The ABC’s Gareth Hutchens is my favourite reporter writing on unemployment, employment and the economy. This story is on wage growth, of which there has been bugger-all for more than ten years.
“The Reserve Bank board has lifted interest rates for the seventh month in a row, as some of the world’s major economies head towards recession.
Last week, I wrote an article about a new paper from Greg Jericho from the Centre for Future Work. The 70-page paper explored the causes of our current inflation, and it laid some blame on profiteering businesses. It also contained comments about Australia’s “inflation-targeting” regime that has been in place since 1993. He said the regime has had an anti-worker bias.
Note Australian workers have been chastised for asking for wage increases to match or better inflation, while businesses have escaped censure for amassing huge profits, even though this has made inflation worse.
“Inflation targeting in Australia since 1993 has not been neutral,” Mr Jericho said. “That period of inflation targeting [especially below-target inflation from 2014 through 2020] was associated with a massive transfer of income and economic power from workers to businesses.
When the Reserve Bank of Australia (RBA) began officially “targeting” inflation in 1993 it was one of the first countries in the world to do so. Since then, every country has had their own approach to targeting inflation, but the RBA has tried to keep inflation averaging within a range of 2 to 3 per cent over the cycle.
Australia was one of the first countries in the world to adopt an inflation-targeting regime. However, the shift to an inflation-targeting regime in the early 1990s didn’t just have economic consequences. It had social and political ones too.
For the first 80 years of Australia’s federation, Australia’s labour markets were built on a system of arbitration courts and centralised wage-setting.
That system was an important element of Australia’s social contract because it was built to distribute our national income fairly evenly among competing groups in the economy. It also assumed much of the responsibility for wage restraint and inflation.
But when Australia’s economy was hit by “stagflation” in the 1970s, opponents of centralised wage-setting and arbitration system, made a convincing argument that it was directly responsible for many of Australia’s economic woes.
They said it had been hijacked by special interests, like unions and it was now doing economic damage. Over the 1980s and 1990s, the old system was dismantled and a new system was put in its place, with an “independent” central bank given responsibility in 1993 for controlling inflation by lifting or cutting interest rates.
The act of bargaining over wages was handed to individual businesses, where the power dynamics were far more unequal.
Mike Beggs, from the University of Sydney, says 1993 was “year zero” for the new macroeconomic policymaking in Australia, because of those changes. For example, in 1997 when the Australian Industrial Relations Commission reviewed the level of award wages, the commission decided on wage restraint for the coming year because that’s what the Reserve Bank wanted.
As the commission said in its review: “We have noted the Reserve Bank’s intimations of the order of increase [in wages] which, in its view, accords with its inflation target. Any increase greater than the amount which we grant carries a risk, in our view, of leading to a rise in interest rates.”
It was a recognition that the RBA would now be ruling the roost in the new inflation-targeting era, Dr Beggs said. And the new era coincided with a huge decline in union membership.
Fast forward to this year. In July, the historian Adam Tooze wrote a fascinating article on this topic after reading the annual economic report from the Bank for International Settlements (BIS).
The BIS is based in Switzerland and it’s the central bank for the world’s central banks.
Mr Tooze said the report showed how the managers of the modern global economic system, “in a remarkably unselfconscious way”, articulate their preference for a particular configuration of social forces.
That is, central banks are very aware of the power dynamics involved in modern inflation targeting, and they know that the inflation-targeting era has coincided with a reduction in workers’ power, and they don’t say it’s a bad thing.
“What it does not comment on are the inequality implications. It does not remark on the fact that the actually existing low-inflation regime of the period since the 1980s opened the door to huge inequality.”
He said it was clear the BIS believes that much of the fight against inflation begins with labour markets. And he pointed to these passages from the BIS report:
“Labour markets have seen major structural changes since the Great Inflation of the 1970s. Their net effect has been to reduce the pricing power of labour. This secular decline reflects many factors, including a declining role of the public sector in setting wages, dwindling unionisation, a wave of labour market deregulation, the gradual opening of markets due to globalisation, and demographics. One possible, albeit imperfect, indicator of labour’s decreasing structural pricing power is the secular decline in the degree of centralisation of wage negotiations.”
He said the BIS seemed very aware that periods of persistently high inflation could concentrate people’s minds on their economic situation, and that may, in turn, encourage workers to unionise and ask for more regular wage increases.
He said this appeared to be a risk in the eyes of the BIS, as the BIS report makes clear:
“The higher the inflation rate, the greater the incentive for workers to unionise, and for wage negotiations to be centralised, as the inflation rate acts as a stronger focal point. And, the more persistent the inflation rate, the greater the incentive to index wages and, more generally, to reduce the length of contracts that are fixed in nominal terms. These forces are amplified by the stylised fact that higher inflation rates tend to go hand in hand with higher volatility and hence uncertainty,” the report said.