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NEWS: Value of wages falls

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The ABC reports that “Australians experienced their largest real wage decline on record in 2022”. At the same time, Trading Economics reports that Australian wages increased 3.3% last year. So how did wages fall?

The nominal (dollar) value of wages in Australia increased by 3.3% in 2022. Australian wages are growing faster than they have in a decade. But inflation (7.8% last year) has been growing faster.

The nominal dollar amount of a wage is far less important to workers than what you can buy with that wage. Inflation is a measure of the general increase in the price of goods and services in the economy. If the price of goods and services goes up, the amount of goods and services people could buy for the same wage will go down.

If the value of workers wages increases by less than the rate of inflation, the dollar value of a workers wage will go up, but the relative value of that wage, as measured by the quantity of goods and services a worker could buy, goes down.

Imagine an economy in which a worker earns $100 and buys bread for $1 a loaf.

Nominal WagePrice of BreadValue of wage in bread
$100$1 a loaf100 loaves

At the start of 2022, our hypothetical worker had a wage worth 100 loaves of bread. Now imagine there has been 7.8% inflation, whilst the worker’s wage goes up 3.3%.

Nominal WagePrice of BreadValue of wage in bread
$103.30$1.08 a loaf95.6 loaves of bread

At the start of the year our hypothetical worker had a wage worth 100 loaves of bread. By the end of the year their “higher” wage was only worth 95.6 loaves of bread. The workers wage might have gone up, but their living standard has declined, and over 2022, the average Australian’s living standards did the same.

We will discuss inflation in Unit 3, Area of Study 2.