It takes a special kind of chutzpah to expect Australian households, already struggling to cover the increased cost of essentials, to shoulder the burden of higher interest rates as the “only” way to drive down inflation. Yet this is the strategy in place.
“It was already difficult, before prices started to increase, to put food in the fridge, petrol in the car, or find and afford accommodation,” says economist and South Australian Greens senator-elect Barbara Pocock. “Suppressing wages to address inflation is like using a fire extinguisher to fix a flood. It won’t work, and it might actually make things worse.”
While official inflation is at a 22-year high, at 5.1 per cent, increases in the costs of essential goods such as rent, food, utilities and fuel are considerably higher. Prices of non-discretionary products are rising at the fastest rate in 15 years, up by 6.6 per cent, more than double the rate of discretionary items, which are up by only 2.7 per cent. Given this rather significant disparity, we can rule out frivolous “post-pandemic” splurging of unspent JobKeeper as the main culprit.
Blaming inflation on wages is a “misdiagnosis of the problem”, says Pocock. We’re supposed to avoid burdening businesses with any substantial wage hikes, despite those businesses having enjoyed handsome pandemic profits.
Profits are now the highest-ever share of Australia’s GDP, while wage shares are at historic lows. A recent analysis of Australia’s national accounts by Greg Jericho from The Australia Institute’s Centre for Future Work found company profits increased by 25.3 per cent over the past year, accounting for a record 31.1 per cent share of national income.
Over the past two years, profit margins increased by 40.3 per cent, while wages increased by just 7.4 per cent.
“Corporate Australia is riding high,” says Alison Pennington, senior economist at the Centre for Future Work.
She says companies often backwards-calculate prices from an “acceptable” profit rate. “If they deliver something people desperately need like groceries and electricity, then that profit-maximising incentive only intensifies.”
Yet the notion that wage growth is the major driver of inflation continues to persist in the public consciousness. There was journalist Phillip Coorey’s infamous claim that pegging wages to inflation would be “a one-way ticket to the Weimar republic”. Likewise, Andrew McKellar, chief executive of the Australian Chamber of Commerce and Industry, said “small business cannot afford” a minimum wage rise of more than 5 per cent, and that such increases would “cruel jobs, not create them”. Meanwhile, broadcaster Waleed Aly described wage stagnation as the “bitter medicine” that might “keep inflation in check”.
Fact check on aisle two: wages do not increase inflation unless they increase faster than inflation and productivity combined. In reality, wages have been flat – or declining in real terms – for more than a decade.
“Business commentators and corporate economists pedal the same tired orthodoxy, blaming wages for high inflation, even evoking fantasies of wage-price spirals,” says Pennington. “But unit labour costs have grown slower than inflation since 2013. Real wages declined 2 per cent in the last 12 months. It ain’t wages.”
The truth is, when we talk about inflation we’re really asking how much poverty and unemployment we’re prepared to tolerate to keep prices at a particular level. That is what inflation targeting is.
“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 maintain at least half-a-million people in unemployment, but we still blame the unemployed for not working hard enough. We pay them low unemployment benefits lest they don’t search hard enough. But the harder they search, the higher we lift interest rates. None of this is an accident.”
Economist Professor Rabee Tourky says the Reserve Bank seems determined to send Australia into a recession, deliberately driving down wages and worker bargaining power rather than dealing with the root cause of inflation.
“Inflation per se is not so harmful,” he says. “Its cure is harmful. The ‘cure’ is more harmful than the disease.”
It’s clear there is a profit price spiral under way, particularly in the gas sector, which is driving inflation.
Denniss says prices are effectively set by the most expensive producer in the market: “Everyone else just gets a pay rise.”
The price of oil or gas has to be high enough to induce companies in high-cost production to supply to the market during times of unexpected crises, such as the invasion of Ukraine.
“Every company has different costs of production,” Denniss says. “When parts of the oil supply are disrupted, new forms of energy have to come into the market. You have to pump gas from further away or move it by sea rather than a pipeline. That just means Santos Australia is making out like a bandit because their costs of production haven’t gone up at all.”
While it’s easy to pin inflation on demand shocks such as the pandemic and lingering supply chain disruption, as well as supply shocks such as post-lockdown spending, climate change and the Ukraine invasion, these factors are only part of the story.
Alison Pennington says this crisis is decades in the making and has more to do with how we organise production in an economy where large oligopolies have the power to charge whatever they want.
“Covid shocked international supply chains,” she says. “Workers in key sectors got sick. Tenuous, ‘just in time’ production techniques unravelled. Even the OECD recognises the impact of widespread price gouging in generating inflation pressures, as companies strategically placed in production networks that exploited buyers and consumers to lift prices and increase profit rates. Those global structural inflation drivers apply to Australia domestically, too.”
Australia suffers from high levels of market concentration. Our sharemarket is the most concentrated in the world, with the top 10 stocks in the ASX 200 now making up 47 per cent of the index. A research report commissioned by the Department of Industry, Innovation and Science under the previous government found at least nine Australian industries were “too concentrated or lacking competition” and that “the increasing concentration of the markets is not especially to be celebrated”.
These sectors included the Big Four banks, which control about 80 per cent of the mortgage market; air transport, “practically 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 retailing.
The report warns that “when firms get large beyond certain scales, whether they are productive or otherwise, they will unequivocally use their size advantage to bend the rules and gain advantage through 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-run inflation, particularly in heavily concentrated or monopolised economies such as Australia’s.
“The less competition, the more concentrated the market is, the higher the initial change in prices will be as a result of a demand shock,” he says.
Market power enables firms to pass additional costs to customers, whereas in a more competitive, less concentrated economy, additional intermediate costs would have been shared and consumers’ experience of inflation would not have been as acute.
“Firms with market power can also hide anti-competitive behaviour behind inflation,” says Rabee Tourky. “And regulators can’t figure out how to prove they are being naughty.”
According to a recent study, the first of its kind in Australia, two of the world’s biggest institutional investors – BlackRock and Vanguard – were found to control at least 50 per cent of the market across more than a fifth of Australian industries, accounting for more than one-third of total industry revenue. 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 per cent. The government is surely aware of this fact because their own MP – Andrew Leigh – co-authored the paper.
At the heart of the inflation we are currently experiencing is the conflict between what both 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 kindness and compassion, the new government is nevertheless prioritising tax cuts for the wealthy at the expense of increasing wages to levels that would allow people to better face the increasing cost of living. Meanwhile, Employment Minister Tony Burke claims it is “too late” to change the points-based JobSeeker system initiated by the Coalition.
Pocock, Pennington and Denniss say free childcare, suppressing executive pay and a super-profits tax on fossil fuel producers are far more effective inflation-fighting strategies than rate hikes and wage suppression.
“We need wide-reaching policy changes to curtail concentrating corporate price-setting power, organising the economy on more equitable, sustainable grounds,” says Pennington.
“We must recalibrate the balance of power between big business and workers through stronger corporate taxation, new wage-boosting systems like sectoral collective bargaining, expanded public services and reversing privatisations in critical services where the private sector have abjectly failed.”
This article was first published in the print edition of The Saturday Paper on July 2, 2022 as "It ain’t wages".
This month marks 10 years since the first edition of The Saturday Paper. The paper is as audacious now as it was then: a rejection of conventional wisdom about what makes the news and who will read it.
To celebrate those 10 years - and the issue-defining journalism produced in them - we are offering all new subscribers a two-year digital subscription for the price of one. That's $298 worth of journalism for $109.
Get more of the best journalism in the country - and celebrate the success of a newspaper built on optimism.
Select your digital subscription