13 February 2023

ABC Business Editor Ian Verrender: “What if you woke up one morning only to be told the very essence of everything you believed in was wrong? And what if those beliefs — and the decisions you made based upon them — underpinned the living standards of millions of people, here and around the world? That’s the reality dawning on a generation of economists who suddenly have been beset with doubts about one of the great tenets of modern economic theory: the relationship between jobs, wages and inflation. … Known as the Phillips Curve — after New Zealand economist William Phillips who first formulated it in 1958 — it maintains that as more people find work, pressure builds on wages, which then leads to higher prices and ultimately entrenches inflation. … Given their primary remit is to control inflation, it’s been the credo to which all central banks have subscribed. Until now. For whatever reason, the relationship between unemployment and inflation has become less clear across the developed world. … [T]he primary problem is that the world has changed dramatically since it first became popular as workers’ rights have been eroded. They no longer have the same kind of bargaining power they once had. In Australia, you can’t just walk off the job in protest at your pay and conditions in the way workers in the 1970s did. You need [FWC] approval to take industrial action. That’s obliterated the number of disputes and strikes… Even now, wages growth is running at way below inflation, meaning most workers are taking a real wages cut while simultaneously being whacked by the most punishing round of interest rate hikes in history. … But … the RBA remains fixated on the notion that if jobs numbers remain strong, inflation could become entrenched, which has only hardened its resolve to keep pushing rates higher. Eventually, they’ll get there. Higher interest rates at some stage will curb spending, cut profits and result in mass layoffs. It could well be recession we didn’t have to have.”