Transcript of Question & Answer Session Adjustments in the Labour Market

My question is about the implications of that low level of wages growth. You have – usually wages growth leads core inflation so if you've got wages growth at the lower end of the registered scale, shouldn't that suggest that sometime in the coming months we should have a further fall in core inflation to maybe 2 per cent or below or something like that, is that possible?

Well by itself that's what you'd expect, that low wage growth is helping to constrain domestic cost pressures and you do see that in the data. You see it particularly in the elements of the CPI that have a very high labour content, things like market services. At the same time though what we've seen is the exchange rate has been depreciating over the past couple of years, and that tends to take quite some time before it fully passes through to the final prices that consumers see on the shelf so to speak; the final prices they face. So we're seeing those – that depreciation affect import prices across the docks, the costs of goods and services we import have gone up in Australian dollar terms commensurate with that depreciation but it takes a little while for those sort of prices to finally move all the way through to the final prices that consumers face.

So we've got these two offsetting things. We've got this low domestic wage growth, well-contained domestic cost pressures, but gradually in our forecasts at least, further pass through still of the – coming from the depreciation of the exchange rate. So those traded and non-traded inflation components are sort of having an offsetting effect if you like and at least by our forecasts are likely to keep underlying inflation sort of towards the middle of the inflation target.

Moving on from that question, so are we seeing [unclear] … a shift in the NAIRU as a result of the low population growth?

Well you know we've outlined in our recent statement that we do think the – at least in the near term, the next couple of years, if our assumptions are right about population growth, and they could well be wrong, but we've made those assumptions that it's going to be a bit lower than we had previously thought. And yes the labour supply – the implication is, other things equal, labour supply growing a bit less rapidly and for an unchanged labour productivity growth that means the productive capacity of the economy is slightly less. But it's a pretty small sort of revision in the scheme of the uncertainty that we have about the economy which we always illustrate with these – these wide bands around the central forecast, whether it's GDP, whether it's unemployment or whether its inflation. But the implication of lower population growth is slightly lower growth of potential or sort of capacity, productive capacity. In terms of the implications for the NAIRU I think it's too early to draw much of a conclusion about that. I mean the main thing is unemployment, though it hasn't increased as much as we might have earlier thought, it's still very high and it's still having this effect on wage growth so clearly there's a lot of spare capacity in the labour market.

Julian Pearce. You talked about compositional changes being quite important. One aspect that perhaps I'd be interested in you drawing out a bit more is the shift between part-time and full-time employment, with the ABS' definition of what it means to be employed being quite generous, all be it in line with international practice. So is some of what we're seeing in terms of the trends in employment driven by a shift towards part-time employment that's more pronounced and the longer term trend?

Well the thing I would emphasise is that there is a longer term trend towards more part-time employment, that's to be expected, I think it's a consistent sort of development across the globe really, it's people expressing a preference to have part-time work and managing to find opportunities to do that. As you said the ABS measurement is just to follow international best practice, I think that's important, it helps make our statistics sort of comparable across the globe. There's – there's a slightly cyclical element perhaps to it, but it's not specific necessarily to the sort of part-time, full-time mix. There are people who would like to work more hours and the ABS do those surveys and those normally increase along with the aggregate level of the unemployment rate. So that's been happening, but I think that's probably affecting labour right across the spectrum not all just on the part-time sort of split.

Tom Newham from Griffith University. I've got a comment and a question and both of them also relate to compositional issues like Julian Pearce just asked. So the comment first, you alluded to in your fourth possible explanation Chris that it could well be that ABS will revise the statistics, but you also talked about how as more and more of the GDP is being shifted over to the services sector, at some point we have to think really hard about how do we measure output value added in the services sector. Putting those two together my comment is that even if the ABS doesn't revise in the near term, maybe we could think that the current moderate rate of growth in GDP is a bit of an understatement. So that's the comment.

The question is about household services, which really shows extraordinary growth compared with say business services and the goods-related sector. I just wonder what are we talking about here, are these Mac workers, are these baristas, are these gardeners and cleaners or what? Because if there's this composition here, if really that's what we're talking about then the shift from very highly paid miners to you know say the kind of workers that I've just listed would perhaps suggest that overall we would see moderation in wage growth rather than really moderation in wage growth for each of the line or industry. Thank you.

Thank you, Tom, a good question. I may miss elements of that so feel free to kind of remind me if I haven't got them all. Just let me start at the latter point in terms of the wage growth. The national accounts measure that I showed you has the compositional effect of just – sort of incorporated in there. So if you have less workers in a high paying industry such as mining and more in lower paying industries, that measure will sort of capture that, that compositional effect on the average level of wages. One measure that tries to adjust for that and take out the compositional effect is the WPI, the Wage Price Index, but it shows a – it doesn't have quite the same long history, it doesn't go back to the early 1990s so I couldn't use that, but it does show a very substantial reduction in wage growth in that as well, so it's happening within each industry and you see that when you pull the industries apart the wage growth has declined to relatively low levels across each industry.

I would caution though against, I mean it's certainly true that mining industry jobs are highly paid, that's not surprising because the miners are employed to use a lot of capital, so that's to be expected. But it's not true that all service jobs are low paying. A lot of the growth is in very well paying jobs, including in health care, including in education. I mean part of the issue is that as we become an economy that's more reliant on services, even though the service industries on average don't use as much physical capital, they still use a lot intangible capital and a lot of human capital is just as important including in some of the very highly paid business service jobs. And so that's going to require maybe more energy devoted towards education than in the past, and education is quite the growth industry, I think not just because of exporting our education services to foreigners. And those can be reasonably well paid jobs as well. So it's a bit of – I wouldn't characterise you know we're moving to services and those are low paid, they're not, many service jobs are paid above goods – sorry jobs in the goods sector.

Quite a few economists looking at the Statement on Monetary Policy that was released last Friday took the fact that you're not expecting unemployment to fall until 2017 as a signal perhaps that monetary policy is likely to stay fairly steady. How accurate would you characterise that?

What a great question.

The interest rate question. I mean I think the – the thing we have said is – the thing we've said about interest rates, about the outlook is that the Board, as it usually does, will continue to keep an open mind, look at the data from month to month, see how things evolve and the point I'd emphasise is to come back to that point I made about uncertainty. There's a lot of uncertainty, and there's a whole industry that is out there trying to predict what it is that might happen to interest rates, financial market prices, that's understandable, that's warranted, that's useful. But we're not in that job; we don't have to do that. The Board can, if it feels the strong need to signal something, can do that. But what I think we've said is that we'll – the Board will keep an open mind, look at how things evolve, our forecasts might deviate from what we've said. You know, there's a slightly positive story to the recent data but the economy is still growing at a moderate pace, the unemployment rate is still very high, there are lots of these very big headwinds that the economy faces, these challenges, so you know we'll just have to wait and see.

I thank Christopher Kent for giving us his time but I reckon we have time for one more.

For sure.

Mark Ludlow from the Financial Review. Just back on economic growth can you outline what would be the impact on governments if there is – it's true that the economy is growing at a slower rate than first thought? And do you believe that the 3.5 per cent economic growth rate is no longer realistic?

Well I'd say two – let me say two things. The first is we've just made our best guess and assumption if you like about population growth based on the recent data that we've seen and the fact that it's understandable that population growth has eased back a bit from quite strong levels to something not quite as strong but still population growth of 1.4 per cent, it's not too far off the historical average. But that could turn again and it makes sense that it's a bit low if our labour market conditions have weakened to a degree while they've improved elsewhere in the world; that makes a lot of sense. But our labour market conditions can change and they can change elsewhere and so that could turn around. So it's not a prediction that I think you could count on for a long period of time, we've just made the best assumption we can.

In terms of sort of what does it mean for state and fiscal finances, well the thing I'd emphasise is those might have to respond to changes in population growth, either population much stronger from here or weaker still or lower than it has been in the past. But it affects both revenue and it affects their expenditure as well over time and it's just like it affects the growth of the aggregate demand in the economy and the aggregate supply. So in terms of the balance it doesn't necessarily have any strong implications because it's going to be affecting both sides of that. Of course if you're an economy in Europe or in Japan which has very high public debt and you've got less growth in the population to generate revenue to service that public debt well that makes life harder, but we don't have especially high public debt as a share of GDP, either at state or federal levels.

Thank you.