Foreign labour significantly changed wage dynamics in Australia

Reserve Bank Governor, Philip Lowe said the global markets for foreign labor may have permanently changed the wage dynamics in Australia. He further added that the government might have to play its part if the interest rates remain low for the long term.

Australia's labor market is turning flexible, making it better for businesses to operate smoothly and easier for employers to hire employees from other countries,  revealed Dr. Lowe of The Economic Society of Australia. This also lowers the possibility of wage increment when the demand for laborers is high.

 "This benefit was clearly evident during the resources boom, and there is a wide range of businesses in industries that have benefited from hiring foreign workers", added Dr. Lowe. "This hiring can [also] dilute the incentive for businesses to train workers to do the required job".

Immigration of foreign workforce

There is a significant difference between foreign worker's roles in the labor market and the major outcome of immigration on the economy of the country. According to Dr. Lowe, the balance between the supply as well as the demand of labor in the economy is hard to estimate fairly and relies on a number of factors. 

"A flat supply curve means that a shift in demand has only a small effect on prices, or in this case, wages", said Dr Lowe. The fact that employers were going for a global labour market for workers portrays the flattening of the supply curve for those particular field workers.

There is an experiment going on with regard to the global labor market since Australia's overseas borders have closed. Many foreign workers have left the country and the employers are facing extreme shortages even when the unemployment rate is 5.1 percent. Moreover, employers are reluctant to provide wage increments.

Borders will remain closed for another 18 months to two years till the wage labor statistics change, said Dr. Lowe after RBA's Board meeting. He is under the assumption that borders might open gradually, primarily for the skilled laborers who are in demand but in short supply. Due to the same reason, Dr. Lowe said it will almost certainly take a few years before wage pressure increases to the point where inflation is sitting comfortably within the 2 to 3 percent band, and that's why he'll be keeping interest rates at exceptionally low levels for the next few years.

Role of Government spending

Dr. Lowe said he would prefer the economy to improve where inflation is in the 2 to 3 percent band, and interest rates are back to normal.

There is a lower possibility that interest rates would increase from their present remarkably low levels by the time the next downturn occurs.

Dr. Lowe said that in such a situation, the government spending or their fiscal policy would play a major role in supporting the economy. "I know the Treasury is thinking about the mechanisms and approaches to make that effective because we all know there are challenges here in using fiscal policy in a counter-cyclical sense", added Dr. Lowe. "Quantitative easing will have an ongoing role but I think it'd be unwise to rely on that as the main instrument of macro-economic management", he further added.