Australia’s longest period of low inflation
Discuss about the Low Wage Growth Remains A Problem Affecting.
Australia has been experiencing the longest period for low inflation. A report in The Guardian (Hutchens 2018) says that since late 1990s, the inflation level in the country was lower than the expected rate and experts say that it could run for another two years. This results in jeopardizing the future of another important economic phenomenon, that is, wage growth. According to the inflation data of the Bureau of Statistics, the rate of inflation is 1.9% in Australia in 2017 (imf.org 2018). The lower rate of inflation has a negative impact on the wage growth and vice versa. It is creating a cycle in the economy. Lower wage growth has been affecting the investment and other economic variables causing an impact on the nation’s economy. The following essay will highlight the aspects of low wage growth in Australia and the risks associated with it in influencing the economy.
A report by the RBA shows that the low wage growth in Australia are partly explained by the excess supply of labor in the market, fall in the inflation and fall in the terms of trade from its peak in 2011. Since 2012, the rise in wage was less frequent and growth outcomes for wages across all jobs. Since wages are the largest part of the business costs, the fall in the wage growth also resulted in the lower inflation rate in the recent times (Jacobs and Rush 2015). Over the years, lower wage growth has become a political issue in Australia. The wage growth started falling since 2012 and the recent data shows that the growth is around or just below 2% (Clarke 2018). During this time, the level of inflation was also very low, less than 2%. According to many experts, the wage growth is low in many developed countries, other than Australia, such as, the USA, due to higher level of technological development, such as the artificial intelligence, leading to a fall in the aggregate demand for the manual labor (Sloan 2018). Along with that, the shift in the jobs from the mining and manufacturing to the service sector also contributed in the lower wage growth, as the service sector works with low capital than the other two sectors. Capital investment is the primary source of productivity growth that results in growth in real wage (Iggulden 2018). As the proportion of workers increases in the service sector, the possibility of wage growth will remain low.
Factors contributing to low wage growth in Australia
It can be shown in the diagram that due to technological advancement, the demand for manual labor is decreased, which shifts the demand curve for labor to the right, while supply of work force remain same. This reduces the wage for the labor along with a fall in the human resource supply.
The impact on the labor market is similar when there is fall in the aggregate demand for the goods and services in the country. The organizations demand less labor, which pushes the wage and the wage growth down. At the same time, lack of demand for consumer goods puts a downward pressure on the inflation, which is the case in Australia.
RBA points out another factor that contributes in the lower wage growth in Australia, and that is, underemployment. The incidence of underemployment, that is, employed workers working more hours, has increased in Australia. Although the rate of unemployment fell, there is excess supply of labor in the market, known as the spare capacity, generated from the underemployment. Within 2004 to 2014, the rate of underemployment was almost similar to that of the unemployment. However, in the recent years, the unemployment rate fell but underemployment rate remained high. A fall in the underemployment rate is expected to be a necessary condition for the WPI to show the rate of wage growth above 2% (Bishop and Cassidy 2017).
RBA also highlighted that frequency of adjustments of wages is at a very low level currently. It is around one fifth of all the wages that are adjusted now compared to one third in 2012. The fall in the average frequency of wage adjustment results in wage freezing or longer delays during contract renegotiation. It is coupled with fall in the average size of wage changes. This is accredited to the fall in the large wage rises, which refers to the wage change of more than 4%. The percentage of jobs, experiencing a change in wage for over 4%, has declined significantly, from one third of total jobs in 2000 to less than 10% jobs in 2016. Moreover, the average size of the large wage changes has decreased to a little less than 6% (parliament.nsw.gov.au 2017). Since 2012, mining and industries have experienced more declines in the large wage changes compared to any other sectors in Australia.
The other possible explanations for the low wage growth rate in Australia are the rapid increase in the number of immigrated workers, especially the skilled workers, and increase in the number of university graduates. Similarly, according to Bhatnagar et al. (2017), increase in the globalization has led to a growth in the cheap labor in the developing countries, and that has kept the wages low in the manufacturing sector in the advanced countries. Other than that, weakening terms of trade, inequality and modest productivity growth in the economy contribute substantially in lower wage growth rate.
Impact of wage growth on labor market and economy
There are some risks of low wage growth. As highlighted by IMF, the Australian economy has still not returned to the full employment situation after the mining boom in the 2000s and the imbalances in the housing market along with the higher level of household growth have become vulnerability factors for the Australian economy (Xinhua.com 2018). IMF stated that the near-term risks to the economic growth are balanced but the large negative shocks, mostly, external and relation with the domestic housing market is a concern for the economy. However, as per the data of Australian Bureau of Statistics, in the last quarter in 2017, the wages grew by 0.6%, exceeding the expected growth of 0.5%, and the annual wage growth increased by 2.1%, and slightly exceeded the inflation rate (imf.org 2018).
The risks of lower rate of wage growth affect both the economy and the individuals. The economic consequences are:
Low inflation and higher housing price: Australia already suffers from low inflation, which is triggered by the lower wage growth. Lowering interest rates for stimulating inflation and boosting the economy has resulted in significant increase in the housing prices (Martin 2017).
Lower income: lower wage growth leads to a fall in the overall household gross disposable income, which constitutes all types of incomes received by individuals and families. According to OECD data, Australian per capita real household gross disposable income has not increased since middle of 2012, in June 2012, it was 113.9 and in December 2016, it remained at 113.8 (Hutchens 2018). This affects the household debt and spending, leading to a fall in the aggregate demand in the economy, and lower level of spending on the goods and services.
Lower government income: Lower household income and lower wages result in lower level of spending in the economy, and consequently generate lower amount of government revenue. As highlighted in the report of NSW parliament, lower wage growth implies less than expected tax revenue, high government payments, which include Family Tax Benefit, and lower consumer spending resulting in lower economic growth (parliament.nsw.gov.au 2017).
There are some social consequences also of the lower wage growth. The metropolitan cities of Australia have been experiencing a huge hike in the housing prices, which is making the properties unaffordable to the people with lower wage growth. On the other hand, low inflationary pressure indicates that the total cost of living is rising parallelly with the wage growth. However, in some areas, such as, housing and utility, the pressure of living cost is high. Lastly, there is rising inequality in the community in terms of well being due to lower wage growth (Jericho 2018). Thus, the slow growth of wages has significant impact on the aggregate demand and supply, unemployment and inflation in the Australian economy.
Risks of low wage growth in Australia
Thus, experts say that the biggest risk of lower wage growth in Australia lies in the housing and debt. According to them, the weak wage growth puts a burden on the consumers at the time of higher debt for household. The weak consumption result in a fall in the aggregate demand and supply in the economy and it is backed by low inflation. There is little cushion for the RBA to improve the trend for facilitating the target consistent outcomes of inflation.
Conclusion
Despite experiencing longest period of economic growth, the Australian economy has been facing a challenge for a long time. The lower wage growth rate is a matter of concern to the Australian government. This affects the economy in many ways. It not only causes a low inflationary pressure in the economy, but also causes housing prices to rise, lower government income, inequality and underemployment in the economy. IMF and RBA state that reduction in underemployment is necessary for wage price index to display the wage growth rate way above the expected 2%. However, imposing the rise in the minimum wage can create difficulties for the smaller businesses and can lead to higher underemployment and unemployment.
References
Bhatnagar, S., Cormier, A.K., Hess, K., de Leon-Manlagnit, P., Martin, E., Rai, V., St-Cyr, R. and Sarker, S., 2017. Low Inflation in Advanced Economies: Facts and Drivers. Bank of Canada= Banque du Canada.
Bishop, J. and Cassidy, N., 2017. Insights into Low Wage Growth in Australia. [ebook] rba.gov.au. Available at: https://www.rba.gov.au/publications/bulletin/2017/mar/pdf/bu-0317-2-insights-into-low-wage-growth-in-australia.pdf [Accessed 8 May 2018].
Clarke, C., 2018. Low wages, high debts and housing bubble threaten the Australian economy in 2018. [online] ABC News. Available at: https://www.abc.net.au/news/2018-01-04/australian-economy-threatened-by-low-wages-high-debts-bubble/9286048 [Accessed 8 May 2018].
Hutchens, G., 2018. Australia ‘locked’ into low inflation and low wage growth, economists fear. The Guardian. Available at: https://www.theguardian.com/business/2018/jan/31/australia-locked-into-low-inflation-and-low-wage-growth-economists-fear [Accessed May 9, 2018].
Iggulden, T., 2018. Low wage growth undercuts Government’s positive economic message. [online] ABC News. Available at: https://www.abc.net.au/news/2018-02-02/low-wage-growth-undercuts-governments-message/9391778 [Accessed 8 May 2018].
imf.org, 2018. IMF Executive Board Concludes 2017 Article IV Consultation with Australia. [online] IMF. Available at: https://www.imf.org/en/News/Articles/2018/02/20/pr1860-australia-imf-executive-board-concludes-2017-article-iv-consultation [Accessed 8 May 2018].
Jacobs, D. and Rush, A., 2015. Why is wage growth so low?. RBA Bulletin, June, pp.9-18.
Jericho, G., 2018. Low wage growth remains a problem affecting all levels of employment. [online] Theguardian.com. Available at: https://www.theguardian.com/business/grogonomics/2018/feb/27/low-wage-growth-remains-a-problem-affecting-all-levels-of-employment [Accessed 8 May 2018].
Martin, P., 2017. Why low wage growth hurts. [online] The Sydney Morning Herald. Available at: https://www.smh.com.au/politics/federal/why-low-wage-growth-hurts-20170222-guj18g.html [Accessed 8 May 2018].
parliament.nsw.gov.au, 2017. Slow wage growth. [online] NSW Parliamentary Research Service. Available at: https://www.parliament.nsw.gov.au/researchpapers/Documents/Slow%20wage%20growth.pdf [Accessed 8 May 2018].
Sloan, J., 2018. Low wage growth based on solid economic reasons. The Australian. Available at: https://www.theaustralian.com.au/news/inquirer/low-wage-growth-based-on-solid-economic-reasons/news-story/93c4d6c52267af16e1386e9df4cbeed9 [Accessed May 9, 2018].
Xinhua.com, 2018. Slow wage growth a risk for Australia’s economy: IMF report. [online] Xinhuanet.com. Available at: https://www.xinhuanet.com/english/2018-02/21/c_136988784.htm [Accessed 8 May 2018].
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