Australia experiencing ‘profit-price inflation’, not wage inflation

While the business lobby, its captured media, and the Coalition are all scaremongering about a ‘wage-price spiral’ if the minimum wage lifts in line with the Consumer Price Index (CPI), Jim Stanford from the Centre for Future Work has instead argued that “profit-price inflation” is the far bigger concern:

De-unionisation, insecure work, and deregulation of the wage-setting process have shifted the balance of power away from workers… greenfield enterprise agreements… [also] lock in predetermined pay rates for years…

Scott Morrison said [granting CPI wage rises] would be like “throwing throwing fuel on the fire” of inflation. But Wednesday’s figures seem to indicate that inflation has a life of its own. It is soaring while wages growth is not.

And after adjusting for productivity growth (which has been surprisingly resilient, averaging 2% per year for the past two years), unit labour costs have grown the slowest in years, by just 1.5% per year since 2019.

Whatever is causing inflation, it isn’t firms passing on higher wage costs to their customers. Some are passing on higher profit margins. If anything, what we are experiencing is more like profit-price inflation than wage-price inflation.

During the COVID crisis, profits climbed to a record high as a share of GDP while labour compensation (mainly wages) fell to its lowest point in postwar history.

The Australian Institute’s chief economist, Richard Denniss, made similar arguments this week:

While economy-wide wage increases have a limited impact on prices, attempts by firms to use wage increases as an excuse to increase profit margins the impact of prices is far more significant. For example, if firms only pass on their actual increase in wage costs the impact on prices (after allowing for second round increases in input costs) is only 1.85 percent. Whereas if firms try to increase their prices by an average 2.5 percent in response to the 1.27 percent increase in total costs that would accompany a five percent increase in wage costs then (again after allowing for second round increases in input costs) the price level would increase by 3.73 percent.

In conclusion, given that an economy-wide increase in wages of five percent would have such a small impact on prices, the inflationary risks of a five percent increase in the minimum wage approaches the trivial. Indeed, the risk of firms exaggerating the impact of wage increases on their costs in order to increase their profit margins seems far more significant. In short, it would seem that the ACCC has a bigger role to play in controlling Australia’s inflation than the Fair Work Commission. The abuse of market power, and Australia’s record profit share of GDP represent real threats to Australia’s inflation and macroeconomic performance more generally.

Whereas former ACCC head, Rod Sims, claims the stronger market power of companies has contributed to higher prices for consumers and lower wages for workers:

“The share of profits in our national income has been rising steadily since the 1970s; and correspondingly the share of national income going to Australia’s workers has been steadily declining since then”…

“We currently have an election discussion about low wages. In the discussion, however, there is little link to Australia’s concentrated economy.”

In short, the business lobby continues to talk its own book in claiming that wage increases in line with CPI would drive inflation skywards.

If they are genuinely worried about inflation, they should look in the mirror.