Wages Policy and Unemployment in Australia

It is generally accepted among Australian economists that high rates of growth of wages at various times over the last decade have made the achievement of full employment and lower rates of inflation more difficult. Fear of a further acceleration of wage growth has also been a policy constraint. It is when one attempts to go further that considerable disagreement becomes evident. From a labour market viewpoint, there does not seem to be a consensus as to the answers to the two broad questions that should be addressed. First, how important are wage changes relative to other factors that depress employment and add to the inflation rate? Second, how does government policy impinge on the process that generates wage changes? To do justice to both of these in a paper as short as this one is difficult, so I shall focus most of the paper on the second question. The relationships between government policy and wage changes are particularly important at this time. For most of the last decade, successive governments have operated a national wages policy, which to a large degree has been based on the indexation of wages for past price changes. The latest experiment, the Prices and Incomes Accord, is the centrepiece of the current government's employment and inflation policy, and, after almost two years of wide community and media support, the key principles upon which it is based are suddenly being questioned.1 Our prime endeavour, therefore, will be to build up sufficient understanding of the wage determination process so that some evaluation can be made as to the effectiveness of these national wage policies. This turns out to be a remarkably difficult task which generates considerable concern in our mind that the data may not be sufficiently rich to serve as a basis for sound judgments. It does appear, however, that the effect of a given level of unemployment upon wage changes has consistently weakened over the last decade. Why this should be so is a major unresolved puzzle. I-offer a loosely constructed theory that is consistent with the facts, but it is by no means the only possible explanation. Section I provides a description of wage-setting in Australia and some key facts of the economy. In Section II the statistical analysis of wage changes focuses on two competing theories: one is the Phillips curve approach, and the other stresses that wage outcomes may be, to a significant degree, independent of the level of unemployment and may depend instead on utilization rates of labour -within the firm. Section III considers the efficacy of incomes policies in Australia. Some final comments areoffered in Section IV.