BSD113-Economics | Growth Rate in Wages of Australian Economy

Introduction

The global economy and its dynamics over the years have been dependent on many factors and occurrences, which in turn can be explained and interpreted in the theoretical and conceptual framework of economics. One such influencing factor, contributing significantly in the global economic dynamics, especially in the contemporary period, is the concept of market. “Market”, in terms of economics, refer to the demand and supply interactions and the buyer and seller activities in any industry at a point of time (Salvatore 2013). Equilibrium in a market, usually occurs at the point where the demand and the supply forces mutually agree to settle in terms of price and quantity of the commodity or service.

One such important market of global significance and implications is the labour market in different countries, where the demand and supply of labour resources interact with each other and the price of the labour (known as wage) is determined in the process. However, often leaving these dynamics to the free market leads to creation of equilibrium situations where one side or both the sides are negatively affected, which in turn requires government monitoring and regulation as dynamics in the labour market have considerable implications not only on the welfare of the labours but also on the overall economic well-being of the country (Ehrenberg and Smith 2016).

Keeping this into consideration, the concerned essay takes into account the recent issue of visibly slow rate of growth of wages in the labour market of one of the globally significant and highly developed economies of Australia in the recent periods and tries to analyse the impacts and risks which can arise from the same, using the conceptual framework of economics.

Australian Economic Overview

As discussed above, the economy of Australia has been one of the most developed and highly prospering economies in the global scenario for decades known for its economic stability, robust government and policy frameworks and huge industrial and service sector expansion. This economic prosperity of the country can be seen from the impressive performance of almost all the macroeconomic indicators like the growth of GDP, rate if inflation, employment generation and others (Dyster and Meredith 2012). The increased prosperity of the country, over the years, has led to huge increase in the population, which in turn can be attributed to both the increase in the domestic population as well as the increasing inflow of the immigrants from all parts of the world in search of higher economic welfare and employment scopes. However, in the recent periods, the economy of the country in consideration has been several bothering issues of which one of the primary ones is that of the falling rate of growth of wage in the country over the last few years (Findlay and Garnaut 2017).

Slow growth rate of wages in the country

The dynamics in the wage growth rate in Australia can be seen with the help of the Wage Price Index of the country, which measures the price of labour and its changes over the years. This is shown as follows:

Figure 1: Australian Wage Price Index (1998-2015)

(Source: Scutt 2018)

From the above figure, it is evident that the wage growth rate, which rose and remained consistently high from 2001 till 2009, fell drastically after that period, recovering to some extent in 2010-2011. However, post 2011 the rate fell alarmingly and is still considerably low in the recent periods, with no sign of recovery in the indicator in the near future (Hawthorne 2016).

Given the fact that a lot of the economic welfare of the population of the country as well as the overall aggregate demand and productivity of the economy of the same depends on the level of wages received by the workers of the country, the decline and slowdown in the growth rate of the wage rates in Australia in the recent years is obviously a concerning issue for the government of the country as well as for the population and there are several reasons behind this problem faced by the Australian economy, the primary ones being elaborated in the following section.

Reasons behind the slow rate of growth of wage in Australia

The primary reasons behind the issue cropping up in the economy are as follows:

Shift in employment and decrease in labour demand- The decline in the rate of growth of wage in the country can be seen to be more abrupt and drastic in the industrial, manufacturing and agricultural sector. This is primarily attributed to the shift which the economy of Australia has been experiencing in the last few years, with the growth of the service sector and a simultaneous shrinkage of the industrial and basic manufacturing sectors (Wilkins 2015). This in turn has created an increase in the demand for high skilled labour and a huge decrease in demand for low or moderate skilled labours whose supply is high, thereby leading to a low growth in the wage rates.

Immigrant labour and low productivity- The huge inflow of low skilled immigrant labours in the country has not been of help in the current period of shrinking manufacturing industries in the country. Their excess supply and low productivity have in turn led to sluggish growth of wages (Whiteford 2014).

Withering of economic booms- The country had over the years experienced huge mining boom, investment booms which in turn created economic prospects, employments and high wages in the economy. However, with the withering of the same, the economic prospects as well as creation of new jobs have slowed down considerably (Preston 2018).

Part time jobs- Many jobs have been created in the economy, however, most of them being part time ones did not contribute in increasing the wage growth rates considerably.

Risks of low rate of growth of wages in Australia

The sluggish growth rates of wages in the country are expected to bring considerable risks and vulnerabilities for the economy if the same persists for a prolonged period. These risks are explained in this section in the light of the relevant economic theories:

Aggregate demand and supply- The demand and supply as well as the overall productivity and economic growth of a country hugely depends on the economic abundance enjoyed by the population of the concerned country (Ehrenberg and Smith 2016). Thus, the presence of low wage growth rates, if persistent for a prolonged period, can lead to the lack of purchasing power and economic welfare of the population in the country, thereby decreasing the overall aggregate demand in the economy attributed to the fall in the consumption and investment expenditures, the effects of which can be seen as follows:

Figure 2: Aggregate demand and aggregate supply

(Source: As created by the author)

Due to the fall in the aggregate demand, as can be seen from the above figure, the overall encouragement for the producers in the country is expected to decrease due to the presence of an excess supply of commodities and services, which in turn is also expected to decrease the aggregate supply in the long run, thereby decreasing the overall productivity in the economy. This in turn is expected to slow down the economic growth and prosperity of the country in the future (Rios, McConnell and Brue 2013).

Inflation dynamics and risks- Another aspect in which the economy of Australia can experience vulnerability due to the slow growth rate of the wages in the country is in the aspects of the overall level of inflation (Barro 2013). In general, while an excessive high inflation rate hurts the purchasing power and consumption of the population of the country, an acute low level of inflation leads to lack of production activities and stagnation of the economy of the same.

Keeping this into consideration, the low wage growth rate in Australia can lead to lesser consumer’s buying power as a whole, thereby pulling down the price levels in the economy, which in turn can lead a fall in the overall aggregate supply in the economy, the effects of which are as follows:

Figure 3: Decrease in Aggregate Supply

(Source: As created by the author)

Due to the fall in the price, the aggregate supply is expected to decrease in the economy, which in turn is expected to reduce the overall output and GDP of the country if the wage growth rate remains slow for a prolonged period of time.

Unemployment and Underemployment- Another issue of immense concern, which can have direct linkage with the slow growth of the wage rates in Australia, is that of the issue of unemployment and unemployment. This is because the wage rates present in a country and their dynamics act as significant indicators of the level of employment in the country:

Figure 4: Labour market dynamics

(Source: As created by the author)

In case of Australia the slow growth of wage signifies the presence of an excess supply of labour, especially in the manufacturing, basic industries and agricultural sectors. Thus, as long as this trend prevails, the country has the risk of experiencing high unemployment, underemployment or disguised employment in the economy (Blustein, Kozan and Connors-Kellgren 2013).

Conclusion

From the above discussion it can be concluded that the otherwise stable and robust economy of Australia, in the contemporary period, has been experiencing several economic issues of which the primary one of immense concern is the issue of a slow growth of the wage rates in the economy. This in turn, if persists for a prolonged period in the economy of Australia, can lead to the creation of immense risks in the economy in the aspects of low aggregate demand, aggregate supply, low productivity, low employment generation, underemployment, low purchasing power, low consumption and investment expenditure and an overall stagnation in the economy of Australia in coming years.

References

Barro, R.J., 2013. Inflation and economic growth. Annals of Economics & Finance, 14(1).

Blustein, D.L., Kozan, S. and Connors-Kellgren, A., 2013. Unemployment and underemployment: A narrative analysis about loss. Journal of Vocational Behavior, 82(3), pp.256-265.

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

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

Findlay, C. and Garnaut, R. eds., 2017. The political economy of manufacturing protection: Experiences of ASEAN and Australia (Vol. 19). Routledge.

Hawthorne, L., 2016. Labour market outcomes for migrant professionals: Canada and Australia compared.

Preston, A., 2018. The structure and determinants of wage relativities: evidence from Australia. Routledge.

Rios, M.C., McConnell, C.R. and Brue, S.L., 2013. Economics: Principles, problems, and policies. McGraw-Hill.

Salvatore, D., 2013. International economics (p. 426). Hoboken, NJ: John Wiley & Sons.

Scutt, D. (2018). CHARTS: Australian wages are growing at the slowest pace on record. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australian-wages-just-grew-at-the-slowest-pace-on-record-2015-8 [Accessed 12 May 2018].

Whiteford, P., 2014. chapter 3 AUSTRALIA: INEQUALITY AND PROSPERITY AND THEIR IMPACTS IN A RADICAL WELFARE STATE. Changing Inequalities and Societal Impacts in Rich Countries: Thirty Countries' Experiences, p.48.

Wilkins, R., 2015. The household, income and labour dynamics in Australia survey: Selected findings from waves 1 to 12. Melbourne: Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.