No evidence of a 'wage-price spiral' in Australia

Iain Ross, a member of the Reserve Bank's monetary policy board, gave a very interesting speech last night.

He rejected the idea that Australia has almost experienced runaway wage growth in recent years that could have fed into damaging inflation.

"I want to talk about wage-price spirals," he said.

"The 'threat' of rising wages has been a persistent theme in the financial press since inflation began rising sharply from mid-2021.

"A number of media commentators have raised the risk of a wage-price spiral — pointing to the 1970s when the oil price shock collided with large pay rises flowing through the economy.

"[But] the labour market framework of today is very different to that of the 1970s and 1980s.

"There is no evidence of the emergence of a wage-price spiral in the present circumstances and recent data suggest such an outcome is unlikely," he argued.

The formation of wage-price spirals

Dr Ross is a former President of the Fair Work Commission, a former judge of the Federal Court and Supreme Court of Victoria, and a former assistant secretary of the Australian Council of Trade Unions (ACTU).

Nobody on the RBA's nine-person monetary policy board has had as much practical experience with Australia's labour market and wage-setting institutions.

It was rare to hear a speech from an RBA board member (these days) that focused so heavily on the reality of Australia's modern wage-setting institutions, and the decline in workers' power, to challenge the idea that our economy could experience a "wage explosion" any time soon.

What is a "wage-price spiral"?

According to the idea, Ross explained, following an increase in aggregate demand or an external cost shock, businesses raise their prices, which pushes up inflation.

Workers then want higher wages to maintain their real wages, and if they think inflation will remain high, they may push for particularly large wage increases (so 'expectations' play an important role in the process).

Those higher wages then feed into higher costs, and prices, and so on, which amplifies the inflationary effects of the original shock, and round and round we go:

Australia's economy experienced episodes of rapidly rising prices and wages in the 1970s and 1980s.

But Ross explained that those events occurred in a very different Australia.

He said our modern labour and wage-setting institutions, our modern financial system, our extremely diminished union movement and much tougher sanctions for unlawful industrial action, and the broader industrial structure of our economy, were significantly different from 50 years ago.

He said our modern industrial relations system limited how frequently workers could revise their wage claims, and how easily higher wage claims could spread through the economy these days.

"These changes in Australia's wage-setting mechanisms have made the wage-price dynamics of the 1970s much less likely to recur," he said.

A 'substantially different' wage bargaining environment today

It's worth reading his entire speech, if you're interested in learning more about the big differences between the 1970s and today.

He talked about the old concept of "comparative wage justice," which held that employees doing the same work for different employers or in different industries should receive the same amount of pay, irrespective of the capacity of their employers or industry.

He said that concept helped to spread large wage rises through Australia's economy 50 years ago.

And he discussed the old practice of indexing wages to the consumer price index every three months, which tied rising wages with rising prices in a rapid inflationary feedback loop in the 1970s.

"The situation is very different today," he said.

"Comparative wage justice no longer plays the pervasive role it once did, and quarterly indexation is not a feature of the current system.

"The current enterprise bargaining arrangements, in particular, effectively operate as a shock absorber by constraining the bargaining capacity of those who are the subject of enterprise agreements.

"Such employees are unable to pursue claims for increased wages until the enterprise agreement to which they are subject has passed its nominal expiry date," he said.

Does the RBA think the unemployment rate is still too low?

His speech was delivered at a fascinating time.

The RBA board will hold a highly-anticipated meeting on Monday and Tuesday next week to discuss what to do with interest rates.

All four major banks and the bulk of money market traders expect the RBA to raise rates next week, given inflation and economic activity have been stronger than anticipated in Australia recently.

Inflation is still a global problem, and central banks in comparable countries have been lifting rates again.

RBA governor Michele Bullock also made a public appearance yesterday (a few hours before Dr Ross delivered his speech).

And she warned that Australia's jobs market was probably still a bit too tight at the moment and putting upwards pressure on wages, business costs, and inflation more generally.

Australia's unemployment rate is currently 4.5 per cent.

"I think between 4.5 and 5 [per cent unemployment] will probably take enough heat out of the labour market that it'll ease pressure on inflation," Bullock said.

Will the RBA board members vote as one next week?

Whatever the RBA board does with interest rates next week, it will be interesting to see if its decision will be unanimous.

Under the board's new voting regime, which began in early 2025, there have been 12 meetings.

Of the 10 meetings where unattributed votes have been published, there have been split votes 30 per cent of the time:

And two of the three meetings in which the board's nine members have failed to vote as one have occurred this year.