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49c pay rise too much for stingy bosses, and the RBA is worried

RBA governor Philip Lowe is concerned businesses will continue to buy into the
RBA governor Philip Lowe is concerned businesses will continue to buy into the "narrative" around the importance of cost control. (Images: Getty).

Employment has fallen to 5.1 per cent - a pre-pandemic low, and the GDP has also returned to strengths last seen in early 2020.

But wages remain stubbornly, frustratingly low. And the Reserve Bank of Australia (RBA) is paying close attention.

In a speech on Thursday, RBA governor Philip Lowe said businesses’ “laser-like focus on costs” could be hamstringing the broader economic recovery.

“Most businesses feel they are operating in a very competitive marketplace and that they have little ability to raise prices. As a result, there is understandably a laser-like focus on costs: if profits can't be increased by expanding or by raising prices, then it has to be achieved by lowering costs,” Lowe said.

“This has become the predominant mindset of many businesses. This mindset can be helpful in making businesses more efficient, but it also has the effect of making wages and prices less responsive to economic conditions.”

His speech came after the Fair Work Commission on Wednesday decided to increase the official minimum wage by 2.5 per cent. While well below the 3.5 per cent unions had hoped for, it was significantly higher than the business lobby’s proposed 1.1 per cent.

The new minimum wage is $20.33 an hour, an increase of 49 cents.

Lowe noted that even in areas where businesses are struggling to find workers, there’s a reluctance to increase wages.

Business’ stinginess is a product of the resources boom, when the exchange rate appreciated significantly.

“When one Australian dollar was worth more than one US dollar, many Australian businesses felt that their Australian dollar cost structure was simply too high,” Lowe said.

“You might recall that through this period many businesses were saying that Australian costs, including labour costs, were leaving them uncompetitive.”

Years later, businesses are still buying into the “narrative about the importance of cost control”.

This experience has left a lasting imprint on many businesses and it has reinforced the narrative about the importance of cost control.

Businesses struggling to find staff are now questioning whether to increase wages or find another way to plug the gap.

“Many firms are choosing this second option, relying on non-wage strategies to retain and attract staff. Some are also adopting a ‘wait and ration’ approach: Wait until labour market conditions ease, perhaps when the borders reopen, and until then, ration output.”

The problem is that as businesses adopt this ‘wait and see’ approach, the broader economy remains somewhat stuck.

The RBA believes the best way to deliver significant and durable economic growth is through low unemployment coupled with faster wages growth, Lowe added. But wage growth “remain[s] subdued”, despite recovering employment.

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