This morning the Aussie dollar has again hit another high, this time being traded for just under 83 US cents. The chief driver behind the recent strength has been weakness in the US dollar, which also hit a two-year low against the Euro overnight. Sluggish US Labour Department figures, showing a 19,000 jump in jobless benefits claims last week, have helped convince world markets that they will see two rate cuts in 2007.

Of course, following our own more bullish employment data released yesterday, the opposite is true in Australia. According to the ABS, the unemployment rate hit 4.5% in March. Although Henry notes that this is an understatement of the actual level of unemployment — the Roy Morgan Unemployment Estimate places the rate at a more believable 7.2% — it does highlight how tight the labour market is relative to recent history.

As Henry has shown, there are a lot of “missing workers” out there. Of course, many of them have been out of the workforce for long periods and cannot readily get used to getting up in the morning and doing those other unpleasant things required of employed Australians. So there is no doubt that the labour market is getting tight and is probably tighter than it has been for a few decades.

Of course, the tight labour market suggests the economy is close to its effective full capacity, which has inflationary implications due to the wage-price spiral. This idea has two interacting elements: 1) when costs are rising, business owners will increase prices to protect their profit margins; and 2) workers increase wage demands due to increasing costs.

However, the Government’s WorkChoices legislation has at least to some extent neutralised the second point — with unions losing power amongst workers, the main method of demanding increased pay has been diminished. This, along with the reduced cost and decreased risks of employing new workers, are the economic benefits of the Industrial Relations reforms.

The IR reforms’ impact on wage growth is the issue. More specifically, are wage pressures widespread or merely concentrated in industries like mining? The ABS labour cost data found mining wages increase 6.2% in the year to December — the real question is whether this will break out throughout the rest of the economy.

However, as David Uren highlights in today’s Oz indicates, WorkChoices has made this less likely, as the real beneficiaries are small businesses:

Although the restaurant and catering industry accounts for less than 5% of the total Australian workforce, ABS figures show it has delivered almost 17% of the new jobs in the past year.

In the run-up to the election, the political battleground is WorkChoices. Will the army of small business owners and contractors desert the ALP if they continue to vow to roll back WorkChoices?

Read more at Henry Thornton.

Peter Fray

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