Last week, economist Gerard Minack wrote a note warning that rebooting Australia’s mass immigration program will crush wage growth and prevent the RBA from achieving its wage targets, which will keep inflation lower for longer:
Stagnant incomes and below-target inflation [over the last decade] were due to low wage growth. Wage growth was low because there was slack in the labour market…
Arguably the single most important reason for persistent labour market slack was high levels of migration…
To the surprise only of a few professors of economics, reducing the supply of labour seems to be putting upward pressure on its price…
Wage growth is now central to RBA policy. The Bank says it will not tighten until actual inflation is sustainably within its 2-3% target range, and that will require materially higher wage growth than current levels…
Markets have significantly lifted their expectations for the RBA cash rate target over the past month… That’s daft. There is no reason for the RBA to tighten simply because the Fed tightens. The key to the RBA is domestic wage growth. The tricky point is that wage growth is likely to be a function of how reopening the international border affects labour supply. The longer supply is crimped, the more likely it is the wage growth may increase to the point where the RBA will need to tighten before 2024. But if migration flows revert to pre-pandemic levels, then it’s likely that wage growth reverts to pre-pandemic levels. If that happens the RBA may be able to go another 11 years without tightening.
The Australian economy has been exceptionally good at growing at a reasonable pace without generating excessive wage costs. This is partly a function of our ability to continuously import human capital through an ambitious skilled migration program…
NSW Premier Dominic Perrottet wants to attract 2 million skilled migrants. And Prime Minister Scott Morrison and Treasurer Josh Frydenberg have similarly stated they want to capture the best brains globally to make Australia an Indo-Pacific powerhouse.
A wave of students and skilled migrants would alleviate upward pressure on wage costs and inflation, and possibly allow the RBA to defer increases to its target cash rate into 2023. A great deal therefore hinges on labour supply, and the current lack thereof.
Our analysis previously showed that the massive reduction in the jobless rate had been primarily driven by the departure of about 334,000 foreign workers. If this offshore labour supply returns, the skills shortages that many firms have been complaining about should dissipate.
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This echoes RBA Governor Phil Lowe’s recent acknowledgement that high immigration pre-COVID was used to hold down wages, which was vigorously attacked by the immigration boosters and the fake left (I’m looking at you Greg Jericho).
Rebooting mass immigration, as advocated by the Morrison Government, the Treasury, the NSW Government, and business and edu-migration lobbies, would unambiguously increase the supply of labour, reduce worker bargaining power, keep unemployment elevated, and prevent wages from rising.
It’s perverse isn’t it? Crush wage growth to ensure lower interest rates and higher house prices: win-win for the elites.
Leith van Onselen is Chief Economist at the MB Fund and MB Super. He is also a co-founder of MacroBusiness.
Leith has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.
