Australians have faced higher costs of living in recent months, with little relief around the corner. ABC’s Vote Compass shows that 45% of respondents (between 12-19 April 2022) have found it harder to make ends meet relative to a year ago. The Australian Council of Trade Unions (ACTU) claims that the average worker on $68,000 a year has seen their real wage cut by $832 in 2021, the worst outcome in two decades as the CPI rose by 3.5%, greater than the rise in the hourly wage rate of 2.3%
The general argument being made is that the rising cost-of-living is due to inflation outstripping wage growth, thus suggesting that the solution lies with (a) reducing inflation, (b) raising wages and more effectively (c) attempting to do both in tandem. However, as this article will suggest, while such steps are helpful, they are blunt instruments that will leave many struggling for years to come, even if the inflation we suffer from today is transient and due to international supply constraint and geo-political factors outside the firm control of the Australian government.
This is as headline rates for the consumer price index (CPI) and wage growth are a useful barometer for the ‘average’ Australian, who, in a land as vast as ours, does not actually exist, and that a sizeable minority of the Australian population rely on either government assistance or other non-wage income as their main income source.
Capitals versus regions
First, the CPI is capital-city centric and thus does not reflect the cost-of-living in regional and remote areas, and even among capital cities the annual inflation rate of 5.1% (March 2021-March 2022) varies by between 4.4% – 7.6%, disparities of which will only be accentuated in smaller population areas where the significant rise in transport cost (up 13.7%) will strike disproportionately..
As well, the consumption patterns of the composite ‘average’ consumer that exists in the mechanisms of the CPI formulation may bear little resemblance to much younger and older Australians, with the latter consuming far more medical products than the former, who would more likely face pressures in the housing market, be it rental or mortgage.
Gender
Gender differences in consumption patterns are also not accounted for; given we already know that our industries are highly gender segregated and that wage rises are not uniformly distributed, this yields cost-of-living pressures that bifurcate by gender. The cost-of-living pressure could be better understood if we were to view the components of the aggregate CPI, for the greater issue is the rise in price of what the ABS terms non-discretionary inflation (covering food, petrol, housing and health), which rose by 4.5% relative to discretionary inflation, which rose by a far more modest 1.9%.
Second, the CPI should be used together with the far less known Living Cost Index (LCI), which attempts to look at expenditure by household type, thus moving away from the non-existent ‘average’ Australian, though it remains capital-city centric.
The latest available annual figures correspond to the 3.5% inflation rate of December 2020-December 2021 shows that the worst hit group are (i) aged pensioners, (ii) self-funded retirees and (iii) pensioners and beneficiaries, with the least negatively affected being employees.
The latest available annual figures correspond to the 3.5% inflation rate of December 2020-December 2021 shows that the worst hit group are (i) aged pensioners, (ii) self-funded retirees and (iii) pensioners and beneficiaries, with the least negatively affected being employees.
This suggests that the conversation on higher wages misses out on a whole host of Australians struggling to make ends meet, and who’s income growth has been even slower than for wage earners. This is particularly pertinent as 23% of households who report governments pensions and allowances as their main source of income, with a whopping 65% (32%) of those in the lowest (second-lowest) income quartile reporting it as their main source of income in the financial year 2017-18. Given lower rates of employment in regional areas, this is once again accentuated in regional and remote areas of the country, which receive little attention due to urban centric data being largely reported.
Third, as briefly noted, wage rises are not uniform, as the Wage Price Index is as blunt an instrument as the headline CPI figure. The annual rise is higher for the private sector (2.4%) than the public sector (2.1%), which is surprising given government and RBA directions to boost wages, and can differ widely by industry (1.3% – 3.5%) and by states and territories (1.4% – 3.2%).
“… policies that increase employment rates and subsequently wages, operate well in theory but are not necessarily as effective in reality, as seen by unmet projections and given that a significant proportion of Australians work in insecure jobs..”
Alleviating cost-of-living pressures
A more nuanced view of cost-of-living pressures is necessary to ensure the right steps are undertaken to alleviate them.
First, we would have to acknowledge that governments have limited room and ability in the short-run to reduce the rate of inflation when inflation is largely imported from overseas.
Second, policies that increase employment rates and subsequently wages, operate well in theory but are not necessarily as effective in reality, as seen by unmet projections and given that a significant proportion of Australians work in insecure jobs. For this group, a rise in hourly pay may not translate to higher income if the hours worked are reduced, for example, while direct negotiations with employers are subject to asymmetrical power plays, thus further reducing the ability to gain higher wages.
As well, wages growth take time to be realised and are hostage to external factors such as global economic growth, which are difficult to control. Third, we cannot ignore variations in cost pressures and income sources that differ by location, gender, age and family size. Those on government assistance are increasingly suffering from the high cost-of-living relative to the employed and are seemingly marginalised in the debate on raising incomes.
Responses to consider
The fastest way for the federal government to make inroads into cost-of-living pressures when inflation is not significantly due to excess demand (as is the case now) is to increase assistance to those most vulnerable to these cost pressures. It can be undertaken directly, as we witnessed with the COVID-19 supplements, or indirectly, perhaps by increasing childcare subsidies. Both need not be viewed as being expenditures only, for then their benefits are ignored. Direct supplements for example, flow back almost instantaneously into the economy, given that the marginal propensity to consume of lower income groups is extremely high; in plain English, every extra dollar delivered by the government to lower-income individuals will be immediately almost-wholly spent, with the revenue going into the local economy.
Given demand spending is not the main cause of inflation at present, such expenditures are unlikely to significantly add to the CPI in the short-term. Rising childcare subsidies allow for parents (mainly mothers) to enter the workforce or work more hours, thus paying for the scheme itself via higher tax receipts and increased family expenditure as family disposable income rises.
Tackling the cost-of-living pressures is complex, but we would be better placed to ameliorate its effects if we move away from headline figures and drill down into their constituent parts and put forward policies that better target the most vulnerable among our society that require the greatest attention; this include non-wage earners, those in regional areas and those unable to work more hours or at all given parenting and caring labor.
Author
Dr Parvinder Kler is an Associate Professor in Economics based within the Department of Accounting, Finance and Economics. He has training in both Economics (Ph. D) and Political Science (Advanced Masters in International Studies), both obtained at the University of Queensland where he was also a Lecturer in Economics.
Parvinder joined Griffith University from the United Nations, where he was an Economics Affairs Officer based in Beirut, Lebanon. He has worked on projects with agencies at both state and federal levels in Australia, as well as with an internationally based conglomeration of unions. His primary areas of research include labour economics, gender issues, job and life satisfaction, economic development, economics of education and financial market regulation.
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