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DMO consultation outcome (part 3/3)

MNI (London)
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 London Bureau; tel: +44 203-586-2225; email:
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