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Public sector caps keeping wages low

The Reserve Bank Governor Rob Lowe has called for wage rises in the three per cent range, warning that public sector pay caps are entrenching low wage growth.

RBA Governor Rob Lowe said the following to a House of Representatives economic committee last week:
“In the medium term, I think wages in Australia should be increasing at three point something. The reason I say that is that we are trying to deliver an average rate of inflation of 2½ per cent. I’m hoping labour productivity growth is at least one per cent—and I’m hoping we can do better than that—but 2½ plus one equals 3½. I think that’s a reasonable medium-term aspiration; I think we can do better, but I think we should be able to do that. So I would like to see the system return to wage growth starting with three.”

“The public sector, directly and indirectly, employs roughly one-third of the labour force, and they’re saying wage increases across the public sector may be averaging two per cent. That has as indirect effect on the private sector, because there’s competition for workers and it reinforces the wage-norming economy at two-point something.”

“But if they made a different trade-off and wages in the public sector were rising at three per cent, then over time I think we’d see stronger aggregate demand growth in the economy. I don’t think it would have much of a negative effect on employment; in fact, arguably it could be positive.”

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