It is not wage rises causing of inflation and harming the economy

Photo by Louie Douvis
By Joe Montero

There are forces in Australia gearing up a campaign to keep wages down. Led by the corporate sector and backed by the Reserve Bank of Australia. There has been a modest rise in rates this year, and they are blaming this for the rise in inflation. If wages are not kept down in the next period, they warn, inflation will get worse, and the economy plunged into serious trouble.

Wage rises don’t cause inflation unless the economy is already working at full capacity. This means that This means that society has more to spend without an increase in the quantity of things to spend it on. The Australian economy has not been running at full capacity for some time, and even less so during the Covid pandemic lockdowns.

The other claim is that increasing the wages share puts off investors, which means, the primary focus should be to ensure growing returns to these investors. The rationale is, that happy investors will grow the economy, and everyone will be left better off.

If this were the case, the years of the falling wages share would have produced a boom like no one has ever seen. Where is it? Anyone can see that raising the investor share of national income has not delivered the promise. What is has delivered is a gradually falling standard of living, only checked by the creation of ever more debt.

The graph below shows a downhill slope in real unit labour costs over 32 years. This means that the wages burden on business overall has been declining.

The fall in real wages relative to productivity is what lies behind the continuing fall of the wages share in national income.

In fact, debt has been the standout growth industry. In fact, Australia’s household debt is now 119.30 percent of the nation’s gross Domestic Product (GDP). The average Australian household owes an estimated $250,000 or around $2 trillion in total. The Debt-to-income ratio stands at 88 percent. This is what the data from the Australian Bureaux of Statistics (ABS) is saying.

The graph below shows the steady rise in Australian household debt over the years, which is only second to Canada’s for a selection of western economies.



Households are spending more than their income to maintain current lifestyles. And the debt burden is set to become considerably worse.

As the graph below shows, workers have steadily been increasing the amount they produce (productivity) since the start of the twenty first century. The gap between this and real consumer wages has grown steadily.

Source: Saul Eslake


Although the portion going to business ahs also gone down, a few at the top have been amassing record profits. This has been achieved by carving out a greater share for themselves at the expense of wage earners and small business. This part of the story is not revealed in the graph.

The rise in debt has caused an effective increase in the money supply and more dollars are chasing those things that we buy. It means real wages have been falling and inflation has gone down along with it.

Inflation is now heading the other way. There must be other factors behind this. Some of them are imported from overseas. The cost of petrol costs and the price for mineral exports are good examples. There is also Australia’s dependency on foreign investment, where the decisions of investors are mostly made by conditions in their home economies and the global economy.

Australia factors include the excessive financialisaton of the Australian economy at the expense of making things, price gauging by market controlling monopolies taking advantage of an uncertain situation, climate change related adverse weather events hurting agriculture, and the impacts of the pandemic.

An in-depth analysis of the causes of inflation is not intended here. They have been mentioned to point out that there are other factors at play.

Raising wages at a faster rate brings some clear advantages. It could, as long as other factors are in place, like investment in the growth of manufacturing and ensuring that the financial system meets the genuine needs of the people and economy, reduce the dependence of households on debt.

If Australia continues down the road of continuing to reduce wages and the wages share in the economy, the prospect will be that a few ill do very well out of it. But it will be the majority and the Australian economy that will pay the price for it.

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