The Effect of Labour Market Programs on Wage Inflation

One explanation for concurrent levels of high unemployment and inflation during the 1980s and early 1990s has been the high incidence of long-term unemploy ment. It has been argued that employers regard the long-term unemployed as de-skilled and accordingly not as viable alternatives to more experienced workers. Therefore they become more likely to grant tbe latter pay increases rather than hire more workers when under pressure from demand or supply. Labour market programs are recom mended as policies to reverse this de-skilling effect. If employers come to consider tbe unemployed as substitutes for their incumbent workforce they will be less inclined voluntarily to grant wage increases. This paper aims to test whether the suite of Working Nation labour market programs affected Australian wage inflation between 1989 and 1997, by estimating a general bargaining model using panel data tech niques. We find that a doubling of labour market program participants per employee lends, at most, to a 1 per cent reduction in nominal wages.