The Reserve Bank of Australia (RBA) is emphasizing the non-linear relationship between unemployment and wage growth, also known as the Phillips curve, to suggest that its recent interest rate hikes will not result in significant job losses. This approach was highlighted by the RBA's deputy governor in a lecture to the Economic Society in Melbourne, referencing economist Bill Phillips' influential 1958 paper. The RBA's current models for wage and price inflation incorporate this non-linearity, indicating that the impact of joblessness on wages is heavily dependent on the starting point of unemployment.
The RBA's re-examination of the Phillips curve suggests that at very low unemployment rates, a slight further tightening in the labor market can trigger a substantial increase in wages and, subsequently, prices. Conversely, when unemployment is higher, each incremental rise in joblessness has a much smaller effect on wage growth, leading to a more gradual easing of inflationary pressures. The RBA believes Australia has moved past the "ultra-tight" phase of the curve, where minor changes in spare capacity led to large wage gains.
This shift gives the RBA greater confidence that inflation can continue to moderate without necessitating a severe downturn in the labor market. The RBA's models imply that the responsiveness of wage and price inflation to a percentage point change in the unemployment rate has varied over time as the economy has progressed along the Phillips curve. For instance, the economy was at a point on the wage Phillips curve seven times steeper in 2008 compared to the aftermath of the early 1990s recession, which then reversed with the Global Financial Crisis (GFC). This understanding underpins the RBA's strategy that a relatively small increase in unemployment could now have a disproportionately large impact on inflation dynamics, allowing for continued easing of inflation without a deep recession.
