MNI POLICY: RBA Paper: Uneven Tech Take-Up Explain Weak Wages

By Sophia Rodrigues

     SYDNEY (MNI) - Technology take-up at an individual firm level rather than

at the macro level may be a reason for low average productivity growth and

slowing wage growth, a research paper published by the Reserve Bank of Australia

Tuesday said, with potential implications for monetary policy over the cycle.

     The paper explores why nominal wages have been growing at a slower rate for

some years  and why real wages have been growing slower than labor productivity

for decades. Below are the key points from the paper.

     --The paper suggests central banks pay closer attention to what is driving

the downward trends in the labor share which could either be a real wage puzzle

or long-run nominal wage puzzle, as it is important for monetary policy. "If

real producer wages are increasing less than labour productivity, the difference

between the two is being reflected in either higher profit mark-ups or lower

output prices, or some combination of the two. Understanding which it is, why

and whether the split is changing over time is important for inflation

forecasting," the paper said.

     --The paper links declining wage shares to the uneven take-up of new

technology and different levels of productivity growth across firms. The paper

cites analysis by the Bank of England suggesting the growing gap between the

productivity frontier and laggard firms across many industries helps explain the

slowdown in average productivity growth, which in turn helps explain low nominal

wages growth.

     --There is some evidence, both overseas and in Australia, that the larger

and more productive firms are increasing their industry market shares as

measured in terms of sales or value added, although there is little or no sign

of benefit for employees. Firms are primarily using their market and bargaining

power to absorb most of their firm-specific productivity gains into higher

profits and lower output prices, rather than into higher wages. On the other

hand, productivity laggards do not have the capacity to offer anything other

than low wage increases in order to remain competitive, the paper notes. 

     --According to the paper, both the both the "distribution of wage increases

and the distribution of employment appear to be much less dispersed than the

distribution of productivity growth across firms." The paper's central

hypothesis is that "firm level observations may be key factors behind not just

the declining labour share and low productivity growth but also downward

pressure on average nominal wages growth." 

     --Causes for slowing wage growth are likely to be structural rather than

cyclical, and if these causal factors also relevant to helping explain more

recent nominal wage behaviour then, to the extent that they are likely to remain

in play or indeed strengthen going forward, central banks can have more

confidence in keeping interest rates lower for longer.

--MNI Sydney Bureau; tel: +61 2-9716-5467; email: sophia.rodrigues@marketnews.com

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