Falling real wages and the stimulus

If you are an economist who looks at things from the demand side, then this is a puzzle:

Most Australians have not had a pay rise in real terms in years in the face of an assault on wages which has policy makers, unions and business groups worried. The typical Australian family takes home less today than it did in 2009, according to the latest Household Income and Labour Dynamics survey released this week. Just on Friday the Reserve Bank cut its economic growth forecasts by half a percentage point for the rest of this year after confirming wages remain at their lowest share of total income in half a century.

I won’t dwell on the obvious – at least the obvious to those who look at these matters from the supply side – but the starting date for this bit of analysis should give you a clue. The GFC was the start but the stimulus was the actual cause. A stimulus that does not add to value-adding output will pull an economy backwards and ultimately slow real wages growth. What are we to do with this?

The mining boom and Rudd/Gillard government’s multi-billion-dollar stimulus spending may have helped shield the economy from the worst of the GFC.

But since 2012 and 2013, Australian workers have felt stuck in a holding pattern of slow wages growth. Wages for the whole economy increased by 1.9 per cent in the year to March just in line with inflation.

No idea of cause and effect. Come along on Tuesday for a different way of looking at these things. No classical economist would be surprised.

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