The federal government’s top economists admit they do not know when lower unemployment levels will finally trigger a wages boom, after a decade of stagnant wage growth.
Treasury wants the government to drive the economy towards full employment, the point at which it says wages growth will start to accelerate, but concedes it does not know what that number is.
In an address to senate estimates, Treasury secretary Steven Kennedy said there was an opportunity to quickly drive wages up, push unemployment to historic lows, and contain inflation at sustainable levels.
He suggested that it was a chance to "reward younger generations" for bearing much of the economic cost of the pandemic so far.
However, he warned, that could be squandered if interest rates rise too fast, government stimulus is withdrawn too quickly or productivity does not keep up with a growing economy.
Unemployment is sitting at a 13-year low of 4.2 per cent, and the federal government has a clear ambition to push it below 4 per cent this year.
But wages have not kept pace, rising slower than many would have expected, given the tight labour market.
Dr Kennedy admitted that Treasury expected wage growth to have already begun its rise.
'We probably underestimated the extent to which we could draw people into work, and not put any pressure on wages," he said.
However, he maintained, the key to driving wages up was to find full employment.
"Australia has not been this close to this opportunity since 2008 and, before that, prior to the shocks of the 1970s," he said.
"While nothing is assured, let us hope that we can seize this opportunity in the period ahead and reward younger generations for the significant impost they have taken on through the budget and protecting all Australians from the impacts of COVID."
Interest rates have to go up, eventually
Dr Kennedy would not weigh in to speculation about when interest rates might start to rise.
But he was clear that substantial rate rises are not just inevitable, but important to help the economy return to a more normal post-COVID setting.
"It's very unusual for them to be where they are today, and I think it will be in the longer-term interest of the country to return to a higher level when circumstances allow them to," Dr Kennedy said.
The cash rate target sits at a historic low of 0.1 per cent, and the Reserve Bank has previously indicated it was not likely to rise before 2023 or 2024.
More recently, RBA Governor Philip Lowe suggested rate rises this year were possible, and the Commonwealth Bank is forecasting the central bank to act as early as June.
Dr Kennedy said it was important both interest rates and government fiscal policy — how much money it is pumping into the economy — were adjusted cautiously or the economy could be slowed too soon.
When will wages rise?
For years, economists and policymakers have been debating what "full employment" actually is.
Mainstream economists use the term "NAIRU" — or non-accelerating inflation rate of unemployment — and it is commonly defined as the tipping point of unemployment at which both inflation and wages growth begin to accelerate.
Basically, the labour market eventually becomes so tight that employers have to lift wages to attract staff.
With unemployment at near-historic lows, Dr Kennedy said, Treasury was still working out just when it would be reached.
"Our experience in the years prior to COVID, and recent developments, suggests that the NAIRU could be lower than our historical estimates," he said.
He said that, if the economic settings were right, productivity gains could offset the risk of rising inflation consuming wages growth.
"If we can achieve productivity growth of 1.5 per cent, then nominal wages can grow at 4 per cent and put no pressure on inflation," he said.
"However, on the other hand, if productivity is only 0.5 per cent, then wages can only grow at 3 per cent before they begin to put pressure on inflation."
Omicron was bad, but not as bad as feared
Dr Kennedy told the committee COVID-19's Omicron wave took a heavy toll on the economy, but it was not quite as bad as initially feared.
Absenteeism was the greatest hurdle, with some businesses reporting staff shortages as high as 30 to 40 per cent as staff became ill or were close contacts who had to isolate.
However, he said, the government's mid-year budget update — delivered last December — had accounted for the possibility that the pandemic would hit the economy again.
And, he said, the cost was not quite as high as it might have been.
"While the disruption caused by Omicron has been significant, its overall economic impact is likely to be less than was foreshadowed in the downside scenario [in the mid-year update]," he said.
"This is because we have also learned that the underlying economy is stronger than we had recognised."
