Australia

Business is not profitable at the expense of workers’ wages

This opinion piece by Business Council Chief Economist Stephen Walters was first published in The Australian Financial Review on Monday 8 August 2022.

Who benefits most from a growing economy, workers or businesses? Of course the answer is both. This is even more so when productivity is increasing. So you should be concerned about the findings from the Productivity Commission this week that growth is at his lowest level in 60 years.

More hourly production means the country’s economic pie size expands faster, eliminating the need to fight over tiny slices of pastry.

These pages and elsewhere claim that companies profit at the expense of their workers through “excess profits”, but the facts do not support that. Some argue that this “overhang” needs to be lifted by significant wage increases to offset the inflation spike. As with anything financial, it’s not that simple.

The Business Council also wants workers to earn more, but wage claims must be tied to productivity. Larger wage increases to meet rising inflation will only provide a temporary victory over shrinking labor force numbers. Lower corporate profits ultimately lead to lower investment, slower economic growth and higher unemployment. After all, it is a loss.

It helps to understand the causes of changes in respective profit and wage shares. Mining’s profit share is increasing on the back of a huge resource investment boom and record terms of trade. However, mining profits are notoriously volatile, just like commodity prices.

Similarly, the financial sector has been profitable thanks to the “cheap money” provided by the RBA during the pandemic. This unprecedented financial support was temporary and is now being withdrawn much more quickly than expected.

After skewing this data and excluding miners and banks with the highest wages in the country, the broader profit share has actually declined. Indeed, many non-mining, non-financial companies are suffering from cautious customers, exploding costs, labor shortages and supply constraints. And for many, the impact of COVID’s devastation has been felt and many are still recovering. The pandemic isn’t over either, and hospitalizations are rising again.

It is true that recent profit growth has outpaced wage growth across the economy, as unions argue. But, as economists say, wage growth is “sticky.” Few employees are offered lower wages, even when the economy is sluggish. Company profits are less sticky. For example, during the turbulent times of the global financial crisis, his wages rose by 3% as his profits fell by nearly 10%.

Taking a long-term view is also beneficial. Real wages have indeed been rising for several years before the recent reversal, but the Treasury Secretary admits it is temporary. Inflation is now above the RBA’s target zone, but has been below his 2-3% in the bank’s comfort zone for the past five years. This led to an increase in real wages over the same period.

Moreover, the recent rise in inflation has been driven by rising costs rather than increased profits as claimed. And most of this price pressure comes from abroad via wars, major supply crises, etc. Most companies’ profit margins are not expanding. Producer price inflation – the wholesale price paid by businesses – has grown broadly in line with the rise in prices that businesses charge consumers.

The main reason for the sluggish growth in nominal wages is the decline in productivity. The decade to 2021 has averaged about 1%, half the halcyon days of the 1990s, but has bounced back from the pandemic as production recovers faster than working hours. This disastrous productivity performance needs to be improved quickly. It is imperative to restart the country’s reform agenda, including in the contested area of ​​corporate taxes.

Productivity is about driving investment and innovation across the economy, working smarter not harder. It’s about putting Australians at the forefront and making things better by doing new things together, taking every opportunity to find new markets, introducing new technologies and making everyone in the company more successful. Do it well and efficiently.

Low productivity slows wage growth and lowers profitability. And let’s not forget, the lowest earner, including those on the lowest wage, received one of the biggest mandatory pay raises in decades.

The role of business negotiations in improving productivity and living standards is important. EBA enables employees and businesses to share in the benefits of a growing economy by encouraging everyone to achieve better performance. The EBA’s dwindling influence, mostly weighed down by rigid rules and unnecessary complexity, needs to be addressed urgently.

The mutual interests of business and workers coincide in another way. For example, an increase in retirement pension balance means that the employee benefits from improved company performance. Profitable companies not only invest in future jobs and growth, they pay dividends. These dividends support employee superannuation fund returns. This is also a win-win.

Stephen Walters is Chief Economist for the Australian Business Council.



Business is not profitable at the expense of workers’ wages

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