Why IR reforms won’t knock the RBA off course

Pat Bustamante
10:00am January 23 2023

IR reforms which came into force in December will give professions including health and aged care greater scope for collective wage bargaining. (Getty)

Early signs suggest that the government’s updated industrial relations framework won’t put any undue upward pressure on inflation, with the full effects likely to take time to feed through. 

By opening up greater scope for bargaining between employers and their workers – for example, making it easier to re-negotiate expired enterprise agreements (EBAs) - there’s no doubt that the changes could lead to some upside in wages growth, in line with the government’s objective to “get wages moving again”. 

However, it will take time for those negotiations to occur, be approved by the Fair Work Commission, and flow into pay packets. The timing may mean pay rises occur after the RBA has finished raising interest rates and when growth in the economy and private sector wages are moderating.  

Since the updated framework was put in place from early December, there have been reports of employees initiating negotiations on expired EBAs – the supermarket chain Coles being a high-profile example. 

Recently released government data on EBAs approved since the changes came into force shows that the average wage increase in the new agreements was 2.8 per cent. That’s lower than the sustainable “steady state” wages growth of 3.5 per cent, which the Reserve Bank has stated is consistent with inflation running within its 2-3 per cent target range.

Still, while there’s nothing to alarm the RBA in those numbers, the changes will ultimately tend to support higher wage outcomes, particularly at the lower end of the earnings scale. 

It’s now easier to opt into multi-employer agreements, although to be included the FWC must be satisfied that employers share a “common interest” and are “reasonably comparable.” As it currently stands, only a small number of employees will be directly impacted by this change. 

The construction sector and small businesses with less than 20 employees are excluded, and larger firms with more than 100 employees are likely to already have EBAs in place.

The updated framework will make it easier for employees in low paid industries to use EBAs, and for all employees to renegotiate expired EBAs. The Productivity Commission recently noted that 56 per cent of employees covered by an EBA are on an expired agreement. 

In our view the new framework will mean that a greater share of expired EBAs may be renegotiated and more workers currently on awards (legal documents that outline the minimum pay rates and conditions of employment) will move onto EBAs. This will particularly impact the public sector and low-paid industries, such as health and aged care, where awards are the main way wages are set and tend to be heavily subsided by government.

Around 35 per cent of the Australian workforce is currently covered by EBAs, compared to about 23 per cent on awards, and the shift to more EBAs could put some upward pressure on wages. But it’s important to note that award conditions have already improved after a minimum wage increase of 5.2 per cent in the September quarter - the highest increase in a decade – so that adjustment is already occurring. 
 

The risk of more strike action also seems manageable, with safeguards in place including the application of a “public interest test” by the FWC. This could be a high hurdle to cross, particularly when it comes to strategically important industries like aviation, transportation, and essential retailing. 

Meanwhile, the unique features of Australia’s labour market, where a higher share of workers are on collective agreements than in other OECD countries, means there is a built-in inertia in the system. As a result, aggregate wages growth is less responsive to current conditions in the labour market.  

Overall, we assess that changes to the industrial relations landscape are unlikely to have a material impact on the RBA’s task of engineering a soft landing for the economy – reducing inflation without causing a recession. 

Our view is that wages growth will pick up to around 4.5 per cent in 2023. However, as the labour market stabilises, we expect it to drift back towards that “steady state” of around 3.5 per cent. 
 

Pat Bustamante

Pat joined Westpac Group as a Senior Economist in August 2022. He covers a range of topics with a focus on the Australian economy and macroeconomic policy. He has also worked across several business lines, including Westpac Business Bank, St.George Bank, BankSA, Bank of Melbourne and BT. Prior to this, Pat was an economic adviser to the Federal Treasurer, the Hon Josh Frydenberg, during the COVID-19 pandemic. This involved advising the Federal Treasurer on the economy and appropriate macroeconomic policy settings, with a focus on taxation policy.

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