Thursday, May 08, 2008

The impending wages explosion

I posted last week on the teachers’ pay decision in Victoria and the dangerous potential for flow on effects that will drive high inflation and create a much larger pool of unemployed. I indicated that I hoped to be wrong on this issue - I lived through the misery of high cost-push inflation and high unemployment during the 1970s and 1980s. It is no joke.

Rudd is trying to suppress release of the Treasury critique of Labor’s foolish IR policies. These will add to inflation and unemployment. But the trade unions can do much more damage than this. They have already made their views clear. The following passage from The Australian is worth studying. Australia faces an impending wages explosion unless Kevin Rudd gets serious about dealing with these trade union fools who evidently seek to damage the interests of labour in Australia:

‘….unions in Victoria vowed to chase annual pay rises of up to 6% for the next 3 years to compensate for the 4.2% inflation rate and suppressed pay under John Howard.

Victorian Trades Hall Council secretary Brian Boyd told The Australian a deal struck by teachers in Victoria endorsing pay rises of up to 15.2% exemplified the catch-up increases unions wanted under the Prime Minister.

"I am quite aware that a number of key private sector unions and groups of workers are arguing for 5% (a year) to get ahead of that 4%" he said.

"There are agreements already being looked at around 15% over three years, and some will even go to 18-19%.

"(It's) not only to compensate for inflation but also to compensate for the restriction on the ability you had for decent wages under the previous government."

The Australian understands the pay push includes unions in the construction, manufacturing, transport, electrical and plumbing sectors. The Victorian teachers' deal has also buoyed public servants across several states - including teachers and nurses - on the verge of pay negotiations.

The wage push came as Brendan Nelson demanded Mr Rudd release Treasury advice prepared in February showing whether his industrial relations reforms would drive up inflation.

….Mr Boyd said the Victorian teachers' deal was a "good case in point" of unions playing catch-up after wages were suppressed under the Howard government.

"There has been a lot of wages curtailed in the last 3 or 4 of the Howard government and people are trying to catch up," he said.

Ordinary working people were not responsible for rising inflation, but were entitled to receive compensation for higher petrol and grocery prices, he said.

"The union movement is an independent voice for trying to find a fair market price for workers they represent in the capitalist market place," he said.

"We have put up with 11 years of IR laws that have been aimed at restricting our ability to find a fair price for labour.

"Just because (John) Howard got elected for a decade doesn't mean we accept that these harsh IR laws were justified in restricting our ability to find a fair price for labour.

"So I have no qualms in saying if we want to play the catch-up game for wages and conditions, we'll do it."

Mr Boyd said he did not accept the wage push would exacerbate game for wages and conditions, we'll do it."

Mr Boyd said he did not accept that the wage push would exacerbate inflationary pressures. "Ordinary working people didn't cause the inflation situation," he said. "Other factors caused that. The oil price internationally is one of them, and grocery prices going up has nothing to do with what workers do.

"They're entitled to get compensation for that. That's why I'm calling it a catch-up process, not a breakout process."

Mr Boyd denied the pay push could lead to a wages breakout. "It's not really a wages explosion, in my view. It's a catch-up that is currently going on because of what happened over the last few years of Howard," he said.

"It's making up lost ground. I think there should be an understanding that a lot of the workforce across the country, not only in Victoria, are viewing their situation in terms of inflation and (consumer price index) rises, in terms of the cost of living, in terms of petrol prices and power prices, and so on".

If Boyd and his crony economic-illiterates can't achieve these objectives then well-and-good. The difficulty is if they can and unions in Australia start playing 'wage catch-up'. Once-and-for-all price hikes will then translate into inflation and eventually the need for a major monetary contraction.

But the key task for Kevin Rudd is not budgetary. It is to talk down the demands for an instant wage nirvana in Australia. It is to put the trade unions in their place and to reinitiate the processes of labour market reform that Rudd has so foolishly quashed.


NPOV said...

This time I more or less agree with you Harry - given Australia's overall productivity in the last few years has not risen significantly, across-the-board wage rises would fairly obviously be inflationary. I don't see much reason to assume Swan and Rudd will make the same mistake Howard and Fraser did in the late 70's, given that the lesson has already been learned the hard way.
What I would support, that presumably you wouldn't, is making the forthcoming tax cuts more progressive: if the average union member now wanting a 5% pay rise gets instead a 5+% tax cut, that should more or less satisfy them. OTOH, tax cuts to above-average income earners seem to me to be far more likely to be inflationary.

Spiros said...

Harry, what you are calling for, perhaps unconsciously, is more labour market regulation to suppress the market forces that are the inevitable outcome of a tight labour market.

The supposed purpose of WorkChoices was to "deregulate" the labour market (though with 1000 pages of legislation and accompanying regulations). If you want a national wages explosion in today's environment - tradesmen in the Pilbara writ large - then deregulating the labour market is the sure way to get it.

Be careful what you wish for.

Anonymous said...
This comment has been removed by a blog administrator.
hc said...

Either be polite anonymous troll and abide by the comments policy - identify yourself with a consistent pseudonymn - or I will continue to delete your comments as I have just done.

Spiros said...

"HOW the unions will get these rises."

By being militant! That's how!

Harry, do you think that John Halfpenny and Norm Gallagher might come back to lead the campaign

NPOV said...

spiros, I'm not so sure about that. You're assuming that there aren't significant numbers of people out there that would be willing to work for lower wages that what unions are demanding. If you completely deregulated the labour market, there would be a number of businesses that would inevitably go to whatever lengths necessary to employ the cheapest labour they possibily could. Hence the short term effect would most likely be a drop in average employee wage. The long term effects would most likely be something of a (milder) rerun of the late 19th century and early 20th century, and we'd inevitably end up back more or less where we are now. Human nature hasn't changed much.

Spiros said...

npov, while that would be true for people with absolutely no skills, in the current environment there would be a wage explosion for most people.

The fact that in some cases it would be unions doing the bargaining is a second order issue. It's like footballers who use player agents to negotiate their salaries. The fundamental driver of footballer salaries is the shortage of footballers with the required skills, not the fact that they use agents to bargain on their behalf.

NPOV said...

But when unions use physical force (or even just threat of it) to prevent employers from employing cheaper labour that is available, then they are changing the equation.
The question is, in a completely deregulated labour market, who would break up union strikes?

conrad said...


I think we're going a 1970s redux, but I think teachers are one of the groups that really deserve the pay rises. Also, I don't see anyway out -- even completely deregulated labor markets are not going to solve the problem -- ask anyone in a rich Asian country = inflation in a mostly deregulated labor market. Its not surprising that people want more money and are willing to do more to get it when things suddenly become more expensive. This is human nature -- many people are happy to get by in good times, but change their behavior in bad. Such a change is not neccessarily a bad thing in the long term.

A third thing I don't get is why you think political parties having any real role to play in private sector unions that exist in non-monopolies. If firms are really worried about getting cheaper labor etc. they should consider actually trying to train more people, and they will essentially destroy union bargaining power. It suprises the hell out of me that many of the big companies that earn billions don't do this -- and then complain that the government doesn't either.

NH said...

Forgive my economic illiteracy, but are you suggesting that people should accept a diminished pay packet (4% payrise minus 4.5% inflation = -0.5% buying power per year), just for the common good?

As a professor of economics, I'm assuming (remember, I may be illiterate) that you are currently employed by a university. Are you an NTEU member? What do you think of the wage increases that your university colleagues have won for you over the past few bargaining rounds?

Spiros said...

Employment was up by 25,300 in April, with 19000 of those jobs full time. (Analysts were expecting only 10000 new jobs.)

Obviously, the job-destroying effects of the government's policies haven't kicked in yet, eh Harry?

hc said...

Don't be silly Spiros. You couldn't attribute any of the current changes to the current government when the lag in the effects of monetary policy might be 18 months or more.

The ABS numbers (here) looked pretty good to me.

Seasonally adjusted there was a 0.1% increase but, as you say, employment grew. The workforce participation rate barely changed.

They are not a bad set of numbers.

Spiros said...

I'm talking about the IR policy not monetary policy. If employers thought they were going to be stuck with useless employees they couldn't fire later on, and have to pay them sky-high-union-jackboot-delivered wages into the bargain, they wouldn't be hiring like there's no tomorrow.

They'd be firing like there's no tomorrow.

robert merkel said...

Harry, perhaps I'm being an economic doofus at this point and you can set me straight, but as I understand it share of national income going in profits has never been higher.

Isn't there room for the profit share of the economy to go down just a little bit, and the wage share to go up?

Anonymous said...

Mr Clarke, way back in 1993 when a certain Mr Brereton introduced legislation for EBAs he made some points in his speech which you would find enlightening.

Your theory of how a wages breakout would eventuaqte lacks basic knowledge of what can be done in an agreement and what needs to happen for it to be registered.

If my memory is correct pattern bargaining didn't even happen in the 80s let alone the 90s!

hc said...

I think you are right Robert but the profits share data is complex to interpret. The profits accrue throughout the economy as dividends on equity held by a broad range of people - including as retirement benefits paid to retirees. They also signal a favourable investment climate that means more better paid jobs.

I disagree with a view of the economy as a producer of cake where two sides (labour, capital) squabble over their share. The best way of organising activity is to have plenty of competition for labour and capital and to allow markets to work.

That's happened in recent years so Australian workers have got much better wages and many fewer of them are unemployed.

Leon Bertrand said...

Dear Harry,

I'm not sure unions have the power to force the wage rises the way they used to.

In private enterprise, wages are now necesarily linked to producivity in an age of fierce compeition.

pcsolotto said...

To the owner of this blog, how far youve come?