Reserve Bank's Phobia of Wage Rises Undermines Economic Growth

The Reserve Bank's reluctance to cut interest rates is rooted in its concern about excessive wage growth, reminiscent of the 1970s. However, labour economists argue that workers' bargaining power has been eroded in recent decades, making a wage explosion unlikely. The bank's reliance on a neoclassical view of economics, which assumes equal bargaining power between workers and employers, is a significant factor in its policy decisions.

Key Takeaways:

• The Reserve Bank is concerned about inflation, but its biggest worry is wage rises, which could lead to higher prices and inflation.
• Labour economists argue that workers' bargaining power has been eroded in recent decades, making a wage explosion unlikely.
• The bank's reliance on a neoclassical view of economics, which assumes equal bargaining power between workers and employers, is a significant factor in its policy decisions.
• The labour market has changed since the 1970s, with wages finally growing faster than inflation, but at a modest pace of 3.4% over the year.
• The Reserve Bank's expectation to cut the cash rate next week reflects its easing stance, despite ongoing concerns about inflation and wage growth.
• Labour economist Professor Emeritus David Peetz argues that real wages have been held back in Australia due to the erosion of workers' power to negotiate.
• Only 1% of employers responding to a 2023 survey by Jobs and Skills Australia said they would adjust their workers' pay in response to a skills shortage.
• The threat of industrial action, such as strikes, is significantly smaller than in the 1970s, with only 100,000 working days lost in 2021 compared to 6.3 million in 1974.

Statistics:

• Inflation hit nearly 8% in 2022, but has since fallen over the past two years.
• The Reserve Bank has cut interest rates only once, and raised them six times, in the past two years.
• Employment grew robustly, with 89,000 additional Australians employed in April compared to March.
• Job vacancy data shows there is still a significant worker shortage, but wages have grown at a modest pace of 3.4% over the year.
• Workers in 1974-75 won wage rises of 10% accounting for inflation, while workers went backwards by 3% in 2021-22.
• Collective bargaining (negotiation across an entire industry) was once common, but is now less common than enterprise bargaining (negotiation between workers and their employer).

Sources:

• Business Briefing newsletter
• The Australian government's Jobs and Skills Australia agency
• Labour economist Professor Emeritus David Peetz from the Carmichael Centre
• Reserve Bank of Australia