The Effect of Labour Market Programs on Wage Inflation

Melbourne Institute Working Paper No. 16/99

Date: June 1999


Elizabeth Webster
Peter Summers


One explanation for concurrent levels of high unemployment and inflation during the 1980s and early 1990s has been the high incidence of long term unemployment. It has been argued that employers cease to regard the long-term unemployed as viable alternatives for more experienced workers and are thus more likely to grant the latter pay increases rather than hire more workers when under pressure from demand or supply. Labour market programs are recommended as policies to reverse this de-skilling effect. If employers come to consider the unemployed as substitutes for their incumbent workforce they will be less inclined voluntarily to grant wage increases. This paper aims to test whether Australian labour market programs have affected wage inflation since 1989, by applying pooled cross-sectional time series data to a general bargaining model. We find that a doubling of labour market program participants per employee leads, at most, to a 1 per cent reduction in nominal wages.

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