As the cost of living continues to rise, finance industry leaders and some politicians are rejecting calls for wage increases in line with the inflation rate, claiming it could have disastrous effects.
Opposition leader Peter Dutton said in June that matching wage increases to inflation could have major implications for interest rates and cause further inflation. He called on the government to find a balanced response or risk an economic crisis.
His calls were supported by Reserve Bank governor Philip Lowe, who said he wanted wage growth capped at 3.5 per cent to avoid stoking inflation.
But are wages the main culprit behind the current inflation spike? One economist has answered that question with a resounding ‘no’.
Australia Institute chief economist Richard Denniss says despite concerns from employers and business groups that increased wages would contribute to rising costs, data reveals that the factor driving up inflation is increasing profits.
Read: Inflation hasn’t been higher for 32 years. What now?
“The national accounts show it is rising profits, not rising costs that are driving Australia’s inflation,” he says.
“While workers are being asked to make sacrifices in the name of controlling inflation, the data makes clear that it is the corporate sector that needs to tighten its belt.”
Mr Denniss is co-author of the report Are wages or profits driving Australia’s inflation?, which looks at this very issue.
Released last month, the discussion paper concludes that wages made no contribution to Australian inflation in 2019-2020, or 2020-2021, measured using the Australian Bureau of Statistics’ broadest indicator of inflation, the GDP Deflator, and that wages accounted for only 0.6 percentage points of the 4.1 per cent increase in prices so far this financial year.
“Australia isn’t experiencing a wage-price spiral, it’s at the beginning of a price-profit spiral,” Mr Denniss says.
Read: Your tax ‘bonus’ fuelling inflation, economists warn
This is a very different narrative than the one espoused by Mr Dutton and other business leaders. Last week, Commonwealth Bank Australia (CBA) chief Matt Comyn said, “A real risk is businesses across the board indexing wage growth towards inflation, that’s going to cause economic problems over the course of the next couple of years because clearly that’s going to stimulate inflation.”
These are sobering comments, but come as little comfort to workers struggling to keep up with the cost of living. They become galling for many in the context of CBA’s latest results, which reveal the bank’s 2021-22 profit was $9.6 billion, an 11 per cent increase on the previous financial year.
Those same results reveal that Mr Comyn was awarded a staggering 35 per cent increase in annual pay to almost $7 million.
Read: How minimum wage rise will affect Age Pension and aged care
And the Australia Institute agrees: “While company spokespeople, such as Gerry Harvey, often suggest that they have ‘no choice’ but to increase prices when other costs rise, this is clearly not the case. Increasing prices in line with, or in excess of, rising costs is a choice to maintain or increase profit margins in Australia even though the profit share of GDP is at a near-record high.”
Fortunately for those advocating a wage increase, Australia’s deputy prime minister Richard Marles appears to be in their corner.
“That [minimum] wage rise was critically important … and it’s not a factor in terms of cost of living. Indeed, it helps cost of living for those who have that increase in their pockets,” he said last month.
The Australia Institute’s analysis supports this notion, concluding in its report, “The fear that wage growth has, or could, play a significant role in Australia’s inflation typically ignores the fact that real wage growth is at historically low levels and has been for some time.”
Are you concerned about the effect of wages increases? How have you been affected by the current spike in inflation? Why not share your experience and thoughts in the comments section below?
If you enjoy our content, don’t keep it to yourself. Share our free eNews with your friends and encourage them to sign up.
Without having to read this article, I can unequivocally assure you, dear reader, that the sole cause of inflation globally always has been, is and will always continue to be “corporate greed:” NOTHING else comes even close.