The blame game is on in earnest.
As the debilitating impact of a dozen rate hikes in a little over a year has begun to hammer a large cohort of mostly younger and new home owners, the finger-pointing has gathered momentum.
Ever since inflation took hold globally in the aftermath of the COVID-19 pandemic and was turbocharged by supply disruptions following Russia’s brutal invasion of Ukraine, central banks have struggled to bring the outbreak under control.
Now, the accusations are flying thick and fast.
Supply chains are returning to normal as shipping costs drop sharply. But while the price rises for goods and materials begin to moderate, the cost of services continues to drive consumer prices higher.
Like a broken record, each month for the past year in the statement accompanying the rates decision, the Reserve Bank of Australia has cautioned that inflation expectations need to be kept in check to ensure we don’t have a repeat of the 1970s wages-prices spiral.
As real wages have been hammered by the surging cost of living, some of the biggest players in corporate Australia have managed to deliver record profits for shareholders, leading to accusations of profiteering.
Endless graphs have been spat out of research centres showing that the share of wages in the overall economy has fallen over the past four decades as the share of profits has grown by roughly the same degree.
Now the corporate world is hitting back. Wages growth, it argues, needs to be kept in check.
And, as evidence, it is pointing to the dramatic drop in national productivity as a root cause of inflation.
Loading…
So, who’s to blame for this stubborn and persistent bout of inflation gripping the nation and the rest of the developed world?
Militant workers hell-bent on returning the economy to the turbulent 1970s, or greedy capitalists out to maximise the leverage they’ve accumulated through years of takeovers and mergers?
Like most things in life, there is no clear or easy answer.
But it is a debate that is becoming increasingly polarised and the outcome will shape our future.
What do you expect?
If newspapers were still a thing, entire forests would have been devoured in recent times by the constant chatter about keeping “inflation expectations anchored”.
It’s been an RBA mantra for more than a year but it’s really just code for “we don’t want wages growth to get out of control”.
Why do we care about what you expect?
It’s not so much the expectations, it’s what happens as a result that matters. Human beings have a nasty habit of altering their behaviour and turning their expectations into reality. They become self-fulfilling.
In this case, if you expect prices to keep rising faster than your wages, there’s a pretty good chance you’ll march into work and demand a bigger pay rise.
If enough people do the same, the boss will charge more for the company’s products, inflation will get a boost and you’ll demand even higher wages, which then becomes a vicious cycle, often leading to industrial chaos and entrenched inflation.
Despite the RBA’s obsession, it simply hasn’t happened this time around.
Over the course of the past year, inflation has outpaced wage growth by a country mile, which means real spending power from wages has declined.
Consumer prices rose an annualised 7 per cent in the March quarter. Wages, on the other hand, rose just 3.7 per cent.
That’s not to say it can’t happen in the future. But for all the concern of a re-run wages price spiral from the 1970s, the RBA, the business lobby groups and a good many economists overlook one important aspect: Our industrial relations system has been designed to ensure it doesn’t happen.
Strikes are almost non-existent these days. Unions must apply to the courts for permission to take industrial action. That’s shifted the balance of power to companies and business owners and kept a lid on wages.
Productivity in the firing line
The Fair Work Commission decision, along with federal government urging, shifted the argument a fortnight ago.
It delivered an effective 8.6 per cent pay rise to Australia’s lowest-paid workers, well above inflation, along with a 5.75 per cent boost to award-wage workers.
While just 0.7 per cent of the workforce would receive the 8.6 per cent rise and around 20 per cent of workers the 5.75 per cent lift, it was enough to raise concerns that wages were rising too quickly.
And the argument all revolves around the concept of productivity.
Despite what you may hear, productivity isn’t about money or wages. So, cutting wages won’t do anything to improve productivity. In fact, it’s more likely to have the opposite effect as it will destroy the incentive to work harder.
What productivity is about is producing more using the same inputs over a given time period. And, as opposed to what you may be told, it’s not just about labour. It also relates to capital and land.
Productivity is one of those ideas that everyone agrees is important but no-one can really get their head around.
We know the what but we can’t quite ever understand the why.
Right now, for instance, we know Australian productivity is about the worst it’s been in decades. And without productivity growth, we’re told, you can’t justify wage rises.
Why is it so bad? Ask those loudly bemoaning our performance and you won’t get a straight answer.
In fact, no-one really knows.
RBA governor Philip Lowe last week reckoned the pandemic might be to blame. Or, he thought, firms might be holding on to workers who weren’t all that productive because there was a shortage of workers.
Recent RBA research suggested our industrial relations system could be at fault.
Good firms had no incentive to offer wages above the award, so good workers stayed with dud firms.
Others say businesses haven’t invested enough in work-saving machinery and new technology.
Part of the problem is that productivity is incredibly difficult to measure, especially in service industries.
You can measure the output of a worker or a machine in a factory or a mine.
But what about education? Is a teacher with a class of 60 students twice as productive as one with 30 pupils? Probably not.
Or health care. Is a doctor treating 30 patients an hour three times more productive than one treating 10?
The same goes for hospitality and aged care.
Consider this — apart from mining, Australia’s economy has transformed into a services economy, a trend that is likely to continue.
Two of our biggest exports are tourism and education. Both are service industries.
So what is the fix?
For all the complaints about our lousy productivity, try extracting a solution on how to fix it or a concrete idea.
You’ll be told we need micro-economic reform, greater competition, a more flexible workforce, better education, less red tape along with a host of other generalities.
Legitimate and important ideals they may be, but they won’t turn our productivity around overnight.
In essence, we have a problem the cause of which we can’t quite identify and that’s difficult to measure, so we can’t tell exactly how bad it is and have no real ideas for a solution.
What we do know is that services inflation is persistent, here and overseas.
And with little or no productivity lift and higher wages, what’s known as unit labour costs have risen.
That’s the metric being thrown about now by business leaders and it is what is most concerning the RBA.
So, even though real wages have declined sharply, the focus again is shifting back to restraining salaries.
Loading…