Wage caps of 2.5 per cent or lower are common across almost every state and territory while the federal government has had a 2 per cent cap for several years.
“Wage caps in the public sector are cementing low wage norms across the country. The norm is 2 to 2.5 per cent and that is partly because of the decisions taken by state governments,” he said.
“Caps on wages growth in public sectors right across the country are another factor contributing to the subdued wage outcomes.
“My view is that a further pick-up in wages growth is both affordable and desirable.”
Dr Lowe said while he could understand why many governments sought to repair their budgets by limiting pay rises, the longer it went on, the more substantial economic impact they were inflicting.
He said he wanted pay rises with a “3” in front of them, suggesting a rate of 3.5 per cent should be a target.
Wage caps in the public sector are cementing low wage norms across the country.
The RBA now believes overall wages will grow by just 2.3 per cent over the next 12 months before barely edging up to 2.4 per cent by the end of 2021.
A downgrade from its most recent forecasts, the RBA’s predictions are well short of the federal Treasury, which in the April budget forecast wage growth of 3.5 per cent through 2021-22.
Unions moved quickly to back the governor’s comments, with ACTU secretary Sally McManus accusing state and federal governments of deliberately keeping wages low and causing “desperation” for many Australians.
“The Reserve Bank governor testified to parliament today that the government’s own position on the pay of people working for it is keeping wages down for everyone,” she said.
Dr Lowe, who said one of the largest risks to the economy was the ongoing trade war between the United States and China, argued that apart from low interest rates, the country had to look at increased infrastructure spending and “productivity-enhancing” structural reforms.
He said an overhaul of the way land was taxed in the country, new competition policies, a revamp of taxes on consumption and innovation plus an investment in skills could all boost productivity across the economy.
Without such changes, the nation faced falling wages and a drop in the value of important assets while government budgets would also suffer.
“That’s the most important challenge that we face,” he said.
In its quarterly outlook on the economy, the RBA downgraded its key forecasts, with the economy now expected to grow 2.5 per cent through this year while the jobless rate is not forecast to slip below 5 per cent until the end of 2021.
Markets expect the RBA to cut official rates twice over the next six months with Dr Lowe not ruling out the official cash rate falling to zero if the global and domestic economy deteriorate.
ANZ’s head of Australian economics, David Blank, said the RBA’s downgraded forecasts suggested it should have considered a rate cut at its meeting this week rather than hold for another month or two.
“We think another rate cut this year is inevitable,” he said.
Shane is a senior economics correspondent for The Age and The Sydney Morning Herald.