My Blog

Author: Jim Stanford

  • Inflation: A Primer

    The Inflation Primer report investigates the history of Australian inflation and policy choices and provides a counter to the view that low inflation and the current inflation target is an unalloyed good. The period of inflation targeting has coincided with a strong shift of national income away from workers to company profits. It has also seen a tendency of the Reserve Bank to act decisively when inflation grows above the target and be much less active when, as we saw in the years prior to the pandemic, inflation slowed below the target range. The report also reveals that workers’ wages did not cause the current level of inflation and yet workers are being urged to accept historic falls in real wages in order bring inflation back within the Reserve Bank target.

    Our review of the causes of current inflation points to some clear policy conclusions, that should be kept in mind by the government, the Reserve Bank, and other stakeholders as Australia continues to adjust to these new inflationary challenges:

    1. Inflation targeting in Australia since 1993 has not been “neutral”. Inflation missed the target from below, far more often than from above. Moreover, that period of inflation targeting (especially the sustained periods when inflation fell below the target) was associated with a massive transfer of income and economic power from workers to businesses. As the Commonwealth government undertakes its review of the RBA’s mandate and operations, these broad political-economic dimensions of monetary policy must be considered carefully. Monetary policy has not been a technocratic exercise, intended to maximise public welfare in a general sense. It clearly reflects and continues to reflect, value judgments and priorities placed on how the costs and benefits of inflation management are distributed across society.
    2. There is no evidence at all that a tight labour market, rising wages, or labour costs more generally have anything to do with the surge in inflation since the COVID pandemic. To the contrary, the evidence is clear that wages have had a dampening impact on inflation in this period. Recent inflation is clearly associated with a further expansion of business profits in Australia, to their highest share ever. Attacking inflation by aiming deliberately to increase unemployment and restrain wage growth even further, is a “blame-the-victim” policy that will only make workers pay even more for a problem they clearly did not create.
    3. The current surge of inflation reflects a “perfect storm” of unique factors (mostly global in nature) sparked by the COVID pandemic: which has been, after all, the most dramatic and painful event in the world economy since WWII. It should hardly be surprising that after-shocks from those events will be felt for some time, and the surge in global inflation is clearly one of them. Responding to this unique and unprecedented challenge by simply reciting a monetary playbook formulated in a fundamentally different era (the inflation of the 1970s) is not just inappropriate. It will, if pursued, lead to a painful and unnecessary global recession that will almost certainly engulf Australia, too.

    For all these reasons, the Reserve Bank and the Commonwealth government need to take a more careful, balanced look at the nature, causes, and consequences of the upsurge in inflation since the pandemic, before leaping to conclusions that are unjustified – and imposing policy responses that do more harm than good.

    The post Inflation: A Primer appeared first on The Australia Institute's Centre for Future Work.

  • War gains: LNG Windfall Profits 2022

    Despite widespread calls by economists and commentators to tax this windfall gain, the Australian Government is yet to do so. At least $20 billion could be raised by a tax on war related profits. This is enough to fund the Australian Government’s entire $20 billion investment in its Rewiring the Nation initiative to modernize Australia’s electricity grid and would leave funds to compensate Australian households and businesses unfairly impacted by spiralling energy costs, largely because of the behaviour of the LNG producers concerned

    The post War gains: LNG Windfall Profits 2022 appeared first on The Australia Institute's Centre for Future Work.

  • Submission to the Senate Select Committee on Work and Care

    The post Submission to the Senate Select Committee on Work and Care appeared first on The Australia Institute's Centre for Future Work.

  • Profit share: Exploring data on profits in the Australian economy

    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.

    The post Profit share appeared first on The Australia Institute's Centre for Future Work.

  • An Economy That Works for People (Jobs Summit)

    In preparation for the Summit, the Australian Council of Trade Unions is publishing a series of discussion papers to spark dialogue over key issues that will be discussed at the event. The first of these papers, on the failures of past macroeconomic policy and the need for better approaches, was prepared with input from Jim Stanford, Director of the Centre for Future Work.

    The 23-page report, titled An Economy That Works for People, first reviews the legacy of the last decade of one-sided macroeconomic and labour market policies from former Coalition governments. Boosted by government actions to reduce taxes, labour costs, and regulations, corporate profits have swelled to the highest share of GDP (almost 30%) in history. But that profit has not translated into investment or innovation: at present just 37 cents of each dollar in profit is reinvested in new projects. Meanwhile, the share of GDP going to workers has never been lower since records have been kept: falling to just 45% in 2022. This redistribution of income from workers to businesses is not just a moral failure. The impact of swelling profit margins on inflation, and the drain in spending power arising from uninvested profits, are holding back Australia’s economy considerably.

    An Economy That Works for People

    The paper discusses the causes and consequences of the current surge in inflation in detail, providing conclusive evidence the problem did not arise in the labour market. To the contrary, labour costs have servedto reduce inflation: nominal unit labour costs grew only 2.1% over the last 12 months (below the RBA inflation target), while unit profit margins surged (by over 14%).

    The paper also reviews statistical evidence on Australia’s productivity growth, and in particular on the failure of productivity growth to be reflected in rising real wages. Real put per hour of work has increased 13% over the past decade: not outstanding, but still positive and steady. Real wages, in contrast, have gone nowhere — and are now falling rapidly in the face of accelerating inflation. Rather than risking an economy-wide recession with rapid interest rate hikes (which impose the worst burden on workers and indebted households), the paper calls for a more multi-dimensional and targeted approach by government (supplementing actions by the RBA) to gradually bring inflation down without causing mass unemployment.

    The paper makes 6 specific recommendations for macroeconomic reforms to ensure working Australians share fairly in the benefits of future growth. The first is to elevate full employment in decent jobs as the central goal of macroeconomic policy, and to ensure that all policy interventions (including from the RBA, the Commonwealth government, and other regulatory agencies) are consistent with that top goal.

    Release of the paper generated extensive media coverage and public debate (which was its goal!): including stories in The Guardian, the ABC, The Sydney Morning Herald, The Australian Financial Review, and The Australian. In this feature interview with 2CC Radio host Leon Delaney, Dr Stanford discusses the main recommendations of the report, and whether it is really such a ‘radical’ idea to make full employment the top goal of economic policy:

    The post An Economy That Works for People appeared first on The Australia Institute's Centre for Future Work.

  • Are Wages or Profits Driving Australia’s Inflation?

    Labour costs have played an insignificant role in the recent increase in inflation, accounting for just 15 percent of economy wide price increases while profits have played an overwhelming role, accounting for about 60 percent of recent inflation.

    The post Are Wages or Profits Driving Australia’s Inflation? appeared first on The Australia Institute's Centre for Future Work.

  • Profits push up prices too, so why is the RBA governor only talking about wages?

    Reserve Bank of Australia governor Phillip Lowe has invoked memories of the 1970s, warning wage growth must be restrained to contain Australia’s surging inflation.

    In the 1970s, Lowe said last week, “we got into trouble because wages growth responded mechanically to the higher inflation rate”. Now, with inflation above 5%, and tipped to reach 7% by the end of the year, he wants want people to keep in mind an “anchoring point” for wage growth of 3.5%.

    That 3.5% represents the central bank’s long-standing judgement that wage growth equal to the RBA’s ideal inflation target (2.5%) plus productivity growth (typically more than 1% a year, currently above 2%) is economically sustainable.

    Lowe says “if wage increases become common in the 4% and 5% range” that will make it harder to get inflation back to his target. But that prospect seems so remote it’s a wonder why he focused on it. Particularly when he said nothing about about the role of ever higher profits on increasing prices.

    Wages increases aren’t the problem.

    Nominal wage growth has languished well below that 3.5% benchmark since 2012. The last time wages grew at more than 4% was 2009.

    Over the past decade, wages have fallen further and further behind the level implied by the RBA’s magic formula. During this time Lowe (governor since 2016) repeatedly cited weak wages as a key factor keeping inflation below the bank’s 2-3% target – but nothing happened.

    So why is he now ringing alarm bells about wages growing too fast? It’s not at all clear when broad wage growth will even regain 3.5%, let alone surge faster.

    The Fair Work Commission’s decision this month to raise the minimum wage by 5.2% and wages for other award-covered workers by 4.6% will boost the pay for about a quarter of workers. But even that can’t be considered “inflationary” by any stretch of imagination. In real terms, the minimum wage will fall again this year, as it did last year.

    Most other workers have little chance of doing as well.

    Wage gains from enterprise bargaining agreements (covering about 35% of workers) remain subdued. In the latest 12-month period they delivered an average increase of just 2.6%.

    For the 38% of workers on individual contracts – now the most common pay-setting method in Australia’s individualised labour market – there is even less reason to expect wage growth to suddenly accelerate.

    Profits have played a bigger role

    Labour is not the only component in production costs: a considerable profit margin is also built into final prices. In fact, after decades of capital’s share of GDP increasing while labour’s declines, those profits have become more important in price-setting.

    That’s a big change from the 1970s, when the narrative about wage-driven inflation became so firmly locked into the national policy discourse.

    Indeed, by the end of 2021, corporations made 62 cents in gross profit for every dollar they paid in labour compensation. That’s the highest in history – and more than twice the rate in the 1970s.

    Yet while the RBA warns darkly about rising labour costs, the growing importance of profits in driving higher prices is not mentioned. This reflects an ideological bias that wages are a “cost” item that must be tightly controlled, while profit is assumed to be a legitimate “reward” to businesses that efficiently supply the market with something valuable.

    Calculating profit costs
    The Australian Bureau of Statistics calculates several measures of unit labour costs – the cost of employing labour per “unit” of production. It does not publish a measure of “unit profit cost” – what gets paid in profit per unit of production. But perhaps it should. That might motivate greater attention to the role of profit margins in current inflation.

    In lieu of ABS data, however, we can create a broad measure of unit profit cost by comparing the growth of nominal corporate profits to the growth of real output (similar to the methodology for measuring unit labour costs).

    As shown in the following graph, since the start of the COVID-19 pandemic unit profit cost has surged 24%, compared with a 4% increase in the nominal unit labour cost (which, being over two years, is still below the RBA’s inflation target.

    Blaming the victims
    Warnings about wages misdiagnose the source of current inflation. They blame the victims of falling real wages for a problem they did not cause.

    The RBA acknowledges the upsurge in inflation was initially fuelled by COVID-19 disruptions – including supply chain problems, global energy prices and major (but temporary) shifts in the composition of consumer demand.

    But corporations with pricing power (particularly potent in sectors like energy, housing and groceries) took advantage of those disruptions to fatten their profit margins. They have profited from inflation, while workers lost out.

    Now workers are being told they must swallow further real wage cuts to fix the inflation that enriched their employers.

    Once the RBA confronts the issue of inflated profits as both a cause and a consequence of current inflation, we then might discuss labour’s role. Until then, workers are justified in fighting to protect their real incomes.

    The post Profits push up prices too, so why is the RBA governor only talking about wages? appeared first on The Australia Institute's Centre for Future Work.

  • Wages, Prices and the Federal Election

    The recent federal election featured important debate regarding the rising cost of living in Australia, and whether and how wages should be boosted to keep up with higher prices. One exchange, late in the campaign, occurred when ALP leader Anthony Albanese stated his belief that wages should keep up with prices — but then was strongly criticised for that view by Coalition leaders and some business commentators.

    New exit poll results from the Australia Institute indicate that a very strong majority of voters (83%) in fact support the idea that wages should at least keep up with prices. This opinion was shared broadly across the political spectrum. Even 79% of Coalition voters supported lifting wages to at least keep up with inflation.

    It seems likely, therefore, that this debate over wages and prices worked to the advantage of Mr Albanese. The exit poll indicated that voters identified the ALP, by a large margin, as having enunciated the best position on the problems of wages and the rising cost of living. 39% of voters (including 11% of Coalition voters) indicated the ALP had the strongest position on this issue, compared to 26% who thought the Coalition had the best policy.

    The post Wages, Prices and the Federal Election appeared first on The Australia Institute's Centre for Future Work.

  • Real wages are shrinking, these figures put it beyond doubt

    Read the full article Real wages are shrinking, these figures put it beyond doubt on The Conversation.

    The post Real wages are shrinking, these figures put it beyond doubt appeared first on The Australia Institute's Centre for Future Work.

  • Working With COVID: Insecure Jobs, Sick Pay, and Public Health

    Almost one in five Australians (and a higher proportion of young workers) acknowledge working with potential COVID symptoms over the course of the pandemic, according to new opinion research published by the Centre for Future Work.

    The research confirms the public health dangers of Australia’s existing patchwork system of sick leave and related entitlements.

    The main findings of the report, based on a poll of 1000 Australians, include:

    • More than one in three (37%) employed Australians have no access to statutory paid sick leave entitlements (including workers hired under casual employment arrangements, and self-employed workers). Another 12% had access only to pro-rated part-time entitlements.
    • When the pandemic hit Australia, barely half (51%) of employed workers could count on regular full-time income if they had to stay home from work.
    • Almost one in five respondents (19%), and a higher proportion of young workers (29%), acknowledged working with potential COVID symptoms at some point during the pandemic. This confirms the public health dangers of Australia’s patchwork system of sick leave and related entitlements.
    • Polling results also confirm that a significant proportion of workers (17%) also attended work after exposure to someone possibly infected with COVID.
    • Given inadequate sick pay entitlements and the surprising share of workers attending work in violation of public health advice, it is not surprising that 18% of workers did not feel safe attending their normal workplaces during the pandemic.

    This research indicates that Australia’s sick pay entitlements are clearly inadequate to protect workers’ health and safety at work and allow them to stay home from work when health advice requires it. The expansion of non-standard and insecure forms of work (including part-time work, casual jobs, contractor positions, and ‘gigs’) has heightened concern that many workers do not have the effective ability to stay home from work for health reasons.

    Government should expand sick pay entitlements to cover all workers, and also implement strategies to limit and reduce the incidence of insecure work: including by constraining employers’ use of ‘permanent casual’ arrangements, sham contracting, and on-demand gigs, none of which provide normal and healthy paid leave entitlements.

    Unfortunately, the current federal Government has done the opposite by reinforcing this shift toward insecure working arrangements – including through its 2021 amendments to the Fair Work Act, which cemented and expanded employers’ rights to hire workers on a casual basis (with no sick pay) in virtually any job they wish.

    The post Working With COVID: Insecure Jobs, Sick Pay, and Public Health appeared first on The Australia Institute's Centre for Future Work.