Inflationary pressures will continue to rise for the time being, with Russia now invading Ukraine and increasing supply chains linking products and countries, and OPEC and OPEC+ price-makers picnicking at uncertainty. Many commentators keep falling into the trap of saying history is repeating itself – which means it’s back in the 1970s. I stand by my position, this is different from what happened in the 1970s, despite the similarities – energy prices went up with the war, etc. If we make the same mistakes we did in the 1970s now, not only will inflation persist, but millions of workers will lose their jobs and incomes.
The changing role of trade unions in society – the decline of trade union membership worldwide
One of the most striking aspects of the current period is that prices of goods and services are rising as supply shortages become binding in an environment where Covid stimulus support helps maintain purchasing power.
Usually during a pandemic (historically) there is a sharp drop in demand, but this did not happen across the board, although spending on services fell and spending on goods increased.
These sectoral differences are caused by lockdowns and other restrictions, diseases and shifting preferences.
They are unlikely to persist, although elements will persist – more online shopping, for example.
But another obvious fact is that one service has failed to secure price increases – labor.
Wage growth remains low despite labour shortages due to disease and border closures, which appears to be a global trend (with some sectoral exceptions in some countries).
Part of the problem is that unions are in decline in many countries.
Various factors are driving this decline, including legislative attacks by governments over the past four decades; changes in the composition of the workforce (from easier-to-organize large manufacturing plants to harder-to-organize smaller service workplaces; increased casual labor; increased female participation; increased use of Short-term immigrant labor for lower wages; and more.
The decline in union density (the proportion of workers in a union) is a global phenomenon.
The rather confusing chart below uses OECD union density data for about 35 countries (missing only Israel) from 1960 to 2018, and just shows the historic decline.
That was at the apex of Iceland resisting that trend (especially since the global financial crisis caused the banking sector to collapse).
Here’s a less cluttered chart showing some of the big declines since the 1960s.
There is some evidence that the COVID-19 crisis is now encouraging workers to unionize again, but it’s too early to tell if this is a trend.
The table below shows the decline in union membership. * Indicates decades for which data is not fully available.
So, in terms of density, we won’t face union forces remotely like we did in the 1970s.
How to deal with industrial disputes?
I have industrial shutdown data going back to 1950, which provides historical context for understanding current data trends.
Last week (10 March 2022), the Australian Bureau of Statistics released the latest figures – Australian Labour Disputes – December 2021 quarter.
These numbers are very low, and I thought it would be interesting to provide some historical context to prevent us from going back to the 1970s again.
While this article is about data from Australia, the trends discussed apply to most countries where different forces combine to make it difficult for workers to get a pay rise.
The graph below shows industrial shutdowns (number) from 1950 to the December 2021 quarter.
Until 1985, the data were only annual data, then the graphs use the latest quarterly data from ABS. I’m assuming the pre-1985 annual total is evenly distributed over 4 quarters each year, which is why it has an interesting Lego look.
But over time, focusing only on levels, they told the story.
Before the legislative assault on unions began in the 1980s, labor disputes were more frequent.
To see why this is important, the chart below shows the annual growth rate of pay per employee in Australia from the March 1973 quarter to the December 2021 quarter.
This is a measure of wage growth – but current data based on the wage price index only goes back to 1997.
Controversy figures are taken into account when considering wage growth figures.
Wage growth rates have fallen and stagnated as membership dwindles and union power wanes, along with the introduction of a host of harmful legislative instruments that make it difficult for existing unions to take industrial action to pursue wage increases.
Wages are now rising at record low levels.
Also, they are lagging rather than leading CPI increases, implying fundamentally different dynamics.
So in terms of workers’ ability to enjoy wage growth and the current situation, there is really no comparison with the situation in the 1970s.
Should gasoline excise tax be cut or eliminated to fight inflation?
I have often pointed out that an important factor driving price level pressure, as measured by the consumer price index, is the institutional and administrative arrangements imposed by the government.
Things like indexation arrangements – for example, allowing private health funds to automatically increase their premiums each year above the CPI.
Other drivers include consumption tax.
In Australia, the federal government levies excise taxes on fuel and petroleum products, with rates linked to changes in the CPI twice a year.
The current conservative government has implemented the process automatically since July 2015.
As of February 2022, rates are 44.2 cents per liter and 14.5 cents per liter for LPG (resource).
The government collects taxes to boost revenue, and figures show that in 2019-20, the government pulled $5.6 billion out of consumers’ pockets through the excise tax on petrol, and another $11.8 billion from diesel (though diesel tax rebates were given back many times).
The Australian Automobile Association claims gross net revenue from GST is around A$11 billion a year (resource).
As petrol prices have risen in recent days, there have been calls for the federal government to cut excise duties to withstand price pressures.
This ABC News article (March 14, 2022) – Gasoline prices soar during Ukraine war, federal government faces internal calls to cut fuel excise tax – Provide some information.
The usual suspects gather on both sides of the debate.
Indeed, if the federal government did cut the excise tax and was able to rein in the greed of local distributors (presumably by forcing them to lower prices by legislative order – did I just say “price control”), the pain the workers would suffer would be less real due to Loss of income due to motor vehicle use.
Economists have made some ridiculous remarks about the proposal.
The geek who claims to have a knack for anything moving basically tweeted (March 13, 2022):
If the gasoline excise tax is lowered, the resulting budget shortfall will have to be borrowed, increasing government debt.
That debt will require higher taxes to pay the interest and then pay it back in time.
Absurd policy – highlights how superficial the current economic debate is
For economists who think this way, it’s hard to know what to do.
First, the revenue handed over does not “must” result in higher debt if the government chooses otherwise.
Second, the term “high tax” is ambiguous.
Does he mean higher tax rates, meaning higher tax revenue at every level of GDP?
Or does he mean the tax revenue will be higher at the same tax rate?
In the first case, I have never seen any robust relationship between tax rate changes and fiscal balance dynamics. I observe periods when fiscal balances increase while tax rates decrease, and vice versa.
In the second case, tax revenue increases automatically as economic activity increases, without arbitrary policy changes because, for example, more workers are hired and taxed.
So is he against raising taxes?
Furthermore, history tells us that debt is not paid for by raising taxes, but by issuing new debt (given the institutional arrangements our government insists on).
Finally, public debt is non-government wealth. So even if his logic (causality) is correct, it means that he seems to object that the increase in non-government wealth is the result of the increase in actual purchases by citizens who buy gasoline.
Anyway, Kooky, as I said.
Another character, who seems to be ABC’s darling (they always kick him out) claims:
You can’t solve the problems President Putin has caused in Europe with tax breaks in Australia…
Yes, you can.
Cutting excise taxes clearly benefits the real income of motor vehicle users.
The economist is right that oil prices have already started to fall anyway, and it doesn’t make sense to set the tax rate to some fluctuating unit of denomination.
Here are three representative oil price movements from February 14 to March 14, 2022
In general, my position question is this.
Given the environmental emergency, we actually want people to drive less, not more.
The more people stop driving and ride bikes, or walk, or carpool, or don’t consider taking public transportation, the better.
These options aren’t always available, but they prefer everyone to get into their car every morning and clog the road and air quality.
Therefore, I am reluctant to support a measure that encourages more motor vehicle use.
I also noticed a strange inconsistency between the types of green that came out in support of the proposal – presumably on fairness grounds – but at the same time strongly advocated for a carbon tax etc.
My only current concern about advocating for more public transport has to do with Covid, which makes such transport less safe than private cars.
in conclusion
There are many subconscious doomsayers out there.
First, in terms of workers’ ability to enjoy wage growth and the current situation, it really doesn’t compare to the 1970s.
Second, a country should not adjust long-term fiscal parameters to respond to short-term crises.
Third, I think inflationary pressures are still temporary.
Enough for today!
(c) Copyright 2022 William Mitchell. all rights reserved.
