Wages growth is a key issue in economic policy at the moment — and not just because of last week’s Productivity Commission industrial relations report.

As the PC noted last week — to the chagrin of business groups and the back-to-WorkChoices commentators at The Australian — the current IR system based on the former Labor government’s Fair Work Act is working for the good of the economy via flexibility, low levels of disputation, and wages that are responsive to labor market conditions. But the Reserve Bank is also focused on wages growth. In Friday’s Statement of Monetary Policy, the bank observed:

“The Wage Price Index (WPI) increased by 0.5 per cent in the March quarter and by 2.3 per cent over the year — the lowest annual pace since the index was first published in the late 1990s. Other wage measures, such as average earnings per hour, suggest that the recent period has been the most protracted episode of low wage growth since the early 1990s … Nationally, wage growth has continued to decline in a range of industries, and all industries have experienced wage growth below their decade averages. According to business liaison and surveys of firms and union officials, growth in wages is widely expected to remain low over the year ahead.”

Why has wages growth been so weak? “Compared with previous episodes,” the RBA said, “increased labour market flexibility may have provided firms with more scope to adjust wages in response to a given change in demand for their goods and services. In any case, very low wage growth appears to have contributed to more employment than would otherwise have been the case.” That’s exactly what employer groups and IR hardliners have been insisting for years isn’t happening because of the restrictions of the FWA.

The ABS will release wage price data for the June quarter on Wednesday and average weekly earnings for thee three months to May the next day. Both are likely to show wages remain well under control and growing sluggishly. And just to illustrate how high the issue is on the agenda at Martin Place, on Friday the RBA’s head of economics, assistant governor Chris Kent, delivers a speech in Brisbane on recent labour market developments. Wages growth is part of the rethink underway about whether the economy’s growth potential has fallen and what that means for growth, wages, profits, taxes, etc.

AMP chief economist Dr Shane Oliver sees the Wage Price Index remaining weak at around 0.5% quarter on quarter, taking the annual growth rate to a new record low of 2.2% year on year. Commonwealth Bank economists see a rise to 0.7% for the quarter and 2.4% for the year. And one thing to watch is revisions for the 2014-15 financial year, which could change the picture slightly. But, either way, the index will show wages growth struggling to keep up with the cost of living on both a headline and underlying basis.

This is great news for business. But it’s bad news for retailers and other consumer-dependent firms, and means slower-than-expected growth in income tax revenues for the government — although the boost to the higher-than-expected jobs growth is a small but significant positive for the wider economy and the budget. As the RBA noted on Friday, “the unemployment rate is forecast to be lower than previously anticipated. In part, this reflects the generally better-than-expected labour market conditions of late. Moreover, the unemployment rate is expected to remain little changed from the levels of recent months. This is despite the change to the forecast for aggregate demand, which is likely to be broadly matched by lower growth of the economy’s productive capacity, owing to lower population growth.”

That is, economic growth will be a little lower than forecast but unemployment won’t rise to match it — reflecting the way the flexibility of the FWA has enabled wages growth to soften.

That’s heresy to the IR hair-shirts, especially in the mining sector where they’re still demanding a comprehensive rewrite of industrial relations. It’s time to call this sort of stuff what it really is — ideologically motivated denialism. With both the RBA and the PC insisting the facts point to an effective IR system and Aussie workers enduring flat real wages growth and even declines while unemployment remains under control, only a denialist would insist on the need to go back to WorkChoices.