The economy is growing but workers are not getting the benefits
[Michael Janda]
This week’s National Accounts show the economy grew at a solid clip of 3.3 per cent over the past year.But that growth is mainly benefiting businesses, especially mining businesses, while workers’ wages fall further behind.
We know this because the National Accounts contain a lot more information than just the headline Gross Domestic Product, or GDP, number.
Here are nine graphs, derived from the National Accounts and other ABS data, that show the growing gap between profits and wages, and give us some insight as to why that gap is widening.
The profit share has been growing for decades
The National Accounts include a breakdown of who gets the income recorded in GDP — companies, employees and owners of land.
The Centre for Future Work’s Greg Jericho has analysed the latest data and says it shows the profit share going to business owners has never been higher.
“The shift of national income from wages to profits has been in place for over 40 years now,” Jericho observes.
“It is a product of decades of industrial relations policies designed to limit the ability of workers to bargain for better wages.
But this trend towards profits has accelerated sharply in recent years, particularly during the pandemic.
Mining boom to blame?
EY’s chief economist Cherelle Murphy says the two big commodity price booms have been a major factor.
“In recent times, the sharp rise in commodity prices both in 2008-2009 and over 2021-2022 has largely been responsible for lifting profits faster than wages,” she notes.
Jericho has graphed the dramatic jump in mining profits since the pandemic began.
IFM Investors chief economist Alex Joiner says that jump is all down to the recent price boom, which has incidentally been driving up the cost of living and doing business for everyone else.
“The rise in total profits was prompted by the spike in commodity prices,” he observes.
Joiner says mining profits have surged so dramatically that they now exceed profits from all other industries combined.
“While the resources companies are doing some increased exploration spending, they are not doing materially more investing in capacity nor employment.
“Wage growth in the sector is still running at under 2 per cent…most likely as salaries in this sector are already quite high.”
Unlike the previous mining investment boom before the global financial crisis, when miners and LNG companies were spending tens of billions of dollars on new and expanded facilities, Jericho says now they are mainly just cashing in.
“The first mining boom was also an employment boom – and saw wages growth flow through to other parts of the economy,” he says.
Cherelle Murphy says even a wage boom in the resources sector would be unlikely to shift the dial much on anaemic wage growth across the rest of the economy.
“From here it seems likely that there will be pressure on resource companies to lift wages at a faster pace, as the pool of available workers is limited and they have the capacity to do so,” she says.
“But mining companies are not big employers – apart from when they are building their operations – and so without the rest of the economy doing the same, the profit/wage balance might not shift much at all.”
Productivity not the problem
For years, in fact the best part of this century so far, we have heard policymakers and businesspeople alike lament the lack of productivity growth.
Productivity is a measure of how much is produced for a given amount of inputs, and the simplest and most commonly used measure is labour productivity – how much output we get for each hour of work.
Weak growth in labour productivity has often been cited as one of the main reasons why wages growth is so low, and why it cannot climb too much higher without worsening inflation.
But a combination of the previous mining investment boom expanding output in that sector and Omicron forcing workers who aren’t sick to get more done to make up for their absent colleagues has turned that argument on its head.
But at the same time that workers have become increasingly productive, their wages have gone backwards in real terms — that is, once the effect of inflation is taken out.
The standard of living for average employees has gone nowhere since 2011.
“Real wages should rise with productivity growth over the median and long terms.But it is clear this has not happened,” observes Jericho.
“Over the past three years, productivity has averaged 1.5 per cent annual growth, while inflation in that period has also risen by an average of 2.1 per cent.
The following graph is real unit labour costs — how much it costs employers in wages for each unit of output, adjusted for changes in prices over time.
In simple terms, it shows employees in Australia have become cheaper for employers relative to what they produce
“This means that companies are taking all the benefit of productivity growth,” says Jericho.
What’s gone wrong for workers?
There’s no single answer as to why real wages growth has fallen so far behind the extra output that’s being generated through workers’ increased productivity.
However, [a recent report from the Centre for Future Work and two leading industrial law academics](/news/2022-05-11/unemployment-rate-wages-jobs-pay-rise-cost-of-living-election/101053596) argued that industrial relations laws that favour employers over workers were a major contributor to weak wages growth.
The combination of highly restrictive rules around going on strike and a plunge in union membership has resulted in a precipitous fall in industrial action.
In the year to December, only 71,000 employees took industrial action across just 130 disputes.
In total last year, employers lost a mere 116,000 working days to strike action.
Compare that to the much smaller workforce of the late 1980s and early 1990s when more than a million days of work were lost to strike action each and every year.
Aside from walking off the job, Greg Jericho suggests a few other changes that could be made to increase wages growth.
“There needs to be a major restructure of the [industrial relations] system,” he argues, listing some suggestions:
– An end to public sector wage caps that the governor of the Reserve Bank, Philip Lowe, has argued keep down wages growth.
– Stronger rises in the minimum wage that account for both inflation and productivity growth.
– Reform the enterprise bargaining system which is now broken due to an ability of employers to terminate agreements during the bargaining process.
– Greater focus from government on wage theft and also insecure work.
– With increased women’s participation there needs to be a continued focus on gender pay gaps – especially in the low paid areas such as the aged care sector.
Finally, he argues that fearmongering over the effect of wage rises on consumer price rises needs to be dialled back.
“Perhaps above all there needs to be a shift from the belief that wage rises above inflation cause inflation,” he says.
“So long as wages rise in line with inflation and productivity, they will not put pressure on inflation.”.