Inflation and Capacity Constraints in Australian Manufacturing Industry

Abstract

In the present paper we estimate a model of price-cost inflation for Australia using business survey responses of firms in the manufacturing sector. The data allow us to circumvent a number of key statistical problems, related in particular to the measurement of costs and structural changes in the model. Equally important, the data allow a new and more detailed perspective on the nature of supply constraints affecting inflation in the manufacturing sector. A new finding is that capital constraints have been more important in generating inflationary pressure than labour constraints or general indicators of capacity utilisation.

Modelling Wages and Prices in Australia*

“…There remains some debate concerning the appropriateness of the unemployment rate as a measure of labour market tightness. For example, Shepherd and Driver (2003) used a range of survey‐based measures of supply capacity conditions for both labour and capital, whereas Ghua and Visviki (2001) found that employment growth in non‐farm payrolls is a better measure of labour market tightness in the USA. Unemployment, however, is commonly used for this purpose and has therefore been maintained in this application.…”