Labour market and fiscal policy director, Greg Jericho writes in Guardian Australia that the rising level of inflation, which combined with low wages growth has led to massive falls in real wages, has many Australians wondering if increasing interest rates is going bring the economy to a halt.

He writes that for now a recession is unlikely, but the risks remain. Previous periods of sharply increasing rates have been followed by rising unemployment, and the current market expectations for the cash rate rising above 3.5% within a year would certainly create a massive brake on the economy.

The story from overseas is also worrying, with the United States battling even higher inflation than Australia and suggestions that the market is already pricing in a recession.

It all highlights that while today’s labour force figures are on the surface very promising, they also show just how affected the economy continues to be by the pandemic. Nearly 300,000 employed in June worked zero hours because of sickness or injury – well over double the usual amount.

The nearly 50-year low unemployment rates are also failing to lead to wages growth anywhere near what would have been expected in previous years, let alone at a level that is keeping up with inflation.

While inflationary pressure do remain, the risk that the Reserve Bank will raise rates too high and too fast remains very much in place – especially given the lack of wages growth.

Even with this new increase, however, real wages for the lowest-paid Australian workers are likely to go backwards this year, with inflation pegged to accelerate to as much as 7%. Nevertheless, Australia’s business lobby are repeating tired old complaints about minimum wages being too high, stoking further inflation, and undermining profits.

In his latest commentary, published in The Guardian, Policy Director Greg Jericho reviews and debunks these predictable complaints. The evidence is clear that wages are not causing inflation. Profit margins have grown along with prices. Workers deserve to have their real incomes protected, as the true sources of the problem (arising mostly from after-effects of the pandemic and the global energy price shock) are addressed.

Please see Greg’s full column, “Workers and their wages are the collateral damage of the war on inflation.”

Labour market policy director, Greg Jericho, in his column in Guardian Australia, however notes that wages should grow faster than inflation, and so long as real wages are not outpacing productivity growth then such rises are not exerting any inflationary pressure. He also shows that given the recent estimates for inflation by the Reserve Bank, a 5.1% increase would not be enough to prevent the minimum wage falling in real terms over the next financial year.

The problem is not that wages have been fuelling inflation, but that for the past 20 years real wages have risen slower than productivity.

We need to change the debate from a reflex that assumes low wages is the ideal to realising that given workers are the economy they should be rewarded fairly for their efforts and improvements in productivity.

You cannot say the economy is healthy if real wages are falling, and most certainly not if the lowest paid in Australia are seeing their living standards decline.

Today the opposition leader, Anthony Albanese was asked about wages in the following exchange:

Journalist: “You said that you don’t want people to go backwards. Does that mean that you would support a wage hike of 5.1% just to keep up with inflation?

Anthony Albanese: “Absolutely”.

Any other response would be to suggest that real wages – and thus people’s ability to purchase goods and services with the money they earn – should decline.

The suggestion that wages rising in line with inflation or even marginally above inflation will increase inflation in a “return to the 1970s” wage spiral ignores basic economics and the advice of the Treasury department.

Real wages should rise – and unless they are outpacing productivity there is no case to be made that they are driving inflation.

This very point was made in February by the Secretary of the Treasury, Steven Kennedy when he noted

“if we can achieve productivity growth of 1.5 per cent, then nominal wages [assuming inflation of 2.5 per cent] can grow at four per cent and put no pressure on inflation”[i].

The problem is not that wages are growing too fast, but that over the past 3 years they have not kept pace with inflation and productivity growth.

From June 2019 to the end of 2021 inflation has increased 5.7% and productivity has grown by 4.5%. And yet rather than wages growth being equal to the sum of those two measures, nominal wages in that period increased just 4.8%, and real wages have fallen 0.8%. Real wages have thus declined, while real labour productivity increased.

The evidence is clear that wages did not cause the current surge in inflation. There is no reason to believe that suppressing wages will cause inflation to moderate. Asking workers to accept a permanent reduction in their real living standards to fight inflation that they did not cause is neither fair nor economically sensible.

The Reserve Bank has rightly suggested that it will keep an eye on labour costs, however it should be noted that in the 12 months to March while the Consumer Price Index grew 5.1%, the Producer Price Index, which measures the inflation of input costs, rose 4.9%, and nominal unit labour costs grew just 4.0%. This confirms that inflation is not being driven by labour costs.

Moreover, Non-farm, Real Unit Labour Costs are now 3.1% below their pre-pandemic level of December 2019.

That decline is even faster than the long-term trend.

A fall in real wages will only continue the transfer of national income from workers to corporate profits – something which also occurred when inflation was falling. Workers were told then to accept lower wages growth (and also public-sector wage caps) because inflation was low. Now they are being told to accept lower wages because inflation is high – and for no fault of their own.

[i] Economics Legislation Committee, 16 February 2022.