Workers told to cut pay to tame inflation

February 22, 2008

On February 14, in a clever piece of political theatre, Labor PM Kevin Rudd declared that federal MPs would forgo their scheduled pay rise for 2008. MP's wages would effectively be frozen until mid-2009. Rudd also called on business executives to curb their pay rises, which averaged in excess of 30% in 2007 according to the Australian Council of Trade Unions (ACTU).

What Rudd didn't say was that MPs' pay rose 6.7% in 2007 and has risen by 50% since 2000. Backbenchers currently earn $127,060 a year, more than double the average wage. With an extra $27,000 a year for "electorate expenses" and sundry perks for participating in parliamentary committees and tax-payer funded "research" junkets, and a superannuation system that makes the standard 9% enjoyed by most workers look paltry, MPs have little to complain about. Not that this stopped Tony "people skills" Abbott from complaining that he couldn't make ends meet on his own fat salary.

Rudd claimed that MPs' pay-freeze was meant to send a message to chief executives to show "restraint". If this was the purpose, it has already failed. On February 16, Sydney's Daily Telegraph reported that the CEOs of the 10 largest Australian companies had "scoffed" at the suggestion. (Collectively they already take home packages worth $125 million a year.)

Calls for wage restraint

In reality the parliamentary pay-freeze is meant to assure the real target of the call for "restraint" — working people — that the burden of "fighting inflation" is being shared. Workers are expected to follow their political masters and show "restraint", even though this means real wages falling.

The first volleys in the "fight" against inflation have been fired by Labor state governments, which claim that acceding to public-sector workers' demands for moderate wage rises would fuel inflation. Teachers, nurses and firefighters in three states have been offered deals that would mean their real pay is cut.

Teachers in NSW are battling a wage offer from Premier Morris Iemma's government of just 2.5% a year over three years, a real wage cut. NSW firefighters were also offered only 2.5% a year, although this was increased to 4% after the Fire Brigade Employees Union took industrial action. The government's offer was soured by the demand that firefighters agree to "productivity" increases, giving up one week's annual leave.

Other NSW public-sector workers are to face similar treatment. Both the Rail Tram and Bus Union and the Public Service Association are crying foul over the state government's plan to cap public-sector wage increases at 2.5% while offering executives pay rises of up to 30%. The NSW Nurses Association is also in dispute with the state government in pursuit of decent wages for its members.

In Victoria, the Labor government is offering teachers 3.25% annually over three years, but only if they accept trade-offs such as cuts in paid leave. The Australian Education Union is calling for increases of 10% a year over three years, to bring Victorian teachers' wages up to the level of their counterparts in NSW. In November 2007 the Victorian government used Work Choices provisions to dock the pay of nurses who were campaigning for wage increases of 6.5% without trade-offs. The government was offering only 3.25%.

In Tasmania, Paul Lennon's government is offering the state's firefighters — the lowest paid in the country — wage increases of less than 4% a year. The United Firefighters Union is demanding increases of 4.2% in the first year and 4% thereafter, to increase wages to the national average.

Inflation — not our fault

Underlying federal Labor's call for wage "restraint" and Labor state governments' attacks on public-sector wages is the argument that wage increases are to blame for inflation. The argument made by neoliberal economists is that wage increases in excess of productivity gains (as measured at an enterprise level) force bosses to increase prices to compensate. The increase in prices fuels inflation, which in turn forces the Reserve Bank of Australia (RBA) to increase interest rates. This increases mortgage repayments and so wipes out any gain from the wage increase in the first place.

As a story, blaming workers for inflation might sound convincing. But it's not true. Inflation is actually caused when demand for commodities outstrips supply. In Zimbabwe for instance, where official inflation reached 7000% per annum in October, no-one was blaming excessive wages. In Australia, the skills shortage contributes to inflation. Shortages of skilled workers (largely due to the failure of business to train new apprentices, exacerbated by cuts to education funding, forcing up costs for individual students), means that increases in demand cannot be met by increased production, and so prices rise.

In a rare moment of honesty, deputy PM Julia Gillard admitted that the skills shortage, brought about by cuts to education funding, was to blame for the increase in inflation. "The concerns of the business community about inflation are concerns driven by skills shortages", she told the 7.30 Report on February 11. "[D]o we have a skills crisis? Absolutely, that's the legacy of Brendan Nelson and Julie Bishop as the last two education ministers of this country", she said.

Interest rates

Gillard is keen, however, to make working people feel that their demands for decent wages are the real cause of inflation. On the February 17 edition of ABC TV's Insiders program, Gillard said: "What we are saying to the working families of Australia is, 'We understand that there are pressures, we understand that people therefore look for a bit more in their pay packet', but in making that calculation, we need people to also understand that if we are fuelling an inflationary cycle, then what comes in through the pay packet ends up going out evermore on the mortgage."

In 1996, the Howard government formalised an agreement with the RBA, mandating it to keep inflation within a target band of between 2-3% a year. In pursuit of this target, the RBA can raise official interest rates. The idea is that if borrowing money is a more expensive prospect, consumers will spend less, demand will decrease and the economy will slow down, relieving pressure on inflation. The problem is that monetary policy is a blunt instrument. The main effect is to increase the cost of mortgages for working people — who are the victims, but not the cause, of inflation.

The Accord

Elected in 1983, the Hawke-Keating Labor government professed a similar concern with inflation and its impact on working people. Labor's solution on that occasion was to sign the Prices and Incomes Accord with the ACTU. Under the terms of the Accord, unions guaranteed wage restraint in return for an increased social wage and some ill-defined restrictions on prices. After 13 years of self-regulated "restraint" by the union movement, real wages had fallen by between 17-28% and the rate of unionisation of the work force had collapsed from 51% in 1981 to 31% by 1996. Profits, on the other hand, boomed.

This time around, however, some public-sector unions have put up a fight. Firefighters, nurses and teachers have all either threatened or taken industrial action in pursuit of wage justice over the last four months. Building unions in Victoria have joined the battle, calling for a 16% wage increase over three years.

The choice for working people faced by "wall to wall" Labor governments is a stark one. If workers are not to end up paying for the inflation crisis with falling wages and worse conditions, unions must reject the government's "fight inflation" strategy and demand the decent wage increases that they are entitled to, while reserving the right to negotiate further increases if inflation increases.

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