Explaining Aggregate Wage In Australia Economics Assignment (Essay Sample)

Explaining aggregate wage in Australia
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Explaining aggregate wage in Australia
The rate of wage growth has been on the decline in recent years in Australia. The authors claim that there are several factors that may influence the level of wages in the country. These factors are unemployment, real exchange rate adjustments, high output prices and low inflation expectations (Jacob & Rush, 2015). These factors will be critically analyzed in this essay and the authors argument established.
The largest source of household income is wages. Wages are also the largest constituent of business costs. The rate at which wages grow is very important to the economy (Janda, 2016). The wages have experienced a slower growth rate in recent years and have reached the lowest space in recent years since the early 1990s. The rate of wage growth is about 2 or 3 per cent. The slow wage growth has been accompanied by faster growth rate in labor productivity. The combination of slow wage growth and fast growth in labor production has led to a moderate growth in labor costs. The low wage growth has also been experienced internationally. Several developed countries have had a wage growth lower than forecasted. However, wage growth in Australia has stood out due to the extent of the decline in growth of wage rates.
A slow growth rate is normally associated with high unemployment rates in the short-term. Firms whose products are experiencing low demand try to contain costs. Wages comprise a significant percentage of costs incurred by a firm and it will reduce this cost by laying off workers and reducing hiring. Employees become anxious about their job security and they become more willing to accept a lower growth in wage rate. There is an increase in spare capacity in the labor market (Bishop and Cassidy, 2017). The decline in wage growth rate in 2012 is associated with high unemployment levels. The long-term analysis also suggests that adjustments in the wages result from the unemployment changes. However, a specific rate of unemployment may result in different growth rate in wages.
Employees are concerned with the purchasing power of their wages rather than the monetary value. The purchasing power is determined by the prevailing inflation levels (Gregory and Smith, 2016). A lower rate of wage growth may be as a result of lower inflation expectations. Surveys unions, households and long-term financial market indicate that the expected consumer price inflation in the coming year will be lower than average. It is also reported that inflation benchmarks used in negotiation of wages has bower than in the past few years. However, real wage growth has declined to around zero even when accounting for lower expectations in inflation. This implies that expectations in inflation account only for a small part in the overall decline.
Output prices are a major concern to companies especially when they are considering the level of wages to offer. Higher wages are offered when the output prices are high and vice versa. Normally, the prices consumers pay for services and goods is related to the output prices of a company (Murphy, 2016). It implies that both households and firms have the same inflation expectations. However, if the terms of trade are changed, the prices that consumer pay for products, and the prices that firms receive for their products can differ significantly. Increase in wages benefits employees more than it costs the firm. Since 2012, the real consumer wage has grown with a smaller rate as opposed to real producer wage, which has sharply increased.
Wage growth has had significant consequences on the cost competitiveness of producers in Australia. This has played an important part in the adjustment of the economy. As portrayed by the real exchange rate. The real exchange rates show prices relative to those of Australia trading partners in common currency terms. The real exchange rate shows an economy’s competitiveness compared to others. An economy competitiveness improves when the real exchange rate depreciates. It can depreciate as a result of a decline in prices or a depreciation of the nominal exchange rate (Eichenbaum, Johannsen and Rebelo, 2017). A real exchange rate can be measured based on the relative ULCs. Since 2012, the decline in ULC growth has assisted Australian producers improve their cost competitiveness. It has depreciated by 12% due to a lower nominal exchange rate and also a decline in Australia’s ULCs relative to trading partners. However, when the terms of trade were in the same level in 2006, the current ULC meas...