It's been two decades since we had reason to worry about excessive wage
growth. This remains true despite cabinet ministers and some economists
saying we have a problem.
The structural reason we don't have to worry
is the continuing effect of the Hawke-Keating government's
micro-economic reforms - particularly the floating of the dollar, the
removal of protection against imports, deregulation of many industries
and the move from central wage-fixing to bargaining at the enterprise
level - in making the economy far less inflation prone, as well as more
flexible in responding to economic shocks.
Micro reform failed to
deliver the expected lasting rise in the rate of productivity
improvement, but it did deliver the unheralded benefit of making the
macro-economy much easier to manage. You would expect people who profess
to care so much about reform to know this.
Starting with the
cabinet ministers, it's understandable that a conservative government
that made a solemn promise to make no significant changes to industrial
relations law in its first term would want to camouflage its lack of
pro-employer militancy by turning up the volume on its anti-union
rhetoric.
That the union movement is a shadow of its former self
is no impediment to the gratification it gives the Liberals (and the
national dailies) to portray the unions as the economy's great bogeyman.
Trouble
is, the ministers don't seem to have looked at the stats lately. As the
Reserve Bank summarised the story on Friday: "Various measures of wage
growth are now around the lowest they have been over the past decade or
longer."
Since the economy has been growing at below trend, with
slowly rising unemployment, for quite a few quarters, this is hardly
surprising.
More worthy of serious discussion is the argument of
Professor Ross Garnaut and others that, if the economy is to gain
lasting stimulus from the belated fall in the dollar, it will need to be
accompanied by a fall in real wages.
It is true that a fall in the dollar leads to a rise in the prices of internationally tradeable goods and services.
It
is also true that the fall in the nominal exchange rate has to be
accompanied by a fall in the real exchange rate (the nominal rate
adjusted for our inflation rate relative to those of our trading
partners) if it is to cause a lasting improvement in the price
competitiveness of our trade-exposed industries.
What doesn't
follow is that the real exchange rate can fall only if real wages fall.
For a start, it doesn't require wages to grow no faster than the
inflation rate for that rate to be unchanged.
All that's need is
for wages to grow no faster than the inflation rate plus the trend rate
of improvement in the productivity of labour (often taken to be 1.5 per
cent a year).
Thus are the benefits of productivity improvement
spread around the economy in the form of rising real wages (and, thanks
to indexation, rising real pensions) without adding to inflation. As it
loved reminding us, this is just what happened throughout the Howard
government's term.
It follows that real wages would need to fall
only to the extent that the increase in inflation caused by the fall in
the dollar exceeded the trend rate of productivity improvement. (Of
course, the need for slower wage growth would also be reduced to the
extent that our trading partners' inflation rate happened to be higher
than ours.)
Let's do some figuring. The Reserve's rule of thumb is
that a 10 per cent fall in the dollar adds between 0.25 and 0.5
percentage points to the annual inflation rate over each of the
following two years or so.
Since its peak last April, the Aussie
has fallen by about 15 per cent against the US dollar. But it's
misleading to focus on temporary peaks, so a more representative fall
would be less than 14 per cent. And we really should use the fall
against the more economy-wide trade-weighted index, which reduces the
depreciation to about 11 per cent.
There may be a fair bit more to
come, of course, but so far we don't have a lot to worry about. There's
no sign we need a fall in real wages, just lower-than-normal real
growth.
And if you take the danger level of economy-wide nominal
wage growth to be 4 per cent (that is, the inflation-target mid-point of
2.5 per cent plus trend labour productivity improvement of 1.5 per
cent), we're looking very restrained.
The wage-price index never
got out of hand even at the height of the resources boom, and by
September its annual rate of increase had slowed to a terrifying 2.7 per
cent. Not.
