April 02, 2012

Horse 1313 - Aggregate Schmaggregate


EMPLOYERS are trying to limit a pay rise for workers on the minimum wage on the grounds they will be "overcompensated" for the new carbon tax.
The Australian Industry Group has asked Fair Work Australia to restrict the next rise in the minimum wage to $14 a week, less than the rate of inflation.
The ACTU is demanding a $26-a-week pay rise, and has asked Fair Work Australia to "look through" the government's carbon tax compensation.
The AI Group argues that the compensation offered by the government to offset the impact of the tax is so generous that the lowest-paid workers should get only a 2.4 per cent pay rise - less than this year's 3.1 per cent increase in the cost of living.
- The Australian, 2nd April 2012

Assuming that you are one of the lowest paid workers in the country, you're on a wage of $589.30 a week, or $30,643.60 per year. Once you allow for Income Tax, the Low-Income Offset and the Medicare Levy into account, you end up with a figure of $27,692.81 per year or $530.73 per week.
I live in a fibro house, 35km away from the city and pay $320.00 a week for the "privilege" of renting.
This means to suggest that according to the Australian Industry Group that someone living in a house which is very much less than average, should have $210.73 a week to play with or $220.53 after the increase.
I don't know exactly what the average cost of groceries is in a week but yesterday I spent $68.48 and there are only two of us, so it's probably likely to be considerably more if you have a family. If you then take into account train fares, petrol, electricity costs, water usage, gas etc. is there even likely to be a single dollar left?

Let me put this in perspective. Someone on $530.73 a week is very likely to have an exceptionally large marginal propensity to consume, that is their chances of spending the next dollar which they'd receive is highly likely to be spent rather than saved. This means to suggest that people right down at the very bottom are highly unlikely to save very much at all, if anything.
What the Australian Industry Group has openly suggested is that that isn't enough. Such people's wages need to be restricted even further in real terms.

Consider the general equation for Aggregate Income in the Economy:

Aggregate Income = Private Consumption + Gross investment + Government Spending + Receipts from Sales on Exports - Savings - Taxation - Payments for Import Purchases

From an economic standpoint because money happens to follow a circular flow, then cutting the supply of real wages further is going to lead to a decrease in the ability of households to Consume goods and services (since at the bottom of the wage scales, their ability to save is practically nil).

Obviously if Private Consumption falls (because people's wages aren't even keeping place with inflation), then to maintain the same levels of Aggregate Income in the economy, then there would have to be a corresponding increase in either the level of Investment, Government Spending or Receipts from Sales on Exports.
Governments generally appear to be tightening spending as a result of the rising cost of debt, which itself was caused by a tightening of credit markets in the first place; leading to a reduction in Investment spending.

To be perfectly honest, the fact that manufacturing in Australia is dying, that really the only part of the economy which appears to be experiencing any growth at all is the mining sector and that at least on the east coast of Australia there is an actual shrinkage in the economy, then cutting wages to households in real terms is going to lead to a real decrease in Aggregate Income because the levels if Investment and Government Spending are not likely to make up the shortfall.

That's all fine if the desired outcome is nothing more than a case of applied social engineering (and a return to social Darwinism) but because of negative feedback loops and money multiplier effects, it just doesn't make any prudent economic sense.
Then again if you are the Australian Industry Group, the broad health of the economy isn't really an issue for you. The only thing that really matters is the bottom line on a Profit & Loss statement.

I suppose that my question to the Australian Industry Group is "how do you propose to increase Aggregate Income and improve the economy, if your suggested policies do precisely the opposite?" Again it's not really their concern.

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