Wages have had little or no effect on inflation in Australia over the past three years, according to a new economic analysis from a leading think tank.
While treasurer Jim Chalmers dismissed what he called “nure warnings” from commentators about the impact of rising wages, a report from the progressive think tank the Australia Institute found that rising corporate profits were a major factor in Australia’s spike in inflation.
In the report, released Monday, the institute analyzed national accounts data to show that rising corporate profits had been a major factor in inflation and that wages had “no contribution” to inflation in fiscal years 2019- 20 and 2020-21, contributing just 0.6% to inflation in Australia in this current fiscal year.
“Australia is not going through a wage-price spiral, it is at the beginning of a price-earnings spiral,” said Australia Institute chief economist Dr Richard Denniss.
“The national accounts show that it is rising profits, not rising costs, that are driving inflation in Australia. While employees are being asked to make sacrifices in the name of controlling inflation, the data makes it clear that it is the corporate sector that needs to tighten its belt.”
The report points out that wage growth was at an all-time low, while earnings share was a near-record share of GDP.
While wage growth has clearly not been the driving force behind recent increases in Australian inflation, or indeed inflation around the world, the continued impact of Covid and the surge in global energy prices linked to the Russian invasion of Ukraine clearly it is,” the report said. said.
Using a methodology recently used by the European Central Bank, the Australia Institute analyzed the GDP deflator — another measure of inflation in the economy, as opposed to the consumer price index (CPI) — to determine the role of profits and wages in determine the headlines. inflation number.
The report found that between 2013 and 2021 in Australia, labor costs “played almost no role in inflation (as measured by the GDP deflator)”.
That included a zero effect of wages on inflation over the past two years and a small effect this fiscal year.
“Meanwhile, gains accounted for 2.5 percentage points of the rise in the GDP deflator (about 60 percent of the total),” the Australia Institute said.
The report noted that prices rose faster than wages and other costs, leading to continued gains in profit share.
“Raising prices in line with or above rising costs is a choice to maintain or increase profit margins in Australia, even though the profit share of GDP is at a near record high,” it said.
The trade-off between wages and inflation became a major factor in the final weeks of the May election campaign, following the Labor Party’s commitment to lobby the Fair Work Commission for minimum wage increases.
Business groups and some economists argued that accelerating wages would exacerbate inflation, but Labor – in the opposition and now in government – insisted modest wage increases would have no significant inflationary effect.
Chalmers, speaking to Sky News on Sunday, reiterated that position again.
“Wages are not the reason why we have this inflation. And so I don’t share some of the concerns that have been expressed about some sort of destructive wage spiral,” he said.
“We still have a decent decline in real wages. We want to see those wages grow sustainably. And that means making the economy more productive, so there are a lot of win-wins for employers and employees and we can raise the standard of living.”
“I don’t share any of those kind of rather serious warnings about that.”
Chalmers reaffirmed the government’s belief that productivity growth is the key to sustainable wage increases, saying it would be a factor in the upcoming jobs summit to be held in Canberra.
“What we hope the Jobs and Skills Summit will do is bring people together around these major economic challenges,” he said.
“We are not naive enough to think that there will be a consensus on some of these issues, including some issues of wages. But we hope and expect and we want to see some kind of consensus emerge about skills and labor shortages and strong and sustainable wage growth and training and migration.”
Chalmers said he expected “inflation will get a little worse before it gets a little better. But everyone understands it will get better.”