The risks of slow growth of wage rate
Discuss about the Report of International Monetary Fund.
According to a report of International Monetary Fund (IMF), the wage growth rate of Australia is very weak and the inflation of the country is below its target range. The weak wage rate can be problematic for the economy in the long run. The wage of the people of the country is expected to generate aggregate demand in the economy which in turn would drive the economy in the long run. The country has recently got over the robust economic performance that it has been experiencing since the year 2000 following the boom in the mining sector. This paper analyses the report of the IMF in order to find out the risks of the low wage growth of the Australian economy and the reason for the concern of the government and the authorities of the country.
The Australian Bureau of statistics presented the data and showed that, although the wages of the people of the country increased in December last year, the overall increase in the annual wage of the citizen remained well below the inflation rate of the country. Few of the economists have stated that this is the encouraging sign as the labor market of the country has started to show signs of growth that would reflect in the wages in the coming years. However, Bishop and Cassidy (2017) contrasted saying that the overall increase in the wages of the labor is still tiny compared to the past records of the country. The estimations have also shown that any kinds of increase from this point will not be much significant. Buchanan and Oliver (2016) highlighted that the household income is not only significantly low but it also lacks the capabilities to recover in the near future as well. This incapability has also been seen in the high household debt and low inflation as well.
Theory 1
One of the important risks that can be harmful to the economy of Australia is the low aggregate demand due to the stagnant wages of the labors of the market. The low level of wages influences the disposable income of the customers of the market which in turn influences the demand for goods and services of the economy. The lack of significant growth of the income of the household stagnate the aggregate demand and hence there remains a chance of an excess supply. Imbun (2016) noted that due to the robust performances of the economy of Australia due to the mining boom the economy has been in full employment for a long period of time. This excess supply can lead to lower future production and hence unemployment. Eventually, there will be a decrease in the demand for labor in the economy and hence the economy would enter a vicious circle having low aggregate demand and income for the people of the country (Lass and Wooden, 2017).
Theory 1
Although the government has come up with intervention strategy in order to give the economy a boost, it has attracted criticism from the section of an economist. The government planned to reduce the corporate tax to 25% in order to have an impact on the overall productivity of the labor. According to Hancock (2015), the government intended to reduce the cost of operation for the organization which can reflect on the wages of the company. This according to the proponents of the strategy would increase the wage of the labor and hence eventually provide a support to boost the aggregate demand of the economy. IMF, itself supported the strategy of the government saying that a reform is needed in the tax structure of the country in order to provide a boost to the economy. However, Zheng and Sakellariou (2016) criticised the strategy of the government saying that even if the government made a conditional reduction of the taxes that the wages of the labor must be reduced, its effect on the economy would be very marginal.
Theory 2
Another major risk associated with the slow growth rate of the wages in the Australian economy is the low level of foreign investment. Reserve bank of Australia, in a report, stated that, despite the full employment in the country, the economy is susceptible to experience a low level of foreign investment following the decreasing consumption spending (Laurenceson and Zarkovic, 2017). This would also reflect on the productivity of the organization and the national level projects of the economy as well eventually becoming an unlikely market for the foreign investors. Cameron et al. (2017) pointed out that, after the robust performance of the Australian economy steady foreign investment is important to smooth out the economic performances of the economy. Therefore, the low wage growth rate also poses threat from the dimension of foreign investment.
The wages of the labors of the economy has a number of importance in driving economies. The wages are not only a part of the cost of production, but it is also the source of income for most of the people of the economy. This also holds true for the case of economy of Australia as well. The wage as a form of income flows through the economy and triggers the demand for the goods and services of the economy. Broadway and Wilkins (2017) highlighted that wages are seen as a cost to the producers when the micro level study is being carried out on the economy. However, the economy as a whole considers the wage as the income of the people of the economy and the source of demand for the goods and services of the economy. It is important to note that the firms and the foreign investors undertake the decision to invest in the business based on the future demand for goods and services of the economy. Therefore the wage growth is important in order to generate demand for the goods and the services that are produced in the economy. The increased real income of the people of the economy will allow them to spend more on the products and hence intrigue the management of the businesses to invest even more leading to a growth in the economy. However, Hwang (2016) stated that it is not only the demand for the goods and the service rather future taxes on the companies are also important decision maker for the management of the organizations. The government in an intention to rewind its contribution to the demand of the economy spends which is termed as the fiscal consolidation which will only impact the economy if the real wage and the corresponding demand for the goods and services of the economy are increasing steadily and significantly. Therefore, this compels the government to support the growth of the wage rate in order to have an impact on the economy.
Theory 2
Furthermore, the increase in the wage rate for everyone also helps the government to articulate the future economic plan of the country as well. Preston (2018) highlighted that the wages of the labors and the compensation paid to the labor are important for the future path of RBA. The steady growth rate is a sign that the labour market of the economy is healthy and hence the central bank of the country would be able to increase the interest rates in the long term. Breunig et al. (2017) pointed out that the healthy performing labor market would enable the central bank of Australia to pull back on the loose monitory policy that the country experienced during the post mining boom robust performance of the economy. Therefore the government of Australia is eager to see an increase in the wages of everyone in the country so that the gap between the productivity growth and the compensation growth can be reduced that would eventually reflect in the overall increase in the aggregate demand in the economy and foreign investment inflow and hence a sustainable growth in the performance of the country.
Conclusion:
Thus, the wage rate growth is important for the Australian economy as it triggers the aggregate demand in the economy. Apart from that, the wage also has other impacts and contribution to the performances of the economy. Proportionately higher growth in the compensation compared to the productivity is the key to the economic prosperity of the country that would be driven by high external and internal investment. Furthermore, low wage growth in the economy of Australia also has the risk to increase the unemployment level in the economy. The government of the country wants to see growth in the wages of all the people of the country as wages drive the economy and creates demand for the products of the economy. In addition to that, the growth in the wage rate also suggests the government that the labour market is at a healthy state and hence different monitory strategies can be implemented for the future in order to improve the performance even more.
References
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