brookings on the australian economy

Brookings on the Australian Economy*

BARRY HUGHES Canberra, ACT 2600

Thb paper offers a review of two central issues of macroeconomic management, nominal wage determination and the relative roles for fmal expansion and real wage restraint, discussed in the Brookings study of the Australian economy. Consideration b given to the book, The Australian Economy: A View from the North, edited by Richard E. Caves and Lawrence B . Krause, George Allen & Unwin, Sydney 1984, and to the January 1984 conference dircussion.

There is perhaps only one worse ordeal than having to jet in for a short while to write a book about a foreign economy; that is to launch the book in the middle of an election campaign immediately after jetting in overnight from Tokyo. Lawrence Krause performed like a seasoned campaigner during a difficult session at the National Press Club, and the book is almost as good.

Its purpose is to inform foreigners about the Australian economy but, to a lesser extent, it will also be useful as a survey of issues in areas less familiar to the Australian economist. The book is packed with historical statistics, is for the most part thorough in its coverage of the literature and, by the standards of overseas reporting, remarkably free from institutional error. Its tone is what one might expect from Brookings, that is it is pro- market, anti-protedion, liberaldemocratic and, for the most part, a strong supporter of the middle against the extremes of both right and left. That can only do the Australian economic debate a power of good.

* The opinions are my own and do not necessarily reflect those of anybody else, including Bob Gregory. I am grateful to Cathy Baird for providing me with a transcript of conference discussions, which are being published in the Discussion Paper series of the Centre for Economic Policy Research at the ANU. Editors’ Note: This paper, and the following paper by Cliff Walsh, were commissioned by the Survey Editor.

I have decided to confine my review comments to two central issues in the surveys of macroeconomic management, both as revealed in the book and in the January 1984 conference discussion. It was put to me by one economist that the further the move away from their area of specialism the more conference participants seemed to be impressed by the draft chapters. That is not so in this reviewer’s case. even after applying a discount for the degree to which the author’s conclusions line up with the prejudices of the reviewer.

I Nominal Wage Determination Is there A Wage Equation?

The authors, in this context principally Dornbusch and Fischer (hereafter DF) and Mitchell, bring to their study of Australian nominal wage determination the internationally transportable model of the early 1980s. It is an expectations augmented Phillips curve onto which has been grafted in ad hoc fashion a notion of real wage resistance. Considerable effort has been expended (particularly by DF) in attempting to flesh out this approach empirically but, despite some success in fending off an Australian challenge to it (discussed separately beneath), at the end of the day the goal of a satisfactory wage equation remains as elusive as ever.

DF show (p.40) that the simple expectations

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augmented approach is unsatisfactory, in that the mere addition of a linear time trend proves statistically significant. While DF throughout are less than clear in their definitions of empirical variables, it appears that the time trend adds some 16 percentage points to the annualized wage inflation rate from star t to end of their 1966-82 data period. The arithmetic power of the time trend means that a very large part of the story of Australian economic history in recent decades is being put in the ‘too hard basket’.

In this sense this result ought to have led the authors to the view that they had completely the wrong model. Instead, without ever giving a vision of the economy based on a non-accelerating inflation rate of unemployment model, the analysis becomes much more ud hoc in character, with the main addition being the grafting on of a real wage resistance term. measured as the ratio of the current real wage to its last peak (before or after tax?), and a largely anecdotal account of a possible institutional impact. DF are a little equivocal on the importance of the real wage variable. On the one hand it appears to be significant (though no equation is presented), so that ‘it may play an important role in the wage process’. On the other hand, it ‘does not appear to be the missing variable’ because it reduces the significance of unemployment and cuts the coefficient on price expectations (p.46). I am not at all happy with this explanation, for reasons to be developed shortly. In any case, there is the strong point raised in the conference discussion by Adrian Pagan that the real wage resistance variable smacks very much of a shift operator pre- and post-1974 (since before that date values were invariably unity). A more fully articulated version of the real wage aspirations model needs to be tested before the results are sufficiently discriminatory among hypotheses to be persuasive.

This is about as far as the econometric study of a macro wage equation is taken. There is no disgrace in this incompleteness for others, both here and overseas, have faced similar difficulty and at least we are spared the probability of a chapter cluttered with inconclusive (and to the general audience, possibly incomprehensible) squiggles. There is no discussion, however, of whether a systematic wage equation is possible, or, as a British tradition has it, wage behaviour is incapable of algebraic formulation, being labelled ‘political’ for want of a better phrase (Artis, 1981). The nearest we get to this is in Mitchell’s chapter, when he makes the penetrating observation that even if we

had a wage equation, it would tell us nothing about how behaviour could be changed (p. 165). The facts are that both the left (through incomes policy) and the right (through deregulation and decentrali- zation) seem to believe that Australian behaviour can be changed. Neither position augurs well for a stable wage equation. Both seem to imply that present wage behaviour is not innate, but rather an organic product of our history.

Are There Price Expectations at Work? It is well known that when expectations are

modelled in adaptive fashion from past inflation rates (as DF seem to do in some unspecified way for much of their econometrics), the structure of the model is formally rather similar to a different vision under which retrospective rather than prospective adjustments are made for variable inflation. Given Australia’s long history of wage indexation and the empirical difficulty of making reliable estimates of future inflation, the casual empirical odds are overwhelmingly in favour of economic agents choosing the simpler option of retrospectivity. Why should anybody bother with anything as messy as expectations when there is an alternative so readily at hand?

It so happens that for many problems of interest, estimating a natural rate for example, it does not matter whether retrospective or prospective adjustment is at work. However, that is not always the case. If what is really going on is retrospective adjustment, DFs reasoning seems faulty on at least one occasion. It will be recalled that they down- grade the importance of their real wage resistance variable because in its presence the unemployment variable is lowered in significance and ‘the coefficient of expected inflation’ is reduced (presumably below unity). There are two separate objections to this statement. One is that in the context of a real wage aspirations model, the extent of the significance or otherwise of a demand variable tells us nothing about the underlying generating mechanism unless, for reasons which escape me, one is committed to a powerful demand effect. The other is that the change in the ‘expectations’ term’s coefficient is precisely what one would expect if real wage aspirations and indexation had been at work.

Imagine an economy, possibly not unlike our own, in which indexation, sometimes full, sometimes partial, was in effect but accompanied by a powerful set of real wage targets. When full indexation is granted, no restorative action is

1985 AUSTRALIAN ECONOMY 407

required. But when partial indexation holds sway, after a while a successful money wage push goes into operation to restore the loss. Thus, over time, real wages do not fall, though there are short intervals when they do, and presumably short intervals when some overshooting occurs in the other direction.

Now, a simple regression on this system with only lagged inflation as independent variable would presumably show a unit effect of prices on money wages, since real wages are assumed constant on average over the data set. By hypothesis, however, we know the effect of inflation on money wage increases to be less than unity, since on average indexation is partial. When a real wage resistance variable is included as an additional independent variable, the non-indexation catch-ups are captured by this variable, leaving the price term to pick up more properly the average degree of partial indexation. In other words, DFs result of a reduced coefficient on prices can be argued to support rather than, as they would have it, detract from the importance of real wage aspirations in the Australian context.

More generally, it is not obvious what price expectations terms are doing in Australian wage equations (whatever their merits under the different US labour market circumstances). Perhaps this formulation of wage theory has been imported rather too readily into Australia? It needs rather more underlying support than the mere observation that the ACTU found it tactically convenient (under Rob Jolly’s advocacy) to phrase its National Wage arguments in terms of inflationary expectations in the mid-1970s. I am not aware that Rob Jolly was actually in the habit of placing any reliance on inflation forecasts at this time, or that any other union leader or arbitrator took them seriously.

Is There A Demand Effect? However interpreted, some inflation term seems

established as a necessry ingredient in any account of Australian money wage determination. A good deal of econometric effort is expended by DF. mainly in a tussle with Bob Gregory and Ralph Smith (1983). over whether an unemployment variable ought also to be included. In other words, whatever its location, is Australian wage determination characterized by a short-run Phillips curve? The alternative considered is the Gregory- Smith (and Treasury N.I.F. Model) use of overtime hours, which is influenced as much by the change

in unemployment as it is by its level. While these DF equations are presumably subject

to the same severe strictures on account of incompleteness as those discussed above, they are able to show: (i) an unemployment rate variable significantly

different from zero both pre- and post-1978 and. moreover, stable over both parts of the data period;

(ii) significance of the overtime variable pre- and post-1978 when it replaces unemployment, but with a coefficient shift between the periods; and

(iii) no significant relationship at all using change in unemployment as the independent variable.

Together these results appear to show that in some way or other the level of unemployment still matters as one of the variables to be taken into account in a complete version of Australian wage determination. At face value this evidence clearly must be disconcerting to upholders of this particular Gregory thesis. But the equation, as previously mentioned, is so poorly specified (even with a dummy for 1974.3 which does quite a lot of work in accounting for data variation) that there remains open the possibility of discounting the DF results altogether. Ilawkins and Wooden (1984) have kept the debate alive.

One disconcerting claim of DF is their insistence on the stability of the unemployment coefficient. A major structural shift occurred in the unemployment-unfilled vacancies relationship in 1972 and 1973 (Hughes, 1975; Gruen, 1976; Harper, 1980). so that the attempt to impose a uniform coefficient of unemployment on the data implies that without the UV shift there would have been a leftward shift of the short-term Phillips curves (at least insofar as unemployment as being used as a proxy for excess demand in the labour market). Against this backdrop, stability of the coefficient is not quite the reassuring result that at first it seems.

The Impact of the Tribunals What the econometrics seem to show is a clear

role for inflation (however interpreted) and quite probably also, a role for unemployment (or some demand level variable). But these two factors are so clearly inadequate alone to account for the course of wages that the modelling must be judged a failure. This natur,ally leads to the question of whether a local institutional impact added an independent contribution to the course of events.

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Australia’s arbitration network is clearly different from institutionalarrangements elsewhere, which novelty continues to exert a considerable fascination for researchers, particularly those from overseas. But all labour markets work through institutional arrangements in some degree intrinsic to their country or region’s particular history. No country of which I am aware has a labour market that functions like an impersonal auction market and it is pleasing to see Mitchell lending his prestige to the debunking of the myth recently prevalent in Australia that labour markets, union or non-union, can appropriately be so modelled. It would be surprising if individual institutional arrangements like our arbitral, union, employer and govern- mental framework had no effect whatsoever on the major economic variables. What is at stake, however, is whether this influence, in whatever direction, is quantitatively important as an independent variable in explaining important economic events. Remember that, judged by DFs econometrics, it is a very big gap that needs to be covered in order to patch up the internationally transportable model.

What do we have on offer here from Brookings? The first is a traversing, by Mitchell, of that old chestnut of especially compressed wage relativities produced by the actions of the tribunals. This proposition used not so long ago to be trotted out with pride by supporters of the tribunals as a powerful accomplishment (Hancock, 1%2). More recently it has formed the basis of a major attack on arbitration on account of its interference with microeconomic resource flexibility and on its alleged tendency to be a macroeconomic inflation generator by transmitting large individual gains rapidly through the wage system and by giving weaker sectors of the economy a shield behind which to resist pressure for real wage cuts.

Mitchell’s contribution to this debate is particularly ethnocentric, being content to show that American wages are more dispersed than those in Australia, the effect being attributed to the tribunals. The result is neither new (Hughes, 1973; Brown, Hayles, Hugh& and Rowe, 1978,1980) nor decisive. The reason is given elsewhere in the volume by DF. They say (p.50) ’it is more likely that, if the commission were somehow abolished, Australian wage determination would reflect the discipline of the British system’ than resemble the American. DF go on to note the existence of an extensive literature on the impact of the tribunals on relative wages, which they sum up, in Mulvey’s phrase, as ‘inconclusive’. Flow-ons are common to

most industrialized labour markets. But as DF say, the existence of an arbitral effect

on relative wages is not a necessary condition for the tribunals to influence inflation. One way in which they could increase (or decrease) inflation is through inertia, clinging to existing patterns of real wages. However, what limited evidence is available as to the macroeconomic flexibility of Australian wage determination (principally the work of Grubb, Jackman and Layard cited by Mitchell, p.164) shows us to occupy a position about the middle of the international pack (rather better than the United States), at least over the 1960s and 1970s. In other words, at least as far as flexibility as opposed to a shock capability is concerned, it is not at all apparent that there do exist uniquely local spanners that stuff up the works of the internationally transportable model.

This conclusion is reinforced by our experience under indexation in 1975-81. Wage inflation did come down rather sharply over the system’s first three years (and in this context of flexibility it is immaterial whether depressed demand or incomes policy achieved the result). Moreover, the overwhelming majority of decisions were partial in character, sufficient in size, had they stuck, to knock over 8 percentage points off the real wage (INDECS ECONOMICS, 1982, pp.50-1). Yet substantial wage drift occurred which, with other wage rises, nullified the impact of the cuts. The drift is not consistent with the idea of a legally determined wage being held above the market, with some suggestions that it may have been primarily employer-motivated (Scherer, 1981 ; Brown, Hayles, Hughes, Rowe, 1984).

The evidence does not seem there confidently to ascribe Australia’s poor inflation-unemployment trade-off to the tribunals. But some one-off shocks do seem to have been imposed by arbitration. Mitchel makes a persuasive case that the equal pay decision of 1972 was one such, noting that similar market pressures on the sex differential in the United States had scarcely moved the ratio (pp. 132-5). And DF cite an earlier criticism of mine of the 1974 National Wage decision, the sound of which was obscured by the noise of the wage explosion. but which still managed to impose about an extra 4 per cent on employers (to contribute to the over 30 per cent increase for males during that year). The Commission was irrelevant at the time to macroeconomic wage determination, but the judges refused to admit it.

As for the wage explosions of 1974 and 1981 and 1982, my reading of events is that they originated


and spread outside the tribunals. It is true that these collectively bargained agreements eventually wound up as ‘consent awards’ of the Commission, very reluctantly so on the part of the judges in the latter case. But the impetus was largely one of bargaining.

This view of events explains why I and others of similar ilk refuse to get terribly excited about the tribunals’ role in generating the last decade’s inflation (now hopefully removed). However, if other economists believe that, both in 1974l and 198 1-82, the Commission could have turned back the tide of private settlements by refusing to accept its strength (beyond the extent that they did in 1981-82), it is easy to see why they regard the tribunals as devil figures. That is the crunch judgement, which cannot be evaded. In defence of the tribunals, at least in 1974, I must note that with the experience of 1968 still fresh in their minds, it would have been an especially brave (or fool- hardy?) set of judges who attempted to carry out the wishes of Australia’s general economists by refusing to rubber stamp.

II The Scope for Fiscal Expansionism , Real Wage Constraints

For different reasons both Brookings’ principal authors @F and Mitchell) regard Australian unemployment as a mixture of the Keynesian and real wage varieties. It is, however, admitted to be a difficult issue to resolve empirically (here and overseas), so that the best that can be done is to make an imprecise guess. At the end of his conference presentation Rudi Dornbusch said that ‘if you tell us that 3.5 per cent of the unemployment is classical . . . we would certainly agree that is a sensible number’. In the published version, DFs empirical guess comes out in the following proposition:

our view is that in Australia fiscal expansionism is appropriate but the unemployment can be characterised largely as classical and that fiscal expansionism cannot be expected to drive unemployment below 6 to 7 per cent without a reduction in real labour costs b.761.

In passing I wish to correct DFs misrepresentation (n.34, p.49) of my position on 1973 wage developments. The real wage fall that occurred over the course of that year makes it a singularly unlikely example of a push, whether from unions or tribunals. It is this fall, rather than any assertion about international price comparability, that demarcates 1973 from 1974.

Judging the impact of real wages on Australia’s unemployment, however, depends upon the precise question being investigated. Four different questions have been asked from time to time: was the real wage eruption of 1974 responsible for initiating the recession?; would a cut in the real wage overhang have reduced unemployment by itself, and by how much?; was it possible to reduce unemployment without cutting the overhang and, if so, by how much?; and was it possible to reduce unemployment to previously accepted full- employment levels without eliminating the overhang? DFs answers are effectively no to the second question, yes to the third (with the extent quoted above) and no to the final prompt. I have not been able to clarify their answer to the first question. The answers follow from a neoclassical model under which the predetermined real wage exceeds the marginal product of labour at full employment, but with an excess of the marginal product over the real wage at the equilibrium or actual level of unemployment.

By contrast, Mitchell is emphatically non- neoclassical, dismissing factor substituion scathingly (and far too readily for my liking), preferring instead to base his real wage effects on an application of the theory of incomecompeting claims. High real unit labour costs are just another expression of a larger-than-usual share for labour, which cannot be accommodated unless the non- labour sector is (unexpectedly) passive. Inflation will result from this competition of claims for more than I 0 0 per cent of the cake, and macroeconomic policy must perforce be put into restrictive mode so that the cyclical decline in the non-labour share can be used to reconcile the adding up of the shares.

I am very much attracted to the theory of incomecompeting claims as an aid to the inter- pretation of stagflation (Hughes, 1980; INDECS ECONOMICS, 1984). But Mitchell’s argument forces too much out of a tautology for my liking. Had pre-indexation 197675 price reactions been great enough to have eliminated the overhang, inflation would have been higher at the outset of indexation, and the temptation to use restrictive policy against inflation even stronger than it evidently was. As Mitchell himself points out, a real wage overhang is not a neceSSary condition for this type of stagflation to emerge from incomecompeting claims.

Secondly, in principle at least, the overhang could have been eliminated without unemployment if productivity growth had been devoted to eliminating the overhang while the real wage was


maintained. The non-labour share would have been temporarily low, but then it always is immediately following a general wage rise. If the bargain was kept, and barring accidents with food and oil prices, inflation could have come down, employment been maintained and the shares eventually returned to the status quo ante. In other words, in principle a real wage overhang is not sufficient to induce the sort of chain reaction envisaged by Mitchell. How temporary is temporary?

Of course, if restrictive policy is implemented the overhang measure will remain higher for longer than it otherwise would, a point accepted by Mitchell in principle but side-stepped in practice

‘by setting up a false dichotomy (p.147 et seq.) between cyclically and non-cyclically induced changes in the relative shares. I have no doubt that both effects were at work from mid-1974 onwards. Presumably (unless one is to use a cyclically corrected version of the shares or overhang), Mitchell’s rule of thumb can be circular in the sense that unemployment induces an effect (change in relative shares) which is then used to justify the maintenance of unemployment. Mitchell would clearly not fall into this crazy error (since he is prepared to use cyclically corrected measures of the shares). but I am not at al l confident that others would not.

Returning to the more orthodox neoclassical framework of the overhang discussion, Mitchell attempts (p.152) to side-step substitution effects by essentially armchair empiricism.

Inherently in the short-run there is little scope for changing cyclicallycorrected capital-labour ratios. The capital stock is large and is expanded only slowly. Once in place the capital-t&labour ratio of a given plant may be f m d , that is, locked into the technology of the plant.

This is an empirical judgement. The fact that no big changes occurred in America, where the overhang never arose dramatically, does not mean that some flexing did not occur under Australia’s large real wage gains. And since manufacturing (essentially Mitchell’s prototype) accounts for only 18.8 per cent of economy-wide employment by 1982, there remains plenty of potential scope for short-run substitution. Wholesale and retail trade (19.5 per cent of employment) allows easy variation in the amount of labour devoted to hustling the extra sales dollar with given capital stock, as does finance, insurance, real estate and business services (9.2 per cent) and entertainment, recreation,

restaurants, hotels and personal services (6.3 per cent).

The facts are that productivity did not grow rapidly by Australian standards after 1974. However, neither did the rate of this growth decline by as much as it did elsewhere. Given the intensive study of productivity growth conducted by Americans in general, and by Brookings in particular, it is disappointing that this issue is not illuminated in the volume, so that Australia’s comparative performance could have been judged against the backdrop of the real wage overhang controversy.

I find it difficult to believe that Australia’s entry into recession was caused by real wage as opposed to inflation effects. The jump in employment started in July and was largely completed by December 1974. At this stage there was little reason to believe that a pronounced overhang would emerge, Indexation was not put into effect until April 1975 and, until the November 1974 mini- budget, the Whitlam government (Clyde Cameron apart) was itself at most lukewarm towards indexation. (Witness the totally different philosophy behind the June Premiers’ Conference position and the abortive July 1974 mini-budget.) There is no obvious productivity growth effect on the record over this short interval. On the other hand, it is relatively easy to trace out a plausible macroeconomic story, coupled with the repex- cussions from soaring inflation driven by high nominal wage gains. The stock cycle, a variable unlikely to be influenced directly by substitution- type arguments, played a major part in the down- turn of the second half of 1974. I am, of course, aware that there are other channels for a real wage effect but remain unpersuaded.

As Max Corden said at the conference, however, the more important policy question from 1975 on was not how we got into the recession but how we could get out of it. His own work, however, tended to obscure the discussion of this important point. Corden stated elegantly the view that full employment could not be regained without a cut in the real wage overhang. Once the big jump of 1974 became clear and its longer term implications digested, there were very few economists (at least outside the old Melbourne Institute) who disagreed with this view. Certainly my own early contri- butions to this debate (stated most clearly in the September 1976 issue of the Australian Bulletin of Lclbour) were premised upon it.

But with full employment by common consent many moons away, the more important policy

1985 AUSTRALIAN ECONOMY 41 1

question was whether the overhang had to be eliminated before unemployment could be reduad. If so. real wages would have to be cut (as the only practical way of eliminating the overhang quickly). If not, real wages could mark time while productivity growth caught up. (Of course, it was always possible to argue, as the Treasury of the late 1970s and early 1980s did, that the labour market contained such a rabble that the only prudent way to behave was to insist on a down payment if not a full advance before anything else was done. This issue is deferred to the incomes policy discussion later.) Given the enormous practical difficulty of securing real wage cuts from the system, this was the crunch issue for policy. Being an empirical issue, Corden had little to offer on the matter.

The record always did show consistently the claims of businessmen that orders, not profitability, formed the principal constraint on expansion. Any number of business surveys attest to this. In any case, it is now clear from the 1979-81 experience and from the expansion of demand over the course of 1982-83, that employment did respond even though the overhang had not been eliminated. This is consistent with the DF position.

How far we could have got without removing the overhang will forever have to remain a matter of conjecture. Until we can find acceptable objective measures of marginal products, the luxury of a fm view is not open to us. There really is no aaxptabk basis for DFs 6 per c a t (a point with which Dornbusch agreed at the conference but did not eliminate from the text), or for any other. The only persuasive evidence would have been of the ‘suck it and see’ variety, had we observed surveys turning from orders to profitability as the key constraint and expansion failing to boost employment. The chance of that experiment has been eliminated with

.the 1984 disappearance of the overhang.’ In essence, however, this question never appeared on the critical path for policy.

If it could have been secured, however, would a real wage cut alone have increased employment? D F s position is not absolutely clear, but their answer appears to be no. Wagca t t ing achieves nothing of first-order importance to restore full employment in the Keynesian region. Reducing real wages may, because of distributional effects, also reduce demand and output’ (p.52). On the other hand, Mitchell appears to give a more positive

a But since there is no reason to believe that 1-72 real unit labour costs remain the equilibrium lcvd in 1985. it is still worth looking at the surveys.

answer. As some others have done, he compares the projections emanating from the Technical Committee of the National Economic Summit and finds ‘that an extra push on real wages of about 3 per cent raises the unemployment rate by about 2% percentage points’ (p. 154). Since the impact was explicitly reversible (projection A compared to C), the conclusion appears to be that, contrary to DF, some real wage cutting could have reduced unemployment. As a member of that committee, perhaps a few

points are in order. It is true, as Mitchell says, that the projections were based on an average of the models carried around in the collective heads of the committee members rather than any explicit piece of econometrics. The real wage result did not please everybody.

Apart from this, Mitchell and many of the others who use the projections to illustrate a real wage effect fail to point out that much of the observed effect comes not from the real wage cut but from the extra fiscal expansionism implicitly built in to projection C compared to A (and in turn B, which is crucified by the effect). With nominal tax rates held constant, higher inflation leads to higher real tax rates across the projections. The result was that the initial-year budget deficit was smaller under A than C, and very much smaller again under the high-wage option B. To illustrate this effect a special projection, C-F, was arranged with the budget deficit constrained to be the same with both C and A wage assumptions. The difference in unemployment was cut in half. No equalization was attempted between B and A, since it was not believed that governments would slash nominal tax rates at a time of accelerating inflation.

This fiscal expansion effect is clearly not what either Max Corden or Rudi Dornbusch had in mind. When it is removed, however, what is left is a very small effecf of about a half percentage point of unemployment (between A and C-F‘) after three years of partial indexation (and avoidance of productivity increases). Some absolute heroics on the wage front produced an effect thus collectively judged to be of the second order. That the result has not been so interpreted generally says something more about the gladiatorial state of the debate than it does about underlying economic reality. In any event, whatever dubious authority the Technical Committee’s efforts can lend to quantification, it does not extend to big, or even sizeable, real wage impacts on employment.

One final observation is that the big real wage cut of 1983 and 1984 (involving the elimination of


the overhang) does not seem to have shot us inexorably back to full employment. Given the presence of both strong fucal expansionism and a dramatic falI in inflation as cocontributors, real wage cutting cannot have been massively powerful, at least in the short term of 12 to 18 months. Moreover, the relative smallness of whatever effect exists is consistent with the international experience of countries like West Germany, which combines an underhang with substantial unemployment.

Walrasian Natural Rate Increasa and Structural Change

Both DF and Mitchell debunk the view that structural change in the economy led to major increases in unemployment. DF are content to cite Kalisch’s (1982) result that, despite the changing demographics, the weighted full employment rate of unemployment rose only from 1.6 per cent in 1966 to 1.7 per cent in 1980. Mitchell (p.137) performs his own exercise and reaches a similar conclusion.

The other prime candidate is the increased size of the replacement ratio between unemployment benefits and wages in the early 1970s put into effect by the McMahon and (especially) the Whitlam governments. Mitchell notes (p.139) that

most econometric studies have failed to establish that unemployment benefits substantially affect the behaviour of teenagers in the labour market (or of the work force as a whole), although some studies have reported an effect on younger males.

Nevertheless, he is suspicious that the existing work may not have been too discriminating and urges ‘more careful review’.

In this context, it is worth noting that (for adults at least) increases in the replacement ratio in 1952 (when the initial post-war nominal benefit rates were doubled) were more dramatic than those of the early 1970s. Yet there seems not to have been any major shift in the UV relationship (Hughes, 1975). My plea is that further work in this area ought not to ignore this valuable 1950s variation in the data, which has tended to happen in the past simply because ABS data are available only as far back as the early 1960s.

The Impotence of Fiscal Policy? Provided that an effective incomes policy was

in place, DF were strongly in favour of an expan- sionary fiscal policy in the circumstances Australia was perceived to be in. The existence of some Keynesian unemployment aside, they did so

because they believe fiscal policy to have positive effects on output and because Australia is ideally placed to mount an expansion. It is not encumbered with a high debt to income ratio (on which see also OECD, 1984) which could lock in high budget deficits.

Not surprisingly, these claims dominated the conference session since they directly challenged one establishment orthodoxy of the past decade. Rudi Dornbusch, who conducted the conference on behalf of the duo, was left rather perplexed as to why he had been so controversial. He had to cope with challenges as diverse as what the Treasury view really was (the answer to which depends upon whether you focus on the view of particular individuals or the ‘writing for the ticks’ ethic that used to make for monolithic written material), Max Corden’s amazing view that Treasury arguments did not amount to much but at least they stopped anything wild happening (which is the sort of ‘any port in the storm’ reasoning that Max is normally quick to condemn), and Adrian Pagan’s valid emphasis on the empirical.

Of these, the latter is the only important issue, to which Dornbusch consistently trotted out the US Reagan experience. I suppose that if the conference had been held a year later, the Fraser-Hawke fiscal policy would have also obtained a guernsey. There are no other empirics in the chapter which are capable of changing views. Confidence, moneti- zation, exchange rate and induced real wage- investment links are all discussed but, in the end, 1 suspect that just as an apparent failure of the Whitlam expansion to reduce unemployment did so much to make fashionable the notion of fiscal impotency in Australia, it will be the experience of the past few years that redresses the balance.

Finally I cannot resist DFs comment that ‘the refusal of Treasury to work with a sensible full- employment figure or structural deficit makes no sense, except as a means of frightening the bourgeoisie by exaggerating the deficit problem’ (p.67). Peter Ong’s 1984 University of Adelaide B.Ec. thesis is 831 excellent guide to the Australian numbers, putting to shame the efforts of more- seasoned tillers of these important slopes.

An Australian Incomes Policy? Brookings is in favour of an Australian incomes

policy, which is no surprise. But DF are very vague about its form, except that it must consist of something more than wage indexation. Mitchell is much more specific, proposing firm-by-firm profit sharing (along Japanese lines) in place of price


indexation so as to increase macroeconomic flexibility. As to the present system, he is worried about the twin possibilities of over-award bargaining and comparative wage justice frust- rating the tribunals’ ability to impose wage restraint.

Mitchell lists four reasons why profit-sharing may not work in Australia, basically boiling down to the view that we as a whole do not think much of the principle. Another way of putting the same proposition, given the dislike, is that to be effective it requires the elimination of comparative wage justice. Otherwise, what is to stop big bonuses in high profit forms from being generalized across the board. Just to give the discussion an international flavour, note the unhappy experience the Dutch had with a similar profit-sharing idea (Pen, 1%3). Note also that in the 1960s the Commission ran away from the idea precisely because of its clash with comparative wage justice. Moreover. there is a lot to be said for extra gains being passed on in lower prices rather than higher wages in the firms concerned, although an element of the latter is already present through over-award payments in Australia (Brown et ol., 1984). On the other hand, if the conditions can be created for thorough-going profit-sharing (which I think not), would not all the intended effect be achieved by the abolition of comparative wage justice, and would not profit- sharing be superfluous? Mitchell squares the circle with a belief that profit-sharing is the necessary facilitating ingredient and that it can be made appealing to Australian unions as part of an industrial democracy package. I would not want to hold my breath waiting for this one.

Mitchell’s discussion of the present incomes policy is marred by an overemphasis on the tribunals as creators or custodians of incomes policy and too little on their role as facilitators of that policy. Thus a whole section is devoted to the topic: ‘Can the Arbitration System Impose Wage Restraint?’ Put this way, I think the question has to be answered in the negative if the other parties are not supportive of the tribunals. The history of the late 1960s as well as the 1970s, pre- and post- indexation, is powerful testimony to this answer.

The present incomes policy, however, is not the creation of the tribunals. The Accord is the creation of the ACTU and the present government while in Opposition, and more particularly of a powerful group of individuals associated with both, who worked it out progressively since the late 1970s. It is perceived in the tradition of the European concerted action variety of incomes policy,

especially that of Austria, and has been adapted to the Australian institutional framework of the tribunals.

It wil l work to the extent that the principal parties want it to work and are able to devise trade-offs both sufficiently palatable and economically disciplined to make it work. The role of the tribunals is to interpret the agreements and to see that they are applied consistently. In any case the general principles of the Accord could not be applied in a vacuum, and if the tribunals did not exist it would be necessary to create something like a pay board for the purpose, as has happened in a number of countries. While not formal parties to the Accord, the associations of private employers are mainly in favour of centralized pay f i i t i on and, while not nccesFariy providing public support, nevertheless (as experienced industrial relations practitioners) have a private role to play also in interpreting the dynamics of the incomes policy and helping to maintain consistency.

Will it work in the long run? This is a hard standard by which to assess since all but the Austrians have seen their successful incomes policies disappear. A more meaningful question is whether it can help Australia over the next decade. I have already noted the old Treasury view of the unions (and indeed of industrial relations practitioners in general) as a collection of unexploded bombs on legs. But to date predictions of imminent doom have not been fulfilled. The system has worked well with the ACTU executive (which contains the most powerful union leaders in the country) policing both special deals and the application of comparative wage justice claims. Moreover, the policing has been done within the framework of a set of economic objectives, relating principally to employment but also to inflation and income distribution. What the future brings remains to be seen. But if the resolve wanes and the Accord fails, I share with Mitchell a foreboding of what might happen even in the presence of substantial unemployment.

REFERENCES Artis, M. (1981), ‘Incomes Policies: Some Rationales’, in J. L. Fallick and R. F. Elliot (eds), InmmesPolicies, Iflation and Relative Pay, London, Allen & Unwin.

Brown, William, Hayles, John, Hughes, Barry, and Rowe, Lyndon (19?8), ‘How Far Does Arbitration Constrain Australia’s Labour Market?’ Australian Bulletin of Lubour. September. - (1980), ‘Occupational Pay Structures Under

Different Wage Fixing Arrangements’, British Journal of Industrial Relations. July, 1980.


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Dawkins. Peter and Wooden, Mark, ‘Labour Utilisation and Wage Inflation in Australia’, Working P a p No. 64. National Institute of Labour Studies, June.

Gregory, R. G. and Smith, R. E. (1983). ‘Unemployment. Inflation and Job -tion Policies in Australia‘, ANU, September.

Grubb, D., Jackman. R. and Layard. R. (1983), Wage Rigidity and Unemployment in OECD Countries’, European Economic Review, March-April.

Gruen, F. (1976), ‘What Went Wrong’, Australian Quarterly, December.

Hancock. K. (1%2), ‘Compulsory Arbitration Versus Collective Bargaining: Three Recent Assessments’, Journal of Industrial Relations, April.

Harper, I. (1980), ‘The Relationship Between Unemployment and Unfilled Vacancies in Australia: 1952-78’. Economic Record, June.

Hughes, Barry (1973), T h e Wages of the Weak and the

Strong‘. Journal of Industrial Relations, March. - (1975). T h e UV Shift’, Australiun Bulletin of

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INDECS ECONOMICS (1982), Stute of Pluy 2, Sydney, Allen & Unwin. - (1984). State of Play 3. Sydney, Allen & Unwin. Kalisch, David (1982). ‘The Output Loss from

Unanploymenk Okun’s Law Revisited’, BLMR Working Papcr No. 10. August.

Mulvey, Charles (1983). ‘Arbitration, Collective Bargaining and the Wage Structure’, Growth 33, Melbourne. CEDA, September.

OECD (1984), Thcbnger-Term Pqformance of OECD Economics: Challenges Facing Government, Paris, February.

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Scherer, Peter (1981), ‘Insubstantial Compliance’, 10th Conference of Economists, Canberra, August.

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