Union Power and Australia’s inflation Barrier, 1965:4 to 2004:3

This paper considers the view that trade union power played a major role in the deterioration of macroeconomic performance in Australia in the 1970s and that the subsequent decrease in trade union power has improved Australia’s macroeconomic possibilities. Using the model of a range of equilibria, it is shown that the evidence supports these views. Increases in trade union power and unemployment benefits, the latter increasing the reservation wage upon which bargained wages are based, shifted the inflation barrier to higher rates of unemployment in the 1970s. Subsequently, the decrease in trade union power has reversed this shift such that at the end of the period, in 2003:3, the inflation barrier is at a rate of unemployment of 3.1 per cent.