Tue Mar 7

Underlying Australia's inflation problem is a historic shift of income from workers to corporate profits

Written by Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of Sydney

The three years since the onset of the pandemic have witnessed a dramatic redistribution of national income, away from labour compensation and towards business profits.

No one should be surprised. Supply-chain disruptions, pent-up consumer demand and inflation have provided businesses with a golden opportunity to increase their margins. Many have taken it.

The latest GDP data ^[1] from the Australian Bureau of Statistics confirms that, in the three years since December 2019, corporate gross operating profits have risen 43.6% – more than twice the growth in wages.

As a result, the share of GDP going to corporate profits has increased by 3.6 percentage points. Conversely, labour’s share shrank by 2.3 percentage points, despite low unemployment rates and rising nominal wages. Even hard-pressed small businesses, personified by the friendly neighbourhood café owner, did better.

The 29% share of national income now going to corporate profits is the highest in Australian history – higher even than 2020 when profits were temporarily boosted by JobKeeper payments and other business subsidies. Meanwhile, workers’ share of GDP reached its lowest point ever (just 45%).

The decline has implications for inequality and social cohesion. It is translating into a notable decline in workers’ real living standards, and exacerbating the rise in inflation.

No, it’s not all about mining

Some claim the rise in profits is solely due ^[2] to supercharged energy and mining prices, and hence does not indicate any general shift in distribution patterns.

The Business Council of Australia’s head, Jennifer Westacott, has even claimed that ^[3] the profit share of non-mining businesses has fallen.

Her calculation is flawed: it excludes mining from one part of the equation (profits) but not the other part (nominal GDP). In 2022 mining’s contribution to GDP exceeded 15%^[4].

An apples-to-apples comparison, measuring non-mining profits to non-mining GDP, shows profits have grown relative to GDP in most of the economy, not just in mining. Whiile mining profits surged 89% in the three years to December 2022, non-mining profits increased 29% – faster than non-mining GDP, and much faster than wages.

In sum, the redistribution of national income is occurring across the economy, with a smaller share for workers and a larger share for the owners of the businesses they work for.

Real wages have plummeted

This decline in labour’s share of GDP just since the pandemic represents foregone earnings of close to A$5,000 a year per employee, on average.

This extends a longer-term ongoing erosion of labour’s share of GDP that has been occurring since the 1980s. It has occurred despite a modest uptick in nominal wage growth, and statutory increases in superannuation contributions by employers (which are included in the statistics above).

Post-COVID inflation has caused a steep fall in the absolute purchasing power of wages.

This is confirmed by the ABS Wage Price Index ^[5] (WPI), which reports changes in average wage levels. It’s a good measure of pure wage inflation, analogous to the Consumer Price Index (CPI) for consumer goods and services.

The latest WPI data shows nominal wages rose 3.3% in the 12 months to December 2022. But with the CPI rising 7.8% in the same period – the biggest gap between the WPI and CPI since the Australian Bureau of Statistics began gathering this data in 1997 – wage growth has now lagged consumer prices for seven consecutive quarters. This is also a record.

As a result, real wages have fallen by 5% in the three years since December 2019.

(The temporary spike in real wages in mid-2020 was an unusual consequence of lockdowns, which most affected low-paid jobs in sectors like hospitality and retail. The loss of these jobs pumped up average wages for the rest, but that was reversed when those sectors re-opened after the lockdowns.)

The real purchasing power of wages is now back to the same level as 2010. More than a decade’s worth of gradual improvement for Australian workers has been wiped out.

Worse, more losses are to come through 2023, and likely much of 2024, according to Reserve Bank of Australia forecasts ^[7].

Why is the RBA focused on wages?

Claims that businesses are mere intermediaries in inflation – simply passing on higher costs to consumers – are disproved by the growth in corporate profits.

This is most starkly visible in mining and energy prices, one of the largest sources of recent CPI inflation. But even in non-mining sectors prices have increased faster than required simply to offset higher costs.

In other research ^[8], I have estimated the rise in corporate profits since December 2019 (both mining and non-mining) accounts for 69% of the jump in inflation above the RBA’s 2.5% target.

Workers are already paying for higher inflation through falling purchasing power. They will pay again through job and income losses from any economic slowdown (potentially a recession) caused by the RBA’s response to that inflation.

Yet the RBA remains narrowly obsessed with supposedly overheated labour markets and rising wages. Its February Statement on Monetary Policy ^[9] mentions wages more than 70 times. Profits are mentioned just once.

Acknowledging reality

Concern over the redistribution of national income from labour to capital is not class envy. For working-class households it has resulted in an increasing struggle to make ends meet.

Addressing and ameliorating the effects of this historic redistribution will require a comprehensive and complex range of policy responses ^[11]. Crucially it requires wages growing faster than prices, both to make up for past real wage losses, and to reflect ongoing productivity growth.

Possible measures to short-circuit this profit-price inflation, and support a recovery in real wages, include price controls ^[12] in energy, housing and other strategic sectors; redistributing excess profits in sectors such as mining through tax ^[13] and transfer mechanisms; and stronger collective bargaining ^[14] provisions.

Such responses are controversial, and will spark debate. They will need careful research and design to ensure they do more good than harm.

But the first step is to acknowledge that this reapportionment of the economic pie, from labour to capital, is indeed happening – and is a problem.