Wages and inflation: When will the beast stir?

The Age asked me to do another 300 word piece for today’s production on the subject of wages and inflation. They haven’t rung today so it looks like there’ll be nothing from me tomorrow! In any event, below the fold, for the record, is my piece. It is a pleasant surprise that we’ve not run into inflationary pressure from wages yet, though clearly the beast will stir at some stage of reducing unemployment, as it already has in WA and Queensland to some extent. Why so tame? I wonder.

One thing that occurs to me is that the lack of wage rises for so many people at the bottom end of the labour market in America might be an even bigger puzzle. Perhaps it’s the level of (mainly illegal) immigration, but I also toy with the idea that there may be some ‘insecurity illusion’. Workers know they can be sacked, and this is costly and highly risky for them – will they get another job that good? Of course they can be ‘bid away’ from jobs they’re in, but at full employment, unless that happens workers are likely to be risk averse about the prospects of hanging around with the devil they know rather than seeking work for a devil they don’t.

So they moderate their pay claims to a level below what the true situation of full or over full employment would otherwise justify.

Just a theory. Anyway, the column is below and it’s already out of date in the sense that the beast does seem to be stirring, though not it seems from wages pressure.

Wages and inflation: When will the beast stir?

An employee recently told me shed been offered double her current pay by her old employer. Fortunately shes still with us, because, as a young mother she wants to work where she wants (at home) when she wants.

Thats how tight things have become. Still, the plural of anecdote is not statistics. At least not yet.

Unemployment is lower than wed dreamt possible a decade ago and still those wage growth stats are behaving themselves.

The comfort zone is around 4 percent annual growth 2.5 percent for inflation, the rest for productivity growth.

Wage growth in the North and West WA and Queensland is already nudging 5 percent with unemployment down to 3.5 percent.

But national wage growth is brought back to 4 percent by Victoria and NSWs slower wage growth of around 3.7 percent. Their unemployment rate is around 4.5 percent.

Why arent the boom states wages soaring higher? WorkChoices is playing its part and I cant see the harm in slowing the wage growth of those near the bottom while we continue to protect those at the bottom with one of the worlds highest minimum wages.

And as Access Economics recently pointed out, the million jobs weve created in the last four years have only reduced unemployment by 100,000. The North Western States have much higher participation than other states averaging around 68 percent where slower growth states average less than 64.

So most additional labour is supplied by migration, return from or delayed retirement, and yes, firms (and WorkChoices) making it easier for Mums to enter or remain in the workforce like us!

So far so good. Then again there is a limit to all this its just impossible to know quite where it is! I guess well find out if we get there!

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Ken Parish
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Ken Parish(@ken-parish)
14 years ago

A significant part of the answer to this conundrum consists of a number and a word. The number is 457 and the word is visa.

Niall
14 years ago

How long is a piece of string?

Ken Lovell
14 years ago

I remember well what the current prime minister had to say about the evils of wage indexation. The work of the devil it was, doomed to create an endless inflationary spiral. As far as I know he hasn’t altered his opinion, so it was somewhat surprising to hear him laud the virtues of using not one, not two but three separate indices of price movements to adjust pensions, with the lucky recipients getting whichever produced the highest result.

He denied that giving more money to pensioners was inflationary.

Mr Howard rejected suggestions that another $4 billion worth of government spending over the next four years would be inflationary, because it was to help with the cost of living.

I think economics has lost its meaning if you regard something like that as inflationary, he said.

No wonder he’s a master of economic management – he realises it’s all in the meaning.

SJ
SJ
14 years ago

Of course it’s not inflationary, Ken. Just like the U.S. doesn’t torture.

‘When I use a word,’ Humpty Dumpty said, in a rather scornful tone,’it means just what I choose it to mean, neither more nor less.’

‘The question is,’ said Alice, ‘whether you can make words mean so many different things.’

‘The question is,’ said Humpty Dumpty, ‘which is to be master – that’s all.’

observa
observa
14 years ago

The answer probably lies in a two stage economy. You can work in the globalised high demand one like the resource sector, or in a high demand service sector with natural protection(eg nursing, building trades) and enjoy the good times. OTOH working in the import/export competing sector like much manufacturing, has little to smile about. Even the trades like fitters are constrained. Toolmakers are an exception. Hospitality is a mixed bag with slowly increasing labour shortages but the price of labour’s output is constrained by discretionary domestic spending. The daughter just did a short bar course and pulls $22/hr casual and can get all the work she wants, but that’s the limit. She’s happy at the local beachside yuppie spot, despite offers to work in similar city spots. (it helps to be a looker in such occupations but it has the career structure of female newsreaders) Tips add about $20 cash a shift, but you probably wouldn’t earn that in a working class local.

As an aside I can tell you younguns never come home with a new job knowing the pay rate. Did you ask how much you’re getting paid? ‘Oh daaad’ and rolls eyes. You get the impression they sorta know from the grapevine and it’s all about the right joint. Not so when she got a checkout job with one of the big 2. Paid training, reams of dos and don’ts and comapny ethos, expected behaviour, uniform and all the remuneration laid out, union form, industry super fund prospectus, etc. They know all about unfair dismissal laws, whereas small biz sticks them on casual and worries about the paperwork later.

Ken may be right about 457s, but most of those are going to be Aus citizens at some stage and as a result are typically willing to do the shitty work or hard yakka the indigenous mob are too spoiled to do. Nothing new in that. Their kids will quickly grow out of it.

John Ryan
John Ryan
14 years ago

I always had the idea that the low paid work in the US was done by illegal immigrants,or the last batch of legal ones.
Wages don,t go up because there always another immigrant who will work for less,maybe thats where the boss of Harvey Norman got his idea from about the two part wage system,with one group being paid half what the others get.

Ken Parish
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Ken Parish(@ken-parish)
14 years ago

Perhaps I should explain more clearly what I meant by my original shorthand comment. I think that the phenomenon of low wage inflation despite extraordinarily low unemployment rates is partly explained by the prevalence/availability of 457 temporary work visas for employers suffering labour shortages and wage demands they see as excessive. As this article from last year noted:

THE number of foreign workers being brought into Australia on temporary visas has increased by two-thirds since 2003-04.

An estimated 40,000 foreigners were expected to have been granted one a 457 visa in the past financial year, making up the increase.

In a research report into the growing use of temporary foreign workers, the Australian Manufacturing Workers Union has asserted that employers are using the visas to undercut local market rates for skilled tradespeople.

These are numbers large enough to make a difference to wage increases in the skilled and semi-skilled sectors where 457 visas are prevalent. Although wage rates for 457 visaholders are supposedly required to be paid at (approximately) the level of average weekly earnings (around $40,000 from memory), there is still an evident downward pressure on local wage levels in areas of high labour demand where wage rates might otherwise be expected to be growing strongly. That is, were it not for 457 visas employers would be having to pay wages well above both award/EBA rates and average weekly earnings to attract staff. The availability of 457 visas gives them an avenue to avoid this, and moreover the mere threat explicit or otherwise, that local staff might be replaced with short term migrant workers if they don’t moderate wage demands is clearly proving effective.

What it effectively amounts to is a latter day version of the old Country Party gambit where the rural sector capitalised profits and socialised losses (apparently a Kim Beazley snr one-liner, so I learned from one of the recent obituaries). In Howard’s Australian workforce, employers can take advantage of market forces to impose AWAs which reduce wages and conditions (or severely limit their increase) in areas of weak labour market demand, while importing cheap-ish foreign labour under 457 visas to cap upward wage pressure in areas of higher demand. Hence the phenomenon Nicholas commented on.

Of course, 457 visas aren’t of much use in lower paid sectors like retail and tourism, where wages are typically lower than average weekly earnings (so that there’s no point in importing workers under 457 visas). In those sectors the “insecurity illusion”/ devil you know factor to which Nicholas refers may be a factor limiting wage increases. So too is the fact that these are sectors with very low levels of trade union membership/activity and low levels of education so that workers are not well equipped to take advantage of the strong position they may well potentially enjoy.

Liam
Liam
14 years ago

the rural sector capitalised profits and socialised losses

I’d always had the impression that it was Lenin who said it first.

Ken Parish
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Ken Parish(@ken-parish)
14 years ago

Quite possibly, but I doubt he was referring to Oz farmers and cockies.