Insights Into Low Wage Growth In Australia: Causes, Risks, And Implications

Wage dynamics in Australia in the contemporary periods

Discuss about the Insights Into Low Wage Growth In Australia.

Over the years, the international economic scenario has developed considerably with the growth and overall development of the economies of the different economies across the world, in different pace and with diverse characteristics. The phenomena of global significance like Globalization, industrial advancements, technological innovations, infrastructural developments as well as the growth of international commerce with trade liberalizations across different countries have cumulatively led to considerable dynamics in the global economic framework (Holland 2018).

One of the predominant economies, in the international framework, has however been that of the Australian economy, which developed significantly over the decades and prospered immensely with due course of time, much of which can be attributed to the immense growth of the agricultural, manufacturing and contemporary service sectors and prospering of the businesses and trades in the country consistently over the years (Dyste and Meredith 2012). The effects of such prosperity can be seen in the impressive and stable growth dynamics which can be seen in almost all the macroeconomic indicators of the country.

This huge economic prosperity has made the country a centre of attraction for not only the global investors and businesses but also for an increasing number of immigrants from all parts of the world who have migrated in the country for better living and economic scopes. However, in the recent period, the country has been experiencing several issues of utmost concern in its economic domain, the most significant one of which is the slow growth rate of the wages in the country in the contemporary period (Bishop 2016). The essay tries to discuss this issue elaborately, thereby trying to analyse the risks which can arise out of the same for the economy of the country in the coming years, in the light of the relevant economic theories.

The economy of Australia, as discussed above, has developed immensely over the decades and shows huge economic prosperity in the aspects of GDP growth, employment generation, stability in the average price levels in the economy as well as the in terms of the growth of the industrial and business prospects and an overall high standard of living of the population of the country (Jacobs and Rush 2015). However, in the last few years, one of the most important indicator of economic well-being of the population of the country, the wage rate, is seen to be showing disappointing trends with very low and declining rates of growth in the economy.

Causes of low rate of growth of Australian wages

This can be seen with the help of the following figure:

Figure 1: Declining growth of the wage rates in Australia

(Source: Scutt 2018)

The above figure shows the movements in the Wage Price Index of the concerned country between the years of 1998-2016, which in turn shows the dynamics in the rate of growth of the price of labours, that is, the wages in the country. As is evident from the above figure, the overall trend, which showed a positive trait till 2006, started declining from 2007 and barring a few short-term fluctuations has declined with time, with the rates being as low as 1% to 2% in 2016 (Wilkins and Wooden 2014). This includes the decline in the rate of growth of wages in both the public sector as well as the private sector of the country, which in turn indicates towards the fact that the decline and slow rate of growth of the wages is not a problem confined to one particular sector of the economy but is actually an economy wide problem, which in turn increases the level of severity and implications of the same.

The low rate of growth of wages in the country in consideration can be attributed to a series of factors, the primary ones being as follows:

Types of jobs generated- The economy in the recent periods have experienced an increase in the number of jobs created as a whole in the economy. However, most of these new jobs created are of part-time type and the total number of newly created full-time jobs have actually decreased drastically over time, which can be observed in the following figure:

Figure 2: Creation of part-time and full-time jobs in Australia over the years

(Source: Herbst 2018)

This in turn, has led to the sluggish growth rate of the wages in the economy in the recent periods.

Sectoral shifts- The country in the recent period has been experiencing a considerable increase in the development of the service sectors at the cost of the reduction in the size of the manufacturing and subsistence sectors. This in turn has led to the increase in the demand for high skilled workers and a loss in the demand for moderately skilled labours who are abundantly present in the economy, thereby leading to a decline in the rate of growth of the wages in the labour market of the country (Jacobs and Rush 2015).

Potential risks and vulnerabilities

Slow economic growth- The booms which the economy experienced in the last few decades, including the mining boom and others have also mellowed down, thereby losing their capability of immense job creation and wage increasing capabilities. This in turn is also one of the primary reasons behind the occurrence of the issue in concern.

High immigration- The country has experienced increasing inflow of immigrants, especially economic immigrants over the years, which in turn has led to an increase in the moderately or low skilled labour force, the excess supply of which has kept the wages low and the growth rates of the same stunted (Bishop and Cassidy 2017).

The wage rate and the growth patterns of the same have immense implications on the economic welfare of the population of the concerned country and on the economy as a whole as with increase in the wages, the purchasing power as well as the consumption and investment increases, which in turn leads to increase in production and an overall economic growth in the country. Thus, the stunted growth rate of wages in Australia can bear substantial risks for the country, which are discussed with the help of the theoretical framework of economics:

Unemployment problems- The wage rate of an economy is usually an indicator of the demand and supply dynamics in the labour market of an economy within a period. This can be shown with the help of the following figure, which shows the demand and supply interactions in the labour market of an economy:

Figure 3: Demand and supply interactions in the labour market

(Source: As created by the author)

As can be seen from the above the equilibrium wage occurs at the point in the labour market of an economy where the supply of labour matches with the demand for the same (Healy 2016). When there is an excess supply of labour, people are forced to work in lower wages, thereby lowering the wage down for the economy and vice versa.

In case of Australia, this can be found to be relevant. The persisting low growth rates of the wages in the economy over the last few years indicates towards the fact that the country is possibly at the risk of low employment generation and high unemployment of especially the majority share of the labours, who are moderately skilled, which can be attributed to the increasing shift of the economy to the capital-intensive capital sectors from the labour-intensive manufacturing and agricultural sectors (Corden 2012).

Aggregate demand supply dynamics- Another risk which the economy face due to the slow growth rate of the wages in the contemporary period is that of the overall stagnation in terms of an overall decreased productivity of the country in the coming years, which can be explained with the help of the aggregate demand and aggregate supply theory in economics (Stockhammer 2013). Due to the slow growth rate of wages in Australia, the economic power of the population in general is expected to decrease, which in turn is expected to decrease the consumption and investment activities substantially, the results of which are as follows:

Figure 4: Loss of overall economic growth in Australia

(Source: As created by the author)

The decrease in the aggregate demand is also expected to decrease the aggregate supply and if the low wage rate growth continues for a prolonged period, this may lead to an acute economic stagnation and stalled growth for the Australian economy.

Negative Inflation- Like high inflation, an acutely low inflation can also be adversely affecting the economy, as shown in the following figure:

Figure 5: Fall in aggregate supply due to fall in price levels

(Source: As created by the author)

As fall in the price of commodities and services would lead to the fall in the supply of the same in the country as a whole, thereby creating more unemployment and economic downturn, which may continue like a viscous cycle (Kumar, Webber and Perry 2012).

Conclusion

From the above discussion it can be seen that the economy of Australia, experiencing the concerning problem of a sluggish and disappointing growth rate of the wages in the contemporary period, faces the probable risks of an overall economic stagnation caused by the lack of employment generation, lack of aggregate demand and supply as well as an overall loss of productivity in the country in the coming years, provided the problem of low growth rate of wages persist for a prolonged period in the country and thus, the problem in consideration can be considered to be an issue of immense concern for the population of the country as well as for the government of the country.

References

Bishop, J. and Cassidy, N., 2017. Insights into Low Wage Growth in Australia. RBA Bulletin, March, pp.13-20.

Bishop, J., 2016. The size and frequency of wage changes. Wage Price Index, Australia.

Corden, W.M., 2012. Dutch disease in Australia: policy options for a three?speed economy. Australian Economic Review, 45(3), pp.290-304.

Dyster, B. and Meredith, D., 2012. Australia in the global economy: continuity and change. Cambridge University Press.

Healy, J., 2016. The Australian labour market in 2015. Journal of Industrial Relations, 58(3), pp.308-323.

Herbst, M. (2018). The jobs numbers: never mind the quantity, check the quality | Moira Herbst. [online] the Guardian. Available at: https://www.theguardian.com/commentisfree/2012/oct/05/jobs-numbers-quantity-quality [Accessed 12 May 2018].

Holland, J.H., 2018. The global economy as an adaptive process. In The economy as an evolving complex system (pp. 117-124). CRC Press.

Jacobs, D. and Rush, A., 2015. Why is wage growth so low?. RBA Bulletin, June, pp.9-18.

Kumar, S., Webber, D.J. and Perry, G., 2012. Real wages, inflation and labour productivity in Australia. Applied Economics, 44(23), pp.2945-2954.

Scutt, D. (2018). Australian wage growth hits another record low. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australia-wage-price-index-q1-rba-interest-rates-inflation-2016-5 [Accessed 12 May 2018].

Stockhammer, E., 2013. Wage-led Growth: An equitable strategy for economic recovery. Springer.

Wilkins, R. and Wooden, M., 2014. Two decades of change: the Australian labour market, 1993–2013. Australian Economic Review, 47(4), pp.417-431.