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  • Closing Loopholes: Important repairs to the industrial relations system, no more, no less

    Closing Loopholes: Important repairs to the industrial relations system, no more, no less

    by Fiona Macdonald in The New Daily

    Fiona Macdonald

    Acting Director, Centre for Future Work

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    Originally published in The New Daily on December 17, 2023

    Labour hire workers can no longer be paid less than employees doing the same job in their workplaces as a result of industrial reforms passed by Parliament.

    However, other important reforms to close loopholes in employment laws and stop exploitation of workers and avoidance of standards won’t be voted on in Parliament until next year.

    This leaves gig platform workers and road transport contractors waiting to get much-needed minimum pay and conditions standards.

    On the final sitting day of Parliament for 2023, the government’s amended Closing Loopholes bill was passed.

    With a Senate Inquiry into the bill due to report in February it was a surprise to many that some of the reforms were legislated, especially the so-called same-job, same-pay labour hire reforms that had been strongly contested by employers.

    This reform targets gaps in laws that have allowed some large and profitable corporations, including BHP and Qantas, to use labour hire to engage workers on rates that undercut those agreed in enterprise agreements.

    A Senate Inquiry heard evidence that, as a result of employers using labour hire this way, workers were being paid up to tens of thousands of dollars less than employees doing the same work in the same workplace.

    As with the government’s 2022 Secure Jobs, Better Pay bargaining reforms, opposition by some employers to this latest reform has been intense, involving an expensive and unnecessary scare campaign.

    The mining employers’ advocacy body, the Minerals Council, was reported to be spending up to $24 million to fight the labour hire changes and, on the day of the bill’s passing, issued a statement greatly exaggerating the nature and extent of the reform by declaring it to be a ‘‘dramatic rewriting of workplace law’’.

    To get the IR changes through the Senate the government needed to secure the support of key independents and, as a result of this, some parts of the Closing Loopholes bill were set aside to be considered by Parliament in February.

    The parts of the bill set aside until next year include minimum standards for digital platform and road transport workers and changes that make it easier for casual employees who want to become permanent.

    Getting the platform and road transport industry changes in place will be critical for improving working lives and ensuring fair pay and conditions for tens of thousands of low-paid and vulnerable workers who are currently without most rights to minimum standards at work, due to their classification as contractors.

    The reticence of independent senators Jacqui Lambie and David Pocock to pass the platform and road transport industry reforms is perhaps not surprising, given the strong and powerful lobby groups and companies such as Uber, who insist all platform workers are entrepreneurs and small business people not in need of protections, despite the numbers of young, inexperienced, migrant and vulnerable workers in these arrangements.

    Platforms say the costs to consumers will increase exponentially. Small business groups argue reforms are all too complicated and may have far-reaching unintended consequences.

    Labour law experts disagree. It is to be hoped that the extra time for consideration of the proposed changes gives the independents an opportunity to go with the evidence.

    With the support of the Greens and the independent senators some other important Closing Loopholes reforms were in the legislation passed.

    These include new laws to make wage theft a criminal offence, reforms to better protect some workers’ redundancy entitlements and changes to enhance work health and safety.

    Industrial manslaughter will now be a criminal offence, protections for workers experiencing family and domestic violence will be strengthened, and first responders/emergency workers with PTSD will have improved access to support.

    Making superannuation theft a crime is a welcome outcome of the government’s negotiations with the Greens.

    There can be little doubt of the need to act on intentional non-payment of superannuation, with the Australian Taxation Office recently reporting that Australian workers are owed more than $2 billion in unpaid superannuation.

    Superannuation theft not only affects workers’ retirement incomes but can see death and disability insurances cancelled.

    The government has also agreed to consider an amendment to provide workers with a right to disconnect from work outside work hours.

    Despite the protestations of some employer groups there is not much that can be called radical in the Closing Loopholes reform package.

    For the most part, the reforms passed this year and the ones still on the table are exactly what the government says they are – improvements to plug gaps and close loopholes that have allowed some workers to miss out on basic protections, standards and benefits that most other workers enjoy and most employers are happy to provide.


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  • Submission to the Senate Community Affairs Legislation Committee on the Paid Parental Leave Amendment (More Support for Working Families) Bill 2023

    Gender at Work, Labour Standards & Workers’ Rights

    Submission to the Senate Community Affairs Legislation Committee on the Paid Parental Leave Amendment (More Support for Working Families) Bill 2023

    Paid Parental leave reform needs to go further to meet best practice standards
    by Fiona Macdonald and Alexia Adhikari

    Authors

    Fiona Macdonald

    Acting Director, Centre for Future Work

    Alexia Adhikari

    Postdoctoral Research Fellow

    This joint submission by the Centre for Future Work and the Nordic Policy Centre argues for immediate further reform to bring Australia’s Paid Parental Leave (PPL) scheme up to international best practice standards.

    In this submission Fiona Macdonald, Centre for Future Work Policy Director and Alexia Adhikari, Post-Doctoral Research Fellow at the Australia Institute, argue that current reforms don’t go far enough and are being implemented too slowly. A proposed entitlement of 26 weeks PPL to be phased in by July 2026 is far less than the international best practice standard of 52 weeks. The two-week ‘use it or lose it’ component reserved for each parent, and which is vital to encouraging more fathers to take leave to care for babies, is too short. Parental leave pay is too low, contributing to women’s economic disadvantage and inequality.

    The submission recommends that the PPL scheme be improved and extended further, including by:

    • Bringing parental leave pay up to a full replacement wage level or to the average wage, whichever is the lesser amount, and including superannuation payments.
    • Bringing forward the extension of the PPL scheme to 26 weeks from 1 July 2024 instead of July 2026 and further extending the scheme through phasing in an entitlement of 52 weeks.
    • Extending to eight weeks the ‘use it or lose it’ component of PPL.



    Full submission

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  • The Stage 3 tax cuts will make our bad tax system worse

    The Stage 3 tax cuts will make our bad tax system worse

    by Jim Stanford in The Conversation

    Jim Stanford

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    Originally published in The Conversation on December 11, 2023

    Australia has one of the weakest tax systems for redistribution among industrial nations, and as Dr Jim Stanford writes, the Stage 3 tax cuts will make it worse.

    One of the chief purposes of government payments and taxes is to redistribute income, which is why tax rates are higher on taxpayers with higher incomes and payments tend to get directed to people on lower incomes.

    Australia’s tax rates range from a low of zero cents in the dollar to a high of 45 cents, and payments including JobSeeker, the age pension, and child benefits which are limited to recipients whose income is below certain thresholds.

    In this way, every nation’s tax and transfer system cuts inequality, some more than others.

    Which is why I was surprised when I used the latest Organisation for Economic Cooperation and Development (OECD) data to calculate how much.

    The OECD measures inequality using what’s known as a gini coefficient. This is a number on a scale between zero and 1 where zero represents complete equality (everyone receives the same income) and 1 represents complete inequality (one person has all the income).

    The higher the number, the higher the higher the inequality.

    Australia is far from the most equal of OECD nations – it is 21st out of the 37 countries for which the OECD collects data, but what really interested me is what Australia’s tax and transfer system does to equalise things.

    And the answer is: surprisingly little compared to other OECD countries.

    Australia’s system does little to temper inequality

    The graph below displays the number of points by which each country’s tax and transfer system reduces its gini coefficient. The ranking indicates the extent to which the system equalises incomes.

    The OECD country whose system most strongly redistributes incomes is Finland, whose tax and transfer rules cut its gini coefficient by 0.25 points.

    The country with the weakest redistribution of incomes is Mexico which only cuts inequality by 0.02 points.

    Australia is the 8th weakest, cutting inequality by only 0.12 points.

    Apart from Mexico, among OECD members only Chile, Costa Rica, Korea, Switzerland, Türkiye and Iceland do a worse job of redistributing incomes.

    What is really odd is that, before redistribution, Australia’s income distribution is pretty good compared to other OECD countries – the tenth best.

    It’s not that Australia’s systems don’t reduce inequality, it’s that other country’s systems do it more.

    Of the OECD members who do less than Australia, four are emerging economies: Chile, Costa Rica, Mexico, and Türkiye. Like most developing countries, they have low taxes, weak social protections and poor tax-gathering systems.

    Indeed, in Chile and Mexico, taxes and transfers do almost nothing to moderate extreme inequality.

    The other three countries ranked below Australia – Iceland, Switzerland, and South Korea – boast unusually equal distributions of market incomes. Each is among the four most equal OECD countries by market income, and each is considerably more equal than Australia.

    Australia ‘less developed’ when it comes to redistribution

    This makes Australia’s weak redistribution system more typical of a low-income emerging economy than an advanced industrial democracy.

    Even Canada, the United States, the United Kingdom and New Zealand do a better job of redistributing income than Australia.

    This new data enhances concerns about the impact of planned Stage 3 tax cuts. By returning proportionately more to high earners than low earners these will further erode the redistributive impact of Australia’s tax system.

    It also highlights the consequences of Australia’s relatively weak payments programs, including JobSeeker which on one measure is the second-weakest in the OECD. It’s an understatement to say we’ve room for improvement.


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    Commonwealth Budget 2025-2026: Our analysis

    by Fiona Macdonald

    The Centre for Future Work’s research team has analysed the Commonwealth Government’s budget, focusing on key areas for workers, working lives, and labour markets. As expected with a Federal election looming, the budget is not a horror one of austerity. However, the 2025-2026 budget is characterised by the absence of any significant initiatives. There is

  • Higher exports prices improve the budget, but the Stage 3 tax cuts remain the wrong tax at the wrong time

    Higher exports prices improve the budget, but the Stage 3 tax cuts remain the wrong tax at the wrong time

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on December 14, 2023

    As the Budget outlook improves, with most of the benefits of Stage 3 tax cuts going to those earing over $120,000, over 80% of workers will be short-changed

    Yesterday’s mid-year economic and fiscal outlook (MYEFO) provided some pleasing news for the Treasurer, Jim Chalmers. But higher revenue does not mean a stronger economy nor that households are better off.

    While the Treasurer was releasing the latest budget numbers the annual figures for median earnings were released by the Bureau of Statistics.

    These figures showed that the median weekly earnings in August this year were $1,300 – a rise of 4.2% from last year, which was less than the 5.4% increase in inflation.

    That weekly amount translates to $67,600 in annual earnings.

    People earning that amount will get just $565 from the Stage 3 tax cuts (0.8%) while someone on $200,000 – well in the top 10% of earners will get a 4.5% cut worth $9,075.

    The Treasurer told ABC 730 on Wednesday night that the government has not changed its position on Stage 3 and that “We think there is an important role for returning bracket creep where governments can afford to do that.”

    The problem is the Stage 3 cuts are mostly focused at rewarding those on high incomes, who are least affected by bracket creep.

    If the Government was truly worried about using the bonus revenue from higher export prices to assist low and middle-income earners it would care more about those on the median income of $66,700 than those in the top tax bracket and top 10% of income.


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    Commonwealth Budget 2025-2026: Our analysis

    by Fiona Macdonald

    The Centre for Future Work’s research team has analysed the Commonwealth Government’s budget, focusing on key areas for workers, working lives, and labour markets. As expected with a Federal election looming, the budget is not a horror one of austerity. However, the 2025-2026 budget is characterised by the absence of any significant initiatives. There is

  • Paying for Collective Bargaining

    Paying for Collective Bargaining

    by Jim Stanford

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    Recent labour law reforms in Australia have focused attention on the crucial role played by collective bargaining in achieving higher wages, safer working conditions, and better job security.

    New provisions contained in both the Secure Jobs Better Pay (2022) and Closing Loopholes (2023) legislation will expand the scope for collective bargaining (including more opportunities for bargaining at a multi-employer level), make it harder for employers to evade collective bargaining, and empower union delegates to fulfil their responsibilities in workplaces to administer and enforce collective agreements.

    However, one important challenge for Australia’s collective bargaining system, that has not been addressed by these reforms, is how to pay for collective bargaining. The infrastructure of representation, bargaining, implementation and enforcement requires ongoing commitment of people and resources, from both the union and the employer sides of the relationship.

    In Australia at present, the workers’ side of this infrastructure is dependent on voluntary union dues contributed by individuals who choose to join a union in their industry. No collective system of union security or dues collection (such as closed or agency shop arrangements, dues preferences, or bargaining fees) are presently allowed under Australian law. Moreover, Australian law fully protects the ability of individual workers to ‘free ride’ on the benefits and protections negotiated by unions in their workplace: every provision of a collective agreement must be provided to all workers in a defined bargaining unit (whether they are members of the union that negotiated them or not). From a perspective of narrow self-interest, this system discourages union membership — and in turn starves the collective bargaining system of the resources it needs to be viable.

    In this article published in The Conversation, Centre for Future Work Director Jim Stanford discusses the nature of this ‘free rider problem,’ and highlights how the treatment of this problem varies wildly between business and union applications. Legal contracts which enforce collective revenue solutions to free-rider problems are common and fully acceptable in many common applications: such as residential strata arrangements, the governance of joint stock corporations, and even government tax collections. Where unions are concerned, however, the law prevents workers from making and enforcing a collective decision to jointly fund the apparatus of collective bargaining, to the shared detriment of workers who consequently cannot exercise collective bargaining power to improve their employment relationship. The rhetoric of ‘individual choice’ is applied selectively to industrial relations; no owner of a strata unit, or shareholder in a corporation, has the ‘free choice’ to refuse to pay the normal costs and obligations associated with those arrangements.

    Australia’s restrictions on union security and collective dues arrangements are uniquely restrictive among industrial countries; they are similar to the rules in so-called ‘right-to-work’ states in the U.S., where union representation has fallen to the low single digits. Free riding has been an important factor in the long-term erosion of union density in Australia: most recent data indicates that just 12.5% of employees in Australia are presently union members. Workers with greater awareness of the importance of collective bargaining to their long-term prosperity will support their unions, even though they are legally entitled to all the benefits of a collective agreement whether they join or not. But the current laws discourage this act of collective solidarity, and collective bargaining has been eroding accordingly. At present just 15% of workers in Australia are covered by an active enterprise agreement (and less than 10% in the private sector). The erosion of collective bargaining has contributed to wage stagnation, growing inequality, and job insecurity.

    Dr Stanford’s Conversation article has been selected for inclusion in the new anthology, 2023: A Year of Consequence, published by Thames & Hudson, and edited by Justin Bergman (International Editor of The Conversation). The book contains several essays published by The Conversation in 2023 that are judged to have contributed most to public policy dialogue in Australia over the past year.

    Further information on the extent and consequences of free riding in Australian collective bargaining, and five different strategies for addressing this problem (based on the variety of policies implemented in other industrial countries where collective bargaining is better-resourced, and hence stronger and more effective), are provided in Dr Stanford’s recent scholarly article in Labour and Industry, titled “International approaches to solving the ‘free rider’ problem in industrial relations.” Click below to see the full article.


    Related documents



    Attachment

    Related research



    Submission to the Senate Education and Employment Legislation Committee Inquiry into the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023



    Full report



    Collective Bargaining and Wage Growth in Australia



    Full report

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  • When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise

    When the prices of necessities are rising fast, the RBA does not need to hit households with another rate rise

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on November 2, 2023

    Cost of living rose by more than inflation because of interest rate rises. Another rate rise would only cause more unnecessary pain.

    In the past week, the likelihood of the Reserve Bank raising the cash rate to 4.35% has gone from about 20% prior to last week’s inflation figures coming out, to now an even-money bet.

    But when you look at the cost of living figures out this week it is clear that households are already having to reduce their spending on non-discretionary items.

    Out of the 14 biggest contributors to inflation, 10 were non-discretionary items.

    At this point we should note the comments of the secretary of the Treasury, Steven Kennedy, last week in Senate estimates. He was asked about the pathway to a “soft landing” – ie where inflation falls without us going into a recession.

    He noted that chances of a soft landing were made harder by recent rises in oil prices because “on the one hand, it will increase headline inflation by raising petrol prices. On the other hand, it may well reduce growth and see other prices fall because people have less to spend. At least in the short term, expenditure on petrol is not very discretionary.”

    When the prices of things you can’t avoid paying for rise faster than others, then that obviously reduces your ability to spend elsewhere. In this way petrol, electricity and rental price rises have the same impact as do interest rate rises.

    The most recent figures of the volume of retail spending will come out tomorrow, but we know that the volume has been falling, and is now back to pre-pandemic trend levels:

    This of course is what you would expect – when the cost of non-retail items such as petrol, mortgages, rents, electricity, property rates, medical services and insurance are rising, you are going to buy less in the shops.

    Since March last year the cost of mortgages has gone up 114%. Does the Reserve Bank think households haven’t really noticed that?

    Even you if discount the record low rates during the pandemic, the cost of mortgages is now about 70% higher than it was at the end of 2019. Since then, wages have risen only about 10.5%.

    Another rate rise is not going to do anything other than add to the cost of necessities. It would not so much reduce inflation as increase the cost of living and hit households whose wages and incomes continue to be worth less than they were a year ago.


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  • The Reserve Bank should not raise rates on Melbourne Cup Day

    The Reserve Bank should not raise rates on Melbourne Cup Day

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on October 26, 2023

    Inflation is being driven by things unaffected by interest rate, so there is no reason for the RBA to raise rates in November

    The latest CPI figures showed inflation grew 5.4%, down from 6% in the June quarter and almost a third below the peak of 7.8% at the end of last year. And yet commentators seem desperate for the Reserve Bank of Australia to raise interest rates next month to show it is tough on inflation. But raising rates now would not be tough, it would just be cruel.

    The annual growth of inflation is falling quite quickly – down from 7.8% at the end of last year. But because the quarterly growth of inflation rose in the September quarter, a numbe rof commentators and economists have been suggesting that the Reserve Bank should raise interest rates in two months.

    But when you examine the drivers of inflation in the September quarter, there is little that would have an impact from higher interest rates.

    Automotive fuel prices accounted for 20% of the growth in inflation in September – that is completely unaffected by rate rises given that it was all due to higher world oil prices due to OPECD restricting supply. Similarly rental prices, electricity, property rates and charges, insurance, tobacco and beer prices have nothing to do with interest rates. Even the cost of building a new home is driven mostly by the increased cost of construction materials from overseas.

    Crucially in the September quarter the cost of “non-discretionary item” rose 1.4% while the cost of “discretionary” item rose just 0.7%. Non-discretionary items are things which you cannot avoid paying (at least in the short-term). In effect those price rises have the same impact on consumer spending as do rate rises – they reduce the ability of people to spend money on things in shops and on discretionary services.

    Had the RBA raised interest rates more in the September quarter there would have been negligible impact on the main drivers of inflation, raising them in November due to these latest figures would just be cruel and hurting people whose real wages continue to fall.


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  • The latest report from the IMF highlights the need for full-employment to be the aim of the government and the Reserve Bank

    The latest report from the IMF highlights the need for full-employment to be the aim of the government and the Reserve Bank

    by Greg Jericho in The Guardian

    Greg Jericho

    Chief Economist

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    Originally published in The Guardian on October 12, 2023

    If the economy grows as slowly as the IMF predicts it will for the next 2 years, Australia will be lucky to avoid a recession.

    The IMF’s latest World Economic Outlook is mostly framed around trying to thread the needle of reducing inflation and cost of living rises and not crashing the economy while doing so.

    And while overall the IMF suggests the world economy is in for a “soft landing” the picture it paints for Australia is of a tough year ahead. Policy director Greg Jericho notes in his Guardian Australia column that the IMF has downgraded its expectation for growth next year from an already bad 1.7% to a historically awful 1.2%.

    Were Australia’s economy to grow this slowly through the year and avoid a recession it would be the first time that has happened. The IMF also predicts that 2025 will grow by just 2.0%. Were that to occur, it would be the first time on record that Australia’s economy has gone 3 consecutive calendar years without growth above 2%. That is hardly a “soft landing”

    The IMF also now predict unemployment will rise quicker than it expected would be the case in its previous outlook in April.

    The report highlights the need for the government and the Reserve Bank to work to deliver full employment. The current settings have the nation on course to grow so slowly for so long that the risk of the economy stalling are rising precipitously.


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  • Insecure work is a feature of our labour market. New laws can change that.

    Insecure work is a feature of our labour market. New laws can change that.

    by Chris Wright

    Chris Wright

    Associate Professor, University of Sydney Business School

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    Chris Wright is Associate Professor in the Discipline of Work and Organisational Studies at the University of Sydney, and a member of the Centre for Future Work’s Advisory Committee. This commentary is based on his submission to the Senate Education and Employment Legislation Committee’s inquiry into the Fair Work Legislation Amendment (Closing Loopholes) Bill 2023, and originally appeared in the Sydney Morning Herald.

    *   *   *   *   *

    The Senate has started reviewing the Australian Government’s Closing Loopholes Bill. If passed, this legislation will allow minimum standards to be set for contract workers, provide stronger penalties against employers who commit wage theft and deter employers from outsourcing to circumvent enterprise bargaining.

    These measures will strengthen protections for workers who often face barriers to job security and career development.

    Australia’s current system of workplace laws was adopted at a time when enterprise bargaining and awards covered a larger share of the workforce than today. Enterprise bargaining and awards encourage employers to invest in their workers through “standard” employment arrangements underpinned by permanent contracts, decent wages and training.

    These arrangements promoting workforce investment benefit both workers and employers. Workers gain job and economic security and career progression opportunities. Employers gain loyal and satisfied workers who contribute to productivity and innovation. As the architects of the current system of workplace laws envisaged, workforce investment thus provides the basis for high-productivity business strategies, which help to make the Australian economy more internationally competitive.

    Recently, however, more businesses have opted for a different course. These businesses have tried to compete not through high-productivity strategies but instead by undercutting or evading workplace laws and by engaging workers via “non-standard” arrangements such as casual contracts or via gig economy platforms.

    The rising incidence of wage theft in which employers pay workers below their legal entitlements is evidence of this undercutting. The growing numbers of workers hired through labour hire arrangements, which some businesses have used to avoid their enterprise bargaining obligations, is evidence of evasion. So too is the emergence of gig platforms exempt from workplace laws.

    Wage theft, gig platforms and use of labour hire as an evasion tactic have become features of Australia’s modern labour market. None of these features existed when the foundations of the current system of workplace laws were first laid in the 1990s.

    As the nature of work and the labour market evolves, workplace laws must adapt in response. The Closing Loopholes Bill recognises this by allowing workers on casual contracts to convert more easily to permanent contracts, increasing protections for gig and labour hire workers and introducing new measures against employers who undercut wage laws.

    While non-standard workers have flexibility, they have little job and economic security under current laws. For instance, casual workers receive a higher hourly pay rate as compensation for this insecurity but are concentrated in the lowest-paid industries. Like their counterparts in the gig economy, casual workers are less likely to receive training than permanent workers.

    The proposed change to give casuals who work regular hours the right to convert to permanent employment will probably improve their access to good quality jobs and career development opportunities.

    Business groups have criticised the Closing Loopholes Bill for its supposedly negative impacts on productivity and innovation. They have not offered evidence supporting these claims. To the contrary, research evidence suggests that measures promoting standard employment are more likely to encourage businesses to compete through high-productivity and innovation-enhancing strategies rather than by undercutting or evading.

    Winston Churchill once said that without effective workplace laws, “the good employer is undercut by the bad and the bad by the worst… Where those conditions prevail you have not a condition of progress, but a condition of progressive degeneration”.

    Workers in Australia are increasingly missing out on legal protections under current laws. The research evidence suggests the Closing Loopholes Bill’s provisions are necessary to avoid a situation like the one Churchill described.


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  • Opening statement to the ACTU Price Gouging Inquiry

    Opening statement to the ACTU Price Gouging Inquiry

    by Jim Stanford and Greg Jericho

    Jim Stanford

    Greg Jericho

    Chief Economist

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    This week Professor Allan Fels, the former head of the Australian Competition and Consumer Commission (ACCC), has begun an inquiry into price gouging across a range of industries, including banks, insurance companies, supermarkets, and energy providers. The inquiry commissioned by the ACTU comes off the back of the highest inflation in 30 years and the biggest falls in real wages on record.

    The Director of the Centre for Future Work, Jim Stanford and policy director and chief economist of the Australia Institute, Greg Jericho, presented evidence at the inquiry based on their research into profit-led inflation. Below is an edited excerpt of their opening statement.

    The recent period of rising inflation has been highly unusual coming as it has after a period where in Australia, core inflation by June 2021 had not been above the Reserve Bank’s target range of 2% to 3% for more than a decade and had been below 2% for five and half years.

    Perhaps unsurprisingly, because of such a long period without rising inflation, we saw very much a default to the thinking of the 1970s and a belief that all inflation is primarily driven by demand factors that need to be limited by higher interest rates.

    This was a fundamental misunderstanding of this inflationary period. It clearly could not be driven by wages because wages at all stages over the past two years have grown on average by less than inflation, such that real wages are now 5.5% below what they were two years ago.

    Wage growth in the 12 months to June this year was just 3.6%, still well below the CPI of 6%, and far from accelerating, actually had fallen from 3.7% growth in the 12 months to March.

    Thus, the question becomes, if not wages, what?

    Our research in February this year revealed that the initial surge of inflation in Australia beginning in mid-2021 was closely associated with a surge in price pressures.

    Business profits were the dominant manifestation of that inflation. The supply shocks that occurred because of the pandemic lockdowns and Russia’s invasion of Ukraine allowed companies in some key industries (such as energy, logistics, and manufacturing) to significantly boost their profit margins, coincident with rising prices.

    Our February 2023 paper, using the decomposition method of the national accounts (as explained by Jim), concluded that since the end of 2019, 69% of unit price increases over and above the RBA’s 2.5% inflation target mid-point were attributable to increased nominal unit profit payments. Only 18% was attributable to higher nominal unit labour costs, and the rest to increases in other nominal factor payments.

    Our paper noted that the profit growth was most dramatic in the energy and resources sector. These findings were broadly consistent with the findings of earlier research by the Australia Institute, as well as with the similar decompositions of inflation reported in other countries.

    Our follow-up report in April confirmed the leading role played by profits in the energy and resource industries. It noted that products from that sector (including petrol, gas, and other fossil fuel-intensive products) were leading sources of domestic inflation in Australia. It also showed that profits in other sectors, such as wholesale trade (56%), manufacturing (38%), professional and technological services (37%) and construction (37%), had also increased as a share of non-mining GDP since the pandemic. This profit growth is not dissimilar from the 48% growth in mining profits during the same period and well in excess of the 27% increase in nominal GDP.

    This confirmed that firms across these sectors have more than simply passed on higher input costs to consumers. As American economist Isabelle Weber has argued, they amplified them.

    The release of two more quarters of national accounts since February allows us to update our figures, which find that despite recent falls in corporate profits in some sectors, higher unit profit payouts still account for over half (56%) of the cumulative increase in nominal unit prices in the Australian economy since December 2019, above and beyond what would be expected due to normal target inflation. The role of higher unit labour costs in overall unit prices has increased in recent quarters and now accounts for just over one-third (35%) of the cumulative above-target rise in prices since the pandemic.

    The influence of profits is clear when you consider that unit profit costs by June 2023 were 27% above their December 2019 levels (down from 37% above in March 2023), while unit labour costs are just 14% above December 2019 levels – pointedly just below the 15% growth in CPI.

    There have been some suggestions by the Reserve Bank and others that our research should exclude mining profits as these do not significantly influence Australian inflation. Profits in mining during this time accounted for over half of all corporate profits in Australia; obviously, if over half of corporate profits are excluded from consideration, then profits will obviously seem less important.

    We reject the argument that mining profits somehow “don’t count” – especially in regard to domestic inflation, given the critical role played by higher petrol, gas, and electricity prices in driving the initial post-pandemic surge in Australian consumer price inflation.

    Clearly, there is a strong connection between energy prices, energy industry profits, and inflation experienced by domestic consumers (not to mention inflation experienced in other sectors of the economy).

    The good news is that corporate profits have begun to moderate in the first half of this year. It is important to note the modest decline in gross operating surplus in some sectors has still left corporate profits as a share of national GDP well above pre-pandemic levels and far above longer-term post-war averages.

    Nevertheless, even the partial moderation of record corporate profits has been associated with a significant and welcome deceleration of inflation. Consumer price inflation in Australia has slowed by over half in the last nine months: from an annualised peak of 8.9% in the first quarter of 2022 (led by surging energy costs) to just 3.4% in the June quarter of 2023 (not much higher than the top of the RBA’s target range).

    Moreover, even in the later stages of this current inflation cycle, with profits stable or even falling and labour costs accelerating, it’s wrong to conclude that labour is now the ‘source’ of inflation: clearly, the rise in unit labour costs reflects efforts by workers to recoup real income losses experienced earlier in the inflationary cycle, which must still be ascribed to the initial profit-led shocks that started the whole process.

    Blaming workers now for inflation because they are pursuing higher wages to recover lost living standards is like blaming a homeowner whose house has been set on fire for using too much water to put out the flames.

    Even as it appears to be moderating, this period of inflation requires a rethink of our policy approaches.

    We have made a number of policy recommendations, including:

    • Price regulations in strategic sectors
    • Fiscal transfers (such as windfall profits taxes combined with cost-of-living transfers to vulnerable households)
    • Competition policy reforms
    • Supports for wage increases in excess of current inflation for a sustained period of time to allow the repair of recent real wage reductions.

    The biggest lesson from this period is that we need more policy tools in our inflation toolkit. Relying on monetary policy and higher interest rates only works if you think inflation is only ever produced by higher wages and strong aggregate demand.

    We know that the future is more likely than not to feature further global shocks – not the least from climate change. Policymakers and central banks need to learn from the past two years and ready themselves to treat the broader causes of inflation and protect workers and households when companies seek to use crises as an opportunity to lift prices.


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