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Factors contributing to declining wage growth

Discuss about the Monetary Fiscal Policy Interaction & Fiscal Stimulus.

IMF has warned that Australia’s target for wage rate growth is weak with its inflation below target range (Jacobs & Rush, 2015). In the past Australia had experienced dynamic economic performance attributed to its mining boom from the year 2000s. Recently the country has not been able to return to full employment capacities and housing market imbalances. High debt has posed vulnerabilities within the economy. Bank forecast for wage growth had been strong, however forecast in the variable reflects that there is greater slack in the labor market considered to anticipated decline in terms of trade. Wage growth has declined surprising even post consideration of taking multiple factors into account.  This implies that wage growth has been connected to other determinants which in turn have changed over the past few years, taking into consideration cyclical factors that weigh over wage growth. Analysing major drivers of wage outcomes is essential for understanding labor market conditions and inflationary pressures experienced by the Australian economy (Ehrenberg & Smith, 2016). Wages form largest factor within business costs, therefore decline in wage growth can be linked to lower rates of inflation outcomes in future period. The slow rate of wage growth poses several challenges to the Australian economy hence government is inclined to view general rise in wages for all. The scope of this analysis deals with several risks that slower rate of wage growth impacts on the economy linking across several factors as inflation rates, GDP and so on.

Declining wage rate growth in Australian labor market has been a concern for the Federal Government, who is trying to induce several measures to increase wage growths. Macro-economic variables manipulation will lead to only limited changes in the wage growth levels, deeper analysis into structural variables need to be analysed in order to arrive at detailed understanding pertaining to the same. Appendix 1. Wage growth is generally measured by means of wage price index (WPI), but Banks generally incorporates a varied type of measures in order to assess labor costs by connecting it to various variables of labor market conditions and inflationary pressures within the economy (Davig & Leeper, 2011). Every concept is connected to different concepts of labor costs with major variables pointing towards slowing of earning in recent time period. Bank generally adheres to average earnings from the national accounts (AENA) and WPI. WPI index calculates changes in wages for particular period, a quantity of labor; it is calculated and published by Australian Bureau of Statistics (ABS). The ABS generally compares wage from a given previous quarter and then makes adjustments into it by exclusion of any changes is wages that arises from quality of certain work performed. It is generally calculated for a defined basket of jobs only and its design need to remain unaffected by composition of labor force. AENA is an indicator of inflationary pressures of the economy compared to the WPI as it includes non-wage costs as superannuation, redundancy payments made and calculating impacts of changes to workforce. According to Jacob and Rush (2015) there are various contributors of lower wage growth as spare capacity in the labour market, the need for the real exchange rate, lower profitability following the decline in the terms of trade and a decline in inflation expectations.

Importance of understanding major drivers of wage outcomes


Initial; slackness in labor market experienced in Australia since the 2008 have led to employees accepting lower wage rates as they were concerned regarding future employment prospects. Wage growth has been restricted by means of declining inflation outcomes and recent year’s expectations (Hein & Stockhammer, 2010). Employees have been seen to be bargaining over ‘real’ wages while comparing some wages to be either indexed or influenced by means of CPI outcomes. Many scholars attribute sharp fall in trade terms have also had considerable influences on wage growth in the past period. At the time of run-up in trade terms multiple firms had seen a sharp increase in their prices, which help conclude that higher wages could be afforded but there had been considerable increase in profitability. Considerations of these firms especially mining and mining-exposed had been increasing wages in order to attract higher output. Since 2011 firms’ output prices have not been able to grow as quickly which have further contributed to slowing down in wage growth rates. Appendix 2.

Strong growth is wages at the time of large run-up in trade terms have been able to overtake comparable economies, which has led to declining competitiveness in the international sphere of Australian labor force (Sumner, 2012). With declining trade terms, slower wage growth has reversed their roles in improving international competitiveness by depreciating exchange rates. A model that encompasses inflation expectations, a measure for firms’ output prices, and labor market spare capacities along with a lag of wage growth rate cannot be used to explain declining wage growth that has been persistent over the 3 years.

Workers wage rate and productivity that a worker produces over a period of time has considerable impacts on the prices of goods and services in the economy (Bishop & Cassidy, 2017). In case productivity is growing then real wages can continue to grow to provide productivity for businesses. An economic consideration that needs to be evaluated prior to analysing changes in a worker’s wage is that productivity is dependent on investment. Changes in technology, setting up new plants or manufacturing units can allow greater amounts of productivity to take place but for such expansion investments need to take place. Therefore, slowing wage rates is bound to impact on productivity as firms will be able to deliver less of productivity in case they wage rates continues to be slow in nature. Rate of return on demanded goods determine services provided by new plants and equipment the business makes investments in.  Competitive imperative links between investments and demand growth allows a business to respond to the growing needs of productivity. Reducing wage rate growths impacts the investment cycles and also capacity enhancements.  Appendix 3 

Demand growth takes place when spending power of workers and employees. With increase in real wages, income flows to the population hands. Availability of disposable income in the hands of the general population leads to creation of demand for certain goods and products with in the economy (De Grauwe, 2018). Apart from incomes, revenues and profits generated from the business also gets spend on those products available in the market. Changes in real wages bring about significant purchasing power in the hands of the workers and they I n turn generate demands for several goods produced within the economy. Therefore this increase in demand creates more capital to be invested into the business in order to cater to such demands (McKinnon, 2010). Increase demand for products within the economy will reduce uncertainties for the product creating more prospective investors to make investments. These investments will lead to increase in capacities or installing more plant and machineries which will require workers to work on. This will demand more workers to be employed thus impacting an increase in wage rates. In absence of this investments wages rates will continue to decline in future period of time.

Measurement of wage growth in Australia

Real wage and purchasing power of worker’s pay packet does impact prices of goods and services. With gradual declining in real wages and its growth over a period of time is bound to impact purchasing power of the population (Friedman, 2017). Analysis of declining real wages in the Australian economy depicts a slowing down of the economy in general as purchasing power has been connected to real wages and productivity. As productivity declines with reduced investments, less number of workers being needed in a factory. Declining trends in productivity will lead to fewer quantities of goods being produced by a factory, catering to meeting customer demands at one end. As workers, who are also in turn consumers of the product have les affordability to make purchases regarding a particular good; demands for such goods will be affected thus lowering inflation (Woodford, 2011). Prices escalating will tend to drop as there is significantly less number of people demanding particular products or goods.

Conclusion

The slowing of wage growth is Australia in the recent time period is reflected by job-level micro WPI data. The reduction in the average size of wage increases can be attributed to the declining terms of trade. Wage increases have been limited across mining and mining related wage increases. The minimum increase of 2-3% in wages can be attributed to inflation outcome hypothesis along with inflation expectations have an impact on wage levels. The Banks however continues to remain optimistic regarding inflation settings and wage growth levels, as they expect same will pick up over the few years’ time period. All variables in regards to wages will largely depend upon ways wage adjustments till mining booms again flourishes. Labor market conditions including levels of underutilization. It has been a major challenge in identifying structural changes that party is expected to drive recent wage outcomes, monitoring these factors might lead to better and detailed understanding related to wages.

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

Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.

Davig, T. and Leeper, E.M., 2011. Monetary–fiscal policy interactions and fiscal stimulus. European Economic Review, 55(2), pp.211-227.

De Grauwe, P., 2018. Economics of monetary union. Oxford university press.

Friedman, M., 2017. Quantity theory of money. The New Palgrave Dictionary of Economics, pp.1-31.

Hein, E. and Stockhammer, E., 2010. Macroeconomic policy mix, employment and inflation in a Post-Keynesian alternative to the New Consensus model. Review of Political Economy, 22(3), pp.317-354.

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

McKinnon, R.I., 2010. Money and capital in economic development. Brookings Institution Press.

Sumner, S., 2012. The case for nominal GDP targeting. Mercatus Research.

Woodford, M., 2011. Interest and prices: Foundations of a theory of monetary policy. princeton university press.

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