Archives for posts with tag: RBA

I grew up in Perth, where the minimum temperature almost never goes below 1 degree. Even in the depths of winter, the maximum daily temperature is usually in the teens. There’s not a lot of need for heavy jackets or thermal underwear. It never snows.

Now imagine I travelled to Siberia. Having never needed thermal underwear or gloves before, would it be right to conclude that I wouldn’t need them in Siberia? Clearly not. Walking around Oymyakon in jeans and a hoodie would be a recipe for a rapid and unpleasant death. The fact that I’d endured countless Perth winters with only a jacket would be no defence against the cold.

In a Perth winter, a jacket and jeans might be enough to stabilise my temperature. In Siberia, I’d require much more. The ‘neutral’ clothing differs depending on the circumstances. Just as it makes sense to adapt to your circumstances when getting dressed, so does the Reserve Bank need to adapt to changes in the economy.

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I told myself I wouldn’t write about the Fair Work Act for a while. I told myself this partly because it’s a topic I’ve done to death in recent weeks and months, and partly because no amount of factual analysis will dissuade the ideological warriors of the right from blaming the Act for all the nation’s economic ills, both real and imagined.

I told myself I’d lay off, but I can’t resist responding to Michael Stutchbury’s piece in today’s edition of The Australian.

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Malcolm Turnbull has an op-ed in Business Spectator in which he claims that:

there is evidence that increased compulsory contributions in Australia have largely been offset by falls in other forms of private saving, and by the public cost of the tax concession – leaving national saving little changed.

He doesn’t enlighten us as to what this evidence might be.

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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.

The ABS released the results of its August Labour Force survey today. Unemployment fell from 5.3% to 5.1% in one month. There were 30 900 more employed Australians in August than in July, with full time employment surging and part time employment falling. There are still problems, to be sure. There are still hundreds of thousands of people unemployed, underemployed or discouraged from seeking work. But virtually every other developed nation would fall over themselves for labour force figures like these.

I would have thought that any competent journalist could write a compelling story about this beautiful set of numbers. There are any number of angles. They could write about the light that these figures cast on the election result: a first-term government struggled to get re-elected with a world’s-best unemployment rate. They could write about the rise of full time employment, as workers whose hours were cut during the downturn have them restored. They could write about the gender split in the numbers, or the breakdown by State. They could write about the sheer alleviation of human misery that these numbers represent: find someone who has found a job after a while out of work, and talk to them about what it means for their family and their self esteem.

What do we get instead?

Instead of stories about the news itself, we get some market economist speculating about the potential implications for the overnight cash rate.

Employment and unemployment don’t matter in themselves, apparently. They’re only evaluated in light of the sole arbiter of economic performance that some journalists seem to understand. Forget the tens of thousands of people who now have jobs, forget the thousands already working who can feel a little bit more secure. No, all that matters is that the increase in employment might make the RBA more likely to increase the overnight cash rate.

For what it’s worth, the futures market is now pricing in a 24% likelihood that rates will increase at the next RBA board meeting, up from only a 7% likelihood yesterday. It seems like a minor aspect of this story to me, but I’m not a journalist.

(I should say that the ABC’s excellent business reporter Michael Janda wrote a balanced piece that covers the detail of the employment numbers themselves, not just the interest rate angle).