World Economy

Cost Cuts in Australia Hurting Workers, Economy

Wage growth in Australia has fallen  dramatically in recent years.Wage growth in Australia has fallen  dramatically in recent years.

The Reserve Bank of Australia says relentless cost cutting by businesses has kept wage growth at record lows and stifled the economy.

In a speech to the Australian Business Economists annual dinner, Governor Philip Lowe said low wages growth was now a “distinguishing feature” of the Australian economy and at the heart of many of the problems the RBA was currently grappling with, including a boom in house prices and dangerous, record debt levels, ABC reported.

“Low growth in wages means low inflation, which means low interest rates, which means high asset valuations,” Lowe said. And he said blame lies, in part, at the door of business and its “laser-like focus on containing costs”, which has seen workers lose out.

“Over recent times there has been a mindset in many businesses, including some here in Australia, that the key to higher profits is to reduce costs. Paying higher wages can sit at odds with that mindset,” Lowe said.

Wages growth in Australia has fallen dramatically in recent years. Previously, 3.5-4% was seen as normal whereas now it would appear 2-2.5% is normal. And it is not just low wage growth, workers are seeing conditions squeezed too.

“We have heard from our liaison program that there has been downward pressure on non-wage payments, including allowances, and an increase in the proportion of new employees hired on lower salaries than their predecessors,” Lowe said.

The disconnect between boardrooms and kitchen tables is stark. “Businesses feel better than they have for some time, but consumers feel weighed down by weak income growth and high debt levels,” Lowe said.

And yet, a lack of consumer confidence brought on by low wages is also hurting business with “growth in consumer spending (remaining) fairly soft”. Less spending by households, means less income for businesses.

The RBA governor said the bank had chosen not to lower interest rates further over the past year because it risked further inflaming an already dangerous situation in the housing market. “Lower interest rates might have provided a bit more support, but would have done so partly by encouraging people to borrow yet more money, thus adding to the risks,” he said.

Australian household debt has reached record highs in recent years as low interest rates have fuelled an extraordinary boom in house prices.

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