In a lecture to the Economic Society in Melbourne, the Reserve Bank of Australia’s deputy governor highlights that the impact of joblessness on wages depends heavily on the starting point. The speech revisits work by New Zealand born economist Bill Phillips, whose influential 1958 paper charted the relationship between unemployment and wage growth.
That early research underpins what is now called the Phillips curve and remains central to how central banks think about inflation.
According to the RBA’s framing, the key lesson from Phillips is that the link between unemployment and wage pressures is not a straight line but a curve. At very low unemployment, even a slight further tightening in the labour market can trigger a sharp jump in wages and then prices.
Once joblessness is higher, each extra tick up in unemployment has a much smaller effect on wage growth, so inflation pressure eases more gradually.
By reviving this curved relationship, the RBA is signalling why a relatively small lift in unemployment could now have a disproportionately large impact on inflation dynamics. The bank sees Australia as having moved off the ultra tight part of the curve, where tiny changes in spare capacity fuel big wage gains.
That shift gives policymakers more confidence that inflation can keep easing without needing a deep downturn in the labour market.
