The Importance of Wage Rate Growth in Australian Economy

This assignment delves into the importance of wage rate growth in the Australian economy. It highlights how proportionately higher compensation growth compared to productivity is key to economic prosperity, driven by high external and internal investment. The government's goal for wage growth reflects a healthy labor market, enabling different monetary strategies for future improvement. Low wage growth increases unemployment risk, emphasizing the significance of wage rate growth in Australia's economy.

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ASSESSMENT TASK 2
INDIVIDUAL ESSAY
MACRO ECONOMICS

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Table of contents
1.0 Introduction..........................................................................................................................3
2.0 The risks of slow growth of wage rate.................................................................................3
3.0 Why government wants to see a general rise in wage rate..................................................4
4.0 Conclusion:..........................................................................................................................5
Reference....................................................................................................................................7

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1.0 Introduction
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.
2.0 The risks of slow growth of wage rate
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).

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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.
3.0 Why government wants to see a general rise in the wage rate
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

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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.
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.
4.0 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

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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.

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Reference
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March, pp.13-20.
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Cameron, R., Dhakal, S. and Burgess, J. eds., 2017. Transitions from Education to Work:
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Hancock, K., 2015. Australian wage policy: infancy and adolescence (p. 750). University of
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Zheng, F. and Sakellariou, C., 2016. After the Reforms: Determinants of Wage Growth and
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