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The Treasurer’s claim that wages growth requires profit growth – Editor

Well known Australian banking economist, Saul Eslake, has published an article [1], using ABS national income data, repudiating the recent claim of Treasurer Scott Morrison that a sustain- ed increase in profitability is a prerequisite for a pick-up in wages growth.

Australian wages growth is, as Reserve Bank governor Philip Lowe recently noted, “the slowest since at least the mid-1960s”. But the idea that wages and profits are connected is not supported by the available data. As Eslake has noted, ” there does not appear to be any ‘leading’ relationship between growth in pre-tax company profits and growth in wages, even if the mining sector (which accounts for a good deal of the fluctuations in profit growth over the past dozen years) is excluded “.

Continuing his comment, Eslake noted: ” Some relationship between profit

margins (that is, profits as a proportion of sales revenue) and wages might have existed in the past. However, that appears to have broken down in the years since the peak of the commodities boom … Since then, aggregate profit margins have risen to levels not seen since the early 2000s, but wages growth has continued to slow.

Rather than being a precursor to faster growth in wages, the growth in Australian company profits in recent years appears to be part of a broader global pattern: the share of aggregate income accruing to capital is rising while that accruing to labour is falling. ”

One of the statistical charts shown by Eslake is reproduced below. He finally concludes: As I’ve argued previously, there’s absolutely no evidence that preferentially taxing small businesses will do anything to boost innovation, productivity, investment or employment. Hence, there’s no reason to think it will do any- thing to lift wages growth.

Nor is there any compelling empirical evidence to suggest that across-the- board tax cuts for larger companies will have any significant impact on employment and hence on wages. ”


Eslake also stated that he thinks it is now important to ensure that real wages do not grow at a pace relative to productivity growth which leads to higher unemployment.

Saul Eslake is a Vice- Chancellor’s Fellow, University of Tasmania

Source: The Conversation, 6 Oct. 2017 Is faster profit growth essential for a pick- up in wages growth?


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