as increasing “shareholder value” and thus the C-suite bonuses.

It’s part of the real world’s scepticism about the claims of big business and the federal government that reducing company tax rates will necessarily mean high wages.

Nonetheless, Dr Ellis remains confident that, eventually, a tightening labour market will result in firms paying more, but it will be a lagged and gradual response. That in turn will result in higher prices as “margins cannot be squeezed forever”.

And that, in turn again, sounds like higher inflation and the RBA’s subsequent normalisation of interest rates remains a long way off.

Meanwhile, the NAB economics team has developed its own wages growth measure as it felt the wage price index had underplayed labour cost movements – the opposite of what the national accounts and average hourly earnings numbers have indicated. Even the NAB measure though “points to an extended period of broadly stable, modest, wages growth”.