Time for a new Accord?

Last week the Australian Workers Union, the country’s second largest union, put forward a proposal for an agreement between the government and unions. Their plan involved trading off tax cuts - of which the Labor government has promised $31 billion in the next budget - for government-funded increases to union members’ superannuation.

The proposal was dismissed by Prime Minister Rudd, but it was an interesting idea. The Sydney Morning Herald quickly got behind it. It is reminiscent of the Accords of 1983-1996, where the Labor government and the Australian Council of Trade Unions formed an agreement to restrain growth in money wages in exchange for macroeconomic policies to enhance employment and greater non-pecuniary benefits for workers. For example, unions would moderate their wage claims if their members could get better leave entitlements and if the government spent more money on health and welfare.

When this agreement was signed, it was a defining historical moment in Australian economic history. In the latter years of the previous Fraser Coalition government a wage-price spiral had started to emerge, where unions anticipated high inflation would erode the purchasing power of wages, and thus made higher wage claims. This pushed up business’ costs and thus prices, ultimately ensuring the inflation the unions had expected was generated as a result of their claims. There was also “leap frogging,” where unions in different sectors tried to jump over the claims of others to improve the relative standing of their workers.

Of course, this was producing both high inflation and low unemployment, and partly explains the recession of the early 1980s. A solution was needed, and the answer was the Accords. While it was in the best interests of individual unions (or workers) to push for higher money wages to preserve their real wages, it became apparent that overall this was bad for the economy. By encouraging wage restraint and tying money wage increases to productivity increases, the wage-price spiral was broken. (Incidentally, there was an added incentive to be more productive, and this improved the economy’s long-run prospects too.)

As it turns out, both money wages and real wages fell over the 1980s, effecting an important long-term adjustment in the Australian economy. Along with deregulation, the floating of the exchange rate and further opening of the economy, this helped to set us up for the growth spurt of the 1990s and 2000s which we’re still enjoying. The Accords also managed to restrain inflation and coincided with strong employment growth, even though these were compromised temporarily during the early 1990s recession.

Today, the Australian economy faces an inflation problem, much as it did in the early 1980s (although not nearly as large). The underlying inflation rate was 3.6 per cent in the last quarter, above the Reserve Bank’s medium-term target band of 2-3 per cent. If inflation isn’t brought back into control quickly then workers and unions may no longer expect inflation to remain low and stable. That’s the real danger. When wage claims are negotiated, if there’s an expectation that inflation will be higher than before, there is upward pressure exerted on nominal wages.

Perhaps there is a risk of another wage-price spiral and a need for a new Accord, made possible by the Labor party regaining power at the federal level.

Indeed, the AWU’s proposal does sound like a good idea. Why go ahead with the election promise to provide $31 billion in tax cuts (most of which people would spend immediately) when that money would be much better off going into superannuation (compulsory savings)? Surely it is better to increase savings, which can be invested in the economy’s productive capacity to help keep inflation down over the longer term, than to boost disposable incomes?

Doing so would be good economic management. Yet why was Kevin Rudd so quick to dismiss any suggestion of a new Accord with unions? Couldn’t this be an option for tackling inflation over time?

As we all know, things are a lot different now to how they were in 1983. Back then, about half of all workers were in unions. In 1996, when the Howard Government came to power, it was 31 per cent. In 2006 it had fallen to just over 20 per cent.

This has happened for numerous reasons, such as greater workforce flexibility, faster employment growth in sectors without a big union presence, and improved bargaining power of workers as unemployment has fallen, making union membership less attractive.

There are also various legal restrictions introduced since 1996, such as restrictions on union involvement in workplaces, closed shops becoming illegal, the decline in centralised bargaining and the shift towards enterprise-level and individual agreements. Strikes have also fallen - in large part due to increased restrictions on when they may take place - as has the power unions can exert by threatening to strike.

Since unions are now less powerful in the labour market, and their wage claims influence fewer workers, any agreement between them and the government may not have much credibility. If unions hold off on wage claims in exchange for other benefits, why will other workers necessarily do the same?

To the extent that non-union workers can negotiate higher wages, the union movement may come to see that it is less able to control aggregate wage levels. While they may be politically powerful, they only represent one in five workers. If wage growth becomes relatively lower for union workers vis-à-vis others, then there may be even further downwards pressure on union membership.

Rudd may also be sceptical of a new Accord for political reasons. Labour fought long and hard during the election campaign to show it was not beholden to unions. Rudd probably wants to sever the mental links voters have between bad union behaviour and Labor governments. Unions, according to some media reports, now seem to evoke images of industrial strangulation and thuggery, and are seen as antithetical to a flexible, globally-oriented and prosperous economy. So avoiding too much co-operation and keeping unions at bay may simply be a way of keeping voters onside.

Nevertheless, inflation is now running hot. Something must be done to keep it under control - especially if inflationary expectations are to be kept low. Yet the best way to achieve this doesn’t need government-union agreements. A wage-price spiral can be nipped in the bud by doing what it takes to control inflationary expectations.

That is why the Reserve Bank recently raised interest rates, in order to cut back investment and consumption expenditure. Once inflation is let loose it’s very hard to bring back under control without engineering a recession. Indeed, if the government wants to help, it should scrap its tax cuts and simply let the $31 billion accumulate as part of the budget surplus to reduce pressure on inflation.

Then there's the legislative changes that the Rudd Government has promised but not yet introduced. To the extent that these make the labour market more flexible and fair, and cut back much of the red tape introduced with WorkChoices, there may be even greater potential to improve our long-term productivity. And that will help to reduce inflation.