Hey RBA boomer, things have changed a lot since the 1970s

It’s clear that Lowe knows a lot about how financial markets work, but not much about the labor market.

Raising mortgage rates or cutting real wages – whichever way you go, the end result is putting pressure on households to keep them from spending that much (something that wage-cutting people want to sell – no, isn’t it? To me It also makes sense to say).

So, we’re back to Lowe’s alleged fear of a wage-price spiral. The whole under-50 crowd must be wondering what such a thing could be. Lowe said this while answering questions after the speech.

“The constant concern of many central banks – and I include us – is that [that] This period of high inflation will cause the labor force to say: ‘well, inflation is high and I need compensation’. “

“Assuming we all accept the idea, [has] A natural appeal: “Inflation is 7%, I should be compensated in my salary”. If that happens, what do you think inflation will be next year? Seven percent, plus or minus.

“Then we had to get that 7 percent and 7 percent compensation . . . that’s what happened in the 70s and 80s, and … it turned out to be a disaster,” Lowe said.

“So I know it’s hard for people to accept the idea that wages aren’t going up with inflation. People are experiencing real wages going down. That’s tough. The alternative, though, is harder,” he added.

This is a reasonable description of how wage-price spirals have worked in the past. But as a specious risk today, it has two glaring weaknesses.

First, it assumes that if an employee decides to ask for a 7 percent raise, the boss has no choice but to forego it. This is dreamland.

The obvious fact is that today, workers lack the industrial power to force employers to raise their wages significantly. Employees in the best positions on enterprise agreements get a 3% to 4% raise, but some still get double that.

Workers in the lowest paid quartile, subject to minimum incentive wages, have their pay rises fixed each year by the Fair Work Commission – but these are awarded after the fact, not in prospect. A handful of them rose 5.2% in July, but most gained 4.6%.

The bargaining power of workers in the 1970s has been weakened by more than four decades of globalization, technological change, and wage-fixing “reforms.” In 1976, 52 percent of workers were union members.it is … now down Only 12.5%.

Another reason why wage-price spirals are unlikely to occur today is that most enterprise agreements are valid for three years. The system prohibits me from getting a bigger raise this year than I already agreed to two years ago.

The second aspect of Lowe’s fear of a wage-price spiral resurrected from the dead is the silly assumption that if workers’ wages rise by 7%, businesses will automatically and easily raise prices by 7%. It only makes sense mathematically when you consider that payroll costs make up the entirety of a business’s costs. In fact, the Bureau of Statistics’ input-output table shows that, across the economy, wages account for only about a quarter of total input costs.

So, on average, a 7% wage increase can justify a price increase of less than 2%. Since business competitors pay about the same, you might think that any company that translates a 2% cost increase into a 7% price increase would demand to be undercut by competitors and lose its market share.


Of course, such a brutal attack on the pockets of industry customers would be possible if the industry was dominated by just a few large companies. They can — and have and do — have an unspoken agreement that everyone raises prices by the same exorbitant amount.

It’s clear that Lowe knows a lot about how financial markets work, but not much about the labor market. But I find it hard to believe he could be so ignorant as to fail to see the weakness of his wage-price spiral demon.

Another possibility is that what really worries him is a massive outbreak of oligopoly pricing power. Getting that back under control could really lead to a recession.

Monetary policy (manipulating interest rates) cannot cure market forces. The only answer is stronger competition policy and tougher regulation from the Australian Competition and Consumer Commission. But neither the Reserve Bank nor the Treasury have much enthusiasm for it.

It’s much less controversial to blame inflation on greedy workers and tell moms and dads to tighten their belts and lose jobs until the problem is fixed.

The Business Briefing newsletter features breaking stories, scoops and expert opinion. Sign up to get it every weekday morning.

Source link

Leave a Reply

Your email address will not be published. Required fields are marked *