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Economists reject warning of wages explosion

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Eric Abetz is urging employers and unions to act responsibly when negotiating new pay deals.

The Federal Employment Minister issued a warning that, despite what economists describe as Australia’s weak and uncertain economic future, escalating wages are a looming threat.

“If this is not done then we risk seeing something akin to the wages explosion of the pre-accord era when unsustainable wage growth simply pushed thousands of Australians out of work,” he cautioned.

Australia has seen periods of rapid wage growth, but the economic conditions that lead to it were much different from what the nation is currently experiencing, according to the chief economist with Bank of America Merrill Lynch in Australia, Saul Eslake.

“First really big wages explosion was in 1973/74. Some of that was egged on by the Whitlam government, although the circumstances that made it possible had previously been laid by the outgoing McMahon government that presided over a very large increase in the money supply at a time when increases in the money supply mattered for inflation,” he explained.

“We had another significant wages explosion in the early 1980s, during the so-called resources boom presided over by the Fraser government.

“In both cases the centralised wage fixing system, and the ability for unions in some sectors of the economy to go to the arbitration commission as it then was and get wage increases that had been obtained in industries where circumstances were very different, played a central role in spreading the wages explosion through the economy.”

Mr Eslake says the last wages break-out was almost two decades ago.

“The last real significant spike in wages was in 1994/95, as unemployment began to fall more rapidly after the recession of the early 1990s,” he added.

In the past 12 months wages have increased by 2.7 per cent, which is significantly lower than the 4 per cent they were at five years ago when the world was heading into global financial crisis.

With inflation now running at 2.6 per cent, wages are just keeping up.

According to economists, the major employers such as the retail sector, public service and banking and finance are recording their slowest growth since 2001 and forecast to slow even further.

However, Saul Eslake says there is a risk that politics can override economics when it comes to discussion of wage levels.

“There’s always a danger that politics could override sound economic judgements, that’s a risk you run in a democratic political system I guess,” he said.

‘Middle ground will be reached’

Despite a recent pick up over the Christmas period, the retail sector, which is considered to be the backbone of Australia’s employment, is still sluggish.

Russell Zimmerman, the executive director of the Australian Retailers Association, says his industry cannot afford a wage increase.

“I don’t think there is a valid reason to have a wages explosion in retail, because I don’t think the industry can stand it,” he warned.

“Quite honestly I think that it would put a lot more retailers out of business.”

Given the current economic conditions and the relatively flat growth in wages in recent years, some analysts suggest the Minister’s warnings are more about industrial negotiations between unions and companies in the transport, construction and mining sectors, than the broader community.

Those negotiations are also at front of mind for the Australian Industry Group’s chief executive Innes Willox.

“This is all part of the negotiation, but I think the bottom line here is what market forces are telling employers, who are the people who are paying the wages, who are taking the risks, who are the people who are making the employment decisions, that in a flowing economy at a time when businesses are under severe structural pressure, the days of significant wage increases are pretty much over,” he said.

He says his members are resisting any large increases in wages.

“What I think we’re seeing is that employers are responding in the sense of the market. Unions are continuing to push their demands, as is their right and their entitlement, and a middle ground will be reached or a common understanding will be reached,” he added.

“But, where possible, employers will not be giving ground to union demands because of the economic circumstances, perhaps as they were able to or did in the past.”