Why the RBA shouldn’t overreact and hit the brakes?

The war in Ukraine is likely to increase fuel prices for the foreseeable future.

But not everything goes up. The costs of transporting sea containers are starting to fall, as are the prices of many raw materials. So are house prices in most Australian states.

the social wage

Talk about a The 1970s-style wage-price spiral is silly. When the two oil price shocks hit our shores in the 1970s, high oil prices fueled wages, driving prices up in a vicious circle.

It took the Hawke-Keating Prices and Income Accord with the union movement to moderate wage demands in exchange for improvements in what came to be known as social wages – Medicare, government support for school costs and, later, guaranteed pensions for working people.

Unions could have secured much larger wage increases in the field, especially during the post-recession recovery of the early 1980s, but they voluntarily moderated their wage demands.

The monetarist who are spearheading a destructive new wage-price spiral must be averted by sharp hikes in spot interest rates, conveniently ignoring the changed structure of the Australian labor market. In the 1970s, about half of the Australian workforce was unionized, whereas today union membership is less than 15 percent.

In addition, industrial relations laws are now much more restrictive than they were in the 1970s, limiting the ability of unions to take lawful industrial action.

Warnings of a wage breakout will continue unless and until official statistics confirm it. The Reserve Bank has referred to its contacts with the business community, but that is hardly a statistically sound basis for decision-making.

That’s the kind of recipe we hear from businessmen and conservative politicians who’ve never seen a pay raise they liked.

Official data continues to show that real wages are falling, with the wage price index increase of 2.4 percent for the March quarter clearly lower than inflation of 5.1 percent for the same period.

Admittedly, the vacancies are so great that there are now only 1.1 unemployed for each vacancy. Wage pressures are mainly the result of low immigration levels, which are temporary and not structural.

Governor of the Reserve Bank Phillip Lowe has indicated that he wouldn’t be too concerned if wage growth were 3.5 percent. At this stage, there is little evidence that aggregate wage growth is faster than this. That evidence could come, but the Reserve Bank should not overreact Tuesday and put on the brakes.

Of course, the Reserve Bank should continue to normalize interest rates from their pandemic lows, consistent with reaching full employment and inflation in the 2 to 3 percent range. But wrecking the economy by raising the Reserve Bank’s cash interest rates to cover the supply shortfall would be the ultimate blunt instrument.

Consider the folly of the monetary authorities who said they had solved the tomato shortage by wrecking the economy, putting many people out of work and making the remaining workers so worried about the future that they thought it was too risky to buy tomatoes anyway and increase their savings instead of.

That’s the kind of recipe we hear from monetarist, businessmen, and conservative politicians who’ve never seen a pay raise they liked.

Following the rise in real wages due to successful wage claims in the late 1970s, the 2000s were characterized by an overhang in real profits and lagging real wages, as real wages fell from about 2013 while profits rose.

The answer to every macroeconomic problem is certainly not to cut real wages further. If conservatives want to break something, try breaking avocados. They are currently very cheap.

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