Economic Instability

What has made the current situation unique is just how much is unexplained. Central banks, economists and traders across the developed world have repeatedly misunderstood the ongoing bout of inflation.

Beneath the surface of this scramble to contain inflation sits an unusual occurrence. In the past year, labour productivity fell 4.6 per cent (see here; GDP per hours worked). Labour productivity growth is now the slowest in 60 years. This trend has perplexed economists.

The fall in labour productivity is pushing up a metric called “unit labour cost” — the difference between wages growth and productivity growth. With wages rising and labour productivity falling, unit labour costs are increasing steeply. “Unit labour cost” is an important concept for central banks because it strongly correlates with inflation.

With wages increasing, inflation will continue to rise unless labour productivity suddenly picks up or the Reserve Bank engineers a recession through multiple additional interest rate rises. Unlike the United States, where the inflation rate has fallen quite steeply, Australia’s Reserve Bank opted for more gradual interest rate increases. A prolonged period of elevated inflation in Australia could further embed high inflation through “inflation psychology” — a process where inflation expectations causes higher inflation in a self-fulfilling manner. 

What does this all mean for clubs?

Putting aside the potential impact of a recession or economic downturn, clubs will be particularly affected by increasing unit labour costs. Hospitality businesses are highly labour intensive, with large proportions of costs expended on wages. If wages rise higher than productivity, businesses must pass on the higher prices or see their margins reduced. Like most other industries on an award, clubs have limited control of wages growth. The Fair Work Commission has shown a propensity to increase award wages by reference to inflation, irrespective of productivity.

Productivity will be difficult to scale up to meet higher wages costs. Industries with “face-to-face” service delivery, like clubs, have limited opportunities to achieve economies of scale. Moreover, with output and consumption occurring at the same time, there are limited opportunities to be more productive through inventory management. 

Productivity in personal services industries, like hospitality, tends to be driven by human resource management, organisational change and investing in skills (see here for a broader analysis of productivity in services sectors).

It will also be important for ClubsNSW and Clubs Australia to work with Government, alongside the business community, to limit and, where possible, reduce the cost of doing business.