Sunday, 21 June 2015

Why is wage growth so low?

In the latest RBA bulletin we get an excellent paper by David Jacobs and Alexandra Rush on why wage growth is so low.
It puts the meat on the bones of what Glenn Stevens was talking about last week.

This is possibly the guts of the issue.

"The decline in wage growth since late 2012 appears to have been unusually large relative to the increase in the unemployment rate. Based on the estimated 3 There are various theoretical explanations for the slow adjustment in wages, including the use of contracts, imperfect information, the effect of wages on productivity (the ‘efficiency wage’ theory) and the absence of unemployed workers from wage bargaining (‘insideroutsider’ theory). 4 The unemployment gap is the difference between the unemployment rate and a statistical estimate of the non-accelerating inflation rate of unemployment (NAIRU). For a discussion, see Ballantyne, De Voss and Jacobs (2014). While one possible explanation for slow wage growth is a decline in the NAIRU, other evidence does not suggest that a marked reduction in the NAIRU has occurred. Graph 3 Australia South Korea UK Spain Japan Norway France Germany OECD Canada Italy Sweden US -2 -1 0 ppt -2 -1 0 ppt Wage Growth Surprise* 2014 * 2014 growth in compensation per employee (i.e. AENA per head), relative to 2013 OECD forecast Sources: OECD; RBA BULLETIN | JUNE QUARTER 2015 11 WHY IS WAGE GROWTH SO LOW? WHY IS WAGE GROWTH SO LOW? relationship that held from 1998–2012, WPI growth has declined by more than twice as much as would have been expected. A longer-term analysis, based on the measure of average earnings from the national accounts (AENA), also suggests that the wage adjustment has been large given the change in unemployment (Graph 5). What stands out about the current episode is that wages have fallen as sharply as they did in some earlier episodes that had larger and sharper increases in the unemployment rate."

It does say the unemployment rate, a decline in inflation expectations and  the decline in the terms of trade and   account for around 2/3 of the reasons for the low growth in wages.

However  they also add
"Wages may have become more flexible over time. It has been widely recognised that the system of wage bargaining in Australia has become more flexible over the course of the past few decades (Borland 2011), and there are reasons to think that flexibility may have been greater than usual in the current episode. To some degree, individual employment contracts are more prevalent in the industries most exposed to the declines in resource prices and investment, Graph 13 Private Sector WPI Growth Year-ended 3 4 % 3 4 % Actual Fitted model Contributions* 1999 2003 2007 2011 2015 -1.0 -0.5 0.0 0.5 ppt -1.0 -0.5 0.0 0.5 ppt Inflation expectations Unemployment** GDP deflator * Contributions to fitted line relative to average since 1998 ** This includes the effect of the change in the unemployment rate and NAIRU gap terms in the model Sources: ABS; RBA 16 RESERVE BANK OF AUSTRALIA WHY IS WAGE GROWTH SO LOW? WHY IS WAGE GROWTH SO LOW? Graph 14 1995 1999 2003 2007 2011 2015 0 1 2 3 4 % 0 1 2 3 4 % Expected Wage Growth One year ahead Firms (NAB survey) Union officials Sources: Australian Council of Trade Unions; Employment Research Australia; NAB; RBA; Workplace Research Centre Table 1: Enterprise Bargaining Agreements Per cent of total Mar 2008–Sep 2009 Jun 2011–Dec 2014 Agreements replaced(a) 80 105 Employees covered under replaced agreements(b) 75 133 (a) Calculated as the number of non-greenfield agreements negotiated divided by the average number of agreements active during the period (b) Calculated as the number of employees covered under non-greenfield agreements negotiated divided by the average number of employees covered by EBAs during the period Sources: Department of Employment; RBA such as mining and business services. Another factor is the relatively long span of the episode, at more than three years. As a result, a higher portion of employment contracts have been renegotiated during this period of subdued demand conditions. The typical length of an Enterprise Bargaining Agreement (EBA) is around three  years, so virtually all outstanding EBAs have been renegotiated since mid 2011 and some agreements have been negotiated twice (Table 1). By comparison, over 2008–09 a lower proportion of agreements were renegotiated, covering fewer employees."


We have had a flexible labour market ever since Keating instituted EBAs. What we are now seeing is the result of this.
Those people who claim the labour market was re-regulated by the previous government have egg all over their face AGAIN.

Greg Jericho on this as well