Today’s 5.75% award wage increase is a necessary boost for the lowest paid workers but does not keep pace with inflation.

The Fair Work Commission (FWC) has today explicitly said this increase “will consequently not cause or contribute to any ‘wage price spiral’”.

Key Points:

• Award wage increase of 5.75% is less than inflation, which is running at 7%. (This covers approx. 20% of workers)
• FWC Commission have said explicitly this will not cause or contribute to a so-called ‘wage-price spiral’
• FWC acknowledges the increase “will not maintain the real value of modern award minimum wages nor reverse the reduction in real value which has occurred”
• Australia Institute research shows excess corporate profits, not wages, are the major driver of inflation
• Fair Work Commission also increased the national minimum wage by 8.65% (this covers approx 0.7% of workers)

“This is a necessary boost, but insufficient to keep the lowest paid workers ahead of inflation,” said Dr. Greg Jericho, Policy Director at the Australia Institute’s Centre for Future Work.

“It’s significant that the Fair Work Commission has explicitly said this will “not cause or contribute to any wage-price spiral”. At a time when companies are making record profits, our research shows profits, not wages, are the major driver of inflation.

“The FWC notes it “will make only a modest contribution to total wages growth in 2023-24 and will consequently not cause or contribute to any wage-price spiral.

“The FWC has made it clear the Reserve Bank can not blame low paid workers wages for driving inflation in the event they raise interest rates next week.”

Excerpt from Fair Work Commission Decision:

As the total wages of modern award-reliant workers constitute a limited proportion of the national wage bill, we are confident that the increase we have determined will make only a modest contribution to total wages growth in 2023-24 and will consequently not cause or contribute to any wage-price spiral.

We acknowledge that this increase will not maintain the real value of modern award minimum wages nor reverse the reduction in real value which has occurred over recent years.

New media reports today quoting former Australian Competition and Consumer Commission Chair Rod Sims have reaffirmed the findings of Australia Institute research showing excess profits from companies like Coles and Woolworths are significant contributors to inflation.

Key Points:

• Real wages fell 4.5% in 2022, the largest drop in a single year on record
• Empirical data shows excess corporate profits account for 69% of inflation beyond the RBAs target range, while unit labour costs account for just 18%
• As of the September quarter of 2022 Australian businesses increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above profits generated by growth in real economic output
• Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019
• Companies including Coles, Woolworths, Banks, Airlines and fossil fuel companies have all posted huge profits recently, with experts blaming a lack of competition

“That the business lobby has been unable to disprove a single number from our research is a testament to the careful, evidence-based nature of our work,” said Dr. Jim Stanford, Director of the Centre for Future Work and report author.

“It’s notable that many of the voices now seeking to cast doubt on the evidence behind a profit-price spiral were silent during the prolonged rhetoric on the existence of a wage-price spiral.

“The report ‘Profit-Price Spiral: the Truth Behind Australia’s Inflation’ contained new macroeconomic data confirming that increasing profit margins per unit of real output in Australia’s economy account for a strong majority (over two-thirds at that time, based on September quarter 2022 data) of above-target inflation since the outbreak of the COVID pandemic in early 2020. The data we presented on the surge in profits, coincident with rising inflation, is clear, sourced to ABS data, and has not been challenged.

“The RBA’s internal correspondence about our report (released as part of a freedom of information request) in fact replicated and verified our finding that rising profit margins account for the bulk of increased nominal valuations in Australia, comparing end-2019 to late-2022.

“Macroeconomic trends since then (including December quarter 2022 data released after our initial report) confirm that unit profit margins are still elevated.

“Contrary to the view of some Australian commentators, numerous high-quality research reports from think tanks, universities, and even central banks in other countries have confirmed the importance of rising profit margins in explaining the acceleration of inflation since the COVID pandemic, using methodological approaches similar to our own statistical decomposition. We cited several of those complementary studies in our follow-up report, Profits and Inflation in Mining and Non-Mining Sectors, and other similar research has been published more recently.

“The main thrust of the critical commentary on our report has not been to challenge its empirical findings on the rapid increase in profits, but rather to deny that any generalised increase in profitability has been the cause of the inflation. Some claim that the rise in profits has been limited to the mining sector, which somehow doesn’t ‘count’ – even though products produced by that sector (including petrol, gas, and other fossil fuels) have been a leading source of recent inflation.

“Our subsequent research showed that profit margins have also increased (albeit less dramatically) in several non-mining sectors. Others claim that swollen profits are just a side-effect of inflation that was caused by other forces (usually including supposed excess wage growth or consumer disposable incomes). That debate over the direction of causation is rather moot: the undeniable reality is that profits are at all-time record levels in Australia, while workers’ real wages continue to decline.

“Business peak bodies who argue for continued wage suppression desperately want to hide the reality that they have profited from the inflation that is causing a crisis in living standards. This explains their interest in trying to challenge our findings.

“The Australia Institute stands by its research. Arguing about the dimensions, causes, and remedies of the inflation problem is a normal part of the national economic debate. We look forward to similar scrutiny being applied to those arguing that wages are driving inflation in Australia.”

A 7% National Minimum Wage rise for low paid workers would help tackle the rising cost of living for those on award wages while having a virtually undetectable impact on economy-wide prices, new research from leading economists at the Centre for Future Work has found.

The data comes as the Fair Work Commission deliberates about how much to boost the nominal wages for some of Australia’s lowest paid workers including cleaners, early childhood educators, hospitality workers and carers who are struggling in the cost of living crisis.

Key Points:

• The national minimum wage (NMW) has increased less than inflation for the past two years.
• By June the NMW will be at least 4.2% in real value below where it was in 2020.
• Despite this business groups continue to advocate for another below inflation increase.
• Research from the Centre For Future Work reveals that the impact of a NWM rise on inflation is negligible and much less than that driven by profits.
• Over the past 25 years there has been no correlation between increases in the NMW and inflation growth over the following year.
• The ACTU’s call for a 7% rise would at most cause economy-wide prices to increase by an average of 0.4% – even if wage increases were fully passed on to consumers by companies.
• That increase in prices would fit easily within the RBA’s inflation target range (2.5% plus or minus 0.5%).
• With company profits at historic records, companies could readily absorb the costs of a higher minimum wage, rather than passing them on to consumers. They could fully absorb those costs through a reduction of just 1.4% in total company profits.
• Suggestions that business can’t afford a 7% increase are false.
• Suggestions that it would set off inflation are wrong.

“This research shows that for low paid workers struggling with the cost of living a 7% wage is a solution to, rather than the driver of, inflation,” said Dr. Greg Jericho, Policy Director at the Australia Institute’s Centre for Future Work.

“Over the past 25 years there has been no correlation between increases in the National Minimum Wage and inflation growth in the following year.

“We need to move from thinking that workers are the ones who must always carry the burden. After 3 years of soaring profits during the pandemic, many sectors of the economy can afford to slightly reduce their margins and still make strong profits.

“Low-paid workers have suffered a massive loss of real wages at the same time company profits have been rising. The 7% rise would be a small recompense for the workers who have seen their living standards deteriorate over the past two year.

“Previous Australia Institute research has demonstrated how excess corporate profits, not wages, are driving post-pandemic inflation in Australia.

“The fact is that average real wages in Australia fell 4.5% last year, the largest drop in a single year on record. That needs to be fixed, starting with the lowest paid who are carrying Australia.”

The past two years have seen the minimum wage rise by less than inflation, causing a significant decline in the real purchasing power of millions of workers covered by the Modern Award system. This marks the first time in a quarter-century that the minimum wage has had a deflationary impact on the economy (that is, increased by less than the inflation rate) over successive years.

The dramatic expansion of business profits has gone mostly ignored by the RBA and other macroeconomic policy-makers, who have focused instead on a supposed ‘wage-price’ spiral which does not exist. This suggests the focus of the RBA on wage restraint is misplaced and unfair, and that interest rates would be far lower today if companies had not gouged customers at the checkout.

The report Profit-Price Spiral: The Truth Behind Australia’s Inflation (attached) comes in the same week supermarket giants Woolworths and Coles posted soaring profits, with banks, gas and petrol companies posting similarly soaring returns.

Key Findings:

• A Profit-Price spiral is the main driver of inflation in Australia, rather than a supposed “Wage-Price” spiral, which does not exist
• As of the September quarter of 2022 (most recent data available), Australian businesses increased prices by a total of $160 billion per year over and above their higher expenses for labour, taxes, and other inputs, and over and above profits generated by growth in real economic output
• Without the inclusion of those excess profits in final prices for Australian-made goods and services, inflation since the pandemic would have been much slower: an annual average of 2.7% per year, barely half of the 5.2% annual average actually recorded since end-2019.
• That pace of inflation would have fallen within the RBA’s target inflation band (equal to its 2.5% target, plus-or-minus 0.5%)
• Excess corporate profits account for 69% of additional inflation beyond the RBA’s target. Rising unit labour costs account for just 18% of that inflation
• The RBAs 9 back-to-back interest rate rises would have been unlikely without excess profits and prices based on the RBA’s own policy framework
• Real wages in Australia fell 4.5% in 2022, the largest fall on record

“This empirical evidence shows excess corporate profits are the main culprit driving inflation, not workers’ wages,” said Dr. Jim Stanford from the Australia Institute’s Centre for Future Work.

“For Australians doing it tough this data would be aggravating.

“We’ve been told a story that workers need to restrict wage growth and accept a permanent reduction in living standards in order to fix inflation. This evidence shows that’s an economic fairytale.

“ABS data shows that without excess price hikes through the pandemic, inflation would likely be within the RBA target band, and hence there would be no need for the nine extreme, back-to-back interest rate rises that are crushing households and mortgage holders, fuelling the cost-of-living crisis.

“The pain experienced by workers through current inflation contrasts sharply with unprecedented increases in business profitability at the same time.

“Through this episode of post-COVID inflation, real wages have declined rapidly, labour’s share of GDP has declined, and corporate profits have set records. That is completely opposite from the experience of the 1970s, when real wages rose, labour’s share of GDP increased, and corporate profit margins fell.

“History confirms that fears of a 1970s-style ‘wage price spiral’ are simply not justified or grounded in reality. Instead, inflation in Australia since the pandemic clearly reflects a profit-price dynamic.”

The new report ‘Profit-Price Spiral: The Truth Behind Australia’s Inflation’ is attached and comes from the Australia Institute’s Centre for Future Work, by Dr. Jim Stanford.

Supermarkets, banks and petrol companies have recently posted huge profits:

• On Thursday Qantas posted $1.4b half-year profits, tripling revenues
• On Wednesday Woolworths posted a 25% rise in profits. Supermarket profits have soared on the strength of rapid food price inflation.
• On Tuesday Coles net profit grew 11% in the latest half-year result announced Monday, beating forecasts.
• On Wednesday Santos posted a 221% annual profit
• Ampol, Australia’s largest oil refiner, reported a 30% increase in first-half net profit, buoyed by soaring petrol prices.
• Commonwealth Bank posted a record $5.1b billion profit, up 9%, buoyed by extra interest income from rising interest rates.

A legislative consensus reached over the weekend to approve reforms to industrial relations laws sets the stage for rebuilding collective bargaining and a significant acceleration of wage growth, according to research from the Australia Institute’s Centre for Future Work.

“These reforms will lift wage growth and improve fairness in workplaces across Australia, big and small, in all sectors of the economy,” said Dr Jim Stanford, Economist and Director of the Centre for Future Work.

“These measures will rebuild collective bargaining, enhance gender equity, ensure greater transparency, and equip workers with critical tools to pursue fair treatment,” Dr Stanford said.

Research published by the Centre for Future Work suggests collective bargaining coverage will rebound under the new laws, which will allow for multi-employer collective bargaining in certain circumstances. Bargaining coverage in Australia has declined dramatically since 2013, with just 11% of private sector workers now covered by a current enterprise agreement. That fall in coverage has been the largest single cause of record-slow wage growth over the last decade.

Based on the historical relationship between bargaining coverage and wage growth, rebuilding coverage toward pre-2013 levels will lift nominal wage growth by 1.6 percentage points per year. Additional wage growth of that magnitude would lift annual incomes for a typical worker by almost $1500 in just one year, and a cumulative total of almost $24,000 over five years.

Another provision in the reform package is a new limit on the ability of employers to unilaterally terminate expired enterprise agreements during their renegotiation. Many employers have used this loophole to wipe out years of collective bargaining gains. A recent example was Qantas’s threat earlier this year to terminate its agreement for cabin crew. Centre for Future Work modeling shows that could have cost senior staff as much as $67,000 per year. This so-called ‘nuclear option’ in employers’ arsenal will be prohibited under the new laws.

“With the post-pandemic acceleration of inflation, many years of wage stagnation have now tipped over into the fastest decline in real wages in Australian history,” said Dr Stanford.

“This bill is a needed and timely response to an unprecedented crisis in workers’ living standards.

“I congratulate the legislators, including Minister Tony Burke, Greens Leader Adam Bandt, and Senator David Pocock, for negotiating this package and working to approve it in Parliament,” Dr Stanford said.

New research shows Australian workers are on average working 6 weeks unpaid overtime per year, costing over $92 billion dollars in unpaid wages across the economy. The average worker is losing over $8,000 per year or $315 per fortnight due to what researchers have branded “time theft”.

23 November 2022 marks Go Home on Time Day, an initiative run by the Australia Institute’s Centre for Future Work, and now in its fourteenth year.

Economists have recommended a ‘Right to Disconnect’ to tackle what they say is the systemic problem of unpaid overtime. The research reveals that employers are profiting from 2.5 billion hours of time theft worth over $92 billion in unpaid wages amid a cost-of-living crisis and declining real wages.

Key Findings:

• The average Australian worker performs 6 weeks unpaid overtime per year, worth over $8,000 per worker per year
• The ‘Right to Disconnect’ is supported by six in seven (84%) workers, and has recently been recommended by the Senate Select Committee on Work & Care
• Across the workforce, this equates to $92 billion in lost income per year, roughly the same as the Commonwealth’s annual expenditure on healthcare
• Workers share of national income is at an all-time low of 44% in 2022, while the profit share of income is at an almost record high of 30%
• Respondents reported 4.3 hours of unpaid work per week, equivalent to 15% of total working hours. This equates to 224.3 hours per year per worker, or six standard 38- hour work weeks.
• Across the whole labour market, over half of all workers (56%) are unsatisfied with their working hours
• Almost one in two (46%) workers in Australia reported that they wanted more paid hours
• 84% workers support the Federal Government legislating a ‘Right to Disconnect’ that directs employers to avoid contacting workers outside of work hours, unless in an emergency, with only 8% who oppose

Negative impacts from unpaid overtime:

• The most commonly experienced negative consequences were physical tiredness (35%), followed by stress and anxiety (32%), and being mentally drained (31%), each affecting around a third of workers.
• Over a quarter of workers reported that overtime interfered with their personal life and relationships (27%), and 17% responded that it led to disrupted or unfulfilling non-work time.
• One in five workers identified that working outside scheduled hours negatively affected their relationship with work, with 22% who reported reduced motivation to work and 19% experienced poor job satisfaction.

“Our research shows unpaid overtime is a systemic, multibillion-dollar problem which robs Australian workers of time and money,” said Eliza Littleton, research economist at the Australia Institute and report author.

“This is time theft. Unpaid overtime harms our quality of life and reduces our time with family, friends, and those we care for.

“This Go Home on Time Day, our research reveals that unpaid overtime is robbing Australian workers and the economy of over $92 billion per year. This time theft only further exacerbates our current cost of living crisis.

“With workers share of national income at the lowest point ever, a focus on reducing unpaid overtime would improve quality of life and ease the cost of living pressure for millions.

“The prevalence of overtime suggests that ‘availability creep’ has eroded the boundaries between work and life.

“Workplace laws could be updated, including creating a ‘Right to Disconnect’ as recommended by the Senate Select Committee into Work & Care, and as exists for employees of Victoria Police, and Queensland Teachers”

Proposed reforms to Australia’s industrial relations laws are likely to support higher coverage for collective bargaining in the national labour market, and provide a boost to stagnant wage growth according to new research from the Centre for Future Work.

The report reviews historical data on the erosion of collective bargaining in Australia, and its close correlation to the slowdown in wage growth visible after 2013. The authors find that the decline of collective bargaining coverage (which fell by almost half in the private sector since 2013) explains over 50% of the change in wage growth during that same time.

“Restoring collective bargaining is vital to any strategy to get wages growing again in Australia,” said Dr. Jim Stanford, co-author of the report and Director of the Centre for Future Work.

“International evidence indicates that requires the ability to undertake bargaining at a multi-employer level.”

Key Points from Report:

• Each one percentage point loss of bargaining coverage has been associated with a reduction in annual wage growth of 0.15 percentage points.
• There is a clear and predictable relationship between countries which support broader multi-employer bargaining, and the level of bargaining coverage which they achieve.
• The reforms contemplated in the Secure Jobs, Better Wages legislation would incrementally restore collective bargaining coverage in Australia: by relaxing current restrictions on multi-employer bargaining, and supporting bargaining through other measures (such as limitations on employer termination of enterprise agreements, stronger dispute settlement provisions, and streamlined processes for approving new agreements).
• These reforms would elevate bargaining coverage in Australia toward a level typical of other countries where most bargaining still occurs at the enterprise level (as would be true under these reforms), but supplemented by some multi-employer bargaining and broader coordination. The OECD has identified a group of these countries, with an average bargaining coverage rate of 33%.
• That would reverse most (but not all) of the loss in coverage experienced over the past decade.
• Considering the observed correlation between bargaining coverage and wage growth, this would lead to an improvement in nominal wage growth of 1.6 percentage points per year.
• Just one year of wage growth at this faster pace would boost annual earnings for a worker with average full-time wages by $1473. That increment would expand to $8300 by the fifth year of (compounded) faster wage growth. On a cumulative basis over the first five years alone, the average worker would receive additional income of almost $24,000.
• The 1.6-percentage-point increment in annual wage growth would boost aggregate wage incomes by $15 billion in the first year, and $75 billion in the fifth year.