The Most Successful Firms Aren’t Focused on Raising Wages, RBA Suggests

(Bloomberg) -- The Reserve Bank of Australia may have solved the weak wage growth puzzle that’s beguiling economists the world over: the most successful firms just aren’t placing much priority on higher salaries.

“High productivity firms would appear to be using most of their higher levels of productivity to reduce prices and increase profit margins rather than passing most of it on to their workforce in higher wages,” RBA economist Geoff Weir said in a discussion paper published Tuesday. “The productivity ‘laggards’ have limited scope to pay higher wages.”

In his paper, ‘Wage Growth Puzzles and Technology,’ Weir says the uneven take-up of new technology by companies is seeing an increased disparity in productivity performance. He cites that as a key factor in the longer-run issue of why labor’s share of national income has been falling, and the shorter-term one of why nominal wages have been weaker than forecasts predicted.

At stake is the global policy outlook: if wage weakness proves to be temporary, then central banks currently running very low interest rates are likely to face an inflation breakout that could prove painful to contain; or if soft wages growth is prolonged, then keeping rates lower for longer is reasonable -- and normalizing policy too quickly could be a risk.

Weir says that while the increasing impact of digital technology is certainly not the only factor that may be leading to increased competition and greater employer resistance to higher cost pressures -- including wages -- anecdotal evidence suggests it’s an important and growing one. A key rationale, after all, for introducing digital technology is to reduce costs.

RBA research on what lies behind weaker wage growth has also pointed at other potential causes, including:

  • Increased import competition, globalization and job insecurity
  • Declining unionization
  • Casualization of the labor force
  • Gradual unwinding of a real wage overhang built up in earlier years

Weir says while the dynamic might explain some changes in Australia, its relevance Down Under is mainly concentrated in a few sectors, particularly the retail and wholesale trades.

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