Big union pay rises will put pressure on interest rates, economist warns

A series of big pay rises won by unions could put pressure on wages across the economy and force the RBA to increase interest rates if it fears wage rises are pushing up inflation, one senior economist has warned.

In recent days the Transport Workers’ Union has secured pay rises of between 14-21% over the next four years, with the Communications Electrical and Plumbing Union also calling for annual increases of 5%.

The union victories come after economists have warned that workers will seek above-average wage increases due to freezes during the financial crisis.

Macquarie senior economist Brian Redican says this type of activity will make the Reserve Bank “sit up and take notice”.

“Wage increases of about 4.5%-5% probably exceed the Reserve Bank’s tolerance level. If these remain very isolated, then it probably wouldn’t be enough to prompt a movement, but if you get a few things happening that may change.”

“The fact that these are coming in a bit of a run at the moment does suggest that there may be a protracted push for higher wages throughout the rest of the economy as well.”

Several indicators have shown wage pressure has been building over the year. A recent Hays survey of over 1,000 businesses revealed businesses intend to increase salaries by between 3%-6% this year, although 62% increased salaries by less than 3% during 2009-10.

The Finance Sector Union has also struck a deal with Westpac to increase pay by 10% over 26 months, along with the ability to spread the 38-hour work week through the weekends.

Redican believes that pressure will continue, and says “the Reserve Bank will be worried if these increases start becoming more common”.

“I think in the next six months what we’re going to see is if a few more announcements are made, the general expectations for wages will be ratcheted up and that may associate itself with a rate rise in February.”

“I do believe that you would need to see a sustained period of wages growth before that became the prime reason for raising rates, but certainly you may see the RBA escalate the rhetoric it uses.”

The Transport Workers’ Union announced this morning that it had secured a deal with Australian Air Express to raise workers’ wages by between 14%-21%. Federal secretary Tony Sheldon said the deal may also include a 7% pay-rise for some other workers.

The Communications Electrical and Plumbing Union is also pushing for a 5% rise for its workers, although a spokesperson has said nothing has been confirmed yet. Nevertheless, Redican says the fact unions are pushing for such high raises indicates a shift in the market.

“I suppose the question is, how much of these agreements are incorporating a catch-up for low wages growth during the financial crisis? If that is the case, then this is less worrying.”

“But the risk is that expectations do rise, and firms put that behaviour into action and fork out a lot more than the Reserve Bank hopes they will.”