OPINION: Wage increases to match the inflation shock could send us back to the 1970s if they are allowed to flow through the economy.
If Australia is to successfully avoid repeating the wage-price spiral afflicting the overheating US economy, most workers will need to begrudgingly accept a real wage cut over the next year.
The bigger challenge is that about 25 per cent to 30 per cent of the workforce have their pay closely linked to the minimum wage increase, via industry awards and some enterprise bargaining agreements. Not all of these people are low paid. Stagflation arrived, with inflation surging to 15 per cent in 1974 from 3.5 per cent in 1970, and the jobless rate jumping to 5 per cent by 1975 from just 1.6 per cent.
It would entrench inflation above the Reserve Bank’s already high forecast of 5.9 per cent by the end of this year. And then what? Would unions and workers demand an even higher across-the-board wage increase in line with inflation next year?Interest rates would then need to rise more aggressively to cool the economy, and unemployment would increase over the next few years.
There should be a shared objective of the government, RBA, business and unions to sustain full employment around the current jobless rate of 3.9 per cent.