With household incomes set to fall, we need to think about what matters in the economy

The current tightening of monetary policy is undoubtedly having an impact. While it may take some time for the slowing of inflation to flow through to the official CPI figures - especially given the level of inflation that is being imported - the economy is set to slow drastically. 

As Labor Market and Fiscal Policy Director Greg Jericho notes in his Guardian Australia column the Reserve Bank in last week's Statement on Monetary Policy, has forecast GDP growth to slow to levels normally associated with recessions - even if the RBA is not actually forecasting a recession. 

However, in one area the RBA is not hedging at all - that of real household disposable income. This measure, which essentially examines the living standards of the average household, is forecast to decline at a pace as bad as any experienced in the past 60 years. 

While a fall in household incomes was always expected given the abnormal level of stimulus that occurred during the pandemic, the fall is predicted to be much greater than just going back to where we were. The Reserve Bank predict incomes will fall well below the pre-pandemic trend level. 

That such a drastic fall has received little coverage highlights that the orthodox commentary and debate around the economy largely focuses on aspects that minimise workers and households in place of corporations and the "broader" economy of GDP. 

The cost of taming inflation is too often discussed in terms of whether it will send the economy into a recession, without examining if that measure misses the real-life experience of most people. 

If the RBA forecast comes true, inflation will have been brought back to the RBA target, GDP will have kept growing, but household living standards will have plunged. 

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Would further interest rate rises do more harm than good?

In the past 7 months, the Reserve Bank has increased the cash rate by 275 basis points. That is as fast as any time since the RBA became independent. Given the pace of inflation growth, the rises are not wholly without cause, but as policy director, Greg Jericho notes in his Guardian Australia column the main drivers of inflation are now easing, and wages are yet to take off. In that case, should the RBA continue to raise rates given it will only slow the economy further?

Over the past year, the main driver of inflation has been house prices accounting for a quarter of the 7.3% rise in the CPI. And yet we know that house price growth is now either slowing dramatically or even falling in some areas. The RBA has also noted that commodity prices are falling and supply-side issues are being dealt with and that these aspects, which are not influenced by interest rates, will reduce inflation next year.

At the same time, the Reserve Bank continues to sound warnings of a wage-price spiral despite any evidence of such a thing occurring. Indeed the latest CPI figures show that overwhelmingly inflation is driven by the price rises of goods rather than services. This is important because service prices and wages are strongly linked.

More rate rises will certainly continue to reduce demand in the economy as the cost of servicing a mortgage rises. But to what end? The main factors driving inflation are easing, wages have not risen above 3% yet, let alone to a rate anywhere near inflation.

Even if wages were to rise in line with the historical link with service prices, in September they would have risen 3.5% - a level very much consistent with inflation growth of between 2% and 3%. And yet we know that wages are unlikely to rise that fast. The most recent estimates have it closer to 2.8%.

The great risk now is that further rate rises will only hurt the economy for little gain and see wages growth stunted before they even get to a level that would see real wages rising.

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Cumulative Cost of NSW Public Sector Pay Caps is Enormous

Since 2012 the NSW government has arbitrarily suppressed pay gains for workers in state-funded public services (including health care, education, public administration, emergency services, and more). At first those pay caps were justified as a deficit-reduction measure, and then later as being supposedly tied to inflation trends. But both those arguments have been discarded, given state surpluses in most years since the cap was introduced, and now the dramatic acceleration in inflation (now running more than twice as fast as allowed compensation gains).

In this new report, Centre for Future Work Economist and Director Jim Stanford adds up the enormous and growing cost of this decade-long wage suppression for nurses, midwives, and other public sector workers in NSW. 

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Inflation is soaring and real wages are plummeting

On Wednesday the latest inflation figures showed that in the 12 months to September prices across Australia grew by 7.3% - the fastest rate since 1990. 

The biggest concerns about the figures are that inflation is rising fastest for items that are non-discretionary, which means people are unable to avoid paying them - things like food, energy bills, transport costs, and health costs. As Labour market and fiscal policy Director, Greg Jericho, notes in his Guardian Australia column low-middle income earners have to spend a greater share of their income on these items than the average, which means they are hurt hardest. 

The inflation figures also show that while house prices are still rising strongly, the rising interest rates are now starting to truly have an impact on rents. Rental prices across every capital city rose by more than 1% in the September quarter - the first time that has happened since 2007. 

But the real damage of inflation is seen in relation to wage growth. The Reserve Bank estimates that wages in the 12 months to September will have grown just 2.85%. This means people's ability to buy things with their wages has fallen over 4% in the past year. This is a massive drop in real wages and unfortunately, it is expected to continue at least until the middle to end of next year. 

Right now real wages are back where they were 12 years ago. It is a damning indictment of the Industrial Relations system that has been designed to keep wages down. The Government today has introduced the Fair Work Legislation Amendment (Secure Jobs, Better Pay) Bill 2022 which seeks to provide workers with greater power to bargain for better wages. Given the latest figures, it is clear how urgently the changes are needed.

 

 

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Commonwealth Budget: A Good Start… But Rocky Times Ahead

The new Albanese Labor government has tabled a revised budget for the 2022-23 fiscal year, revising revenue and spending forecasts originally contained in the March budget (from the previous Morrison government), and providing new funding to support several new programs and policies.

In this review of the budget, our team of Centre for Future Work researchers evaluates the budget's assumptions and policy measures, from the perspective of workers and labour markets. The budget marks a clear change of emphasis from budgets over the previous decade: including explicit recognition of the need to strengthen wage growth, new funding for vital care sectors, and important investments in diversifying Australia's industrial base.

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Job Opening: Carmichael Distinguished Research Fellow

The Carmichael Centre at the Centre for Future Work invites applications for the Laurie Carmichael Distinguished Research Fellow position. It's a three-year posting, with awesome potential to explore a range of progressive issues related to unions, collective bargaining, industrial policy, and workers' education.

Applications are due at 11:59 pm 21 November 2022. The Melbourne-based position will start in January. Please see job description and application details below. Come and join our team!

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Inflation Primer

Over the past year, inflation has accelerated both in Australia and in most advanced economies, to rates much faster than have been observed for many years. Not unsurprisingly, this has caused much concern among people whose cost of living has risen abruptly. It has also created great challenges for policy makers: the risks of tackling higher inflation are high, given that the conventional response is to reduce aggregate demand, economic activity, and employment in order to “cool off” spending and thus reduce price pressures. This can mean that the “cure” can be worse than the “disease” – especially if, as occurred in the 1980s and 1990s, a recession follows efforts to constrain inflation.

Our new Inflation: A Primer report investigates the history of Australian inflation and policy choices and provides a counter to the view that low inflation and the current inflation target is an unalloyed good. The period of inflation targeting has coincided with a strong shift of national income away from workers to company profits. It has also seen a tendency of the Reserve Bank to act decisively when inflation grows above the target and be much less active when, as we saw in the years prior to the pandemic, inflation slowed below the target range. The report also reveals that workers' wages did not cause the current level of inflation  and yet workers are being urged to accept historic falls in real wages in order bring inflation back within the Reserve Bank target. 

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Families change but the same problems remain

The latest data from the Bureau of Statistics on families shows that more than ever before couples with dependants are both working. 

Labour market policy director, Greg Jericho, notes in his Guardian Australia column that over the past 40 years the make-up of families has shifted dramatically from ones with just one parent working to now more than 70% having both partners in employment.

While this has mostly come from the great gains made by women since the 1970s that have seen changes to discrimination laws, child care and also societal norms to allow women to participate in paid work even once they have had children, it also highlights the rising cost of living pressures faced by most families. 

The times when a family on one income could be expected to buy a house are long gone. But the decade of weak wage growth and recent falls in real wages make living on one wage even more difficult. 

But the data reveals that men are still more likely to be the sole breadwinner and it confirms the labour force data that shows women remain much less likely than men to work full-time. This is a major reason why women in over 90% of occupations earn on average less than do men. It means that women remain at a heightened risk of income loss in the event of relationship breakdowns that can severely affect their standard of living, especially in retirement. 

The data also reveals that women remain very much the most likely parent in sole-parent families. Given the laws that now see such parents move from the parenting allowance to the lower-paying Jobseeker once their youngest child turns 8, this highlights the precarious nature over 800,000 women face as they attempt to survive as the sole parent. 

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Webinar on Wages, Prices, and Power

The Australian Council of Trade Unions is sponsoring a series of webinars for union members, delegates, officials, and leaders on the current crisis in the cost of living in Australia. The surge in inflation since economic re-opening after COVID lockdowns has obviously intensified that crisis. But the seeds for it were planted long ago: by a decade of historically weak wage growth, a speculative property price bubble, and a systematic efforts to weaken collective bargaining and unionisation.

Jim Stanford (Economist and Director) and Greg Jericho (Policy Director, Labour Market and Fiscal) from the Centre for Future Work are providing keynote presentations as part of this series. Below is a recording of the first of these presentations, presented by Jim.

Webinar Opening Slide

 

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With a global recession looming the cure of inflation looks to be worse than the disease

This week the IMF released its latest World Economic Outlook. And the outlook is dire. Economic growth around the world was downgraded with recession-like conditions being predicted for many advanced economies including the USA, UK and much of the EU. 

As policy director, Greg Jericho, notes in his Guardian Australia column, the outlook is not much better for Australia. The IMF is now predicting that in 2023 and 2024 Australia's GDP will grow less than 2%. Such meagre growth in the past has been consistent with periods of recession.

The report should serve as a stark warning to central banks around the world that their efforts to limit inflation by sharply raising interest rates is becoming more and more likely to end with a recession and the resultant massive loss of jobs that will follow. Experience from the 1980s and 1990s where similar recessions followed extreme tightening of monetary policy suggests it can take a long time to reverse the damage. 

While the Reserve Bank is somewhat constrained because it needs to be mindful of the rate rises in the USA that weaken the value of the Australian dollar, the IMF report should cause them to weigh much more the costs of sharply slowing growth through interest rate rises. 

We know that current efforts to limit inflation growth are mostly involving workers taking a real wage hit. Having to endure rising unemployment and a recession after 2 years of already extreme falls in living standards would be disastrous, especially while profits continue to rise. 

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