Economics

Exercise 3

Explain the concept of wage indexation.

One aspect of a centralised wage determination system is the use of wage indexation which links increases in money wages to changes in the Consumer Price Index (CPI).

Accord I introduced full wage indexation, and linked wage rises to increases in the CPI. For example, if the CPI rose by 3% over a six-month period, workers would be granted a 3% pay rise.

Partial Indexation was part of Accord II, where wage increases were discounted by 2% to counter the impact of the depreciation in the value of the Australian dollar.
Briefly outline the use of an incomes policy as a policy instrument for the Howard Government.

Under the Howard government, incomes policy has decreased in importance as a macroeconomic management tool. Instead, the government had a decentralised structure under the Work Place Relations Act 1996, where the forces of supply and demand in the labour market determined wage outcomes. The influence of third parties such as the AIRC was also significantly reduced.