Time for a new Accord?

Since unions are now less powerful in the labour market, and their wage claims influence fewer workers, any agreement between them and the government may not have much credibility. If unions hold off on wage claims in exchange for other benefits, why will other workers necessarily do the same?

To the extent that non-union workers can negotiate higher wages, the union movement may come to see that it is less able to control aggregate wage levels. While they may be politically powerful, they only represent one in five workers. If wage growth becomes relatively lower for union workers vis-à-vis others, then there may be even further downwards pressure on union membership.

Rudd may also be sceptical of a new Accord for political reasons. Labour fought long and hard during the election campaign to show it was not beholden to unions. Rudd probably wants to sever the mental links voters have between bad union behaviour and Labor governments. Unions, according to some media reports, now seem to evoke images of industrial strangulation and thuggery, and are seen as antithetical to a flexible, globally-oriented and prosperous economy. So avoiding too much co-operation and keeping unions at bay may simply be a way of keeping voters onside.

Nevertheless, inflation is now running hot. Something must be done to keep it under control - especially if inflationary expectations are to be kept low. Yet the best way to achieve this doesn’t need government-union agreements. A wage-price spiral can be nipped in the bud by doing what it takes to control inflationary expectations.

That is why the Reserve Bank recently raised interest rates, in order to cut back investment and consumption expenditure. Once inflation is let loose it’s very hard to bring back under control without engineering a recession. Indeed, if the government wants to help, it should scrap its tax cuts and simply let the $31 billion accumulate as part of the budget surplus to reduce pressure on inflation.

Then there's the legislative changes that the Rudd Government has promised but not yet introduced. To the extent that these make the labour market more flexible and fair, and cut back much of the red tape introduced with WorkChoices, there may be even greater potential to improve our long-term productivity. And that will help to reduce inflation.