Record-low wage growth presents more economic challenges for Australia

Since the mining boom ended, and jobs in the manufacturing industries were recently cut, our economy has struggled to replicate its wealth and success that it had during the mining boom.

With inflation rates, level of economic activity and interest rates all falling in recent years and remaining relatively static, recent slowing of wage growth coupled with the slowing of the retail industry has potential to be detrimental to the overall health of our economy, and is just another set of factors that are adding up to Australia’s precarious economic position.
Alarmingly low wage growth and interest rates
Currently interest rates are low 1.5%, which is lower than the RBA’s target cash rate of 2-3%. This low cash rate signifies that the RBA’s aim is to stimulate spending and boost economic activity. However, despite a .4% increase in retail sales in January; which would indicate that the incentives for consumers to spend provided by low interest rates is working; many experts such as RBA governor Philip Lowe believe that this increase is somewhat deceiving, as he believes households will see their disposable income decrease with these declining rates in wage growth. He believes that as families begin to discover this trend, they will be even more reluctant to spend their money, and that the decreasing consumer confidence and reduced disposable income will essentially counter and overpower the incentives to spend more that come with low interest rates, ultimately leading to a slow in economic activity and goods traded in the economy.

On the contrary, Australian Retailers Association executive director Russell Zimmerman claims that the new Sunday rate penalty cuts (talked about by Matt in a previous article) will provide longer trading hours and subsequently and overall increase in quantity in goods traded in particular industries where the rate cuts applied (such as retail and fast food).Although this new policy is aimed to counter slowing economic activity, I still feel like it won’t impact the selected industries and the economy hugely, as the rate cuts are not huge, and even though I believe that the cuts are a smart economic decision, I personally believe that this is merely a small step in the right direction, and that it will take much more for Australia’s economic figures to start looking more positive again.

Solutions
The many compounding factors are currently effecting our economy are all hugely complex, and looking at this from a macroeconomic standpoint, it is very difficult for me to come up with any solutions.
For example, measures such as decreasing cash rates further will have adverse effects on other parts of the economy and a decreasing cash rate is seen as far from ideal as the RBA’s target is 2-3%, and is ultimately unsustainably low, And although many younger workers will feel the impact of the Sunday wage cuts, I do think is a small measure that is a smart way to boost the economy, but ultimately I think the issues with low wage growth have to be addressed somehow. However the issue with simply raising wages is that will then have negative effects on many industries, as cost of production increases, and in the industries where wage cuts occurred, wage hikes to try to increase disposable income and economic activity will counter the benefits from the wage cut, making this new policy useless.

Overall it is very hard to simply figure out how to fix the economy, and i think it will take a long time until we start to see our economy thriving once again.

sources: http://www.theage.com.au/business/the-economy/retail-sales-bounce-but-consumer-spending-lacklustre-20170306-gurkrz.html

http://www.rba.gov.au/monetary-policy/int-rate-decisions/2017/

 

 

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10 Comments

    1. If you look at recent trends the Australian economy has yet to be in a recession for decades. Evn with slow economic growth the chance are the economy will recover to 3-4% but it may take time.

      Liked by 1 person

  1. This increasing ratio of wage growth to inflation rates will only seperate the middle class from the lower class even further; creating an even larger wage gap. Hopefully, we find another industry gap we can fill up and have another economic boom again.

    Liked by 1 person

  2. The slow wage growth is also the reason why many young Australians cant afford houses ! The increase in house prices is way higher than the increase in wage growth, making it difficult for young people to even buy houses compared to a decade before :((

    Liked by 1 person

    1. I agree, slow wage growth is making it especially difficult for younger Australians to do anything. There are young Australians who have more than two jobs just to be able to save and pay the bills. When are they meant to enjoy life in between their many jobs?

      Liked by 1 person

  3. One of the reasons Australia may have low wage growth is due to low job security. If people don’t feel as confident about their jobs lasting, they may be less inclined to negotiate higher wages. Employers need to work towards increasing job security.

    Liked by 1 person

  4. While I can see that cutting penalty rates is meant to stimulate the economy by allowing businesses to hire more workers on Sunday’s, as you said the amount is so little that it wouldn’t help all that much but instead further decrease the disposable income of part timers without the guarantee of businesses hiring more people to actually help stimulate the economy

    Liked by 1 person

  5. It’s not surprising that wages should fall when it’s cheaper for businesses to just ship products from a warehouse than bother with managing a storefront/employees – for example Kogan has outpriced every other electronics store because they don’t waste money on paying employees that they don’t need to pay for their business model

    Liked by 1 person

  6. If wages did increase, wouldn’t businesses just increase their prices as well since they have to pay higher wages, and they know that people can afford more? This wage-price spiral is what causes inflation to get out of hand sometimes. Granted, inflation right now is worrying low (1.5% according to the RBA) but higher wages would only put inflationary pressure on prices.

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