Inflation, Wages and Reinvestment in the Productive Economy

The return of inflation and the continued stagnation of wages—described frequently as the ‘cost-of-living crisis’—have been the defining economic issues of the first half of the Albanese government’s term in office.  

Annualised inflation peaked at 7.8% in the December 2022 quarter and has remained stubbornly above 6% this year despite consistent interest rate hikes since last year’s federal election. At the same time, wage growth has continued to be anaemic, remaining well below 4% and dramatically below the rate of inflation.  

This aggregate decline in worker purchasing power has occurred against the backdrop of the continued decline of union membership, with last year’s data release from the ABS showing a drop from 14.3% unionisation in 2020 to 12.5% in 2022. More dramatically, this marks a 28.5% decline since 1992, when 41% of the Australian workforce was organised. 

The causes of inflation have been subject to significant conjecture among economists and commentators. A February report from Dr Jim Stanford at the Centre for Future Work found that excess corporate profits accounted for 69% of additional inflation beyond the RBA’s target level. Stanford’s findings were contested—or flat out condemned—by some economists, citing supply chain shocks associated with the COVID-19 pandemic, the ecological crisis, alongside war in Europe and increasing geo-political tensions in Asia. Though it should be noted that sources as diverse as the University of Massachusetts economist Dr Isabella Weber, and more recently OECD have reached similar conclusions on the causes of inflation to Professor Stanford.  

While some have attempted to link stagnating wages to productivity issues, it is well established that the link between labour productivity and labour share of the value it creates was severed several decades ago. The issue is declining worker power, and the causes are well known. The decline of manufacturing and other traditional homes of union organisation are important factors here. But most importantly for our purposes, the OECD ranked Australia’s labour laws as among the most restrictive of union activity among developed countries prior to the recent changes legislated by the Albanese government. 

It is relatively straightforward to sketch a muscular social democratic policy agenda that might begin to address the cost-of-living crisis Australia faces. Inflation could be tackled through the regulation of profits and implementation of price controls, thus addressing the ‘profit-price spiral’ identified by Stanford. Further, a major re-investment in the productive economy (especially in manufacturing) would insulate Australia from ongoing supply chain shocks that the ecological crisis will inevitably produce. If this investment is directed towards green energy infrastructure, and targeted at legacy fossil fuel areas of the country, it would have the additional benefits of accelerating Australia’s transition to a zero emissions economy and creating high-skilled manufacturing jobs in the process. 

Stagnant wages could be addressed through an ambitious industrial relations reform package to increase the bargaining power of workers in relation to capital. Central to this package would be reinstating the right of workers in Australia to strike, and a genuine return to industry-wide bargaining. The right to withdraw labour is an internationally recognised human right. However, under Australian laws, strikes can only happen during the period in which a proposed enterprise agreement is being negotiated. Industry-wide bargaining would take wages out of competition for a particular sector and help generate a race to the top for upskilling workers and high value adding work processes, helping to address productivity concerns while also encouraging wage growth.  

So, how does the Labor government’s first year and a half in office stack up against the ambitious social democratic policy agenda sketched above? 

The Albanese government has flirted with the idea of price controls, with caps on wholesale gas prices as part of the gas code of conduct which includes provisions for local supply. But price controls and profit regulation on other strategic sectors like domestic air travel, financial services and groceries have not been considered in any meaningful sense, despite obvious price gouging by Qantas, the big four banks, and the supermarket duopoly. Instead, the federal government has largely relied on the RBA to bring inflation under control. This has meant increasing interests rates, placing growing stress on Australian mortgage holders and resulting, subsequently, in a slowing economy. The government has attempted to lay the blame for economic pain associated with rising interest rates at the RBA’s feet, but given the opportunity for a change of direction, appointed an RBA-lifer to replace the outgoing governor.  

In terms of re-investing in the productive economy, this government has taken some modest steps towards a green industrial policy. The $15.2 billion National Reconstruction Fund, along with some ad-hoc tripartite industry co-ordination, such as the Rail National Innovation Council, are welcome steps in a positive direction. But these are hardly adequate to the task of green re-industrialisation. Already, there is evidence of the $US500 billion Inflation Reduction Act in the United States ‘crowding in’ manufacturing investment to the US at the expense of economies like Australia. Economist Professor Adam Tooze has argued that countries need to start thinking in trillions, rather than billions, if they wish to use industry policy as the lever to address clean energy transitions. For a social democratic government in a mid-sized economy like Australia we surely must begin to think in the hundreds of billions.  

Such an investment in high value-adding green manufacturing, such as advanced wind and solar infrastructure, electric heavy and commercial vehicles, and the refining of critical minerals like lithium would be a strong place to start. Encouragingly, the NRF investment mandate allows for low interest finance or equity, but not for grants (read: handouts). Unions including the AMWU, ETU, and MUA have been advocating for government-owned common user facilities, whereby the government owns a piece of advanced industrial infrastructure and the private sector bids for access to the space and its technologies. Such a model would ensure a long-term investment in productive capacity and generate thousands of good jobs.  

The Labor government has made multiple positive changes to industrial relations legislation since returning to power including banning pay secrecy, legislating domestic violence leave, and the return of multi-employer bargaining in limited cases. Same job, same pay legislation is also in the pipeline. How much these reforms will meet the stated aims of increasing worker bargaining power, and increasing wages, remains to be seen. Thus far, left unions’ demands for wider multi-employer bargaining and the right to strike have fallen on deaf ears.  

In conclusion, while the Albanese government has taken some steps towards a social democratic reform agenda, they remain markedly inadequate for the challenges facing Australia in the coming decades. Rebuilding the labour share of GDP, regulating the profit-price spiral, and tackling the task of energy transition will require more ambition and more conviction. Being better than the Coalition will not be enough.   

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    commented on Inflation, Wages and Reinvestment in the Productive Economy 2023-11-12 17:47:17 +1100
    Steve’s general conclusion is valid when it comes to Labor’s first half of what we hope will be more than just a first term: “… markedly inadequate…”. Dare one add this is an understatement? However, his absent discussion about the character of a new working-class movement that could challenge that inadequacy is sadly disappointing. We expect that of laborism but not of one of the best-placed union leaders who could promote it. Steve’s focus on future investment is essential but lacks a real-world description of how serious the problem is: in brief, the proportion of new productive investment from the rip-roaring profits that have dominated the past decade or so has been anaemic. That is the bellwether of how capitalist dynamics cannot take society in a new non-carbon direction that slows and reduces climate heating. Instead, the corporations have chased profiteering on the money market. The occasional exception is not the rule. Tripartite consultations have been inadequate also and more of them, and better, are not a substitute for a new movement. Steve also reproduces a poor grasp of the linkages between profits, profitability, environmental degradation, and downward pressure on wages, unfortunately, a feature of Australian union leadership these days.
    commented on Inflation, Wages and Reinvestment in the Productive Economy 2023-10-26 07:31:32 +1100
    The comment; “Rebuilding the labour share of GDP, regulating the profit-price spiral, and tackling the task of energy transition will require more ambition and more conviction.” needs a policy focus.

    You would expect that a Labor government could change wage determination guidelines such that Fair Work processes need to ensure that minimum wage outcomes did not lead to lowering labour’s factor share of GNP.

    Factor share was meant to be an issue in the recent Jobs Summit, but was not pursued in sessions I saw.
    published Inflation, Wages and Reinvestment in the Productive Economy in Articles & Publications 2023-10-16 18:11:26 +1100