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Prices and Incomes Policy

This tutorial was written by
Ken Edge
Head Teacher Social Science
Cardiff High School

Outcomes
Overview
Content
Review exercises
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Outcomes

HSC Topic Four: Economic Polices and Management is described in the Board of Studies NSW Stage 6 Economics Syllabus (1999) on pages 40 to 42. The specific outcomes from the syllabus for this tutorial are listed below.

A student:

H1	demonstrates understanding of economic terms, concepts and relationships
H2	analyses the economic role of individuals, firms, institutions and governments
H5	discusses alternative policy options for dealing with problems and issues in contemporary and hypothetical contexts
H6	analyses the impact of economic polices in theoretical and contemporary Australian contexts
H7	evaluates the consequences of contemporary economic problems and issues on individuals, firms and governments.

Overview

A prices and incomes policy includes all actions by the government to influence prices, the working conditions and the incomes of Australians. Prices and incomes policies attempt to control wages growth as a source of cost inflation and achieve a fairer distribution between wages and profit.

The government does not have any constitutional power to directly control prices, although prices and competition can be indirectly influenced through the Australian Competition and Consumer Commission or ACCC (previously the Prices Surveillance Authority).

From 1983 to 1995 the Prices and Incomes Accords, which were agreements between the ACTU and the Labor Government played an important role in achieving macroeconomic management objectives. The Accords encouraged wage restraint and protected low wage earners with “safety net” award adjustments. This form of wage determination had the elements of a centralised wage-fixing system.

With the introduction of the Workplace Relation Act 1996 by the Howard government, wages and working conditions became linked to productivity, and were negotiated at an industry or enterprise level, either by unions or individuals. Industrial Relations became part of microeconomic reform. Consequently, incomes policy now plays a less significant role in macroeconomic management.

Monetary policy is currently the government’s main economic weapon to control inflationary pressures in the economy.

Content

Why have a prices and incomes policy?

One of the main reasons for governments to use a prices and incomes policy is to support other macroeconomic policies, and so achieve internal balance, (where economic growth rates lead to acceptable inflation and employment outcomes). Governments can use prices and income policies such as the Accords for a variety of purposes.
1. Reduce unemployment and lower the inflation rate
  An organised system of wage determination can remove the problem that occurs in the free market, where workers with greater bargaining power are often able to gain excessive wage increases. This may cause a flow-on effect to other industries that cannot afford the wage increases. Cost-push inflation and higher levels of unemployment can result, as these less competitive industries increase prices and reduce their labour forces in attempts to remain profitable.
2. Increase international competitiveness
  One of the main economic reasons for the introduction of the Accords by the Hawke Labor government in 1983 was to restrain wages growth and reduce industrial disputation. Reduced labour costs and improved reliability of production have since helped substantially in bettering Australia’s international competitiveness.
3. Reduce the number of industrial disputes
  The government needs an effective system to resolve any conflict between employees and employers. Strikes and prolonged industrial action are costly to the economy and can affect our standing in the international community.
4. Create a more equitable distribution of income
  As previously outlined, wage earners in industries with greater bargaining power can gain larger increases than those with less influence. Inequality may occur between workers who are doing the same or similar work, but in different industries. This is the principle of comparative wage justice.
5. As part of macroeconomic policy
  A prices and incomes policy can also be used to support fiscal and monetary policy, keeping budget outcomes, inflation, unemployment and interest rates at targeted levels.

Possible prices and incomes policy for Australia

The Accords of the Hawke and Keating Labor governments between 1983 and 1995 are good examples of an incomes policy at work. The Accords were a social contract based on consensus and cooperation between the Federal Government and the Australian Council of Trade Unions (ACTU). The Accords had the basic elements of a centralised wage system, with minimum wages and specified working conditions for a number of occupations under Federal awards.

The Accords attempted to reduce the levels of inflation, industrial disputation and unemployment.

The successes of the Accords, Mark 1 to Mark V, were reflected in a reduction in the inflation rate, from 11.5% in June 1983 to 7.4% in June 1989. During the same period unemployment fell from 9.6% to 6.6% and industrial disputation decreased by 60%.

Table 1 contains an overview of the main stages in Australia’s Prices and Income Policy from 1983 to 1997.

Table 1 Australia’s Prices and Income Policy 1983–97

Stage 1	Accord I: full indexation (September 1983 to September 1985). Wage rises were directly linked to increases in the Consumer Price Index (CPI). Accord II: (September 1985 to March 1987). Partial indexation as wage rises were discounted by 2% of the CPI. Accord III: (March 1987 to August 1988). Wage indexation was no longer used. A two-tier wage system, firstly an automatic flat-rate increase to all wage earners, and secondly any further increases were to be negotiated with employers, based on increased efficiency in work practices. Accord IV: (August 1988 to April 1989). Awards were reviewed and any wage increases were linked to efficiency and productivity gains. Accord V: (April 1989 to April 1991). Included a wage increase, tax cuts and welfare benefits for improvement in work practices.
Stage II	Accord VI: (April 1991 to March 1993). The start of enterprise bargaining and the move to a more decentralised method of wage determination. All wage earners received a pay rise, additional increases were linked to efficiency and productivity gains. The introduction of enterprise agreements.
Stage III	Accord VII: (March 1993 to July 1995). Enterprise agreements were the main method of determining wage increases. Agreements between employers and unions had to be ratified by the AIRC. Annual “safety net” award adjustments were initiated to protect workers unable to secure increases.
Stage IV	The Howard Government’s Workplace Relations Act 1996 introduced enterprise bargaining for unions and individuals.

Methods of determining wage increases under a centralised system

Under a centralised system, a government’s industrial tribunal determines award wages and working conditions. The Australian Industrial Relation Commission (AIRC) is the main industrial tribunal in Australia. Consultation with peak employee groups, such as the Australian Council of Trade Unions (ACTU) and employer groups form part of the process.

When determining wage and working conditions under a centralised system there are a number of factors that need to be considered.
1. The capacity of industry to pay wage rises
  Some industries may be able to afford wage rises based on improved levels of productivity. A problem arises when some industries are not able to afford to pay the increases. Inflation, or a rise in unemployment, can result when these industries attempt to reduce costs.
  Comparative wage justice is another factor that needs to be considered. This is the belief that workers who have similar skills and jobs in different industries should receive the same award wages.
2. Cost of living adjustments
  One key aspect of a centralised wage determination system can be the use of wage indexation. Wage indexation links increases in money wages to changes in the Consumer Price Index (CPI).
  - Full Indexation
    Accord Mark 1 introduced full wage indexation linking wage rises to increases in the CPI.
  - Partial Indexation
    Under this system, the full increase in the CPI is not passed onto wage earners. For example, in Accord II wage increases were discounted by 2% to counter the impact of a depreciation in the value of the Australian dollar.
3. Productivity increases in the economy
  In this situation, the government may elect to give increases based on overall productivity gains in the economy. All workers, regardless of the industry they work in, receive the same increase. This situation is different to industry based enterprise agreements, where the capacity to pay is the basis for wage increases.
4. General state of the economy
  The government needs to consider key indicators such as the level of economic growth, inflation, unemployment level and the Current Account Deficit (CAD).
What are some of the advantages and disadvantages of centralised polices?
1. Advantages
  - lower levels of industrial disputation, the use of conciliation and arbitration by the AIRC to solve disputes
  - reduced unemployment
  - lower levels of inflation, wage restraint encouraged, as employees are compensated for price increases and business can control costs
  - fairer distribution of income and profits.
2. Disadvantages
  - structural change, causing inefficient allocation of resources in wage indexation, can lead to cost inflation, as wage increases are passed on in the economy in the form of higher prices
  - reduced incentive for workers to increase productivity
  - may slow down the economy
  - may not eliminate industrial unrest, as powerful unions can gain large wage increases and non-wage outcomes under the highly centralised conciliation and arbitration system of the AIRC
  - redistributes income to favour wage and salary earners, and not to efficient areas of the economy.
Methods of determining wages under a decentralised system of wage determination

In a decentralised system, wages and working conditions are determined at an industry or enterprise level through direct negotiation between employers and employees. The Accord Mark VI was the first major step towards a decentralised system, with the current industrial relations framework, which is the corner stone of the Howard government’s microeconomic reforms.
What are some of the advantages and disadvantages of decentralised polices?
1. Advantages
  - wages are effectively determined in the market place by the forces of supply and demand, leading to efficient allocation of labour resources and labour mobility
  - wage rates in each industry reflect the capacity to pay, and any increases need to be linked to improvements in productivity
  - cost inflation is reduced as wage rises reflect the capacity to pay in each industry. This reduces costs, and helps exporting and importing industries become more internationally competitive.
2. Disadvantages
  - increases income inequality, as workers in one industry may have the ability to gain above award wage increases, while workers doing a similar job in another industry miss out
  - with economic growth, unemployment levels decrease and some industries may have the ability to push for higher wage increases, causing wage based cost inflation.

Review exercises

Exercise 1

What is a prices and incomes policy?
Answer
List the main weapons of a prices and incomes policy.
Answer
Briefly outline the purpose of the Accords used by the Labor governments of Hawke and Keating.
Answer

Exercise 2

Explain the principle of comparative wage justice.
Answer
List one disadvantage and one advantage of a decentralised system of wage determination.
Answer

Exercise 3

Explain the concept of wage indexation.
Answer
Briefly outline the use of an incomes policy as a policy instrument for the Howard Government.
Answer

Research tasks

Briefly outline the main functions of the Australian Industrial Relations Commission (AIRC).
Answer
Describe the role of the ACCC .
Answer

The AIRC web site also has information on current cases set down for hearings and a section for students to review.

Extension

The Australian Council of Trade Unions (ACTU), represents around 1.8 million workers, and is the only peak council and national centre representing the Australian workforce. Spend some time and research the history of the trade union movement or current campaigns by the ACTU.