Real wages are shrinking as profits are soaring. But are most businesses really raking it in?

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The government’s jobs and skills summit is less than a fortnight away but there is still intense disagreement over exactly what problems actually exist in Australia’s labour market.

Unions and progressive think tanks have pointed to the decade-long stagnation and recent collapse in real wages as the key concern.

Real wages are measured by looking at workers’ increase in pay minus inflation, otherwise known as the rising cost of living.

With inflation (as measured by the Consumer Price Index) surging and pay packets (as measured by the Wage Price Index) not keeping pace, over the past year the average worker has seen their standard of living fall substantially.

In fact, real wages for Australian workers are now back at the levels they were a decade ago.

Yet, barring the COVID-19 recession, Australia’s economy has grown, albeit rather modestly, over that period.

The Australia Institute’s executive director, Richard Denniss, said it was clear where that extra income had gone.

Australia Institute Richard Denniss.
Richard Denniss says companies are taking a greater share of the economic pie away from workers.(Rob Reibel, ABC News.)

“You would expect the profit share to be rising at the moment, because if prices are going up and wages aren’t, that money’s got to be going somewhere and economists tend to call that somewhere profit,” he told ABC News.

“What we’ve seen in Australia is a significant redistribution towards profit, particularly towards profit in the mining industry.”

The Australia Institute analysed recent Australian Bureau of Statistics figures to back up this claim.

The Australia Institute argues company profits are still up strongly in recent years, even without the mining sector.
The Australia Institute argues company profits are still up strongly in recent years, even without the mining sector.(Supplied: The Australia Institute)

The result of this growth in profit is that the employee share of national income is now less than half.

However, Peter Burn, head of policy for business lobby the AiGroup, said that decline had been driven almost entirely by two industries.

“The labour share has not declined, other than for the mining and finance sectors,” he told ABC News.

“All other sectors aggregated, there is no decline in the labour share of income.”

Mining profits have roughly trebled as a share of GDP over the past five or six years.
Mining profits have roughly trebled as a share of GDP over the past five or six years, while other non-financial profits have generally flatlined.(Supplied: RBA)

In the resources sector, Dr Burn said, this was due to massive investment in expanding mines and machinery during the mining boom, which increased output far more than the need for workers, combined with the current surge in commodity prices increasing the value of that output.

In finance, he explained it was due to increasing automation over the past few decades, which has meant less bank revenue is paid out in wages, with fewer branches and staff.

Peter Burn
Peter Burn says finance and mining are responsible for the shift from wages to profits.(ABC News: Dan Irvine)

Dr Burn argued this concentration of rising profits in just two sectors of the economy was crucial for the discussion around wages.

“Is there a general argument to say that business can afford wage increases, because the wages share has fallen, and therefore the capital share has risen?” he asked rhetorically.

“Well, the answer to that is well clearly no for the vast bulk of the economy.”

Time for a resources super profits tax?

Mining truck drives on red dirt at BHP's Jimblebar mine on a bright sunny day.
The resources sector has recently enjoyed a surge in profit without the need to create many additional jobs.(ABC News: Rachel Pupazzoni)

Richard Denniss is incredulous at this analysis.

“It’s a bit weird for people to say, ‘Oh, if you take the most profitable sectors out of the measure of profit, profits haven’t gone up nearly as much’,” he countered.

“Well, yeah, if you took the tallest people out of a classroom, the average height of people in the classroom would be a bit lower.

“If profits in mining are so big that they’re distorting our National Accounts, you’d think that’s an obvious case for what Joe Stiglitz, the Nobel Prize-winning economist, [has] been saying — why don’t we have a windfall profits tax on some of these profits?”



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