The prices and incomes accord

The prices and incomes accord was macroeconomic policy implemented by the Hawke Government beginning in 1983. The accord was designed to combat the endemic problem of that era - stagflation.

This is the crushing economic condition where the economy suffers simultaneous high unemployment and high inflation - a situation John Maynard Keynes stated was impossible to achieve. 

Hawke's policy affected prices, wages, non-wage incomes, taxation and social payments. As an incomes policy, the economic goal was to limit nominal wage increases in order to achieve a sustained decrease in inflation.

American president, Richard Nixon introduced a prices and incomes policy in the early 1970s and despite a short-term respite, stagflation however returned with a vengeance immediately after the policy was lifted.

The bitter medicine inflicted on the American economy by Federal Reserve chairman Paul Volker to purposely induce a recession finally smashed inflation in the late 1970s. A decade later, the prices and income policy framework was now Australian economic policy.

It was hypothesised that through such anti-inflation policy; employment growth would lead to an simultaneous decrease in inflation and unemployment. Stagflation was a problem Keynes economic theories had been unable to solve; signaling an end to the stagflation period of the late 1970s and early 1980s required monetarist policy intervention.

It has been implied - those who rule wages rule the country, or so it would seem.

The prices and income accord was implemented due to wage inflation varying between 30% (1975) and 18% (1981). Governments unsuccessfully attempted to solve the stagflation problem through various fiscal and monetary policies, a wages breakout was blamed for the 1981/82 recession.

The accord provided a solution to the problem via a decrease in nominal wages without the need for contractionary fiscal and monetary policies, increasing employment at a moderate inflation rate.

Nominal wage cuts led to decreases in real unit labour costs with an increasing proportion of Australian GDP heading towards business profits - away from wages. Increasing business investment, economic growth and employment, wage rises were traded off for economic and employment growth.

Costs, such as the price of labour, are subject to direct influence from agents with market power (unions); incomes policy is designed to influence such agent behaviour. The prices and incomes accord was designed not as substitute for demand demand management policies, but to compliment them.

Therefore, the prices and incomes accord could be implemented restraining wage/price spirals whilst expanding demand simultaneously achieving higher levels of employment. It is also argued the goals of income policies curb inflation to positively influence prices and employment.

Utilising the Phillips Curve as their economic tool of choice; proponents argue labour supply prices increase at a slower rate due to the slower money wage growth combined with simultaneous productivity increases - pushing the Phillips Curve to the left. According to their argument, a lower inflation rate is achieved through a lower unemployment rate.

The prices and incomes accord ultimately ended in 1996 with the election of the Howard government; under Howard, wages rose significantly, productivity rose and wages were negotiated freely.

I am a believer of individual wage negotiations; if you are professional in your conduct and you have knowledge and skills in demand, you hold a strong negotiating position, you have the opportunity to sub-contract your services operating as a small business reaping the benefits of such business structures in a deregulated environment.