We haven’t had a recession in decades, so why do Australians feel so poor?

It was announced that Australia now holds the record for the longest period of growth without a technical recession. If this is the case then why do the vast majority of us all feel so poor?

If this is the case then why do the vast majority of us all feel so poor?

The reason is quite unusual and is not something that Australia has faced for a very long time. Wages growth is at record lows and while inflation is also low, it is still rising faster than wages.

What does that all mean? It means that the stuff you’re buying is going up in price faster than your wage. You can’t buy as much stuff as you could before.

Over the last 12 months prices are 0.2 per cent higher than wages growth. Economists call this a fall in real wages and it’s not just bad for you, it’s bad for the whole economy.

Economists call this a fall in real wages and it’s not just bad for you, it’s bad for the whole economy.

The economy runs on us buying stuff. If we can’t afford to buy as much stuff then that puts a break on spending which then reduces the amount of stuff businesses sell and in turn the amount of people business needs to employ to make that stuff.

Retail sales have come to a virtual stop in the last six months, growing just 0.6 per cent and in the last two months they’ve gone backwards. Workers are feeling the pinch and they have responded by closing their wallets.

There have been a number of periods over the last 20 years when inflation has grown faster than wages.

It happened with the introduction of the GST. The new goods and services tax pushed up prices faster than wages but at the same time the government handed out compensation in the form of tax cuts and increases in welfare payments. So the people were cushioned from the full impact.

Inflation also grew faster than wages just before the GFC hit. But at this time wages were growing at around four per cent and inflation just crept above it. The economy was booming. That is a very different situation than the one we’re facing now.

The more recent fall in real wages is not because of a change in tax that people have been compensated for or because inflation in a strongly growing economy got just ahead of strongly growing wages. Rather it is because everything is slowly grinding to a stop.

Politicians like to blame this on the slowdown in the mining boom. It makes it sound like there is nothing we can really do.

But this is a cop out for two reasons.

Firstly, booms always come to an end and anyone who was serious about managing the economy would have been trying to slow the boom as it grew. Instead most politicians were happy to cheer it on, preferring to throw more fuel on the fire. The only sensible economic policy that was put up at the time was the mining super profits tax. Such a policy may have better managed the boom and prevented some of the problems we face today. But unfortunately that was watered down and it came too late.

For politicians to complain that the boom caused economic damage is like teenagers complaining that their guests trashed the house during a drunken party while their parents where away.

For politicians to complain that the boom caused economic damage is like teenagers complaining that their guests trashed the house during a drunken party while their parents where away.

The second reason that it’s a cop out is because record low wages growth is not some unexpected event but rather it’s the outcome of 20 years of industrial relations policy. The coalition has been pushing labour market ‘flexibility’. This is code for less secure work through sham contracting, casualisation of the workforce, attacking unions and slashing penalty rates.

Since the Coalition came to power in September 2013 full time employment has increased just three percent while part time employment has increased four times faster at 12 per cent.

We’re rapidly turning into a nation of part time and casual employees in insecure work. Or as the government would say a nation of more ‘flexible’ workers.

No one should be surprised that after a long period of trying to reduce the power of workers that they are no longer able to demand higher wages. Unless things turn around soon business groups are going to be confronted with the awful truth that their workers are also their customers. Forcing down the wages of your workers also forces down demand for your product.

20 years of pursuing these policies has fundamentally changed the economy, as John Fraser the Head of Treasury recently admitted.

There are a number of structural trends that are undermining our capacity to raise the revenue that we have come to expect from a growing economy. One such trend is a shift in the composition of growth away from wages and towards corporate profits.

What does this mean? It means that the economy is changing and the rewards of a growing economy are now flowing to those who earn profit and away from those who earn wages. This shift is not just bad for the budget of most Australians but it is also bad for the government’s budget.

Low wages growth is not an unfortunate downturn in the cycle but the outcome of 20 years of deliberate policy. As an economist would say it’s a structural change.

So what is the government doing about this? Well they’re pursuing policies that are designed to make things worse.

Despite the shift in the balance of power from wages to profits, the government is intent on pursuing a massive corporate tax cut. The last election was a double dissolution fought on introducing a new body to battle against the unions. And the government is keen to strip penalty rates from Australia’s lowest paid workers.

But what can we expect in the future if we continue down this path? As more and more Australians feel they are missing out on their fair share of the growing economy, they’re likely to become disconnected from politics and increasingly angry.

Angry voters are more likely to turn to those offering quick and easy solutions.

Maybe the argument that giving business everything they want is not the path to a healthy economy and society. Maybe we need to step back and not walk down the path to growing inequality and a poorer angrier society.

— —

From all of the team at The Australia Institute, thanks for reading.
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The Australia Institute

The Australia Institute

an independent think-tank based in Canberra > australia.org.au

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