63,000 Americans lost their job in February – the biggest employment decline in 5 years. Whether you say the US is entering a 'recession' or a 'slowdown' is immaterial – the US economy is in trouble. As Australian interest rates continue to rise US real interest rates are negative as Gregory Mankiw points out and as is illustrated above:‘negative real interest rates are most likely to arise if growth expectations are particularly low or if uncertainty is particularly high. Low growth expectations encourage households to save, which drives down equilibrium rates of return. High uncertainty drives up risk premiums, which in turn drives down the return on safe assets, perhaps below zero. Both forces seem to be working now.’
Long-term this Howard-government created investment boom will strengthen the Australian economy by increasing economic capacity. But it is the short-term effects of the boom that the RBA is focussing on.
Specifically the RBA's use of interest rate hikes is is a gamble on a structural change having occurred in the Australian economy which produces lower dependence on the US economy both directly and through what is being presumed to be weaker feedback effects on the Chinese economy from the US slowdown. These indirect effects will impact on Chinese import demands for Australian raw materials.
I suspect too that the RBA are concerned that Mr Rudd's government will provide a more supportive environment within which cost-push pressures from wages can develop. This is not the present situation - inflation is emerging in response to higher commodity and food prices - but if trade unionists can convince the government of the need to 'secure the real wage' in the face of inflation then the long-term expansion of the Australian economy will come to a griding halt with resurgent inflation and unemployment. It is a grim prospect that I assume the RBA see as their worst nightmare.
The Labor government has ended any prospect for further labour market reform and has left as the only means for addressing potential cost push pressures reducing the demand for labour through higher interest rates. Otherwise commodity price shocks would simply be experienced as once-and-for-all factors slowing down demand and could be more easily ignored.
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Like I've pointed a few times now, get over your trade union paranoia. Trade unions have been so destroyed in the last decade or so, they're almost of negative value to their members now and the industries they represent (just look at the NTEU!), since they stop ambitious people trying to get more than the union mandated level (just imagine if all schools were private). In fact, the power they had has now been gone for so long, most young people don't even remember when they had some -- which was one of the campaign mistakes of the last election for the Libs.
I'll bet that the wage inflation is going to come from all those industries where enough people haven't been properley trained, and since there no central group to bargain with, I imagine that it is going to be a lot harder to control. You are going to see people charging what they want, without any productivity gains. It will be interesting to see if that then spreads to other areas if people can't afford the things and services they want.
"Howard-government created investment boom"
The Howard government created the Chinese economy? He sure was a clever man, that John Howard.
" the only means for addressing potential cost push pressures ..."
How about ending cost push pressures by skilling up the unskilled? Ask yourself, Harry, why we have have cost push pressures when there are hundreds of thousands of unemployed, and hundreds of thousands more either pushed off into disbility pensions or underemployed. Then ask yourself who was in government for over a decade and let this situation develop. (Hint: it wasn't Kevin Rudd.)
Spiros
Conrad, The unions are already making wage demands that will 'compensate' them for price increases. These neanderthals believe that governments can compensate the community for externally imposed price shocks.
Most in the community don't want anything to do with these people but they did just fund the election of a Labor government - they are not finished yet.
Your second para is just wrong - wage demands will peak in those sectors where unions can threaten the community.
Spiros, You are reproducing myths that have been repeatedly demolished - both here on this blog and elsewhere. The massive reduction in unemployment that occurred under the Howard government and which has accompanied an economy-wide investment boom was real. Most of the jobs that were created were full-time and the increase in disability pensions was tiny relative to the increase in employment. You are repeating myths.
Because unemployment is the lowest it has been for 34 years those getting jobs now are often the long-term unemployed - they are the economy's least productive workers. At least they have jobs now - it is a lot better than being unemployed for years as was the case under Labor.
There may be a productivity slowdown but that is the reason.
And for goodness sake be sensible. An economy expands continuously for 17 years - the biggest continuous expansion for at least 50 years - and you think skill shortages are the problem of government! That is a ridiculous position that you know is false.
HC,
you need to check out average wages.
here
Where is the relationship between level of unionisation in the workforce and average pay? The fact of the matter is that most unions in recent times have been aweful at securing pay rises. In education, they have been so bad its now perhaps the least most preferable university course you can do. You can fail year 12 and still be a primary school teacher -- how much more ammunition would you need to get a pay rise? This shows that the union people are basically a bunch of losers at negotiating pay rises (and for that matter, the government is too ready to exploit this).
Think about that next time you need a GP or dentist and wonder why they can charge anything they want for exactly the same service as they have always provided.
Conrad, The article you cite des not bear on the issue you raise. But look at what Sharon Burrow (speaking from the luxury resort town of Davos in Switzerland) has to say about the need for wages to be adjusted for commodity price increases:
'ACTU president Sharan Burrow says while unions will be responsible, rising petrol, mortgages and other costs mean it is not acceptable to have wages fall behind prices.
"You can't put the blame for an overheated economy at the door of working families struggling to pay their bills," she said.
"While it's important to get the balance right, while it's important that inflation is controlled, we would reject any notion that you'd have a real wage cut for working families.
"The critical piece is that the balance is there, and that working families maintain their capacity to pay their mortgages'.
The Australian which cites these remarks gets it absolutely right:
'The ACTU's recipe for wages, to cut company profits to offset rises in the consumer price index, represents a direct threat to employment, proving once again that the trade union movement does not care about workers, only members.'
HC,
you are confusing what the ACTU wants and what they are likely to get. Sure they can talk the big talk (its obviously good for membership), but in recent history (or history for most people under 30), they have been basically worthless. What this shows is that they are good for the government -- because the government can negotiate a lower wages deal than would be the case if the industries they were in were privatized and individuals all bargained for their wages (Its a no-brainer to know where teachers, for example, get the highest wages, and isn't in the public system). Are you suggesting that somehow they are going to become expert bargainers and that, for example, industries with skill shortages (e.g., mining, health)are not going to get exceissive rises for no productivity gains?
Last para says it all Harry, wages will step up to inflation and rising interest rates to counter wage hikes will hurt wage earners.
Now that the award system has been reinstated latest rate for unskilled casual labour is $20/hr plus allowances.
Advertised in local paper, mowing and general duties $18/hr plus benefits (+super, workcover, wet weather, uniform etc etc allow $25)
harry:
It's the perefect storm.
High rates, labor markets that won't be allowed to clear as easily, high levels of debt and a banking system that's basically damaged.
Good luck everyone. I'll see you on the oher side.
jc
Spiros:
You shouldn't comment when you don't understand economics. " skilling" workers will do nothing to change the issue with inflation.
That's like suggesting trimming one's nails will treat kidney disease.
Jc
what wages push?
JC, the RBA has been talking about skill shortages as a source of inflationary pressure for two years. You can look up their statements on the RBA web site. I guess that means they don't know anythint about economics. Ditto the Treasury.
Spiros
Spiros:
If they did know a lot about inflation maybe we wouldn't be at the top of the CPI band right now and would have had it under control a lot earlier with much less pain.
If the RBA and Treasury think that they are wrong. Do you have link as I want to see what they said, as I don't quite believe you're reading it correctly. You know how economics is not your strongest area.
that was me
Jc
look harry, you can't expect people to remember to put their name underneath a para all the time.
Why don't you think about doing something about it.
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