ECW2141ECG9170

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ECW2141/ECG9170 Labour Economics
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Topic 6 Alternative models of the labour market
Topic 7 Discrimination in labour markets
Topic 5 Internal labour markets
Topic 8 Trade unions
Topic 4 Education, training and human capital
investment
Labour Economics
Topic 9 Wage relativities and the personal
distribution of income
Topic 3 (Two weeks) Labour supply, labour demand
and market equilibrium
Topic 10 Wages, unemployment and inflation
Topic 2 The supply of labour
Topic 1 An overview of the study of labour
markets
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Aims
Wages, unemployment and inflation

• This topic aims to explain
• the definition, measurement and incidence of
  unemployment
• the concept of full employment and the full
  employment level of unemployment
• involuntary unemployment the role of real wage
  rigidity and the real wage overhang
• the connection between money wage changes and
  inflation
• the Phillips Curve and the role inflationary
  expectations
• the role of trade unions in the inflationary
  process and
• controlling unemployment and inflation through
  wage policy.

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Reading
Wages, unemployment and inflation

• Textbooks
• Norris, Chs. 10, 11.
• Hamermesh and Rees, pp.407-438.
• King, Chs. 10, 11.
• McConnell and Brue, Chs. 19, 20.

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Wages, unemployment and inflation
Measurement
Hidden unemployment
Full employment
Wages and macroeconomic policy
The macroeconomic issues
Real wages and unemployment
Real labour costs
Money wages and inflation
Inflationary expectations
Money wage changes as a cause of inflation
Wage policy
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Wages, unemployment and inflation
Measurement

• ABS. A survey method. To be classified as
  unemployed a person must respond to the following
  questions
• No, I have not undertaken any paid work in the
  week of the survey
• Yes, I have actively sought work in the month
  preceding the survey
• Yes, I am available to start work.
• The Department of Social Security -
• unemployed are those who receive unemployment
  benefit.

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Wages, unemployment and inflation
Hidden unemployment

• People who do not meet all ABS criteria, but are
  willing to work and available to start work
• Artificially reduced participation rate
• HA increases, at the time of high unemployment /
  recession

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Wages, unemployment and inflation
Wages and macroeconomic policy
The macroeconomic issues
Revise macroeconomic issues related to employment

• Wages and unemployment.
• Are high real wages the cause of, or a
  consequence, of high unemployment?
• can unemployment be reduced by lowering real
  wages, and
• can a centralised wage fixing system act to
  reduce real wage levels?

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Wages, unemployment and inflation
Wages and macroeconomic policy
The macroeconomic issues
Revise macroeconomic issues related to employment

• Wages and inflation
• Do money wages, increasing faster than
  productivity, result in inflation?
• The answer depends on which theory of inflation
  is accepted.

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Wages, unemployment and inflation
Wages and macroeconomic policy
The macroeconomic issues
Revise macroeconomic issues related to employment

• Wages and inflation
• The neo-classical/monetarist position is summed
  up in the expectations-augmented Phillips Curve.
• Inflation is demand induced (via increases in the
  money supply).
• Wage rises are a consequence rather than a cause
  of inflation.
• Controlling money wages rises therefore is not an
  appropriate anti-inflationary policy.

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Wages, unemployment and inflation
Wages and macroeconomic policy
The macroeconomic issues
Revise macroeconomic issues related to employment

• Wages and inflation
• The institutionalist view is based on the cost
  inflation
• Money wage rises can be autonomous, that is
  unrelated to demand pressures.
• This produces price increases and leads to
  further wage demands - a wage-price spiral
• A policy to limit money wage rises has a role to
  play in this view of the inflationary process.

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Wages, unemployment and inflation
Wages and macroeconomic policy
The macroeconomic issues
Revise macroeconomic issues related to employment

• Incomes policy
• The legal or quasi-legal control of incomes as an
  instrument of economic policy.
• Opponents of such measures see them as being
  unnecessary and distorting in an economy where
  wages are determined in competitive markets.
• Supporters argue that labour markets are not
  competitive, and that the alternatives to some
  form of incomes policy is wage determination on
  the basis of bargaining power.

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Wages, unemployment and inflation
Real wages and unemployment

• There is little doubt that high real wages are
  correlated with unemployment.
• Keynesian type unemployment, due to a
  deficiency in aggregate demand, and
• classical unemployment which arises from an
  increase in money wages not matched by an
  increase in prices- that is a rise in real wages.

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Wages, unemployment and inflation
Real wages and unemployment
Why do prices not rise in response to a rise in
money wages?
Market conditions, especially perhaps the threat
of competition from imports, may prevent firms
from raising product prices to fully compensate
for wage increases.
Why, in the presence of unemployment, does the
market not force a downwards adjustment in real
wages?
Wages tend to be rigid, particularly downwards.
(This is an argument we met earlier.) Wage
rigidity may arise from institutional factors
legal awards, or trade union pressure. Wage
rigidity was a key feature of internal labour
markets, and the theories of efficiency wages and
implicit contracts also argued for inflexible
wage structures.
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Wages, unemployment and inflation
Real wages and unemployment
Real labour costs

• Increasing real wages produce more unemployment
  only if other things are unchanged. In reality
• The productivity of the workforce grows over
  time.
• A rise in real wages matched by an equal
  percentage gain in labour productivity leaves
  business costs unaltered and therefore should
  have no impact on unemployment.
• A more accurate measure of business costs is real
  unit labour costs, that is changes in real wages
  (including non-wage costs of employment) adjusted
  for changes in labour productivity.
• If real wages grow faster than labour
  productivity then real unit labour costs will
  rise, leading to increased unemployment. (wage
  overhang)

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Wages, unemployment and inflation
Money wages and inflation

• The relationship between money wages changes and
  changes in inflation involves issues of cause and
  effect.
• Excess demand for goods and services produces
  rising prices, including rising wages, as
  producers attempt to satisfy increased demand by
  expanding output.
• There is therefore a correlation between money
  wage changes and changes in the rate of
  inflation, but money wage changes are an effect
  not a cause of the inflationary process.
• The original Phillips curve depicted a stable
  relationship between changes in price (inflation)
  and changes in unemployment.
• The reverse was also thought to be true a
  reduction in inflation could be purchased at the
  cost of increased unemployment. (Australia, early
  1990s)

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Wages, unemployment and inflation
Money wages and inflation
Inflationary expectations

• Friedman There is no long-term trade-off between
  unemployment and inflation.
• The problem is that the behaviour of the actors
  in the economy is governed by their expectations
  of future inflation, which, is conditioned by
  past experience of inflation.
• Any change in demand alters the rate of
  inflation, but the change to unemployment is only
  temporary
• - it lasts as long as it takes for the
  expectations of employers and employees to adapt
  to the actual new rate of inflation.
• There can be temporary changes in unemployment
  levels away from the natural rate.
• Long-term reduction of the level of unemployment
  below this level could only be achieved by a
  constantly accelerating rate of inflation.

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Wages, unemployment and inflation
Money wages and inflation
Money wage changes as a cause of inflation
Is it possible for inflation to emerge from the
supply side of the economy, or in other words,
can money wage rises occur in the absence of
excess demand and therefore act as the cause of
rising inflation?

• The question is based on the ability of workers
  to push up money wages, usually through the
  bargaining activities of their trade unions, or,
• In the case of Australia, by persuading the
  central wage fixing authority to grant award wage
  increases.
• If such autonomous money wage rises occur and
  employers are able to pass them on in terms of
  higher prices then the inflation which results
  can be seen to occur as a result of the wage rise.

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Wages, unemployment and inflation
Money wages and inflation
Money wage changes as a cause of inflation
Wage-price spiral.

• Suppose trade unions are able to engineer a wage
  rise.
• Higher real wages have been purchased at the cost
  of increased unemployment.
• Suppose that government does not wish to allow
  unemployment to increase.
• They can respond by increasing aggregate demand.
• This increased demand allows prices to rise
  therefore moderating or eliminating the real wage
  increase.
• Employment has been preserved but at the cost of
  higher prices (inflation).
• Furthermore since workers have failed in their
  attempt to gain higher real wages they may try
  again.

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Wages, unemployment and inflation
Wage policy

• Wages policy (incomes policy or prices and
  incomes policies) has a fairly long history.
• A variety of instruments ranging from moral
  suasion through voluntary guidelines, social
  contracts, and legally enforced wage and price
  rules have been attempted in many countries

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Wages, unemployment and inflation
Wage policy
In Australa

• The long history of centralised wage fixing.
• In early-mid 1990s the Australian Government
  (under the ALP/ACTU Accord) and the Industrial
  Relations Commission have tried to control money
  wage movements through the setting of fairly
  stringent guidelines for wage increases, and
  through a series of wage/tax deals.
• A wage/tax trade-off gives the employee a greater
  disposable income without raising money wages.
• This policy has not been limited to simply
  controlling money wages.
• Real wage reductions have come from holding money
  wage increases below the increase in the price
  level and real labour costs have reduced by
  holding wage increases below productivity gains.
• The current situation - research question.

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Topic 11 The Australian system of wage
determination
Research question
The Australian system of wage determination
(Section D) is a research topic. You are supposed
to research in the current policy debate on the
industrial relations reforms proposed by the
Federal Government and prepare your answer to the
following question By introducing the
industrial relation reforms, the Federal
Government attempts increasing productivity and
competitiveness of the Australian economy.
Discuss the proposed measures using appropriate
elements of the economic theory. In your
opinion, will the government succeed in achieving
the goals of the reform? Why?