With Russia now invading Ukraine and adding to the already highly disrupted supply chains linking products and nations, and the price fixers in OPEC and OPEC+ having a picnic on the uncertainty, inflationary pressures will continue to rise for the time being. Many commentators keep falling into the trap of saying that history is repeating itself – meaning that it is the 1970s over again. I maintain my position that this is not akin to what was going on in the 1970s although there are similarities – energy price rises accompanying war, etc. And if we make the same mistakes that were made in the 1970s now, then not only will the inflation persist but millions of workers will lose their jobs and their incomes.
The changing role of unions in society – the worldwide decline in trade union membership
One of the striking aspects of the current period is that the prices of goods and services are rising as supply shortages become binding in an environment where Covid stimulus support has helped maintain purchasing power.
Normally during a pandemic (historically) demand drops sharply, but this time around, that has not occured across the board, although services spending declined while spending on goods rose.
Those sectoral differences were created by lockdowns and other restrictions, illness and shifting patterns of preference.
They are unlikely to persist although elements will – such as, more on-line shopping.
But the other stark fact is that one service has not been able to secure price rises – labour.
Despite labour shortages emerging due to sickness and border closures, wages growth remains at low levels and that appears to be a global trend (with some sectoral exception in some nations).
In part, this problem has arisen because unions are in decline in many countries.
Various factors are driving this decline including legislative attacks from governments over the last four decades; the changing composition of the workforce (away from big manufacturing plants which are easier to organise towards small service workplaces, which are hard to organise; increased casualisation; increased participation of women; increased use of short-term migrant labour to undercut wages; and more.
The decline in trade union density (proportion of workers in unions) is a global phenomenon.
The following rather messy graph uses the OECD trade union density data from 1960 to 2018 for some 35 nations (only Israel is missing) and just demonstrates the historical decline.
That is Iceland at the top resisting the trend (especially since the GFC collapse of the banking sector).
Here is a less messy graph showing some of the big declines since the 1960s.
There is some evidence that the COVID-19 crisis is now encouraging workers to once again join unions but it is too early to tell whether this is a trend or not.
The following Table shows the decline in union membership in numbers. The * indicate decades where data is not completely available.
So in density terms, we are not remotely facing union strength like in the 1970s.
What about industrial disputation?
I have data on industrial stoppages back to 1950 and it provides an historical context for understanding the current data trends.
Last week (March 10, 2022), the Australian Bureau of Statistics released the latest data – Industrial Disputes, Australia – for the December-quarter 2021.
The numbers are very low and I thought it would be interesting to provide some historical context in order to discourage conclusions that we are just back in the 1970s again.
While this post is about Australian data, the trends discussed apply to most nations, where different forces have combined to make it difficult for workers to gain wage increases.
The following graph shows the industrial stoppages (number) from 1950 to the December-quarter 2021.
Up until 1985, the data is only annual and then the graph uses the latest quarterly data from the ABS. I assumed the annual aggregate before 1985 was distributed evenly through the 4 quarters of each year, which is why it has that funny Lego block look.
But just focus on the levels over time, they tell the story.
Industrial disputation was much more frequent before the legislative attacks on the unions began in the 1980s.
To see why this matters, here is a graph showing the annual growth in compensation per employee since the March-quarter 1973 in Australia to the December-quarter 2021.
This is one measure of wages growth – but the current data based on the Wage Price Index only goes back to 1997.
Think about the disputes data when thinking about the wages growth data.
With the decline in union power as membership waned and the introduction of a range of pernicious legislative contrivances which made it hard for existing unions to pursue industrial action in pursuit of wage rises, the rate of growth in wages has slumped and stagnated.
Wages are growing at record low levels now.
Further, they lag behind CPI rises rather than lead them, which means there is a fundamentally different dynamic operating.
So there is really no comparison with what went on in the 1970s in terms of the capacity of workers to enjoy wages growth and the situation at present.
Should petrol excises be cut or scrapped to deal with inflation?
I have often pointed out that a significant factor driving price level pressures, as measured by the Consumer Price Index, are institutional and administration arrangements imposed by government.
Things like indexation arrangements – for example, allowing private health funds to automatically increase premiums each year in excess of the CPI.
Other drivers include excise taxes.
In Australia, the federal government imposes an excise tax on fuel and petroleum products and the rates are indexed twice a year to movements in the CPI.
The current conservative government made that process automatic from July 2015.
As at February 2022, the rate is 44.2 cents per litre and for LPG it is 14.5 cents per litre (Source).
The government levies the tax to raise revenue and in 2019-20, the data shows the government took $A5.6 billion out of the pockets of consumers through excises on petrol and a further $A11.8 billion from diesel (although diesel rebates gave a lot of that back.
The Australian Automobile Association claims the total net revenue from excises is around $A11 billion annually (Source).
In recent days, with the price of petrol now escalating, there have been calls for the federal government to cut the excise to take pressure of the price.
This ABC news article (March 14, 2022) – Federal government faces calls from within to cut fuel excise as petrol prices soar during Ukraine war – provides some information.
The usual suspects have assembled on both sides of the debate.
It is true that if the federal government did cut the excise and were able to control the greed of local distributors (presumably through a legislative fiat forcing them to cut the price – did I just say ‘price controls’) then workers would suffer less real income loss as a result of their use of motor vehicles.
Economists have come out with some ridiculous statements about the proposal.
The kooky-one who professes expertise on anything that moves basically tweeted (March 13, 2022):
If the petrol excise is reduced, the budget shortfall that causes will have to be borrowed, adding to govt debt.
That debt will require higher taxes to pay the interest on it & then in time to repay it.
Ridiculous policy – highlights how shallow the economic debate is right now
It is hard to know what to do with an economist who thinks like this.
First, the revenue surrendered does not ‘have’ to lead to higher debt if the government chooses otherwise.
Second, the term ‘higher taxes’ is ambiguous.
Does he mean higher tax rates, meaning at each GDP level, tax revenue would be higher?
Or, does he mean that tax revenue would be higher with the same tax rates?
In the first case, I have never seen any robust relationship between changes in tax rates and the dynamics of the fiscal balance. I have observed periods where the fiscal balance has increased while tax rates have been cut and vice versa.
In the second case, as economic activity rises, tax revenue increases automatically with no discretionary policy change because, for example, more workers are employed and paying tax.
Does he then oppose those increases in tax revenue?
Further, history tells us that debt is repaid not through higher tax revenue specifically but by issuing new debt (given the institutional arrangements that our governments hang on to).
Finally, public debt is non-government wealth. So even if his logic (the causality) is correct, that means he is seemingly opposed to a rise in non-government wealth being the result of a rise in real purchasing for citizens who purchase petrol.
Anyway, Kooky, as I said.
Another character, who seems to be the darling of the ABC (they always wheel him out) claimed:
You can’t solve a problem caused by President Putin in Europe with tax relief in Australia …
Yes you can.
Cutting the excise would clearly benefit the real income of motor vehicle users.
What that economist did get right is that the price of oil is already starting to come off anyway and it doesn’t make sense to set tax rates to some fluctuating numeraire.
Here are three representative oil price movements since February 14 to March 14, 2022
Overall, my position issue is this.
We actually want people to drive less not more given the environmental emergency.
The more people stop driving and ride cycles instead, or walk, or pool cars, or, spare the thought take public transport, the better.
Those options are not always possible but where they are they are preferred to everyone getting into their own cars each morning and clogging up the roads and the air quality.
So I am reluctant to support a measure that provides an incentive for more motor vehicle usage.
I also note a curious inconsistency between green types who are coming out to support the proposal – presumably on equity grounds – yet at the same time argue vehemently for carbon taxes and the like.
My only concern about advocating more public transport at present relates to Covid, which has made such conveyances less safe than the private car.
There is a lot of knee jerk doomsayers out there at the moment.
First, there is really no comparison with what went on in the 1970s in terms of the capacity of workers to enjoy wages growth and the situation at present.
Second, a nation should not adjust longer term fiscal parameters to deal with a short-term crisis.
Third, the inflationary pressures remain transitory in my view.
That is enough for today!
(c) Copyright 2022 William Mitchell. All Rights Reserved.