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Labour cost madness will keep unemployment high

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1ί° e" , M edia R elease 159/92 13 May 1992


Just as many commentators are expressing concern at the plight of the long-term unemployed, Paul Keating is putting in place labour cost policies which will condemn many more people to that situation.

Not content with immersing us in a terrible debt situation as a consequence of his gross budgetary mismanagement, Mr Keating is now hell bent on forcing through labour cost increases, including a new superannuation tax levy which, coming on top of previous excesses, threatens to keep unemployment 2 to 3 per cent higher than it need be even under Mr Keating's deficient policies.

The Existing Labour Cost Overhang

Since the recession started in the December Quarter 1989, real wages (measured against the GDP deflator which is the best

indicator of capacity to pay) have increased by a massive 5 per cent (see chart below). Since trend productivity is only running at about 1/2 per cent a year, this real wage overhang may alone hold unemployment about 2 per cent above where it should be in

any recovery.

REAL WAGE OVERHANG index dec 86=100



r e a l w age o v e r h a n




2 3 4 3 4

nominal wages " D " G D P Deflator


The Promised Additions to Labour Cost Overhang

The present situation is bad enough.

But last week, the Government signalled that it is determined to add to the problem.

It is in the process of setting a labour cost increase target of 4 per cent for the year ahead.

A target which purports to allow for a significant National Wage Case, plus payment of the Government's compulsory superannuation levy plus Enterprise Based Wage deals which are destined to cover well over 50 per cent of the workforce (a probable labour cost

scenario over the next 18 months is set out in the Attachment).

And this target has been set despite the fact that trend

productivity is only running at around 0.5 per cent a year and

that the capital stock is falling due to the collapse in

investment, thereby reducing our capacity for future productivity potential.

Even if we were to get a slight pick up in productivity during

the recovery, this wage target will not be consistent with the Government's 2.5 per cent inflation target or, therefore, with the spurious claim that the Government and the ACTU have a

special "deal" which will keep wage and price increases to levels consistent with that of our major trading partners (currently running at about 3 per cent and falling - see chart attached).

Indeed, as the table in the attachment reveals, a 4 per cent

target seems a minimum, the outcome could well be higher.

Since the SGL and the 1.5 per cent Wage Case are now "done deals" and a modest "wage drift" is unavoidable, the starting point for next year is about 3 1/2 per cent.

Even a modest take-up of EBA deals will push the increase to over 4 per cent.

And those increases do not cover the prospective claim by the

ACTU to cover price increases during 1992/93.

The Government had been planning to buy this prospective claim out by granting a $2 to $3 billion tax cut in the August Budget

but this week's revelations that the budget is falling apart

should have put an end to such thoughts.

So the bottom line is that Labor is on track to make it even

harder to get people back into jobs by pushing up real wage costs even further.

And as inflation rises above target and that of our trading partners, the Reserve Bank will be faced yet again with an

unpleasant choice.

Should it tighten policy and abort any recovery in order to

achieve the Government's inflation target?

Or should it accommodate a blow out in inflation which will take us back down the road of slipping international competitiveness which was the sorry story of the 1980s*

Either way it will threaten to unnecessarily add further to the problem of reducing unemployment below 10 per cent.

And all this just to preserve One Job!



There are basically four separate strands to the likely wage

outcome in 1992/93: -- a National Wage Case in the December Qtr which unions have

indicated will be about 1.5 per cent (being the rate of inflation through 1991/92) . This NWC figure makes no allowance for any

increase in wages to cover increases during 1992/93 which, prior to this week's news the budget blow out, were to be bought out

by tax cuts of $2 to $3 billion in the August B u dget;

- the Superannuation Levy which is estimated to add around 1.5 per cent to labour costs in the September Qtr;

- Enterprise Based Agreements (EBAs) which have been hailed as the way of the future by Mr Keating and which are expected to

cover around half the workforce by 1993; and

- a "wage drift" factor which reflects changes in overtime hours and related compositional factors which are difficult to forecast but nevertheless go into total national wage costs.

Putting these increases together means that the wage pattern is likely to look something like something like the following:-Wage Case Enterprise Drift Super Total

Round % increase

1991 Sep Actual 2.4

Dec Actual 0.2

Mar 0.1 .05 .20 0.35

Jun. .15 .25 0.40

1992 Sep .20 .25 1.5 1.95

Dec , 1.0 .20 .25 1.45

Mar 0.5 .30 .25 1.05

Jun .30 .25 0.55

That pattern of labour cost increases would yield an average year on year increase of abot 4.2 per cent. And a June on june

increase of about 5 per c e n t .

Much of it is already built-in.

The SGL plus the retrospective NWC plus allowance for some wage drift puts the increase next year at close to 3.5 per cent before we start.

Even modest EBAs would push the overall increase to about 4.25 per c e n t .

P e r c e n t a g e c n c n g e on p r e v io u s ye ar












Major OECD Trading Partners (a)


Jun-80 D ec-81 Jun-83 Dec-84 Jun-86 D ec-87 Jun-89 Dec-90

(a) March quarter OECD figures are estimates.