AARON PATRICK: The Fair Work commission may have just blown up the RBA’s plan to kill off inflation

The Fair Work Commission, which sets the wages of one-fifth of workers, may have just blown up the Reserve Bank’s salvage mission for the economy.

In a misguided act of munificence, the industrial court decided on Tuesday to raise the wages of 2.7 million award workers, from sales assistants to airline pilots, by 4.75 per cent.

Economists fear the decision will trigger copycat wage demands among the majority of employees outside the award system.

The result could be an economic disaster: a wage-price spiral where unions and businesses repeatedly push wages and prices up to get ahead of, or keep pace with, inflation.

History shows such a scenario ends with the dead hand of punitive interest rate rises, the only tool the Reserve Bank of Australia has to kill inflation.

Prices are already rising too quickly, which is why rates went up three times this year.

Expectations warning

One of the experts tasked with setting monetary policy, economist Ian Harper, warned on Tuesday that the Reserve Bank is worried about signals from the financial markets that inflation may be higher in three years than today.

“Those measures have taken an uptick,” he told the Committee for Economic Development of Australia in Melbourne. “That’s a matter of concern.”

That is a red flag large enough to lead a May Day procession. If enough people expect inflation to go up, it usually does, because they make it happen by raising prices or demanding extra pay.

Under the Reserve Bank’s current plan, inflation will get back to normal levels in two years time.

Inflation is damaging in many ways. It destroys the value of savings, sends investment into the wrong areas, including gold and crypto, and distracts workers and employers from the core business of work.

The remedy is painful too. A quarter-point increase in interest rates costs Australians, overall, between $3 billion and $6 billion a year, according to research cited by independent economist Chris Richardson.

$10 billion tax hike

Economists at AMP reckon the wage increases will be followed by not one but two interest rate increases. That’s potentially the equivalent of a $10 billion tax increase triggered by the Labor-associated barrister who leads the commission, Adam Hatcher, SC, and his colleagues.

Imagine if the Budget, in addition to the tax increases on investments, had raised income taxes by this amount? The outrage would be overwhelming. Taxpayers would be marching on the streets.

An economist who used to help determine monetary policy at the Reserve Bank, Jonathan Kearns, said he sympathised with the intention to protect the lowest paid from rising prices.

The minimum wage, which is paid to about 100,000 people, will increase 6 per cent. The poor are often hit hardest by inflation because they spend most or all of their income on essentials such as rent, food and transport.

But Dr Kearns said, unless Australia learns to become more efficient, wages can’t rise as much as the Fair Work Commission orders without triggering inflation.

“In an economy where we have close to zero productivity growth, if you want to get to 2.5 per cent inflation, you can’t have wages growth above 3 per cent,” he said.

When those interest rates increases arrive, unemployment and under-employment will increase. The most vulnerable will be people with the least skills, which includes most paid the minimum wage.

The majority are women, including secretaries and cleaners, and young people in shops and service jobs. If inflation accelerates, their wage increases will disappear quickly. Many of their jobs will too.

The commission has ignored this unfortunate by-product of big wage increases. Justice Hatcher and six colleagues are today able to enjoy the warm glow of looking like champions of the working class in a decision they decided to broadcast on YouTube.

They are the latest culprits in a spend-a-thon led by the Federal and State governments that will eventually make almost everyone poorer.