Stronger Wage Growth improves the Economy and the Budget

by Jim Stanford

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Stronger wage growth will deliver more money to workers and also improve the budget position buy delivering more tax revenue

Wage growth has sped up modestly in recent months in Australia. The latest reading from the ABS Wage Price Index shows a 3.6% increase in average wages over the year ending in June. That was down slightly from the 3.7% reported in the March quarter—but better than the historically slow wage growth recorded in the previous decade.

Indeed, from 2013 through 2022 (the tenure of recent Coalition governments), average weekly earnings in Australia grew at an average rate of just 2.2% per year. That was exactly half the pace recorded from the turn of the century through 2013 (4.4% per year) – a pace more typical of Australia’s postwar history.

More recent wage-supporting policies – like strong minimum wage increases, industrial reforms to strengthen collective bargaining, and the new Closing Loopholes legislation to limit wage-suppressing policies by labour hire firms and gig platforms) – will help to restore wage growth back toward those pre-2013 norms.

RBA officials and others worry that stronger wages will be harmful, somehow reigniting a ‘wage-price spiral’ like the 1970s. This fear is misplaced. After all, real wages (after inflation) are still badly damaged by the outbreak of post-pandemic inflation. For almost three straight years – from June 2020 through March 2023 – the quarterly growth in prices exceeded the quarterly growth in wages, causing a decline in real purchasing power for workers. That’s the longest losing streak for real wages in Australian history.

Real wages stopped falling in the June quarter, which is a good sign. But they are still down by more than 5% compared to when the pandemic hit. Just to repair that damage, wages need to grow significantly faster than prices (1-2 percentage points per year), for a sustained period of time (up to 5 years). The RBA seems determined to prevent that from happening; its approach would lock in the real wage cut permanently. Employer groups, not surprisingly, are cheering them on.

Restoring real wages is a matter of simple fairness for Australian workers. But there are also many broader economic and fiscal benefits from lifting the rate of wage growth – and keeping it there. Lifting wage growth by 2 percentage points per year, reversing most (but not all) of the wage suppression that resulted in the 2013-2022 period, would have dramatic impacts on macroeconomic conditions.

As shown above, wage growth of, say, 4.2% per year (2 points higher than the unusually slow pre-pandemic rate) puts substantial additional sending power into workers’ pay packets: over $20 billion in the first year, over $125 billion by the fifth year. Additional wage income from 2% faster wage growth over five years comes to a cumulative total of $355 billion.

Workers spend most of what they get: on average, 85% of disposable personal income is pumped back into the economy in consumption purchases. Stronger wage growth, therefore, translates immediately into more demand for consumer goods and services: $14 billion in the first year, $88 billion in the fifth, and a cumulative total of almost $250 billion over five years. That would provide a major boost to aggregate demand in Australia, at a moment when high interest rates and global uncertainty are threatening future growth and job creation.

Governments, too, have a huge stake in faster wage growth. Combined income tax and GST revenues arising from higher wages (and related consumer spending) would pump $5 billion into government coffers in the first year, over $30 billion by the fifth year, and a cumulative five-year total of almost $90 billion.

Wage-boosting policies like the Closing Loopholes reforms will contribute to restoring normal historic trends in wages, and provide workers with badly-needed relief from the recent cost-of-living crisis. They will help to strengthen overall spending conditions in the economy, at a moment when the risk of recession is high. And they will generate tens of billions of incremental revenue for governments: reducing deficits, and providing funds for important investments in public services and infrastructure.

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