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But how worried should we be about inflation expectations? That’s an empirical question: Is the idea supported by facts and figures?
In 2022, Dr. John Bluedorn and his colleagues at the IMF studied the historical evidence of wage-price spirals in advanced economies, and concluded that a jump in wage growth should not necessarily be viewed as a sign that the wage-price spiral is taking hold.
Bluedorn detailed these findings at the Fed’s annual research conference last September. The speaker for his paper was Ian Ross, the former chairman of the Fair Labor Commission and now a member of the Fed’s board of directors.
Ross (and leading labour market economists, such as Professor Geoff Bourland of the University of Melbourne) agree that Australia experienced a wage-price spiral in the 1970s. But they conclude that our circumstances 50 years later are “very different,” meaning that it is possible to sustain steady wage growth without triggering a wage-price spiral.
In mid-2022, Borland noted three ways in which our current circumstances differ. First, upward pressure on wages on the supply side is mitigated by employers’ ability to give more hours to part-time workers who prefer more hours, and by attracting more participants into the labor market.
Second, changes in the “institutional environment” since the 1970s have reduced the scope for people to receive wage increases based on the principle of “comparative wage equity”—“these workers got a wage increase, so it is fair that we get the same.”
Federal Reserve Board member Ian Ross said a wage-price spiral is unlikely under current conditions.credit: Pat Scala
Third, the decline in the proportion of workers who are union members, and a host of other factors, has reduced workers' bargaining power, thus limiting the size of the wage increases they are likely to obtain.
There could be no one in the country more qualified than Ross to explain how the institutional arrangements governing the way wages are set have changed over the decades. He said at the conference “These changes were profound and greatly reduced the likelihood of a wage-price spiral.”
The key difference was that in the 1970s and 1980s, institutional arrangements facilitated the transmission of wage increases negotiated at the enterprise level – usually through unions in the metal trades – to the industry sector concerned, and ultimately to the wider workforce.
There are four important aspects in which the current rules differ significantly. First, the new “modern bonuses” act as a minimum safety net, and the circumstances in which the minimum wage can be adjusted are limited. In fact, there is no scope for adjusting minimum bonus rates to reflect the results of collective bargaining at the enterprise level.
Secondly, the Fair Work Act limits the general adjustment of all modern minimum wage rates to a single annual wage review by the Fair Work Commission.
Third, company agreements must be approved by the Commission before they can take legal force. The average duration of agreements is three years, during which time employees covered by the agreement may not legally engage in industrial action to seek additional wage increases.
Fourth, Ross said, sanctions for engaging in such industrial action are “easily accessible and effective.”
Ross noted that the percentage of all workers who belong to a union has fallen dramatically since the 1970s. From just over 50 percent, it has fallen to 12.5 percent. In the private sector, it has fallen to 8.2 percent.
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Manufacturing and its unions were key factors in the wage-price spiral of the 1970s. But manufacturing’s share of total employment fell from 22% to 6%, while the share of union membership in manufacturing fell from 57% to 10%.
Whereas the number of working days lost annually due to industrial disputes was about 800 per 1,000 employees during the 1970s, this figure is now almost nothing.
Ross said current corporate bargaining arrangements act as a shock absorber by restricting the ability of employees subject to an agreement to negotiate. “There is no evidence yet of a wage-price spiral emerging under current conditions and recent data suggests that such an outcome is unlikely,” he concluded.
My view is that the Fed has no reason to fear an imminent deterioration in inflation expectations if the ability of workers and their unions to convert their expectations into higher wages is severely constrained. Thus, we should not allow impatience in trying to bring inflation back to target to exacerbate the risk of a recession, the depth and length of which could undermine our ability to return to full employment.
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