Archives for posts with tag: unions

[A]dopting an incomes policy was like jumping out of a second storey window: nobody in his right mind would do it unless the stairs were on fire… The stairs were aflame in Australia in 1983, when the Hawke Government won office.  -Peter Cook.

The Accord is back in fashion. The past few months have seen a lot of pining for the “Hawke-Keating model,” particularly the compact between the two wings of the labour movement. A lot of the discussion seems to me to lack a sense of what made the Accord necessary (in the eyes of the protagonists), what made the Accord possible, and the ways in which our current circumstances differ from those of 1983.

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I don’t want my blog to just be a forum for rebutting claims made in The Australian, but it can be difficult to resist.

For example, this quote from Stephen Matchett in today’s Oz [paywalled], regarding the slowdown in productivity growth, riled me enough that I couldn’t let it through to the keeper.

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The Financial Review ran an article on its front cover yesterday about the perils of wage inflation (it’s paywalled, so no use linking). Wages are apparently rising at an unsustainable level, threatening the only economic indicator that matters, the overnight cash rate:

The mining boom has triggered a wages blowout that could ignite inflation and tip the Reserve Bank of Australia into raising interest rates more quickly than planned. Labour costs rose by 4 per cent in the year ended August 31, up from 3.7 per cent in July, according to NAB’s monthly survey of business conditions.

Oh no! A 0.3 percentage point increase in year-ended terms!

Note that the entire story hangs off one data source, the NAB business survey. Even then, the crux of the story is a rise in year-on-year wages growth from 3.7% to 4%, hardly the stuff of central bankers’ nightmares.

The evidence of wage pressures comes as the ACTU secretary Jeff Lawrence and president Ged Kearney will have their first meeting today with the Gillard Government.

Oh no! Unionists!

It’s the full scare campaign. News of the apparently unsustainable wages growth is mixed in with news that union officials are meeting with ministers. The clear implication for readers is that the two are connected and there’s cause for concern. The problem for the Fin is that there are hardly any facts to support its strongly-worded warnings.

The available ABS wages data would give the RBA no cause for alarm.

Here’s the quarterly growth in the Wage Price Index for the past three years, with the long term average (1997-2010) as a dotted line. Wage growth dipped below average in January 2009, and still hasn’t recovered. Private sector wage growth has flatlined for the past few months, while public sector wage growth has fallen. There is no evidence here to support the Fin’s claim that wages are spiralling out of control.

If we set aside the fact that the NAB survey results seem like an aberration, what about the article’s suggestion that wage rises necessarily imply unsustainable inflation?

Although the increases aren’t big by historic standards, the survey showed wages are growing faster than prices.

Oh no! Real wage growth!

I had a look at how common it is for wages to grow faster than prices. I compared year-on-year WPI and headline CPI and found that wages have in fact grown faster than prices for 37 of the past 48 quarters. It’s far from unusual for wages to grow in real terms; in fact, it’s the norm. I don’t recall too many hyper-inflationary price spirals over that period.

And yet, we have ANZ Banking Group economist Katie Dean claiming that:

Catch up or not, higher wages are inflationary.

Really, Katie? I would have thought that if there are productivity improvements then real wage growth is justified, even within a neo-classical economic framework.

So, what has happened to productivity? An easy way to measure the relationship between productivity and wages is to look at real unit labour costs. This measures the average cost of labour per unit of output, adjusted for inflation. If real unit labour costs are falling, then it costs employers less, in real terms, to employ people to produce a given quantity of goods or services.

Here’s what has happened to real unit labour costs over the past 25 years:

Inconveniently for a newspaper wanting to run a 1970s-style “unions lead wage breakout” story, real unit labour costs are at their lowest on record. They were roughly stable throughout the 1990s, and fell steadily in the 2000s, with sharp falls in the past year. Productivity is rising, real unit labour costs are falling and the wage price index is stagnant. Not exactly the perilous, overstretched labour market the newspaper depicts.

Let’s instead focus on the Fin’s other claim, that we’re reaching “full employment”. Forget for a moment the theoretical debates about where the full employment level lies, or the ideological debates about whether we should accept the concept. Instead, we’ll just take the Fin’s assumptions as given.

The paper claims that unemployment is “dangerously close to the 5 per cent mark, which economists say is the lowest level the jobless rate can go before tightness in the labour market pushes inflation above the Reserve Bank’s target band”.

There’s good reason to think that 5% unemployment in 2010 does not look like 5% unemployment did in 2008. We have more underemployment (people who are working part time, but want more hours) and we’re working fewer hours, on average.  The labour force underutilisation rate, equal to unemployment plus underemployment, is at 12.5%, still well above its pre-financial crisis low (9.9%).

Employees are still working fewer hours, on average, than they were before the downturn.

This doesn’t look to me like a labour market with no spare capacity. The ‘headline’ unemployment rate only tells part of the story.

I don’t quibble with the basic point that things are getting better in the labour market: wages are going up, unemployment is coming down. The RBA might well start increasing rates soon, though the futures market still only sees an increase at the next meeting as a one-in-four chance. We know that the Bank has its eye on the medium-term (ie. a couple of years out), so it’s more concerned about emerging trends than the current state of play. It may well be tilting towards a more hawkish position, and the Fin’s readers would want to know that.

What I take issue with is the Fin’s shallow analysis, based on one survey, that seeks to whip up unjustified consternation about moderate wage rises and imply that unions are somehow behaving irresponsibly. As usual, the real story here is subtle, one of slightly improved conditions in the labour market, with the potential for moderate impacts on inflation over the medium term. The problem is that that doesn’t make for very appealing front-page copy, so instead we get the typical hyperbole.