Could immigration revive wage growth? RBA governor suggests it’s possible

By Maja Garaca Djurdjevic

July 09 2021
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The RBA governor has drawn a parallel between immigration and wages growth, suggesting that while immigration has been known to dilute the upwards pressure on wages, recent events are implying the opposite holds.

In a speech to the Economic Society of Australia, the governor of the Reserve Bank of Australia noted that subdued wages growth had become a familiar pattern before the pandemic, pinning the lack of upwards pressure on wages on strong uplifts in both labour demand and supply.

According to Philip Lowe, the strong growth in labour demand was closely matched by a strong increase in labour supply. With both demand and supply rising, there was little need for the price – that is wages – to move.

“Immigration adds to both the supply of, and demand for, labour: when immigrants work they supply labour and their consumption of goods and services adds to the demand for labour,” Mr Lowe said.

“The picture, though, is clearer when firms are hiring workers to overcome bottlenecks and fill specific gaps where workers are in short supply.

“This hiring dilutes the upward pressure on wages in these hotspots, and it is possible that there are spillovers to the rest of the labour market. This hiring can also dilute the incentive for businesses to train workers to do the required job,” he continued.

But while this may have been the theory prior to the pandemic, Mr Lowe’s later observations of Australia’s current labour shortages seem to suggest the opposite.

Noting that while labour demand is currently outpacing supply as a direct result of the ongoing closure of international borders, wage increases have remained modest for most workers.

“Most firms retain their strong focus on cost control, with many preferring to wait things out until the borders open, and ration output in the meantime,” he said.

“Previously, some of these vacancies could have been filled by people on visas, this is now more difficult to do. Since March 2020, the number of people in Australia on a visa with the right to work has fallen by over 250,000, which is a significant decline,” he added.

Looking ahead, Mr Lowe suggested that the closure of the borders is making it more difficult to match workers with jobs, opening the possibility that labour shortages occur at a higher rate of unemployment than previously expected.

Moreover, recent research by the RBA has backed this possibility, suggesting also that wage growth actually occurs at lower rates of unemployment.

Namely, having examined the relationship between the unemployment rate in nearly 300 individual local labour markets across Australia and the average increase in labour income in these markets using data from the Australian Taxation Office, the RBA’s researchers arrived at the conclusion that tighter labour markets do generate stronger wage increases and that the relationship seems to be stronger at unemployment rates below 5 per cent.

“These are important conclusions from a policy perspective, especially given the RBA’s strategy is to get the unemployment rate down so that wages growth picks up and inflation returns in a sustainable way to the target range.”

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

About the author

Maja Garaca Djurdjevic

Maja Garaca Djurdjevic is the editor of nestegg and Smart Property Investment. Email Maja at [email protected]

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