On February 20 this year, the International Monetary Fund (IMF) stated that "wage growth is weak and inflation is below its target range" for the Australian economy.
What risks does a slow growth rate in wages pose to the Australian economy, and why are economists and governments so eager to see a general rise in wages for everyone?
Primarily, wages imply the financial compensation given to a worker by the employer after the work has been done. Over the years, wage increases have been effective in boosting household incomes which is important for supporting economic growth through consumption of commodities and services plus investment. However, recent Australian economy is still struggling with low wage growth levels which is curtailing the demand and supply of labor, inflation growth and promoting more unemployment opportunities thereby contributing to the low economic growth rate in the country. It is imperative that the Australian minimum wage be reviewed upwards to support economic growth
According to a recent IMF report, there is a weak wage growth in the economy of Australia. The effects of a lower wage bracket isn’t supportive towards increases in the income of households which could boost economic activity through increased household consumption of goods and services(ICBC.Com 2018).The fact that the Australian economy is struggling with low rises in the wage gap makes it impossible for there to be a rise in the Australian commodities and services thereby stalling economic growth(Investopedia 2018).This is called wage inflation which cannot occur in the case of slow wage rate growths. Primarily, wage increases are meant to boost the purchasing power of consumers .Economic growth is boosted by more consumer expenditure which stems from consumers having increased disposable income hence slow wage increases discourage expenditure by consumers at the expense of savings.
Usually, higher wages are an incentive for many persons to seek employment and the reverse is true (Pettinger 2017).The fact that lower wage rates will discourage active employment means there will be high unemployment rates in countries where there are minimal wage rate growth. Cases of high unemployment slow down economic growth rates thus the need to provide work incentives through increased wage growth over time. Consequently, there will be slow economic activity growth rate owing to low labor participation rates in the Australian economy thus the need for constant wage reviews upwards. The Australian minimal wage needs to be upgraded so as to make employment attractive to the unemployed population. Unemployment engineered by low wages is called real wage unemployment as illustrated in Fig.1 whereby the wage(NMW) reduces labor demand thus few employment level as illustrated by Q2.However an increase in the wage gap(NMW),there will be an excessive labor supply(Q3 from Q1).
Effect of Wages on Aggregrate Demand and Supply
Essentially, low wages are responsible for the rightward shifting of the supply curve .Predominantly, low wages causes reduced production costs thereby resulting in an increase in the aggregate supply of goods and services in the short-run(Fig 2).The effect of low wages on the gross domestic product of the Australian economy will be a contraction as illustrated by the SRAS Curve (Amos web 2018).Economists are weary of contracted economy due to the slow pace of wage growth thus the concern surrounding the push for growth of the Australian workers’ wages. Further, slow growth rate of wages is responsible for stagnated economic performance and low rates of inflation (Economists view 2014).According to some economist opinions, increase in wage growth rates are an indicative of a growing economy and a tightened labor force thus the raised concerns over the current Australian wage rate. The fact that low wages mean less disposable household income means that there will be less demand for products and services.
Usually, a wage increase is likely to steer is likely to substantively reduce the debts of households. However, low wage levels are likely to encourage high repayment rates due to increased level of income (Kinsella 2017).low wage levels has led to high level of debt among Australian household thus much of the income goes into debt repayment as opposed to investments and expenditure that are to boost economic activity thus the need to raise current Australian wage rates. Currently, most Australian households are suffering from debt repayments. The fact that there is no wage increases is likely to extend their debt repayment terms which will likely be higher interest rates due to possible defaults and longer repayment perios.With such high debt burdens, much of the population is going to be left with little or no disposable income to invest or consume thus the current reduction in the Australian economic activity.
Aggregrate Demand and Aggregrate Supply
Predominantly, the Gross domestic product of a country is the mostly used measure of economic activity in a given country like Australia. The calculation of gross domestic product of the Australian economy depends on the aggregate forces of demand and supply of commodities and services in the Australian economy thus the importance of supply. The fact that wages affects the supply of commodities and services justifies the concerns over wage growth levels in the Australian context. The low inflation rates in Australia have partly contributed to the low inflation rates in the country. The current wage rate is unlikely to support the 2.5 percent targeted inflation rate to stir more economic activity for the Australian economy (Scrutt 2018).The current low wage raises are curtailing the much anticipated inflation to support further economic recovery of the Australian economy(Ryan 2017).Currently, the Australian level of inflation is too law to support any substantive economic growth rates thus the need for the wage levels to improve so as to boost the inflationary pressures in the country.Sometimes,increase in wages has been effective in industries inflation which is necessary for economic activities to flourish.
The Reserve Bank of Australia and Wage Growth
Currently, the Reserve Bank of Australia opinion is that the wage rate growth rate is low alongside inflationary pressures. Theoretically, lower wages might be responsible for demand or wage push forms of inflation (Pettinger2017). Despite the expected rise in employment levels, the Australian wage levels are expected to decline until there is strong economic growth (Woodhouse 2018).Despite the recent 1.5 cash rates by the central bank, there has been no rises in the Australian wage bracket. According to the Reserve Bank recommendation a raise in the minimum workers wage in Australia is necessary for regulating the inflationary pressures in the Australian economy(Reuters 2018).This goes to show the potential impact of wages on inflation which will inspire the demand for goods and services for economic growth. In the event of real wage inflationary pressures ,there will be increased in the average household income thus increased expenditure on goods and services which is essential for the growth of the Australian gross domestic product values.
However, low wage margins imply less consumption of commodities and services hence low investment activities .Low investment and expenditure by consumers slow down the process of economic activity and recovery hence the need to increase wages (Pettinger 2017).In addition ,wage raises are likely to trigger investment opportunities for the Australian population. Also, employment opportunities are expected to increase due to the increased investment opportunities. However, the current wage growth decline is curtailing investment and creation of more employment opportunities thus the need to push for wage growth. According to a recent statement by the Reserve Bank, wage growth is expected to determine the interest rates for the Australian economy which has remained unchanged for more than a year and seven months (Scrutt 2018).It is important that the Reserve Bank policies support wage levels in the Australian economy.
Notably, the role of minimal wages in the Australian economy is not encouraging thus the need to review the current Australian worker minimal wages. Usually, increased wages are likely to encourage employment and investment opportunities which are very crucial for economic activity and growth. Currently, there is massive real wage based unemployment and low inflation rates which are not conductive for investment opportunities hence the slow economic growth decline in the Australian economy. Most Australian households are struggling with little disposable income and high indebtedness rates due to low incomes which encourage more saving rather than expenditure and investment thus raising the need to raise the current minimal wage in the country. Basically the supply and demand of labor which affects the supply of goods and services depends on the wage rates in the economy. The Australian government through the Reserve bank is making steps to boost the wage and inflationary rates in the country.However, not much progress has taken place hence the reason which economists fear for the economic growth of the Australian economy.
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