Slow Wage Growth And Its Implication On The Australian Economy

Theoretical and Conceptual Framework of Economics

Discuss about the Theory and Applications of the Economics Indices.

The theoretical and conceptual framework of economics consist of several components of immense importance and relevance to the real economic scenarios in the global framework. Of these concepts the primary ones being that of the notion of “Markets” and that of demand and supply dynamics. In economics, the term market is a representation of a situation where the pricing and output decisions of different commodities and services are decided by mutual interactions of the demand and supply side dynamics (Ehrenberg and Smith 2016, pp. 16-18). Thus, for any market to be at a stable equilibrium and to work efficiently, it is of utmost importance for the demand and the supply forces to be in accordance with each other. Any anomaly between these two forces can lead to non-optimal situations for either the demand side or the supply side or both, thereby affecting the economy as a whole (Salvatore 2013, p. 426).

In this context, the dynamics of labour market can also be considered as the market equilibrium depends on the demand and supply of labour resources in the market (Eichhorn 2013, p.76). The price of labour resources being the wages paid to the labours, the demand and supply dynamics in the market are directly linked with the wage levels of the labours, which in turn has considerable implications of the welfare of the labours as well as on the different components of the economy as a whole.

Keeping this into consideration, the concerned essay tries to discuss and analyse the slow rate of growth of wages which has been existing in the otherwise globally dominant economy of Australia in the contemporary period, in the light of the different components of the theoretical and conceptual framework of economics.

One of the predominantly economies in the contemporary global scenario is the economy of Australia, which over the years has been showing impressive growth patterns in almost all the economic indicators and maintaining stability in the economic scenario as a whole. Over the years, with the increase in the economic and commercial aspects the economy has attracted huge number of people from all parts of the world, with the objective of better job opportunities and an overall increased economic welfare (Hutchens, 2018). However, in the last few years, the country has been experiencing a consistent decline in the aspects of the growth rates of the wages in the labour market, which can be seen as follows, with the use of Wage Price Index, which shows the changes in the price of labour in the country:

Labour Market and Demand and Supply Dynamics

Figure 1: Wage Price Index of Australia over the years

(Source: Scutt 2018)

As can be seen from the above figure, the wage growth level in Australia, which remained consistently high till 2009, dropped significantly in the end of 2009 and post that kept on declining alarmingly barring several discrete fluctuations.

There has been the presence of several crucial factors in the contemporary period in the economy of Australia, which has led to the existence of an extremely sluggish growth rate of wage in the country of which the primary ones are as follows:

• Low level of demand for labour- With the shift of the production and industrial pattern of the country from basic manufacturing sectors to high end technological and capital-intensive sectors, the demand for labour especially the low skilled ones has been decreasing (Lavoie and Stockhammer 2013, pp. 13-39).
• Withering of mining boom- The mining boom, which created huge economic and employment scopes withered out in the contemporary period, which in turn has led to the decrease in the scopes of employment in the country, thereby leading to the low wage crisis.
• Low productivity- The productivity growth of labour, in general, in the country, has also been highly sluggish, much of which can be attributed to the fact that a significant share of the labour force of the country is created by the population who immigrate to the country from different parts of the world in search of better economic prospects, most of whom are not high skilled labours.

Keeping this into consideration, the following section of the essay tries to analyse the risks which the economy of Australia is expected to face due to the presence of the considerably low growth rate of wage of Australia in the contemporary period.

The presence of consistent low wage in an economy can be detrimental to the economy to a considerable extent, having linkages and influences in different aspects, which can be explained with the help of the following theoretical and conceptual frameworks of economics which are as follows:

1. Aggregate Demand and Aggregate Supply

The economic growth of any country depends considerably on the total productivity of goods and services in the economy, which in turn is dependent to a huge extent on the aggregate demand present in the economy, which in turn influences the aggregate supply, thereby influencing the total production in the economy (Corden 2012, pp.290-320). In this context, the presence of a consistent and acute sluggish growth rate of wages leads to the presence of a lack of purchasing power in the hands of the labour force of the country, thereby decreasing the aggregate demand for goods and services:

Figure 2: Decrease in the aggregate demand

(Source: As created by the author)

This in turn leads to a fall in the price of the commodities or services, which in turn leads to a decrease in the aggregate supply in the country:

Figure 3: Decrease in the aggregate supply in the economy

(Source: As created by the author)

Thus, the overall productivity of the country has the risk to decrease the overall production of the country, which in turn leads to stagnation in the economy, thereby further decreasing the wage growth in a cyclical manner (Mankiw 2014, pp. 122-123).

One of the primary aspects in which the low wage growth rate acts as an indicator is the presence of high unemployment in the economy. This can be explained with the help of the following figure:

Slow Wage Growth in Australia

Figure 4: Demand and supply dynamics in the labour market

(Source: As created by the author)

As is evident from the above figure, in the presence of enough employment scopes, the number of options in the hand of the labours are high, which in turn tends to create an excess demand in the labour market, thereby increasing the wage rate of the labours, in the economy. On the other hand, when there are not enough job scopes in the economy, there exists excess supply in the labour market, which reduces the wage rate in the labour market, which seems to be one of the potential threats in the labour market of the country (Heijdra 2017, p.29). The consistent and sluggish growth rate of wage in the country can be an indicator of lack or loss of jobs in the economy, which can have immense negative implications on the employment and job scenarios of the country.

The low wage growth in an economy leads to decrease in the aggregate demand which in turn decreases the average price levels which can be seen as follows:

Figure 5: Fall in price due to fall in demand

(Source: As created by the author)

This fall in demand accompanied by decrease in the average price levels lead to a very low inflation level in the country. An excessively low inflation rate in the economy can also be detrimental in the aspect of stagnation in the economy (Brunnermeier, Eisenbach and Sannikov 2012, pp.9-10).

Conclusion

Thus, from the above discussion it can be asserted that the economy of Australia, which had been facing the problem of acute slow growth of the wage rate in the labour market in the contemporary period, has the threat of facing threats in the aspects of economic stagnation, high unemployment, decrease in the aggregate demand and supply as well as an overall stagnation in the economic progress and development of the country in the long run.

References

Brunnermeier, M.K., Eisenbach, T.M. and Sannikov, Y., 2012. Macroeconomics with financial frictions: A survey (No. w18102). National Bureau of Economic Research.

Corden, W.M., 2012. Dutch disease in Australia: policy options for a three?speed economy. Australian Economic Review, 45(3), pp.290-304.

Ehrenberg, R.G. and Smith, R.S., 2016. Modern labor economics: Theory and public policy. Routledge.

Eichhorn, W. ed., 2013. Measurement in Economics: Theory and Applications of Economics Indices. Springer Science & Business Media.

Heijdra, B.J., 2017. Foundations of modern macroeconomics. Oxford university press.

Hutchens, G. (2018). Australia ‘locked’ into low inflation and low wage growth, economists fear. [online] the Guardian. Available at: https://www.theguardian.com/business/2018/jan/31/australia-locked-into-low-inflation-and-low-wage-growth-economists-fear [Accessed 3 May 2018].

Lavoie, M. and Stockhammer, E., 2013. Wage-led growth: Concept, theories and policies. In Wage-led Growth (pp. 13-39). Palgrave Macmillan, London.

Mankiw, N.G., 2014. Principles of macroeconomics. Cengage Learning.

Salvatore, D., 2013. International economics (p. 426). Hoboken, NJ: John Wiley & Sons.

Scutt, D. (2018). CHARTS: Australian wages are growing at the slowest pace on record. [online] Business Insider Australia. Available at: https://www.businessinsider.com.au/australian-wages-just-grew-at-the-slowest-pace-on-record-2015-8 [Accessed 3 May 2018].