Wage Growth Assignment PDF

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WAGE GROWTH IN AUSTRALIA
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Wage Growth in Australia
Introduction
On February this year, the International Monetary Fund (IMF) revealed that the Wage
growth and inflation in the Australian economy is weak and below the target range. The wages in
the country have grown at record low levels despite the ever rising cost of living (Iggulden,
2018). It is also worth noting that although the economy has been experiencing a reduction in the
unemployment, rising workforce participation and a record level of job growths, the wage
growth in the country has remained stagnant for a while now (Jericho, 2018). The persistent
income growth has opened up policy and ideological differences among major stakeholders.
While Labour parties favor interventionist methods to solve the issue, the Coalition favors the
fundamentals of labour and supply to balance out the problem (Jericho and Hutchens, 2018). As
a result, both the IMF and the Australian government are concerned about the phenomena as it
possesses significant risks for the Australian economy. The risks associated with low wage
growth and inflation in the country includes lower investments, lower economic growth, lower
consumer spending, higher government payments, and lower tax revenues.
Discussion of Low Wage Growth in Australia
The country has been experiencing record low wage growth levels over the past few
years. From the year 1998 until last year, the average wage growth in the country is estimated at
3.29 percent. Over this time period, the highest wage growth in the country was experienced in
the second quarter of 2018 at 4.30 percent. On the other hand, the lowest wage growth over this
time period was recorded in 2016 at 1.90 percent (Australia Annual Change, 2018). It is worth

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noting that the quarterly trends and the seasonally adjusted wage price indexes for the country
both rose by 1.6 percent in the December quarter of 2017. As a result, it continues the moderate
rate of wage growth in the country recorded by the series over the past two years. The quarterly
change in the private and public sector was estimated at 0.5 percent and 0.6 percent respectively
(ABS, 2018). On the other hand, the annual change in the trend and seasonally adjusted indexes
both rose by 2.1 percent between the 2016 and 2017 December quarter.
Figure 1: Australia annual change in hourly rates of pay
Source: Trading economics
From the graph above, one can note that the wage growth rate in the country has been
rising and falling since 2015. In the July quarter of 2015, the hourly rates of pay rose by 2.3
percent and remained constant until the December quarter of the same year (Australia Annual
Change, 2018). In the year that followed, the hourly rates of pay dropped to 2.2 percent in the
January quarter of 2016 before falling further to 2.1 percent in the July quarter (Australia Annual

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Change, 2018). By the end of the December quarter of the same year, the change in hourly rates
of pay had dropped to 1.9 percent. The wage growth in the country remained stagnant at 1.9
percent until the July quarter of 2017, before rising slightly to 2 percent in the following quarter
(Australia Annual Change, 2018). In January this year, the growth in hourly rates of pay in the
country was estimated at 2 .1 percent (Australia Annual Change, 2018).
Risks of Low Wage Growth
By and large, a prolonged period of low wage growth within a country is associated with
various risks and problems for its economy. Primarily, these challenges are associated with low
investments for the economy, low economic growth, high government spending on social
services, low government revenue and lower consumer spending within the country (Martin,
2017). Indeed, all these problems associated with low wage growth and inflation in the country
will result in significant economic challenges (Sloan, 2018). These risks will be explained in
terms of theories such as unemployment, inflation, and aggregate demand and aggregate supply
theories.
Aggregate Demand and Aggregate Supply
A slow rate of growth in the income of workers within a country in the face of an ever
rising standard of living has a negative impact on the aggregate demand and supply of the
country. As such, prices of goods and services in the economy keep rising while the income of
households remains constant. In turn, this makes the goods and services in the economy rather
expensive for households to purchase. Thus, consumer spending is reduced substantially.

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Consequently, they reduce their demand for the products in the economy as they can no longer
afford to purchase them. Therefore, this significantly reduces the total demand in the economy.
Additionally, a slow wage growth negatively affects the aggregate supply in the
economy. Specifically, workers lack the motivation to increase their level of efficiency and
productivity in their various industries of work. As a result, labor productivity and output per
worker is significantly reduced. In turn, this negatively affects the total goods and services
produced by firms in the country. Consequently, it negatively affects the aggregate supply of
goods and services in the economy. Intermittently, the overall decline in the aggregate demand
and supply in the economy negatively affects the country’s GDP, thereby leading to slow
economic growth in the country as a whole.
Unemployment
It is imperative to note that a slow wage growth also has an effect on the employment
rates in the country. By and large, when real wages of workers in the economy remains
unchanged, the aggregate demand for goods and services in the economy slows down too. In
turn, the demand for products from firms within the country also falls. Therefore, firms are
forced to cut down on their production costs to offset the losses arising from a fall in demand for
their products and services. As a means to cut down their costs, the firm may opt to reduce its
supply of goods and services into the market. Alternatively, it may opt to reduce its wage costs
by firing some workers in order to remain profitable. In this case therefore, by firing employees
the level of unemployment in the country will also rise. It is, therefore, important to note that a
slow growth rate in workers’ wages in the country poses significant risks of raising the level of
unemployment in the country.

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Inflation
It is worth noting that there is a positive relationship between the inflation of a country
and its wage growth. As such, the low wage growth in the country has caused the inflation rates
to fall below the IMF targets. Notably, when the wage growth rises, inflation also rises. The
reverse is also true. Inflation refers to the sustained increase in the price level of essential goods
and services. While high levels of inflation are undesirable, low inflations levels are
recommended for stimulating the economy (Sanchez, 2015). Over the past few years, the wage
growth rate in the country has been low, thereby forcing the inflation rates in the country
downwards. As noted earlier, a low wage growth rate substantially reduces the demand for goods
and services in the economy. As a result, the prices of products in the economy also remain
largely unchanged. In turn, this causes the inflation levels to reduce significantly. Yet, a little
inflation in the economy is desirable as it stimulates productivity within the economy by
encouraging borrowing and lending from financial institutions as loans tends to be cheaper. Also,
when the prices in the economy are too low and keep falling, it may result in deflation which is
harmful to the economy (Milligan, 2015). Furthermore, low inflation may result in weak
economic growth in the country. For this reason, it is important for the Australian government to
initiate policies that aim at boosting the wage growth rates in the country in a bid to raise the
level of inflation of inflation in the country to the IMF target rate.

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Conclusion
All in all, all factors taken into consideration the Australian economy has been
experiencing substantially low rates of wage growth over the past few years. Currently, the wage
growth rate is estimated at 2.1 percent. It is imperative to note that a slow wage growth and
inflation has significant negative effects to the entire economy. Mainly, the key consequences
and effects of a slow wage growth regime include a low consumer spending, higher government
spending on social services, low tax revenues, low inflation rates, and even low levels of
investment in the country. As a whole, these risks can be explained in terms of theories such as
aggregate demand and supply, unemployment theories and even inflation. As such, a slow wage
growth negatively affects the level of aggregate demand and supply in the country. In addition, it
results in firing of workers, which in turn raises the level of unemployment. Furthermore, it
brings about the falling of inflation rates way below the target rates, thereby slowing the
economy down. Thus, the Australian government must initiate policies that aim at raising the
wage growth rates in the country.

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Reference List
6345.0 - Wage Price Index, Australia, Dec 2017. (2018). Online] Australian Bureau of Statistics.
Available at: < http://www.abs.gov.au/ausstats/abs@.nsf/mf/6345.0 > [Accessed 9 May. 2018].
Australia Annual Change in Hourly Rates of Pay. (2018). Online] Trading Economics.
Available at: <https://tradingeconomics.com/australia/wage-growth > [Accessed 9 May. 2018].
Iggulden, T. (2018). Low wage growth undercutting Government's positive economic message.
[Online] ABC News. Available at: < http://www.abc.net.au/news/2018-02-02/low-wage-growth-
undercuts-governments-message/9391778> [Accessed 9 May. 2018].
Jericho, G., and Hutchens, G. (2018). Whatever happened to wage rises in Australia?. [Online]
The Guardian. Available at:
<https://www.theguardian.com/australia-news/2018/mar/01/whatever-happened-to-wage-rises-
in-australia> [Accessed 9 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 9 May. 2018].
Milligan, B. (2015). How can inflation be good for you?. [Online] BBC News. Available at:
<http://www.bbc.com/news/business-30778491> [Accessed 9 May. 2018].
Sanchez, J. (2015). The Relationship between Wage Growth and Inflation. [Online] Federal
Reserve Bank of St. Louis. Available at: <

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https://www.stlouisfed.org/on-the-economy/2015/november/relationship-between-wage-growth-
inflation> [Accessed 9 May. 2018].
Sloan, J. (2018). Low wage growth based on solid economic reasons. [Online] The Australian.
Available at: < https://www.theaustralian.com.au/news/inquirer/low-wage-growth-based-on-
solid-economic-reasons/news-story/93c4d6c52267af16e1386e9df4cbeed9> [Accessed 9 May.
2018].