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Will Salaries Increase As Interest Rates Drop? 

Will Salaries Increase As Interest Rates Drop? 

By Jane Carey, CEO, Edge Recruitment

Every first Tuesday of the month we are updated through the media on the decision the Reserve Bank has made regarding interest rates. The commentary inevitably revolves around the impact on mortgages, and to a lesser extent retirees. What is often not highlighted is the very important link between interest rates, employment and wages growth.  

Phillip lowe lunchAt a recent lunch I attended, guest speaker Phillip Lowe, the Governor of the Reserve Bank explained that the board of the RBA concentrate heavily on the employment market during their meetings. Unemployment across Australia currently sits at around 5.3%. To put this in some context there are less than 3 unemployed people for each vacancy, compared to the 1990’s recession where it was 20 to 1.  Even so, the RBA believe there is capacity for higher employment participation and a reduced unemployment rate.    

 

Wages Growth 
Wages GrowthIn reducing interest rates the RBA are hoping to lift spending and investment by both individuals and companies.  When companies grow and invest in capital projects, they need labour - this in turn creates a demand for staff. A key flow on effect to this is a drop in unemployment and even more importantly underemployment - which leads to a more competitive market for labour and in turn increases wages.  Over the last five years wage growth has slowed significantly to an annual average of 2.2 percent to December 2018, compared with annual growth of 3.3 percent for the previous five years to December 2013.   

So why has wages growth been so sluggish?  

The RBA indicates several potential reasons including an environment that is making businesses cautious about investing and increasing competition both on a local and national level, causing businesses to control costs and run efficiently. Essentially, no one is ‘splashing the cash’ and this includes employing staff! 

According to the Australia Bureau of Statistics, 3 million Australia workers are in part-time work because they choose to be. However, 25 percent of part-time workers would like to work more hours per week. A strong labour market not only improves wage conditions, it also offers more flexibility for workers and allows older workers to stay in the market for longer, as their skills and experience increase in demand.  With a more competitive market for labour, wages will rise. Higher wages flow back into the economy making the economy stronger and around it goes! 

South Australian Data 

At a local level the jobless rate in South Australia sits at a national high of 7.3 percent.  While this is not a prize any state wants to win, a Deloitte Business Outlook report published this week points to positive long-term outlooks for SA.  According to Deloitte, two “good-news” trends have occurred; a rising number of jobs and an increase in willingness to work.  In fact, we are experiencing the fastest increase in the state’s workforce since the mid-1980's according to Deloitte. Medium to long term positive impacts on the economy and jobless figures include;  

  • a rise in international student numbers;  
  • growth in the agricultural sector; and 
  • increased infrastructure spend by the government and opportunities from the  
    ship building program.   

So next time the media report on RBA interest rates, give some thought to the flow on effect it may have to wages growth and employment. It will be interesting to see if any future reductions in interest rates have the intended impact.