One of the great puzzles about the Australian economy in its record-breaking boom is the virtual absence of wage push inflation.

We have attributed this in part to the large buffer stock of people who are unemployed (but not counted in the official figures) or semi-employed but looking for extra work, including the army of independent contractors. Plus Australia has lots of welfare recipients who can be tempted back into the workforce if the incentives are right.

On this point, it is great to see that the penny has dropped for the mainstream economics commentariat – the SMH‘s Ross Gittins today says that the real unemployment rate “would be nearer 9 or 10%”, which is much closer to the Roy Morgan Unemployment Estimate than the ABS.

Also, the Government’s new IR legislation has encouraged workers to be less demanding on questions of pay and conditions, which also adds downward pressure to wage-driven inflation.

But there is a further restraining issue, large numbers of foreign workers on temporary work visas. A mining mogul recently put it to Henry that if not for this scheme, wage claims in his mines, and those of his competitors, would now be so radioactive they glowed in the dark.

Even with all these moderating influences, the aggregate labour cost picture is beginning to be of concern. Alan Wood writes today in the Oz: “Yesterday’s business survey by St George Bank and the Australian Chamber of Commerce and Industry carried the headline “Wage growth highest on record while employment continues to grow”. The RBA’s liaison program with firms also indicates labour market conditions remain tight.”

This graph shows the participation rate for males aged 15 or over. Note the downward lurch at the time of the Whitlam government’s “great society” reforms, including no fault divorce. Note the recent upward adjustment as the Howard government tightens eligibility tests for those on pensions and reduces rates of income tax, including the big reductions still to come for “seniors” superannuation.

It seems as if male participation is more or less back on the pre-Whitlam trend but, given the long downward trend, the outcome could be better than that. This will be important for Australia’s inflation outlook, and thus for the future course of interest rates.

Henry, however, does not fully share “Woody’s” optimism as reported today: “Monday’s monetary policy message from the Reserve Bank of Australia was music to John Howard’s ears, and he will want it to keep playing the tune all year: no more interest rate rises”.

Read more at Henry Thornton.