It is clear that the most recent global inflation rate of 5.1% underestimates the current level and is on the rise. RBA Governor Philip Lowe even took the unusual step of appearing on ABC’s 7.30am program to discuss it with Leigh Sales on Tuesday. Lowe, along with most forecasters, believes inflation will reach 7% more by the end of this year.
The implication of this is that the RBA will have to raise interest rates even more aggressively to hit inflation head on. As former US Federal Reserve Chairman Ben Bernanke recently wrote: “The Fed recognizes today that it must play a leading role in controlling inflation, and has the tools and political independence to do so. -ho “. The same goes for the RBA. That’s not to say it’s not painful.
The bill for this JobKeeper insurance policy is being viewed.
The RBA cash rate is at least 2.5 percent. Quickly. It could easily be between 3.0% and 3.5% in 2023. This means that mortgage rates are around 5% in a country with mostly variable rate loans, or fixed-term loans for just a few years. . Higher rates mean less consumer spending, less investment and business expansion. It means fewer hiring and fewer jobs.
This is the inevitable consequence of a normalization of interest rates from extraordinary and historically low levels. Even if the RBA designs the softest of the soft landings, it will involve economic pain. This decision of the minimum wage, in spite of its obvious and important advantages, will amplify this pain.
There is also the effect of the minimum wage on employment. As I wrote earlier in these pages, there is a trade-off between the minimum wage and unemployment.
Many on the left point to a famous document by David Card and the late Alan Krueger that shows that in New Jersey in the early 1990s, a minimum wage increase to $ 5.05 an hour to $ 4.25 a hour did not increase unemployment. among fast food workers.
This article is a classic for the causal inference method that was pioneered (“difference-in-differences”) not for the robustness of its conclusions.
Subsequent work has highlighted both technical issues (the presence of so-called “claims”) and data with their analysis. When more reliable payroll data was used, rather than survey data, it turns out that there is a significant reduction in employment from the increase in the minimum wage.
And evidence from many other countries clearly shows what both economic theory and any discussion you might have with an entrepreneur will tell you. There is a trade-off between the minimum wage and unemployment.
So make no mistake, Wednesday’s decision means fewer people will earn the minimum wage and more people will be on JobSeeker.
The real question is “how many?” The FWC has tried to find a balance between the good that the decision does for those who remain in employment and the bad that it does for those who will be unemployed. Its decision achieves a reasonable balance, but being relatively high carries real risks for employment.
It’s worth stepping away to get a wide-angle view of Australia’s current economic landscape.
Prior to the pandemic, the RBA was experiencing anemic economic growth with an annual inflation rate of 1%, and at literally zero during the quarter. Then, in the face of a major economic crisis in the form of a pandemic, the RBA bought a large insurance policy against 15% unemployment and the worst recession in a century.
The bill for this JobKeeper insurance policy is being viewed. It needs, and will do, to bring inflation back in the 2% to 3% target range by 2023. But these processes will be difficult, even heartbreaking.
And as it develops, there will be continued downward pressure on real wages. But we must resist the push for short-term solutions through a well-intentioned but irresponsible fiscal policy, or the pressure for large wage increases by organized workers. These movements cause widespread collateral damage.
The Fair Work Commission faced a difficult compromise and struck a reasonable balance in its decision. But the balance between the cost of living, on the one hand, and inflation and unemployment, on the other, will remain sharp until well into 2023.