Business lobby scaremongers on wage inflation

Innes Willox – chair of the Migration Council of Australia and CEO of the Australian Industry Group – claims that allowing wages to rise in line with inflation is the number one threat to the economy:

Innes Willox on Monday said businesses were under pressure from unions pushing across-the-board wage rises at “an unsustainable level for many businesses”…

“This is perhaps the No.1 issue,” he told Ausbiz.

“You can’t get undo significant wage increases … then you get a situation of the dog chasing its tail where you get wage increases leading to inflation leading to interest rate rises … We have to tread very carefully here.”

Mr Willox cautioned that the latest data showing sluggish wage growth of 2.4 per cent “does not really reflect what is really going on with workplaces”.

“It’s very common to hear employers talk about giving workers 10, 20, 30 per cent pay increases to retain staff because of the job shortages we have at the moment”…

Earth to Willox – the wage price index measures like-for-like wage increases across the economy. Therefore, if there are some employers “giving workers 10, 20, 30 per cent pay increases to retain staff”, then wage growth must be below the average of 2.4% across many other employers. That’s how averages work. You cannot just cherry pick some extreme examples to make the case that wage inflation is rampant.

In any event, “profit-price inflation” is the far bigger driver of inflation than wage growth.

As noted last week by Jim Stanford from the Centre for Future Work:

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.

Richard Denniss, chief economist at The Australian Institute, made a similar assessment:

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.

Former ACCC head, Rod Sims, also believes 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, Innes Willox continues to talk his own book in arguing that wage increases in line with CPI would drive inflation skywards and threaten the economy. If anything, they would deliver productivity gains as firms are forced to innovate and invest in labour-saving technologies.

Besides, if the business lobby is genuinely concerned about inflation, it should look in the mirror at its on price gouging:

Workers vs bossesWages share of national income

Why should Australian workers go backwards while businesses continue to enjoy booming profits? How is that fair or good for society?

Unconventional Economist

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