Source: RBA
Source: RBA

Viral graph embarrasses the RBA

Have you seen this viral graph going around?

It shows a frightening fact about Australia's economic situation - we experienced an acute and totally unexpected fall in wages growth.


Source: RBA.
Source: RBA.

The graph shows wages growth falling below 2 per cent a year, and the Reserve Bank of Australia, our independent economic policy brains trust, failing to expect it. Their forecasts repeatedly show an expectation the problem will get better. Meanwhile, it gets worse. This sequence of events explains a great deal about Australia's economic malaise. Nobody expected it to come to this.

But no single graph can tell the whole story. There is more to it. And the true moral of the story is not the simple one some people are drawing from the graph.

Many people believe the RBA is stupid for missing these forecasts. Others think the RBA is duplicitous. Some people subscribe to a theory of a great conspiracy to drive wages down.

I don't believe in any of those, and I don't think anyone sensible ought to either. Yes, the RBA has been embarrassed, but it published the above graph to highlight the error.

Meanwhile, it is in everyone's long-run interest - government, business and citizen - for wages growth to be high because without high wages growth we see terrible weakness in consumption, and consumption is by far the largest part of our economy.

So, why are wages so low?

The fall in wages isn't just an Australian phenomenon. It has been global among advanced economies. And we still don't know exactly why it has happened. This is one of the things economists have to admit sometimes. The economy is complex, we don't understand it fully.

There are a lot of theories why wages have fallen. It might be the decline of unions. It might be the rise of international trade. It might be underemployment, the rise of technology, the power of big business to pay lower wages or lower labour productivity growth.

Depending on your biases (and we all have them!) it is possible to become convinced by any of these theories because they all make sense.

But the best economists have fallen on the data and tried to analyse it to determine which of the above is to blame. They tend to come up saying, it's a little bit of everything, but even when you take these things into account, we still can't fully explain how low wages growth is.

That leaves a mystery factor.

"It appears that some, as yet unidentified, common factor, or factors, have weighed on wage growth in recent years," the RBA says.


The existence of the mystery factor helps somewhat in forgiving the RBA for its misses. Nobody expected the mystery factor and if we can't even find it now, it's hard to forecast it in advance.

The good news about the mystery factor is it seems to be on the wane. In the US and the UK, where wages growth was, like Australia's, depressed for a long time, growth has recently jumped up to 4 per cent per year. This week, UK wages growth hit its highest level in 10 years.

What those countries have done is drive unemployment way down - below 4 per cent. That needs to be a priority here too, and all arms of government - RBA, treasurer, and state treasurers too - should be working to achieve it. Australia's unemployment rate is at 5.2 per cent, higher than this time last year.

Can we hope for wages growth to pick up? As the next graph shows it already has. What's more, the RBA's forecasts have got a lot lower.

There is even a chance that if wages growth leaps, the RBA, chastened by its recent over-estimates, will fail to forecast that as well. And indeed, the 2019 forecast is sitting slightly lower than the wage price index


Wages growth.
Wages growth.

What I would love to see is unemployment falling and wages growth rising so high and so fast that the RBA suffers another series of embarrassing missed forecasts. But this time, missing on the low side.