Film and TV industry workers protest in Los Angeles, July 2023.

Alan Bollard, a former governor of the Reserve Bank of New Zealand, published a biography in 2016 about a trained electrician turned electrical engineer, one-time crocodile hunter and former Japanese prisoner-of-war who failed two economic subjects when in 1949 he just earned a sociology degree in the UK. The subject of A Few Hares to Chase still interests central bankers nearly 55 years after his death because this New Zealander became one of the world’s most influential economists.

Bill Phillips gained prominence (and a doctorate and a professorship in economics) in the early 1950s when he built a hydraulic model of the UK economy from wrecked war planes that used water flows directed by equations to study how policymakers could steady economies subject to shocks.

Phillips bemoaned the model’s weakness was that it ignored price effects. In 1958, he came across more than a century’s worth of data on UK unemployment rates and wages growth that allowed him to test his hunch that economic growth influences inflation. The result of Phillips’s “wet weekend’s work” was a plotted relationship that, forming the first half of a U, showed an inverse relationship between unemployment and wages growth.

What subsequent economists referred to as the “Phillips Curve” proved a useful framework because the short-term trade-off between employment and inflation is a central dilemma confronting policymakers.

Until it wasn’t. For much of this century, advanced economies have enjoyed low inflation and full employment such that nexus appeared broken between a tight jobs market, growth in wages (a major expense for most companies) and the prices firms charge.

The Phillips Curve appeared so ‘dead’ that in 2019 Federal Reserve Chair Jerome Powell joked that it’s “more like a Phillips line”. The curve’s irrelevance meant central banks had more scope to pursue growth without stirring wages-driven inflation.

If the trade-off of the Phillips Curve holds again, however, asset prices would be vulnerable if a wages-driven surge in inflation forces central banks to keep monetary policy tighter than expected.

The curve killer

One way to judge the relevance of the Phillips Curve is to ask what forces emerged to suppress wages growth at full employment. Something did. From the global financial crisis until the pandemic of 2020, US wages growth stayed mostly below 3 per cent a year even though the US jobless rate fell from 10 per cent in 2009 to below 4 per cent from 2018.

What that something might be can be gleaned from the work published in 2014 by French economist Thomas Piketty, who analysed centuries of data on the split of income and wealth between labour and capital. The central insight in Piketty’s Capital in the 21st century was that capitalism promotes inequality because it intrinsically favours capital over labour.

The data, however, showed that human effort and circumstance can hasten or reverse capitalism’s trajectory towards greater inequality. From the 1980s, inequality escalated because circumstance favoured the pro-capital forces that came to dominate politics.

From the 1980s, the capital class maximised the power bestowed by automation, globalisation, neoliberalism and the winner-take-all ‘network effect’ to weaken worker legal protections and enfeeble union power, in an era when immigration and more women entering the workforce boosted the supply of labour.

The result was wider use of individual contracts lopsided against workers rather than industry-wide agreements. Temporary and contract work rose, as did unpaid overtime. Firms turned to sub-contracting and outsourcing, which carry few worker protections. Businesses gained more legal power to dismiss staff at less cost. Shorter time limits on dole eligibility forced people to accept lower-paying jobs. The result was that wages dropped to a record low share of GDP.

Many of the forces that favoured capital, however, are reversing amid a backlash against inequality. Workers spurred on by high inflation and unions enjoying 1960s-like public support have become more militant. In the US, the United Auto Workers has won such concessions from unionised car companies that non-unionised rivals are offering higher wages to stave off unionisation. Organised labour beat Hollywood studios over money and grievances. Hospitality workers in Los Vegas secured pay rises on threats to strike. Healthcare workers are unionising; so are fast-food, warehouse, ride-share and tech workers, among others.

The backlash against inequality is roiling politics. Many governments now back labour against capital. In Australia, for example, new federal laws require that workers hired through labour-hire firms be offered the same pay and conditions as full-time employees. The laws require too that small businesses pay redundancies – previously those with fewer than 15 employees were exempt. Legislation is being discussed to protect gig workers and criminalise deliberate underpayment of staff.

Real gains

The human effort and circumstances favouring workers are occurring as advanced economies enjoy full, or buoyant, employment. The result is real wage gains that hark of the resurrection of the Phillips Curve.

In 2023, US average hourly earnings of private sector (non-farm) employees rose 4.1 per cent, to outpace the 3.4 per cent increase in consumer prices. In the eurozone, hourly labour costs gained 5.3 per cent in the 12 months to September, to trump the gain of 4.4 per cent in consumer prices. Real UK wages rose 1.3 per cent in the year to November. Australia’s wage price index gained 1.3 per cent in the September quarter, to just pip inflation of 1.2 per cent. Such numbers show the risk is growing that the wages-price spiral that investors and policymakers dread could materialise.

No doubt, human effort and circumstance could change to favour capital again. Rising unemployment could kill an inflation threat. Wages gains might not fan inflation – business could accept lower margins. Union membership and muscle are unlikely to return to heyday levels – only 10.1 per cent of US workers were unionised in 2022, the lowest ratio recorded.

All true but reactions against inequality are underway such that central bankers and investors might find a curve created by a New Zealander who struggled with undergraduate economics will regain relevance. Ouch for asset prices.

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