Australia’s disappearing Phillips Curve

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The RBA’s realisation that the NAIRU is a bit lower than they had thought is a case of better late than ever. The data hasn’t lent much support to it for most of this decade.

The chart below shows that the data is the other way around — or rather classical, if you prefer. Lower unemployment rates are associated with a slower pace of wage gains. Note that I’ve used the state level trend unemployment rates and WPI measures so that you can see the variation across Australia.

It’s tempting to write it off as ‘mining boom’, but that’s not true. As you can see from the below chart, the only place where we find the (expected) relationship — where lower unemployment is associated with higher wages — is in the mining boom states of WA and NT.

The animation below gives a feel for how things have developed over time. It shows a Phillips curve type relationship (estimated using the national as well as state level data) over the past twenty years. The level has been declining and the curve has been flat for some time.

This leaves the RBA quite passive in terms of monetary policy. There’s just no way of knowing when wages might start to accelerate — so they are left trying to glide the unemployment rate down, while they watch for signs of wage inflation.

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9 comments

  1. Perhaps now people will realise it was Howard that re-regulated the labour force ( work choices) and the ALP which then de-regulated it ( fair work).
    Those people talking about a wages explosion when the LNP won back Government in 22013 were talking through ideological glasses they have yet to take off.

  2. sorry I should have added that globalisation is exacerbating this trend.

    What we are seeing here is merely what has occurred in the USA.

    As I do not see people joining unions despite their benefit I reckon low wages growth is par for the course now

    1. Presumably this all explodes once there’s a generally acceptable reason to ask for pay rises. In many ways that is what caused the inflation spike following the oil shocks.

  3. I do not want to sound like a marxist but it seems to me all gains from Productivity are going to capital.

    workers of the world unite!!

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