The Times Australia
The Times World News

.
The Times Real Estate

.

Why there's no magic jobless rate to increase Australians' wages

  • Written by Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of Sydney
Why there's no magic jobless rate to increase Australians' wages

With the official unemployment rate[1] now 4.2% – the lowest since 2008 – Prime Minister Scott Morrison has predicted[2] a rate “with a 3 in front of it this year”. The Reserve Bank of Australia agrees[3], forecasting unemployment below 4% in coming months.

Many economists have been surprised at how quickly employment has rebounded from the effects of COVID-19. Now they are scratching their heads for another reason.

With unemployment so low, why aren’t wages growing more quickly?

Real wages falling

If something is in short supply, its price is supposed to rise. That’s according to conventional economics, which treats the price of labour (wages) much like any other commodity, from pork bellies to rapid antigen tests.

But there is little sign of that happening.

Since 2013, growth in nominal wages (not accounting for inflation) has been weaker than any time since the 1930s, with the average annual rate of 2.1%[4] growth half the typical rate of earlier years.

After grinding to a halt during the lockdowns, wage growth has rebounded – but only to those anaemic pre-pandemic rates (up just 2.2% in the past 12 months). Nominal wages are now lagging well behind consumer prices. Real wages (accounting for inflation) are therefore falling – the opposite of what free-market theory predicts when unemployment is low.

Read more: Unemployment below 3% is possible for the first time in 50 years – if Australia budgets for it[5]

This outcome puzzles those economists who focus on market forces to explain income distribution. But it’s not surprising to those who consider a broader array of structural, institutional and social determinants of wages.

Unemployment may matter to wage trends, although not necessarily for the same reasons assumed by market-focused theories. But many other factors – including minimum wages, collective bargaining, the award system, and even politics and culture – also explain who gets paid what.

Market-based ideas driving policy

A simple market-based understanding of wages has guided the policy stance of the government and the RBA for a generation.

Both still ascribe, for example, to the concept of a “non-accelerating inflation rate of unemployment” (or NAIRU).

The Non-Accelerating Inflation Rate of Unemployment (NAIRU)

The non-accelerating inflation rate of unemployment (NAIRU).
RBA, CC BY[6] This refers the lowest unemployment rate achievable without causing wages to grow and inflation to rise. Both keep changing their estimates of its precise level, with the treasury’s most recent calculations[7] putting it at 4.5% to 5% in the years before the pandemic. One reason the estimates shift is because the concept is impossible to measure. Many countries have abandoned this widely criticised[8] concept. Yet it still underpins Australia’s fiscal and monetary policies. A gentler approach acknowledges wages will accelerate gradually, instead of taking off suddenly, as unemployment approaches the estimated non-accelerating inflation rate of unemployment (NAIRU). This relationship is expressed graphically in what is called the Phillips Curve. The Phillips Curve The Phillips Curve RBA, CC BY[9][10] As unemployment falls, wage growth should gradually gain steam. That allows policy makers, especially the RBA, to try to guide the economy to a “sweet spot” on the Phillips Curve: with wage growth consistent with the RBA’s inflation target. Nice in theory, not in reality Unfortunately for both theories, the expected automatic relationship between unemployment and wages isn’t visible in the real world. Australia’s unemployment rate has fallen through successive estimates of the NAIRU (first 6%, then 5%, now 4%) with no sign of inflationary take-off. The Phillips Curve is also morphing, changing both its vertical position and its shape. The accompanying figure plots unemployment versus the annual rate of growth in wages. Wage growth and unemployment, 2000-2021 alt ABS wage price index and labour force data., CC BY[11] Before 2013 only a weak relationship was visible between wages and unemployment. Since 2013 the curve has shifted down and flattened, with hardly any discernable connection between unemployment and wages. Other factors at play The only way to explain this seeming anomaly is to look at the broader, structural determinants of wages. No economy simply sets the market loose to determine how much people get paid. Regulations, institutions and processes mediate the distribution of income across classes, occupations and jobs. They can be used to create a more equitable distribution. Or they can be used to reward certain groups and suppress the incomes of others. Either way, it is institutions and policies – shaped fundamentally by politics and power – that determine how the economic pie gets divided. Circumstances now provide a telling insight into how important those institutions are – and how dramatically they have changed. The accompanying table compares labour market outcomes and institutional parameters today, to those that prevailed the last time unemployment was below 4%. Unemployment and wages indicators, 1972 vs 2022. CC BY[12] Fifty years ago nominal wages were growing robustly, at more than 10%. Inflation was high (close to 6%) but real wages still rose. Now inflation is half that rate, yet wages are falling behind prices. This is due to a night-and-day contrast between labour-market institutions then and now. The minimum wage now is much lower relative to the average. The awards system has been restructured to serve only as a safety net, rather than leading improvements in wages and conditions. Unions and collective bargaining have been decimated, with strikes almost non-existent. Workers’ bargaining power has been further eroded by the spread of part-time work, casual jobs and other non-standard employment, including digital gigs. Fifty years ago workers had institutional power to win decent wage increases – even when unemployment was relatively high. That power has been steadily and deliberately stripped away through privatisation, suppression of union activity and liberalisation of insecure employment. Read more: Top economists expect RBA to hold rates low in 2022 as real wages fall[13] Higher wages would strengthen household finances, support consumer spending and achieve a fairer distribution of income. But there’s no magic unemployment rate that will deliver that outcome. If we want higher wages, we must win them through deliberate wage-boosting policies. References^ official unemployment rate (www.abs.gov.au)^ predicted (www.afr.com)^ agrees (www.rba.gov.au)^ average annual rate of 2.1% (www.abs.gov.au)^ Unemployment below 3% is possible for the first time in 50 years – if Australia budgets for it (theconversation.com)^ CC BY (creativecommons.org)^ most recent calculations (treasury.gov.au)^ widely criticised (d3n8a8pro7vhmx.cloudfront.net)^ RBA (www.rba.gov.au)^ CC BY (creativecommons.org)^ CC BY (creativecommons.org)^ CC BY (creativecommons.org)^ Top economists expect RBA to hold rates low in 2022 as real wages fall (theconversation.com)

Read more https://theconversation.com/why-theres-no-magic-jobless-rate-to-increase-australians-wages-176538

The Times Features

Itinerary to Maximize Your Two-Week Adventure in Vietnam and Cambodia

Two weeks may not seem like much, but it’s just the right time for travelers to explore the best of Vietnam and Cambodia. From the bustling streets of Hanoi to the magnificent te...

How to Protect Your Garden Trees from Wind Damage in Australia

In Australia's expansive landscape, garden trees hold noteworthy significance. They not only enhance the aesthetic appeal of our homes but also play an integral role in the local...

Brisbane Homeowners Warned: Non-Compliant Flexible Hoses Pose High Flood Risk

As a homeowner in Brisbane, when you think of the potential for flood damage to your home, you probably think of weather events. But you should know that there may be a tickin...

Argan Oil-Infused Moroccanoil Shampoo: Nourish and Revitalize Your Hair

Are you ready to transform your hair from dull and lifeless to vibrant and full of life? Look no further than the luxurious embrace of Argan Oil-Infused Moroccanoil Shampoo! In a...

Building A Strong Foundation For Any Structure

Building a home or commercial building can be very exciting. The possibilities are endless and the future is interesting. You can always change aspects of the building to meet the ...

The Role of a Family Dentist: Why Every Household Needs One

source A family dentist isn’t like your regular dentist who may specialise in a particular age group and whom you visit only when something goes wrong. A family dentist takes proa...

Times Magazine

"Eternal Nurture" by Cara Barilla: A Timeless Collection of Wisdom and Healing

Renowned Sydney-born author and educator Cara Barilla has released her latest book, Eternal Nurture, a profound collection of inspirational quotes designed to support mindfulness, emotional healing, and personal growth. With a deep commitment to ...

How AI-Driven SEO Enhancements Can Improve Headless CMS Content Visibility

Whereas SEO (search engine optimization) is critical in the digital landscape for making connections to content, much of it is still done manually keyword research, metatags, final tweaks at publication requiring a human element that takes extensiv...

Crypto Expert John Fenga Reveals How Blockchain is Revolutionising Charity

One of the most persistent challenges in the charity sector is trust. Donors often wonder whether their contributions are being used effectively or if overhead costs consume a significant portion. Traditional fundraising methods can be opaque, with...

Navigating Parenting Arrangements in Australia: A Legal Guide for Parents

Understanding Parenting Arrangements in Australia. Child custody disputes are often one of the most emotionally charged aspects of separation or divorce. Parents naturally want what is best for their children, but the legal process of determining ...

Blocky Adventures: A Minecraft Movie Celebration for Your Wrist

The Minecraft movie is almost here—and it’s time to get excited! With the film set to hit theaters on April 4, 2025, fans have a brand-new reason to celebrate. To honor the upcoming blockbuster, watchfaces.co has released a special Minecraft-inspir...

The Ultimate Guide to Apple Watch Faces & Trending Wallpapers

In today’s digital world, personalization is everything. Your smartwatch isn’t just a timepiece—it’s an extension of your style. Thanks to innovative third-party developers, customizing your Apple Watch has reached new heights with stunning designs...

LayBy Shopping