Friday, July 28, 2006

A $30 wage claim

The ACTU claim for a $30, or 6.2%, wage growth claim for the 20% of Australia's workforce on minimum wages will give Australia's macroeconomic managers the horrors. It is this type of claim - not once-and-for-all banana or fuel price increases - that raise the prospect of reemerging inflation. The claims that workers have had their real wages eroded by price hikes and the prospects of an interest rate hike are foolish arguments if consequent cost-push pressures result in sustained higher inflation, much higher interest rates and reemerging high unemployment.

Wage policy should not be used to address issues of distributive justice - the so-called 'Fair Pay Commission' is an inappropriately-named instituition. Distributive justice needs to be addressed via fiscal policy and the tax-transfer mechanism. Irresponsible ACTU claim should be rejected by the FPC- they will disadvantage those struggling to hang onto low-paid Australian jobs and threatens the sustained economic expansion we have enjoyed for so long.

Moreover the FPC should reject these claims given its charter. This requires it to consider the welfare not only of those with jobs but also those thrown onto the unemployment scrapheap as a result of selfish trade union claims.

Update: The following discussion of minimum wages is useful in an Australian setting.


Bring Back EP at LP said...

Harps ain't going to give such a wage rise so settle down.

hc said...

I think you are probably right. Its the language that causes an almost Pavlovian reflex - 'prices rose so wages must rise'. I lived through the 1980s.

By the way the AFR are worried - they see the FPC as a bit of a wild card.

Fred Argy said...

Harry, spoken like a good economist. The cost-effectiveness of minimum wage increases as instruments of redistribution is suspect. But surely there are wider issues involved. First, should there be some form of fiscal compensation for the genuine losers if the real minimum wage is allowed to erode? Secondly, to avoid charges of double standard. should there at least be a plea by politiicans and academics like yourself) for more restraint by our managers and CEO's? And please Harry don't tell me it's the market at work because you must know that the maagerial remuneration market operates very imperfectly, as anyone who has sat on a corporate Board would tell you.

hc said...

Fred, I favour income redistributions towards those on low incomes. CEO and managerial salaries are obscene relative to those in the 20% of the workforce taking home the minimum wage - I agree there are market failures all over the place in connection with these. Hence I favour tax reform at the low income levels. But I think the 4.9% unemployment statistic is a good one and want to retain it.

Talk of wages playing catchup with prices makes me nervous particularly when the economy is getting close to full capacity. I've heard it all before and know the misery it leads to.

The main defence for low income workers is a strong economy with expanding job prospects, low inflation and low interest rates.

Damien Eldridge said...

Hi Harry.

In terms of Fred's first point, I wonder whether you would really want to target just the people who lose from an erosion in real minimum wages. It seems that there are two groups that are particularly affected. The first group is those that would have been unemployed if the real value of minimum wages had remained the same, but are employed when the real minimum wage falls. This group gain from the erosion in real minimum wages. The second group are those that have minimum wage jobs before the erosion. If they stay in minimum wage jobs, then they are worse off following the erosion (which is presumably due to inflation rather than a lowering of the nominal minimum wage). Would you try and target just this second group? Or would you simply target those on low income, whatever the cause? The latter option seems to be a reasonable choice. One option might be to index both the tax brackets and welfare payments to some appropriate measure of inflation. Of course, this would have revenue implications (no seignorage!!!), so it may require adjustments to either the tax raters or government expenditure (or both of these). Furthermore, the efficiency implications of this policy may not be straightforward. In particular, even in the absence of formal minimum wages, there would be an implicit minimum wage set by the level of unemployment benefits. As such, any indexation of these benefits may reduce the "employment creation" effect of real erosion in the "implicit" minimum wage due to inflation.

This brings me to the issue of linking wages to inflation. I think it is useful to differentiate between wages that are set by "market forces" and legislated minimum wages. Presumably wage cases relate to the latter. If minimum wages were held constant in real terms, then you would lose the employment creation effects of inflation that were mentioned above. Indeed, Phil Lewis has suggested that this effect may well be important for Australia (although possibly difficult to test given data limitations).

However, it seems reasonable to suppose that most people or groups of people take any expected future inflation, along with any unanticipated past inflation, into account when they are bargainning with their employer over the nominal wage for the next contract period.

As an aside, there is an interesting paper by Ted Sieper that looks at the impact of nominal wage precontracting on the Sargent-Wallace policy irrelevance proposition in an ISLM framework. He finds that nominal wage precontracting overturns the Sargent-Wallace poliucy irrelevance propoition. The title of the paper is "Policy irrelevance is not the rule".



hc said...

Damien, See my post on the OECD view above. Of course you must account for the welfare of those who will lose their jobs as a consequence oif a pay increase - the Fair Pay Commission is instructed to do this.

The indexation arguments you cite scare me a bit because they sound like the sorts of things that might translate a once-and-for-all-price-shock into ongoing inflation.