Hardly the wages blowout of an inflexible market

May 7, 2014

By Stephen Koukoulas

Treasurer Joe Hockey and Employment Minister Eric Abetz must be delighted with the current structure of the industrial relations system and the degree of flexibility in labour market conditions.

Recent labour market data has confirmed a near textbook degree of flexibility in wages. At a time when employment growth is softening and the unemployment rate has been edging up, there has been a quite abrupt slowing in the pace of wages growth.

Here are the facts.

Since the first half of 2011, the unemployment rate has edged up from a little below 5 per cent to the current rate of 6.0 per cent. This has been the direct result of the extended period of sub-trend economic growth as the terms of trade have fallen and as monetary policy was kept too tight for too long.

The flexibility of the labour market is shown in the fact that the annual pace of wages growth has slowed from around 4 per cent three years ago to a record low 2.6 per cent in the most recent period.

If the labour market were rigid, inflexible or the industrial relations system were in need of a major overhaul, wages growth would not have slowed (and certainly not to a record low) in the wake of the upward trend in the unemployment rate.

All of which suggests the hidden agenda of reform to the labour market slowly but surely being unfurled by the Coalition government since the election is not really about macroeconomic management.

There is no doubt that for a high-growth, strong productivity and high-income economy, the labour market has to have some degree of flexibility embedded in it.

In its most extreme, a completely flexible labour market would be characterised by no minimum wage, no unemployment benefits, unregulated health and safety guidelines, and workers agreeing to a wage according to the offer of employers.

Generally very poor and impoverished countries are closest to this system of full flexibility. Of the rich countries, the US labour market is highly flexible but the system there is riddled with minimum wages and a poor social welfare safety net which simply reinforce poverty. The recent history also shows, all too clearly, that a high degree of flexibility did not prevent the unemployment rate from hitting 10 per cent during the recent recession and even now, it is still around 6.5 per cent.

Australia’s allegedly inflexible labour market, at least according to the industrial relations zealots, has not had an unemployment rate above 6.0 per cent since 2003.

To be sure, the Australian industrial relations system and labour market regulations need to be refined and adjusted from time to time, according to structural and other changes within the economy. There of course needs to be an ongoing embrace of the structure that links pay rises to productivity, that sees high wages paid to high skilled workers and, importantly, for there to be a safety net for those who slip through the cracks as the economy evolves.

It is also important to emphasise that within labour market reform comes training, skilling and education. Reskilling a factory worker is all about flexibility as well as, obviously, having a decent social outcome for the population. Bringing children through the education system with knowledge and a vibrant mind is not only good for the individual, but also good for the economy as the breadth of job opportunities unfolds.

In the end, the hard facts on the macroeconomic outlook confirm a good degree of labour market flexibility and no urgency for mass reform of the industrial relations system. A soft economy is being accompanied by slowing wages growth.

This is good news, and it is aided by the fact that productivity growth has been strong over the past year.

The other good news is that as the pace of economic growth accelerates towards 3.5 per cent through 2014 and into 2015, the rate of job creation will inevitably lift and the unemployment rate will fall, just as any flexible labour market would dictate.

When this happens, the flexible labour market will react to the falling unemployment rate with some acceleration in wages growth. This will be a good thing as the profit share tilts a little towards labour and away from the corporate sector.