Mining wage

Australia is experiencing the longest period of falling real wages in its history

Center for Future Work Policy Director Greg Jericho has published an excellent 70 page paper titled “Inflation: A Primer”, which shows (among other things) that Australian real wage growth has fallen for eight consecutive quarters. It is the longest streak of real wage cuts on record and comes at a time when real profits – even those outside mining – have risen sharply.

Jericho argues that Australian workers have therefore been the victims of inflation, which has been pushed higher by the actions of companies seeking to inflate their profit margins.

Below are excerpts from Greg Jericho’s article explaining these points. They will look familiar to regular MB readers.


Real unit labor costs (measuring the ratio of real wage growth to productivity growth) in 2022 are actually 6% lower than their pre-pandemic level, further confirming that workers are the victims of this inflation, not its cause.

Indeed, given that the consumer price index rose faster than the wage price index for 8 consecutive quarters until June 2022, it would be rather perverse to claim that wages have fueled inflation. . But the argument that wage growth must be lower than inflation in order not to be inflationary is flawed for other reasons as well. In fact, wages should rise faster than inflation, so that real wages keep pace with productivity growth and labor’s share of total GDP is preserved. Failure to keep pace with inflation, in the absence of government subsidies or tax cuts, means that workers’ living standards will fall. Real wages – the value of wages after adjusting for inflation – measure the ability of workers to buy goods and services with their earnings.

In the current situation, with prices rising faster than wages for an extended period, the real purchasing power of wages declines. It fell so rapidly in just 12 months to June 2022 that average real wages were 3.3% below their June 2021 level (Chart 35). Indeed, the average purchasing power of workers has returned to its level of June 2012. It has fallen further since then.

A decade of lost wages

The reason wages can rise faster than inflation without causing inflation is productivity growth. Labor productivity measures the amount of real output produced per unit of labor time (an hour, a week, or a year). If workers can produce more real output in an hour for their employers, that means they can earn more per hour (in real, inflation-adjusted terms) with no change in the amount of labor cost integrated into each production unit. There would be no pressure on the firm to increase the price of its goods in order to maintain its profit margins, and the total amount of profits would also increase due to improved labor productivity. So not only should wages keep up with inflation: they should actually grow a bit faster than inflation, so that real wages reflect continued improvements in labor productivity…

The problem is that while the relationship between real wages and labor productivity is commonly assumed in economic theory, it is not a given in actual practice (see Figure 36). Wage increases depend on the ability of workers to negotiate better wages; relationship is more honors in the breech than observance. Since the turn of the century, there has not been a time when sustained wage growth has been faster than the sum of inflation and productivity, and therefore when wages could be considered the engine of growth. ‘inflation. And over the past three COVID-disrupted years, not only have wages not grown faster than inflation and productivity combined, they have actually grown less than inflation alone. Unit labor costs have therefore increased more slowly than actual inflation and target inflation, suggesting that wages are in fact reducing inflationary pressures in the economy…

Wages, inflation and productivity growth

Indeed, while the impact of wages on inflation is often mentioned, the impact of profits on prices is rarely mentioned. One exception was the Bureau of Statistics’ acknowledgment, noted when releasing its March 2022 National Accounts report, that “Australian businesses have benefited from higher prices” (ABS 2022). The data indicates that profits of mining companies increased by 14.7% and that “the share of national income devoted to profits reached an all-time high of 31.1%”…

According to the June 2022 national accounts, for example, profits had increased by 28.5% in the previous 12 months, compared to a 6.8% increase in total wages. In the 12-month period to June 2022, real unit labor costs fell by 6.4%, while real unit profits (i.e. the level of profit per unit of output) increased by 13.1% (Chart 39). Even if we were to exclude the mining sector from earnings growth, as some business groups suggest (probably because recent earnings in this sector are somehow “abnormal”), the rise in non-mining earnings is still 9.4% – not only well above wages. growth, but also inflation. However, given the importance of the mining industry to the Australian economy, arbitrarily excluding its profits from a discussion of national income distribution is rather absurd. Profits in the mining industry have greatly exceeded wages in this sector for 5 years now, indicating that the current super-profits are hardly a one-time anomaly. Moreover, to exclude this most profitable sector from a discussion of fairness in profits and wages would be like looking at a sports league and suggesting that the evidence shows that all teams have an equal chance of winning – so long as we exclude the team that has won the title every year for 20 years.

Labor Costs vs. Profits

Clearly, profits are growing much faster than labor costs and headline inflation. This suggests that the main driver of inflation is that businesses are willing and able to raise prices, far beyond what is “explained” by mere growth in labor costs or other inputs…

The demand-driven component of inflation clearly does not come from wage increases. Wage growth remains below inflation and the CPI has now exceeded the wage price index for 8 consecutive quarters (the longest such period on record; see Figure 40). This period has thus seen real wages fall by 5.3% in this period of time…

Quarterly inflation and wage growth

The rise in the rate of inflation has been accompanied by record levels of profits, contrasting with a sharp decline in living standards – especially for low-income households who devote a greater proportion of their expenditure to essential items…

Fear of inflation has driven monetary policy, and much of fiscal policy, for several decades now in Australia, but that fear has mostly expressed itself in the form of higher wages rather than a increase in profits. This recent spike in inflation has revealed that wages have long been suppressed; when prices rise rapidly, the cost to workers is felt much more directly than to employers.

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