Profits up, wages down in today’s Australia
It takes some nerve to expect Australian households, already struggling to cover the rising cost of basic necessities, to shoulder the burden of rising interest rates as the ‘only’ way to lower inflation. Yet this is the strategy in place.
“It was already difficult, before prices started to rise, to put food in the fridge, gas in the car, or find and pay for housing,” says Barbara Pocock, economist and elected senator. of the South Australian Greens. “Cutting wages to fight inflation is like using a fire extinguisher to fix a flood. It won’t work and it might actually make things worse.
While headline inflation is at its highest level in 22 years at 5.1%, cost increases for essentials such as rent, food, utilities and fuel are significantly higher. Prices for non-discretionary items are rising at the fastest rate in 15 years, up 6.6%, more than double the rate for discretionary items, which rose only 2.7%. Given this rather large disparity, we can rule out frivolous “post-pandemic” unspent JobKeeper spending as the primary culprit.
Blaming inflation on wages is a “misdiagnosis of the problem,” says Pocock. We are supposed to avoid forcing companies to pay substantial wage increases, even if these companies have made handsome profits in the event of a pandemic.
Profits now account for the highest share of Australian GDP, while the wage share is at historic lows. A recent analysis of Australia’s national accounts by Greg Jericho of the Australia Institute’s Center for Future Work found that corporate profits rose 25.3% over the past year to a record share of 31.1 % of national income.
Over the past two years, profit margins have increased by 40.3%, while wages have only increased by 7.4%.
“Corporate Australia is booming,” says Alison Pennington, senior economist at the Center for Future Work.
She says companies often calculate prices backwards from an “acceptable” rate of profit. “If they’re providing something that people desperately need, like groceries and electricity, then that incentive to maximize profits will only intensify.”
Yet the idea that wage growth is the main driver of inflation persists in the public consciousness. There was journalist Phillip Coorey’s infamous claim that pegging wages to inflation would be “a one-way trip for the Weimar Republic.” Similarly, Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry, said that “small businesses cannot afford” a minimum wage increase of more than 5%, and that such increases would “create cruel jobs, not create any”. Meanwhile, broadcaster Waleed Aly described stagnating wages as the “bitter remedy” that could “contain inflation”.
Aisle Two Fact Check: Wages Don’t Increase Inflation Unless They’re Rising Faster Than Inflation and combined productivity. In fact, wages have been stable – or falling in real terms – for more than a decade.
“Business commentators and business economists pedal the same tired orthodoxy, blaming wages for high inflation, even conjuring up fantasies of wage-price spirals,” Pennington says. “But unit labor costs have risen more slowly than inflation since 2013. Real wages have fallen by 2% over the past 12 months. It is not a salary.
The truth is that when we talk about inflation, we are really asking ourselves how much poverty and unemployment we are willing to tolerate to keep prices at a certain level. This is inflation targeting.
“For decades in Australia, monetary policy has used the pain of unemployment as a tool to control inflation,” says Richard Denniss, chief economist at the Australia Institute.
“We use interest rate policy to keep at least half a million people out of work, but we still blame the unemployed for not working hard enough. We pay them low unemployment benefits for fear that they are not looking hard enough. But the more they search, the more we raise interest rates. None of this is an accident.
Economist Professor Rabee Tourky says the Reserve Bank appears determined to plunge Australia into recession, deliberately lowering wages and workers’ bargaining power rather than tackling the root cause of the crisis. inflation.
“Inflation in itself is not that bad,” he says. “His healing is harmful. The “cure” is more harmful than the disease.
It is clear that a spiral of profit prices is underway, particularly in the gas sector, which is fueling inflation.
Denniss says prices are effectively set by the most expensive producer in the market: “Everyone just gets a raise.”
The price of oil or gas must be high enough to induce high-cost production companies to supply the market in times of unexpected crisis, such as the invasion of Ukraine.
“Every business has different production costs,” says Denniss. “When parts of the oil supply are interrupted, new forms of energy have to come to market. You have to pump the gas from further afield or move it by sea rather than by pipeline. That just means Santos Australia behaves like a bandit because its production costs have not increased at all.
While it is easy to attribute inflation to demand shocks such as the pandemic and ongoing supply chain disruptions, as well as supply shocks such as post-lockdown spending, climate change and the invasion of Ukraine, these factors are only part of the story.
Alison Pennington says this crisis has been going on for decades and has more to do with how we organize production in an economy where big oligopolies have the power to charge whatever they want.
“Covid has shocked international supply chains,” she says. “Workers in key sectors have fallen ill. Tenacious, just-in-time production techniques have broken down. Even the OECD recognizes the impact of widespread price increases on generating inflationary pressures, as companies are strategically placed in production networks that exploit buyers and consumers to raise prices and increase profit rates. These drivers of global structural inflation also apply to Australia domestically.
Australia suffers from high levels of market concentration. Our stock market is the most concentrated in the world, with the top 10 stocks on the ASX 200 now accounting for 47% of the index. A research report commissioned by the Department of Industry, Innovation and Science under the previous government found that at least nine Australian industries were “too concentrated or lacking in competition” and that “increasing concentration markets is not particularly to be celebrated”.
These sectors included the big four banks, which control about 80% of the mortgage market; air transport, “virtually served by two carriers: Qantas and Virgin Australia”; as well as electricity, educational support services, iron and steel forging, printing and support services, telecommunications, supermarkets and fuel retail.
The report warns that “when firms become large beyond certain scales, whether productive or not, they will unequivocally use their size advantage to circumvent the rules and gain advantage by influencing the political process.”
Professor Flavio Menezes recently co-authored a paper with Professor John Quiggin demonstrating that market power – the ability to raise prices – can amplify and exacerbate short-term inflation, particularly in highly concentrated economies or monopolized like that of Australia.
“The less competition, the more concentrated the market, the higher the initial price change will be following a demand shock,” he says.
Market power allows firms to pass on additional costs to customers, whereas in a more competitive and less concentrated economy the additional intermediary costs would have been shared and consumers’ experience of inflation would not have been as acute.
“Companies with market power can also hide anti-competitive behavior behind inflation,” explains Rabee Tourky. “And regulators don’t know how to prove they’re bad.”
According to a recent study, the first of its kind in Australia, two of the world’s largest institutional investors – BlackRock and Vanguard – were found to control at least 50% of the market in more than a fifth of Australian industries, accounting for more than a third of total industry turnover. These include commercial banking, explosives manufacturing, fuel retailing, general insurance, and iron ore mining. Common ownership was found to increase effective market concentration by 21 percent. The government is surely aware of this fact because its own MP – Andrew Leigh – is a co-author of the article.
At the heart of the inflation we are experiencing today is the conflict between what the two parties felt they had to say to get elected and what the government must now do – or not do – to bring it under control.
Having been elected on a platform of benevolence and compassion, the new government is nevertheless prioritizing tax cuts for the rich at the expense of raising wages to levels that would allow people to better cope with the crisis. increase in the cost of living. Meanwhile, Employment Minister Tony Burke says it is “too late” to change the points-based JobSeeker system initiated by the Coalition.
Pocock, Pennington and Denniss argue that free childcare, cutting executive salaries and a tax on the super-profits of fossil fuel producers are far more effective inflation-fighting strategies than rate hikes and the abolition of wages.
“We need far-reaching policy changes to reduce the concentration of corporate pricing power, organizing the economy on more equitable and sustainable foundations,” Pennington said.
“We need to recalibrate the balance of power between big business and workers through stronger corporate taxation, new systems of wage increases like sectoral collective bargaining, expanding public services and reversing privatizations. in essential services where the private sector has failed miserably.”
This article first appeared in the print edition of The Saturday Paper on July 2, 2022 under the headline “It’s Not a Paycheck”.
A free press is a paid press. Now is the time to subscribe.