13 / 06 / 2018 productivity, wages and prosperity | speeches | rba speech productivity, wages and prosperity philip lowe [ * ] governor address to australian industry group melbourne – 13 june 2018 i would like to thank australian industry group ( ai group ) for the invitation to speak at this lunch today. i have participated in many ai group events over the years and i have always valued hearing from your members, so it is a pleasure to be here in melbourne today. the title i have chosen for my remarks this afternoon is ‘ productivity, wages and prosperity ’. i know that these three issues are important to your members and they are also important to the broader australian community. australians enjoy a level of economic prosperity that few other people in the world enjoy. per capita incomes here are high and so, too, is wealth per capita. we have also avoided bouts of high unemployment for over a quarter of a century now. our banking system is strong, we have worldclass natural resources and australians have access to high - quality health care and education. so there is much for us to feel fortunate about. the question is how do we sustain this prosperity? this is an important question to be asking. at the moment, there is unease in parts of the community about the future of work, about competition from overseas and about the implications of technology – all issues that i know the members of ai group are dealing with every day. for others in our community, these concerns are being brought into sharp focus by unusually slow growth in wages. as we address these important issues, we also need to keep focused on the critical task of raising national productivity. after all, lifting productivity is the key to building on our current prosperity and ensuring sustained growth in wages and incomes. there is no shortage of good ideas to consider here. http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 06 - 13. html 1 / 15 13 / 06 / 2018 productivity, wages and prosperity | speeches | rba my remarks today will be in four parts. first, i will briefly cover the recent economic data. then, with that context, i will talk about some of the reasons why wages growth has been as low as it has. i will then turn to productivity growth. finally, i will say a few words about the recent monetary policy decisions by the reserve bank board. the recent economic data last week's national accounts contained positive news about the australian economy. over the past year

wages growth, it is clear that the slow growth in wages is affecting our economy. on the positive side of the ledger, it is one of the factors that has helped boost employment growth over recent times. of course, there are other effects as well. one is that the low growth in wages is contributing to low rates of inflation in australia. indeed, if wages growth were to continue at around its current rate for an extended period, it is unlikely that the rate of inflation would average around the midpoint of the inflation target in the period ahead. wages growth of 2 per cent and reasonable labour productivity growth are unlikely to make for 2½ per cent inflation on a sustained basis. another consequence is that real debt burdens stay higher for longer. many people who borrowed expected their incomes to grow at something like the old rate rather than the current rate. with their expectations not being realised, the real value of the debt stays higher than they expected and this is likely to affect their spending decisions. and beyond these purely economic effects, the slow wages growth is diminishing our sense of shared prosperity. if this remains the case, it can make needed economic reforms more difficult. given these various effects, some pick - up in wages growth would be a welcome development. it would help deliver a rate of inflation consistent with the target, it would help with the debt situation and it would add to our sense of shared prosperity. in my judgement, a return, over time, to a world where wage increases started with a 3 rather than a 2 is both possible and desirable. to be clear, this is not a call for a sudden jump in wages growth from current rates to 3 point something. rather, we will be better off if this increase takes place steadily over time as the economy improves. there are some signs that we are starting to move in this direction, but it is likely to be a gradual process. labour markets in most parts of the country have tightened over the past year. one piece of evidence in support of this is the responses to the nab survey i showed earlier. there has been a sharp increase in the share of firms reporting the availability of labour as a constraint ( graph 6 ). the only other time in the past 25 years where this share has been as high as it is now was in the early http : / / www. rba. gov. au / speeches / 2018 / sp - gov - 2018 - 06 - 13. html 9 / 15 13 / 06 / 2018