Australia
Recent Economic Developments

This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus is on developments in the real sector, public finances, monetary policy, and the balance of payments during 1996–97. The paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

Abstract

This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus is on developments in the real sector, public finances, monetary policy, and the balance of payments during 1996–97. The paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

Australia: Basic Data 1/

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Sources: Data provided by the Australian authorities; IMF, International Financial Statistics: and staff projections.

Fiscal year ends June 30.

Average of income, expenditure, and production measures of GDP.

Based on 1996/97 Commonwealth Budget Projections.

Adjusted to exclude net advances.

October 1996, percent change on a year earlier.

December 1996.

November 1996.

Foreign borrowing by Australian residents less the sum of reserve assets and Australian lending abroad.

IMF, Information Notice System index, excluding Brazil.

October 1996.

I. Introduction

1. This paper reviews developments in the Australian economy during the prolonged expansion of the 1990s. The focus of this paper is on developments in the real sector, public finances, monetary policy, and the balance of payments, especially since the last report on Recent Economic Developments was issued in March 1996. An accompanying set of papers1 addresses some of the current policy issues in a longer-run perspective.

2. The Australian economy has now completed five years of solid growth since the recession of 1990/91, which saw output decline and unemployment eventually peak at 11 percent. Chapter II analyses the real sector developments during the various stages of the recovery. Initially, growth was weak and based almost solely on consumption spending, notably by the public sector. Later, activity accelerated and signs of overheating began to emerge: unemployment fell rapidly, the current account deficit deteriorated sharply, and underlying inflation moved above 3 percent. The authorities responded by tightening financial policies and, by 1995/96, the recovery was once again on a sustainable path.

3. At the same time, the reduction in unemployment stalled, with the rate remaining around 8½ percent through end-1996. This trend is symptomatic of the challenges faced by Australia in achieving a significant reduction in unemployment. Chapter III reviews labor market developments during the recovery, including the trend toward more part-time workers and greater female labor force participation. Also reviewed are the government’s initiatives aimed at promoting a more flexible and efficient labor market and recent reforms to active labor market policies.

4. Chapter IV discusses public finances, reviewing developments at the Commonwealth and state levels. Although the recovery has allowed a cyclical reduction in the public sector deficit from the high levels reached during the recession, the underlying structural Commonwealth deficit has shown less improvement, and public saving remains a low 2½ percent of GDP. Consequently, the government introduced in the 1996/97 Commonwealth budget a new medium-term deficit-reduction plan and a fiscal framework that seeks to achieve underlying budget balance “over the cycle.” The fiscal consolidation is expected to reduce the Commonwealth’s underlying budget deficit from 2 percent of GDP in 1995/96 to 1 percent of GDP in 1996/97; however, slippages have recently emerged. To improve the transparency and accountability of fiscal policy, the government plans to introduce a Charter of Budget Honesty.

5. Monetary policy is also being guided by a new institutional framework, an inflation-targeting approach, introduced in 1993, which aims to achieve underlying inflation of 2–3 percent, on average, over the cycle. From mid-1996, as the inflation outlook improved and the exchange rate strengthened, the Reserve Bank saw room to reduce the official short-term interest rate target by 150 basis points to 6 percent. These developments are discussed in Chapter V, with a brief discussion of the recent steps taken to further improve monetary policy accountability and transparency. Also discussed is the Wallis Inquiry into the financial system, established by the government to review the regulatory framework and recommend reforms.

6. Another notable aspect of the recovery is the persistence of sizable external current account deficits. Although these have been financed easily, they have also resulted in a significant buildup in external liabilities, put a floor on domestic interest rates, and increased the vulnerability of the economy to external shocks. Hence, a main focus of the government’s fiscal strategy—and of the overall strategy to raise national saving—is to address the structural imbalance in the external position, and to reduce the level of external debt. External sector developments are reviewed in Chapter VI.

7. The Australian economy is still undergoing substantial structural change. Chapter VII gives the details of the authorities’ policy in this area. The centerpiece of the current efforts is the National Competition Policy, which aims to extend competition to previously sheltered sectors of the economy, especially the public enterprises. This policy was adopted in 1995, and considerable progress has already been made in bringing greater competition to the electricity and gas sectors. Reviews are also being undertaken of the foreign investment policy and future assistance to the motor vehicle, and clothing, textiles, and footwear sectors.

8. In addition, three background papers have been prepared in an accompanying volume that addresses selected key issues in greater analytical detail.

9. The first paper concerns the issue of saving, the indispensable central element in any scenario for raising potential output. The paper focuses on the impact of the structure and generosity of the tax and social security and welfare system, which has long been viewed as a factor behind the unusually sharp decline in household saving in Australia. The paper presents an empirical analysis of the determinants of household saving in 21 OECD countries and draws some implications for Australia.

10. The next paper reviews longer-term developments in the labor market in Australia, examining the causes of the trend rise in unemployment. In particular, it examines the role played by the traditional, centralized industrial relations system and discusses the efforts to encourage enterprise bargaining and establish a more flexible labor market.

11. The third paper assesses Australia’s approach to institutional reform in the key areas of monetary and fiscal policy. The paper discusses the important steps being taken to build the credibility of monetary and fiscal policy by emphasizing transparency and accountability. Australia’s reforms are also contrasted with the approach taken in other countries, particularly New Zealand.

II. Real Sector

A. Overview

12. The current economic expansion, which began in 1991/92 after a short and shallow recession, differs from its predecessors in a number of important ways. Compared with the expansion after the recession of 1982/83, output and employment growth has been somewhat less vigorous during the present recovery. Over the last five years, real output has risen 20 percent,2 slightly less than the 25 percent registered at the same stage of the previous expansion, while employment has increased by only 8 percent, compared to 17 percent previously (Chart 1).

CHART 1
CHART 1

AUSTRALIA: RECOVERIES, 1983/84–1996/97 1/

(Trough=100)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ The troughs are as follows: 1983Q1 for the 1983/84 recovery; 1991Q2 for the 1991/92 recovery.

13. Nevertheless, this expansion represents in many ways a stronger performance than earlier recoveries. To begin with, the expansion has been unusually prolonged. Since the cyclical trough in 1991, the Australian economy has expanded for 21 consecutive quarters—the longest period of uninterrupted quarterly growth since the late 1950s. Moreover, the expansion has been soundly based, on well-balanced increases in aggregate demand and wide-ranging increases in production. Growth has also been evenly paced, avoiding the “boom-and-bust” cycles of the past. Although some demand pressures emerged in 1994/95, a forward-looking tightening of financial policies soon put the expansion back on a sustainable path. Finally, the improvement in labor productivity has been relatively large in the present recovery, and total factor productivity appears to have significantly improved compared with the 1980s.3

14. On the demand side, growth has been well balanced, with each area’s contribution to growth being close to its share in overall GDP (Table 1). Private consumption has been the predominant driving force, accounting for two-thirds of total growth over the five-year period. Investment, too, has made an important—and growing—contribution, accounting for one-fifth of growth during the expansion as a whole, and one-third from the third year onward. Meanwhile, public consumption played only a limited role (except in the initial stages), while the contribution from net exports has fluctuated greatly and was slightly negative on average (with exports accounting for about one-half of growth, and imports subtracting about the same amount).

Table 1.

Australia: Selected National Accounts Aggregates at 1989/90 Prices, 1991/92-1996/97

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Includes real estate transfer expenses.

Contributions to GDP(I) growth, at annual rates.

15. Growth has also been well balanced on the supply side (Table 2). On average, real output growth has been strongest in communication services (11 percent on average from 1991/92 to 1995/96) following the deregulation of the sector, which allowed a second communication company to establish a network in Australia and which will open the market to all potential entrants in 1997. The manufacturing sector has also performed relatively well, with its gross output growing by an average 3 percent per annum, and its exports increasing from 18 percent to 27 percent of total foreign shipments over the past five years.

Table 2.

Australia: Sectoral Components of Gross Domestic Product at 1989/90 Prices, 1991/92-1996/97

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Production-based measure.

Income-based measure.

16. Moreover, sectoral growth has proceeded in a sequential fashion, with slowdowns in some areas being accompanied by accelerations in others, thereby keeping the expansion on an even keel. The agricultural sector was caught in a severe drought in 1994/95, causing output to fall by 20 percent in real terms, but it fully recovered in 1995/96. Mining was weak at the outset of the expansion, but picked up steadily and grew by a solid 4¾ percent in the past two years, reflecting a gradual strengthening of export demand. Most recently, manufacturing has weakened, but services growth has picked up.

B. Evolution of the Expansion

17. The five years of expansion can be roughly divided into three phases. The expansion began with two years of relatively weak growth, with real GDP expanding at about 2 percent on average. This was followed by two years of strong growth of about 4¼ percent on average, during which signs of overheating appeared. Then, over the past year, demand pressures eased, and growth slowed to a more sustainable 3¾ percent in the year ending September 1996.

18. In the first phase of the expansion, from 1991/92 to 1992/93, consumption was the main—almost the sole—engine of growth. Private consumption accounted for the bulk of the early expansion, increasing at 3 percent on average over the first two years and driven by renewed growth in disposable income, as well as a decline in the household saving ratio. Active counter-cyclical fiscal policy also played an important role, as public consumption increased by 3 percent during the first year. Meanwhile, aggregate private investment continued to contract in 1991/92 (by about 6 percent in real terms), as the recession had created a substantial margin in capacity and weakened firms’ balance sheets. Employment also continued to fall, causing the unemployment rate to rise to 11 percent in 1992/93.

19. In the second phase of the expansion, from 1993/94 to 1994/95, private investment began to boom, triggering a surge in aggregate demand (Chart 2). Solid growth in household incomes, low mortgage rates, and favorable levels of household indebtedness spurred housing investment to double-digit growth rates. Business investment also picked up, as a result of rising company profits and strong business confidence, with equipment investment reaching a peak of 21½ percent real growth in 1994/95. At the same time, consumption growth remained strong. Private consumption growth accelerated to 4¾ percent, financed partly by further declines in the household saving ratio, which reached a historic low of 2¼ percent in 1994/95. Government consumption growth also remained rapid, despite the entrenchment of the recovery, as additional spending on areas such as health and labor market programs offset declines in unemployment benefits.

CHART 2
CHART 2

AUSTRALIA: REAL OUTPUT, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

20. By 1994/95, the rapid expansion of aggregate demand had begun to generate overheating pressures. GDP growth increased to more than 4 percent for the second consecutive year, thereby creating a positive output gap (according to staff estimates),4 while employment grew by 4 percent, bringing the unemployment rate down to 8½ percent at the end of the year. However, this increase in supply was far outstripped by a 6¼ percent increase in gross national expenditure. As a result, imports surged, led by a rapid growth of capital equipment, which swelled the current account deficit to 6¼ percent of GDP, from 4 percent of GDP the year before. Early in the next financial year, underlying inflation breached the upper end of the authorities’ 2–3 percent target band. As signs of these pressures emerged in 1994, the authorities tightened financial policies, both by raising interest rates substantially and by consolidating fiscal policy.

21. In the third phase of the expansion, starting in 1995/96, this tightening began to take clear hold.5 Construction activity contracted sharply, while business fixed investment slowed, reducing aggregate real private investment growth to 1½ percent in 1995/96, compared with 10½ percent in the year before. Public consumption growth also declined, to 2½ percent, while a decline in import growth—paralleled by a good export performance—narrowed the current account deficit back to 4¼ percent of GDP. Meanwhile, underlying inflation returned to well within the target band.

C. Developments During 1995/96–1996/97

22. Over the past year, growth decelerated to a more sustainable pace but, at the same time, some sectoral weaknesses began to emerge. Real growth decelerated to 3¾ percent in the year ending September 1996 (the first quarter of 1996/97), bringing actual growth closer to potential, which has been estimated by the staff at 3¼ to 3½ percent.6 The base of the expansion narrowed somewhat, as private consumption and net exports both slowed, overall demand from the public sector fell, and manufacturing output decelerated. However, investment activity once again increased.

23. The slowdown of private consumption growth, from 5 percent in the year ending March 1996 to 3¼ percent in the year ending September 1996, reflected two main factors. Household income growth declined, as annual growth in average wage earnings7 eased from 5 percent in December 1995 to 3¾ percent in September 1996, while employment growth dropped significantly. In addition, the sharp downward trend in the household saving ratio bottomed out, and household saving rebounded to 3 percent of disposable income in the September 1996 quarter, up from 2¼ percent in the March 1996 quarter (Table 3).8

Table 3.

Australia: Household Income, Expenditure, and Savings, 1991/92-1996/97

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Source: Australian Bureau of Statistics, National Accounts.

Seasonally adjusted.

Includes the income of other unincorporated enterprises, rent from dwellings, interest, and dividends.

Includes third-party insurance transfers, transfers from overseas, and current grants to nonprofit organizations.

Includes income tax, other direct taxes, fees, fines, consumer debt interest, and unrequited transfers to overseas.

Savings is derived as a balancing item.

Deflated by the implicit price deflator for private consumption expenditure.

Savings as a percent of household disposable income.

24. Slowdowns were also apparent in several other areas. Net exports slowed, owing both to a deceleration of exports from mid-1996 and an acceleration of imports. This can, in part, be attributed to the appreciation of the exchange rate, in a context where the opening of the economy has led to a significant increase in international competition. As a result, corporate profits fell markedly, especially in manufacturing (Chart 3). At the same time, public sector demand declined, owing to the ongoing efforts of fiscal consolidation at all levels of government. Investment demand at the level of public enterprises fell sharply, although part of this was merely the result of a shift in the national accounts to the private sector, induced by privatization.

CHART 3
CHART 3

AUSTRALIA: COMPANY PROFITS AND BUSINESS INVESTMENT, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

25. On the positive side, however, business investment remained strong, buoyed by the large declines in interest rates over the past year. In the year ending September 1996, business investment increased by 19 percent in real terms, contributing 2 percentage points to GDP growth—just as much as private consumption. Nondwelling construction grew rapidly, reflecting extensive investment in the communication sector, privately provided infrastructure investment, and construction associated with the Olympic Games in Sydney in 2000. Equipment investment accelerated during the year to 22 percent real growth in September 1996, although much of this was apparently capital-deepening rather than capital-widening investment, with the aim of saving on labor inputs, whose costs had risen significantly in the expansion. The fact that employment growth halved to 2½ percent in 1995/96, from 4 percent the year before, may be an indication of a laborsaving trend.

26. On residential construction, which had fallen by 13 percent in 1995/96, signs emerged (increasing number of mortgage and loan applications) that pointed to a revival of activity, partly due to the decline in interest rates, but also because the excess supply that had been created earlier in the expansion had been eliminated.

27. On the production side, two sectoral developments in 1995/96 stand out: the strong recovery of the agricultural sector, which expanded by 21 percent in real terms (recovering fully from the drought a year earlier), and the continued strong growth of the communication services sector, which expanded by 13 percent. Output growth in the remaining sectors was spread relatively evenly in 1995/96, including the mining sector, which demonstrated a solid expansion of 4¾ percent.

D. Prices

28. Another striking aspect of the current recovery is that inflation has remained at low levels throughout, never exceeding 3¼ percent in underlying terms, compared with a peak of 10 percent during the expansion of the mid-1980s (Table 5). Some cyclical pressures on costs and prices did emerge in 1994/95, as margins of slack in the economy narrowed, world commodity prices increased, and the exchange rate weakened. As a result, underlying inflation9 accelerated in mid-1995, reaching 3¼ percent by December 1995. Headline consumer price (CPI) inflation picked up more sharply, reaching a little over 5 percent in the year to December 1995 (Chart 4), mainly reflecting the impact of the tightening of monetary policy10 in the second half of 1994 on mortgage and other interest rates. Both the underlying and headline rates were boosted by the impact of the indirect tax increases in late 1995, which added about ½ percent to inflation.

Table 4.

Australia: Saving and Investment Balances, 1991/92-1995/96

(In percent of GDP)

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Source: Australian Bureau of Statistics, National Accounts.
Table 5.

Australia: Selected Price Indices, 1991/92-1996/97

(Percent change from previous year)

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Sources: Australian Bureau of Statistics, National Accounts and Reserve Bank of Australia, Bulletin.

The consumer price index excluding interest charges, gasoline, and certain other exogenous and seasonal items; used as an indicator of underlying inflation.

Goods and nonfactor services.

CHART 4
CHART 4

AUSTRALIA: PRICES, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ The consumer price Index excluding Interest charges, gasoline, and certain other exogenous and seasonal items; used as an indicator of underlying Inflation.

29. In early 1996, however, both underlying and headline inflation decelerated, owing to an appreciation of the exchange rate and the impact of the Reserve Bank’s tightening of monetary policy in late 1994. The appreciation of the exchange rate by about 10 percent in trade weighted terms over the year to September 1996 led to a fall in import prices by 8 percent over the same period. As a result of these developments, underlying inflation fell to 2½ percent in the year to September 1996, while headline inflation fell to 2 percent.

III. Labor Market

A. Overview

30. A further significant aspect of the present expansion has been the persistence of historically high levels of unemployment. Five years after the recession, at end-1995/96, the unemployment rate was still at 8½ percent, only 2½ percentage points lower than its peak of 11 percent in 1992/93. In comparison, during the recovery after the 1982/83 recession, unemployment peaked at only 9½ percent, and five years later it had fallen to 6½percent.

31. Although the decline in unemployment from its peak has been similar to previous experience, the pace of both employment and labor force growth has been much slower. Employment has been dampened by a number of factors: the average output growth of 3¼ percent per annum was somewhat lower than the 4½ percent in the previous expansion; real wages have risen significantly during the present expansion, while they fell during the expansion of the 1980s; employment growth in the public sector has been significantly lower than in the 1980s; and, finally, continuing structural changes in the economy (such as an increase in the services sector) and capital-deepening in the manufacturing sector may have contributed to the low rate of full-time employment growth.

B. Employment

32. According to recent estimates, the structural rate of unemployment (the NAIRU) has increased over the past decade; for 1995/96, a number of sources have estimated it at about 7½ to 8½ percent, compared with 6 to 7 percent in the late 1980s.11 The long-term unemployment rate has shifted upward in the present cycle as well: whereas it stayed below 3 percent throughout the recession and recovery of the 1980s, during the current expansion it peaked at 4 percent in 1992/93, and its level of 2½ percent in 1995/96 was still significantly above its trough of 1½ percent in the late 1980s. The unemployment rate has also varied according to the different stages of the current expansion. During the first stage, when economic growth was slow, unemployment actually rose, from 8½ percent during the recession of 1990/91 to a peak of 11 percent in 1992/93 (Table 6). In the two subsequent years, when the output expansion gained momentum, the rate fell significantly, to 8½ percent by end-1994/95. Then, in 1995/96, when the expansion entered its third slower phase, the rate began to stabilize, standing at 8¾ percent in the quarter ending September 1996 (Chart 5).

Table 6.

Australia: Labor Market, 1991/92-1996/97 1/

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Source: Australian Bureau of Statistics, Labor Force, Australia.

Seasonally adjusted.

From previous year.

Labor force as a percentage of population aged 15 and over.

As a percentage of the labor force.

Over one year.

CHART 5
CHART 5

AUSTRALIA: EMPLOYMENT AND UNEMPLOYMENT, 1986/87–1996/97

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.1/ Over one year.

33. The upward shift in unemployment in the present recovery has not been due to a more rapid labor force growth, but rather to subdued employment growth. Over the entire five years of expansion, employment growth averaged at 1¼ percent per annum, compared with 2¾ percent per annum in the five years after the 1982/83 recession. During the first two years of the present recovery, employment actually fell, by a cumulative 2 percent, despite a gradual pickup in GDP growth to 3¼ percent. Only from end-1993 onward, when the expansion gained momentum, did it begin to grow, reaching a peak of 4 percent growth in 1994/95, and then declining to 2½ percent in 1995/96.12

34. There are a number of reasons for the relatively subdued rate of employment growth in the present recovery. Output growth has been somewhat weaker in the present expansion than in previous expansions, and government employment has hardly grown (1 percent per annum on average). Furthermore, real wages have risen relatively rapidly: in 1995/96, average ordinary full-time earnings were 7 percent higher in real terms than in 1990/91; whereas in 1987/88, they were 2 percent lower than in the recession five years earlier,13 reflecting a government-union incomes policy (the “Accord”).14 Furthermore, particularly in the later stage of the present expansion, inflation fell short of inflation expectations, leading to higher-than-expected real wage outcomes (see Section C below).

35. In addition, a shift in the composition of employment toward a higher share of part-time employment has also taken place over the present cycle. On average, in the five years of the present expansion, part-time employment grew by 4 percent per annum, compared with full-time employment growth of less than 1 percent per annum. This led to an increase in the share of employed persons occupying part-time jobs to 25 percent at end-1995/96, compared with 23 percent five years earlier. Underlying this shift to more part-time employment may have been the fact that, recently, sectors that have expanded which either use little labor input (mining) or use part-time labor heavily (services). By contrast, activity in sectors which mainly use full-time employees, such as dwelling construction, manufacturing, and the public sector, remained subdued. Also, the deregulation of the economy (including changes in labor regulations) and labor-saving changes within organizations may have played a role in strengthening part-time job creation, at the expense of full-time jobs. The banking sector, for example, reduced full-time staff significantly, and increasingly began to operate branches with a minimum of full-time staff, complemented by part-time employees during peak hours.

36. Possibly linked to the relatively strong growth of part-time employment was an increase in the share of female employment in total employment, which rose from 42 percent to 43 percent from 1991/92 to 1995/96. Indicative of the trends outlined above, the share of part-time employment within female employment rose from 37¾ percent to 43¼ percent over the same period.

37. Labor force growth was minimal in the first two years of the expansion (about ½ percent on average), but accelerated to 2 percent on average in the following three years. Participation rates were flat in the first two years, but have gradually increased since then, from 62½ percent in 1992/93 to 63¾ percent in 1995/96. The entire increase traces back to a higher female participation rate, which stood at 54 percent in 1995/96, 2 percentage points higher than at the beginning of the cycle. The male participation rate remained practically unchanged at 74 percent throughout.

C. Recent Wage Developments

38. The employment growth during the recent stage of the cycle has been accompanied by an acceleration of wage growth. Growth in AWOTE increased from 2 percent in 1992/93 to 4 percent in 1994/95 and to 4½ percent in 1995/96 (Table 7). Wage increases in enterprise bargaining agreements increased to around 5 percent, although those through the award system remained subdued below 2 percent. These wage developments implied that, in the nonfarm business sector, despite a strong productivity increase of 3¾ percent, unit labor costs rose by 3¾ percent, the strongest rise in unit labor costs in the present cycle (Table 8 and Chart 6).

Table 7.

Australia: Changes in Employees’ Average Awards and Weekly Earnings, 1991/92-1996/97

(Percent change from previous year)

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Sources: Australian Bureau of Statistics, National Accounts and Averace Weekly Earnings: and Reserve Bank of Australia, Bulletin.

The difference between increases in award rates of pay and ordinary time earnings is commonly used as a measure of wage drift. However, differences may also reflect compositional and timing factors.

Deflated by the implicit price deflator for private final consumption expenditure.

Nonfarm wages, salaries, and supplements per nonfarm wage and salary earner.

Table 8.

Australia: Developments in Unit Labor Costs in the Nonfarm Sector, 1991/92-1996/97

(Percent change from previous year)

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Source: Australian Bureau of Statistics, National Accounts.

Ratio of gross nonfarm product to hours worked by all persons employed in the nonfarm sector at constant prices.

Calculated as nonfarm labor costs divided by nonfarm labor productivity.

Unit labor costs divided by the nonfarm GDP deflator.

Average 1989/90 = 100.0.

CHART 6
CHART 6

AUSTRALIA: EARNINGS AND COSTS, 1986/87–1996/97

(Annual percent change)

Citation: IMF Staff Country Reports 1997, 022; 10.5089/9781451801941.002.A001

Source: Australian Bureau of Statistics.

39. Over the past year, growth in AWOTE has, however, moderated, from 5 percent in the quarter ending September 1995 to 3¾ percent in the quarter ending September 1996. Nevertheless, since inflation has fallen more sharply than nominal wages, real wages have actually increased, from a level of about zero in September 1995 to about 1¾ percent in September 1996. Part of this increase in real wages reflects actual inflation outcomes that have continuously fallen short of inflation expectations, as measured by consumer and business surveys. In the manufacturing sector, where international competition and (more recently) exchange rat