In an address to a business audience Thursday in Brisbane Glenn Stevens made perhaps his most important policy speech since becoming RBA Governor. He emphasized the importance of the supply side response – in particular the labour market response – in Australia gaining all the benefits from the massive growth in China – without inflation taking off. In effect he sided with Paul Keating who recently emphasized the role of labour market reforms that confine high wage growth to the more productive sectors of the economy.
He is saying that the Labor Party is wrong in attributing Australia’s recent economic success entirely to the minerals boom. It is more precisely the minerals boom plus structural reform in the economy.
‘Unless supply is somehow forthcoming expanding demand just produces overheating and inflation’. With such overheating come contractionary monetary policy, bankruptcies and job losses.
Stevens argues that extra migrants and low prices of Chinese goods have helped produce this outcome but that the main reason for the outcome is the increased labour market flexibility over the past two decades.
‘…my guess at present is that at least some of the explanation for these better-than-expected outcomes probably has to do with changed behaviour in the labour market. Despite, on most counts, the tightest labour market conditions for a generation, growth in most measures of labour costs has remained well disciplined for the past two years or more, after a mild acceleration earlier. Wages are rising quickly in some areas, but quite slowly in others. That is, relative wages are changing, adjusting to the forces at work on the economy, but without, so far at least, a serious inflation of the whole economy‑wide cost structure’.
Stevens saw the WorkChoices legislation that came into place 15 months ago as part of this move to flexibility. It has contributed to the sustainability of an expansion that is now approaching its 17th year. This accords with recent RBA research confirming that
deregulating labour markets along with product markets drives productivity growth.
As The AFR editorialized (subscription only) on Friday:
‘The question the government will pose every day until the election, and Labor must answer, is can we afford Labor’s misguided plan to return to a more regulated labour market than the one Paul Keating gave us in 1993? Mr Stevens is saying diplomatically that labour market flexibility trumps all. The answer must be no.’
The ACTU lies when it claims underemployment is up in the economy – it isn’t as full time jobs are growing at the expense of part-time jobs and workforce participation is at record levels. As the AFR point out tax revenues have also surged giving us the capability of a generous safety net.
Australia’s future economic prospects are excellent – we should build on the economic successes of the past 17 years – not take actions which endanger our continued prosperity.