Economics Report: Analysis, Policy, and Impact on Australia's Wages

This economics report delves into the persistent issue of low real wage growth in Australia. It begins by analyzing the trends and figures related to wage stagnation, highlighting the contrast between nominal and real wage growth and the impact of inflation. The report then explores the various factors contributing to this phenomenon, including the Reserve Bank of Australia's inflation-targeting policy, excess labor supply, and the resulting decline in household consumption. The core of the analysis examines the impact of low wage growth on macroeconomic equilibrium, illustrating how reduced consumption shifts the aggregate demand curve, leading to lower GDP and price levels. The report further discusses potential policy suggestions to mitigate the adverse consequences of low real wage growth, such as fiscal policy expansion, infrastructure investment, and minimum wage adjustments. The report concludes by summarizing the key findings and the significant effects of the low wage growth on the Australian economy.

Running head: ECONOMICS
Economics
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Table of Contents
Introduction......................................................................................................................................2
Analysis of low real wage growth in Australia...............................................................................2
Policy suggestion.............................................................................................................................4
Conclusion.......................................................................................................................................5
References........................................................................................................................................6

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Introduction
Wages are the return to labors given for their efforts in production. As labor is an integral
part of production process, the trend in wage growth affects the economy significantly (Heijdra,
2017) The paper studies persistently slow real wage growth dynamics in Australia. Attention has
been given to evaluate the impact of low wage growth on macroeconomic equilibrium of the
nation. The discussion of impact of low wage growth is followed by suggestive policy
recommendation.
Analysis of low real wage growth in Australia
Australian economy today is facing a serious challenge because of a low real wage
growth for the last few years. The ABS figures suggests hourly wage grew only by 0.54 percent
in the last quarter of 2018. This is lower than the expected growth of 0.6 percent. Growth in
nominal wage is 2.27 percent. With the economy having an inflation rate of 1.8 percent, real
wage growth is only 0.5 percent (actu.org.au., 2019). Wage is public sector is relatively slower
than wage growth in private sector.
Low wage growth in Australia is number of different factors. Successful implementation
of inflation targeting policy of RBA keeps the inflation rate at a relatively low level. Inflation in
Australia varied around 2 percent since the adaption of inflation targeting policy. Low inflation
means lower profitability which discourages productive activity. As production declines, there is
fall in labor demand resulting in a slow growth in wage. The excess supply of labor is another
factor that leads to a low wage (Ross, 2018). The labor market of Australia has considerably
large excess capacity. The spare capacity in labor market has been indicated by large proportion

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of unemployed labors in the economy. The spare capacity in the labor market reduces bargaining
power of labors resulting in slow wage growth.
Real wage is the nominal wage that accounts the inflation rate. For most household wage
is the primary source of income. Household income in turn determines the level of consumption
expenditure made by the household. Among the four components of aggregate demand,
household consumption is most important one accounting largest share in Australia’s GDP. As
consumption decline, there is a decline in aggregate demand of the economy. As a result,
macroeconomic equilibrium defined in terms of aggregate demand and aggregate supply gets
affected due to a slow wage growth (Cohn, 2015). The contraction of aggregate demand causes
an inward shift of the aggregate demand curve. The resulted effect on macroeconomic
equilibrium is explained in the following figure.
Figure 5: Low wage growth and impact on macroeconomic equilibrium

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In figure 5, AD1 and AS1 curve shows the respective aggregate demand and aggregate
supply curve. Macroeconomic equilibrium in the economy occurs at E1. Real GDP in the
economy is Y1 and the price level is at P1. Now, as consumption expenditure declines because of
low wage growth, the aggregate demand contracts shifting the aggregate demand curve to the left
to AD2. The economy attains new equilibrium at E2. Corresponding to the new macroeconomic
equilibrium, real GDP contracts to Y2 and price level pushes down to P2. The low inflation is
again responsible for low wage growth. This thus traps the economy into the cycle of low real
wage.
The economy of Australia responds to the similar way as that suggested by the theory.
The first direct consequence of slow wage growth is the decline in GDP. One of the reasons of
recent slow growth in Australia is the loop of low real wage. There is a considerable decline in
average income of Australian household leading to a decline in consumption expenditure
(Jericho & Hutchens, 2018). Low real wage in formal sector encourages workers to join informal
sector or part time job increasing the problem of underemployment.
Policy suggestion
Government should take appropriate policy to mitigate the adverse consequence of low
real wage growth. One way to boost economic activity is to undertake fiscal policy expansion. In
order to overcome the likely consequence of a decline in household consumption expenditure
government should increase spending on different areas. In order to improve productivity of the
economy government should carry out large scale investment in infrastructure (Stanford, 2018).
Government can increase wages by increasing the minimum wage for workers of all sectors.
Australian government can further increase productivity and wage by offering subsidy to
employers.

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Conclusion
The discussion so far made suggested that real wage growth in Australia has reached to
the all-time lowest level of 0.5 percent. Factors responsible for declining wage include low
inflation, spare capacity and such other. The low real wage growth in Australia affects
macroeconomic equilibrium by lowering GDP growth and inflation.

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References
actu.org.au. (2019). Real wage growth remains near record low at 0.5%. Retrieved from
https://www.actu.org.au/actu-media/media-releases/2019/real-wage-growth-remains-
near-record-low-at-05
Cohn, S. M. (2015). Reintroducing Macroeconomics: A Critical Approach: A Critical Approach.
Routledge.
Heijdra, B. J. (2017). Foundations of modern macroeconomics. Oxford university press.
Jericho, G., & Hutchens, G. (2018). Whatever happened to wage rises in Australia?. Retrieved
from https://www.theguardian.com/australia-news/2018/mar/01/whatever-happened-to-
wage-rises-in-australia
Ross, D. (2018). The three reasons wages in Australia are not going up. Retrieved from
https://www.news.com.au/finance/work/at-work/the-three-reasons-wages-in-australia-
are-not-going-up/news-story/b891e324fe7511c372ccf505a37e8ce6
Stanford, J. (2018). Wage crisis has obvious solutions. Australian Options, (87), 23.