Is IR becoming a problem?

One of my themes is that the NAIRU has probably moved up because of the re-regulation of the workplace. This may be part of the reason we’re generating more inflation than expected, given the unemployment rate.

If this is the case, the RBA has little scope to ease monetary policy to boost the economy.

Regardless of if you think the labour or capital has too little or too much power, I think most people can agree that increasing the power of labour tends to raise the NAIRU. A direct measure of the balance of power in the labour market is industrial disputes – and these support my hypothesis that the NAIRU has risen.

Today, the ABS released the Q2 Industrial Disputes data.  The working days lost series showed a ~300% increase (+46.5k to 66.2k) over Q1. Only a small part of this is seasonal — the YoY pace is a whopping +175% (+42.2k).

Seasonal adjustment takes out a bit of the noise, and reveals an uptick in industrial disputes: +13%q/q and +59%y/y.  That’s a hefty increase in industrial action, but the level is a long way from the bad old days.

A potential issue with the seasonal adjustment process is that the large number of outliers may be mucking things up. To control for this I used a (Baysean) algorithm to remove outliers. This process increases some of the end point problems – however in this case it also reduces apparent increase (it’s now +6%q/q, and +30%y/y). What it does reveal, however, is that industrial disputes have been trending up for some time.  According to this method, the series minimum was ~3k working days lost in both of the quarters of H1’07 … despite the fact we had ~4% unemployment.

Of course, what happened in H2’07 is that the a Labor Government was elected, with a mandate to swing the pendulum back toward workers.

The transmission path from a lower to a higher NAIRU is higher inflation, higher interest rates, and higher unemployment — and that’s also political kryptonite. I doubt that the ALP will have much humour as they reap what they have sewed.

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20 Responses to Is IR becoming a problem?

  1. On your Marx says:

    Re-regulation happened with Workchoices. it increased legislation by over 1600 pages. Fair work in that prism must be viewed as de-regulation.

    until people such as yourself can come up with concrete examples of how the market has been re-regulated instead of using vague generalities i wil continue to ignore such assertions with do not have a scintilla of evidence.

    • Ricardo says:

      Isn’t this evidence? I think your point is semantic – what I am saying is that the whip has changed hands, and that there are consequences of that change.

      We could, with only a few pages, swing the pendulum to either extreme. I am not talking about the paperwork costs of regulation – though I am sure that those losses are very large – I am talking about laws that increase the power of workers.

      This is what we would expect to see if laws had increased the power of labour, and the data suggests that is exactly what has occurred.

      Sent from my iPad

  2. On your Marx says:

    you could have less industrial disputes with more regulation alah workchoices.

    We do not have wages doing anything different. if regulation is actually increasing you would expect it to flow through to a higher NAIRU quickly.

    no sign of it indeed we do not even have any decent anecdote’s yet

    • Ricardo says:

      Historically, workers strike to demonstrate their bargaining power, and thereby obtain higher settlements. We will know in a few years, but my guess is that this is the flex before the unit labour cost spike (much of the recent spike could be noise).

      Stay tuned!

      Sent from my iPad

  3. Andrew says:

    The data cleaning process does something horrendous to that series…the original series has no trend from 08-10, which doesn’t sit well with the re-regulation hypothesis.

    Not implying that you’ve committed the exact same crime, but it reminds me a little of this post from the Pagan:
    http://johnquiggin.com/2007/11/16/guest-post-from-adrian-pagan/

    • Ricardo says:

      Yeah, all this stuff is a bit of a black art. The problems are more typically at the end point — in sample is usually better — so it is plausible that the apparent uptrend just recently is an artifact.

      I liked that it fit my priors, and my sense of what has been going on, so i didn’t look at other filters. I may have a look at them and post again.

      Sent from my iPad

  4. The Lorax says:

    This may be part of the reason we’re generating more inflation than expected…

    What inflation? Inflationary expectations have been falling all year because outside the Pilbara (and Glenn’s fevered imagination) there is zero chance of a wage-price spiral. Most people are saving like crazy and praying they can keep their jobs for a few more months.

    Again, you guys are like old generals replaying the last war. In 2007 the domestic economy was going gangbusters. In 2011 its beyond grim.

    If the RBA’s mandate is to set monetary policy according to economic conditions in the Pilbara, then today’s policy stance would be perfectly appropriate, but it bears no relationship to the economic conditions that the vast majority of Australians are experiencing.

    Its time the RBA started setting policy for the majority, because if they don’t, this will explode as a political issue, and the RBA will lose what independence it has.

    • Ricardo says:

      Doubtful…

      Sent from my iPad

      • The Lorax says:

        Yeah whatever…

        The TD Securities – Melbourne Institute Monthly Inflation Gauge fell by 0.1 in August, following a 0.3 per cent increase in July and no change in June.

        Imagine where inflation would be if the RBA had hiked several times this year as demanded by the hawks?

        • Ricardo says:

          That survey is a pile of junk.

          Anyhow, we can say pretty clearly what would have happened. The RBA last forecast inflation going to 3.25% at their tail – when policy has had it’s full impact. A pessimistic view of recent weakness might hammer that down to 2.75% – but no lower. If they had tightened twice that forecast is likely to have been 25bps or so lower.

          Sent from my iPad

      • The Lorax says:

        Which survey? Both? ANZ job ads. Is that junk too?

        Don’t tell me. The inventory build is because businesses are ramping up a growth spurt in the second half?

        Really, what planet are you on?

  5. The Lorax says:

    Another survey for you…

    Of the 820 investors surveyed, 80 per cent expect an economic slowdown in the coming quarter and 68 per cent expect business conditions to deteriorate.

    Don’t tell me, its just “sentiment”, and if we could all just snap out of it and realise how wonderful this TOT/resources boom is, we’d all be happy campers.

    • Ricardo says:

      Ha, I am not that strident! I just don’t know the survey. Seems consistent with the various other sentiment surveys.

      There is little doubt the savings rate has kept going up.

      We can be pretty sure of this as the q2 business indicators survey showed good income formation yesterday and we know from the monthly data that the expenditure side has been weak.

      Sent from my iPad

    • Ricardo says:

      Turns out there were a few problems with the Q2 publication. From the bank’s comments they seem to downplay the weighting drift issue but did think this may have been a problem.

      The bounce in consumer confidence suggests to me that the August WMI survey was a dud. The weekly RM survey never went down in August, and led this uptick in the prior few weekly surveys. I suspect it never really got quite so low.

      I suspect the consumer had been expecting higher rates, and that the RBA’s public move to neutral has worked a bit like a cut.

      Sent from my iPad

      • The Lorax says:

        The WMI survey is pretty noisy. It moves around by 8% quite often, so nothing unusual there.

        Given the economic newsflow in August/September I’m more inclined to think the September survey was dud. Bill says its all about the perception that interest rates won’t be going up anytime soon — which is possible — but more likely its just statistical noise.

        Also, with so much volatility on the stockmarket the timing of the survey could have a big effect. If, for example, the bulk of survey was done between the 6th and 9th of Sep the confidence read might be higher than if was done between the 1st and the 6th.

        If the next survey is done the week after Greece defaults, I expect the results will be bad. If its done the week after Greek bailout plan #27 is announced, I expect the results will be good.

        What is really significant is the big move down from the 120s last year to the 90s today.

      • The Lorax says:

        Westpac today: Consumer expectation of inflation continue to ease, worries about unemployment spike.

        Wasn’t it just a week ago the bulls were telling everyone the economy was booming, and anyone who said the non-mining economy was weak was a liar?

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