The roles of profits, wages and costs in driving inflation has been widely discussed in recent months. Claims by the Business Council of Australia that profit shares are at a 20-year low are not supported by official data sources.
In recent months the relative role of wages, costs of production and profits in driving inflation in Australia, and around the world, has been widely discussed. However, as is often the case in Australia, even simple questions such as ‘is the profit share rising or falling?’ and ‘have wages or profits played a bigger role in driving inflation?’ have become contested.
For example, while the Australia Institute and the ACTU1 have argued that profit growth has contributed more to inflation than wage growth, and that the profit share of GDP is at historically high levels, the Business Council of Australia (BCA) is arguing the exact opposite. For example, the CEO of the BCA, Jennifer Westacott was recently reported as complaining that recent focus by the unions on the size of profits in Australia created an “us v them” narrative. Moreover, she was reported as saying that once mining profits were removed, the profits share of income had actually fallen to its lowest point in 20 years.2 While it is of course possible that Ms Westacott was misreported, no corrections have been issued. And while she may have provided data to support her claim, the journalist who wrote the story made no reference to it, nor has the BCA provided any data to support their claim on their website.
Intriguingly, soon after Ms Westacott’s claims were reported the BCA’s Chief Economist, Stephen Walters, made a related, but significantly more cautious claim, namely:
After excluding the miners and banks which are distorting this data and where wages are among the highest in the nation, the broader profit share actually has fallen.3
Not only does Mr Walters suggest that it is useful to exclude the profits of two industries to understand what it happening to profits in Australia (rather than just the one identified by his CEO) he makes no claims about the relevant period for analysis (as opposed to his CEO’s claim about trends over the last 20 years). Neither Ms Westacott nor Mr Walters explain why they are excluding an arbitrary number of profitable industries from their analysis of profits. But, as discussed below, if the volatility or recent growth of profits in some sectors is the explanation for their exclusion then it seems unusual that sectors with volatile or rapidly growing wage bills would not also be excluded from their analysis.
This paper presents a wide range of data from the Australian Bureau of Statistics (ABS) that suggests, contrary to recent claims made by representatives of the BCA, the profit share of GDP is rising.
While the topic of this paper may seem esoteric, it is important to consider the consequences for policy debate in Australia of the inability of different groups to agree on thing as simple as whether profits are currently at historically high or low levels. As has been shown with climate change, if groups cannot agree on the nature of a problem it is difficult, if not impossible, for them to develop solutions.