Melbourne Institute Working Paper Series Database (1984 - 2010)

Melbourne Institute Working Paper No. 06/2003

Conflict Inflation: Estimating the Contributions to Wage Inflation in Australia During the 1990s

by

Tim R.L. Fry and Elizabeth Webster

Date: March 2003

Abstract: One of the major emerging macroeconomic problems during the century has been the tendency for inflation to accelerate under prolonged periods of full employment. According to Isaac (1977) and Kaldor (1996, 5th Lecture), this arises from the process of wage determination common to most western economics. They argue that there are three major objectives of wage earners that are in competition with one another. First, the desire to maintain relativities; secondly, the desire to have a fair share of companies profits; and thirdly, a reluctance to allow any encroachment on achieved standards due to unfavourable (exogenous) events. If companies have differing rates of profit then the first objective will conflict with the second. If there are adverse changes the terms of trade, then the third objective will cause inflation. This paper tests how well the three objectives of wage earners cited above in the context of their power to effect these objectives, explains wage inflation in Australia using a times series of micro wage rate rates for detailed occupations and industries for the period 1989 to 2000. We find that wages are sensitive to the three major objectives, but not occupational unemployment rates. One of the major emerging macroeconomic problems during the century has been the tendency for inflation to accelerate under prolonged periods of full employment. According to Isaac (1977) and Kaldor (1996, 5th Lecture), this arises from the process of wage determination common to most western economics. They argue that there are three major objectives of wage earners that are in competition with one another. First, the desire to maintain relativities; secondly, the desire to have a fair share of companies profits; and thirdly, a reluctance to allow any encroachment on achieved standards due to unfavourable (exogenous) events. If companies have differing rates of profit then the first objective will conflict with the second. If there are adverse changes the terms of trade, then the third objective will cause inflation. This paper tests how well the three objectives of wage earners cited above in the context of their power to effect these objectives, explains wage inflation in Australia using a times series of micro wage rate rates for detailed occupations and industries for the period 1989 to 2000. We find that wages are sensitive to the three major objectives, but not occupational unemployment rates.

 

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