Australia’s Profits Story (part 1)

The wages and profit-taking relationship

As I write this the Fair Work Commission’s (FWC) Annual Wage Review (AWR) is in its final stage. Final submissions are in and the FWC panel is considering its decision. The “ambit”, to use an old phrase, is an outcome between 2.5% and 5.5%. Even 5.5% will not be enough to keep up with expected price increases over the next 12 months. For low-income workers, the direct impact on their standard of living of the FWC’s decision will be significant one way or another.

In the light of the new inflation, all the discussion has been on whether a significant wage increase will add to or “entrench” inflation. The employers’ adage - “never is a good time to pursue a wage claim” – infects and is reflected in just about all mainstream commentary.

But wages are only half the story. The reason why employers pay wages is that workers have produced all the value from which they get their profits, including their own incomes. Profits cannot exist without wages and vice-versa.

So, what’s going on with profits? And might that explain a lot of what is wrong in Australian society?

These graphs are the story's central thread, although not the complete one. All but one of them are sourced from the Australian Bureau of Statistics (ABS) and its quarterly national accounts data. Almost certainly, there are ways in which a more precise and polished story could be told. Also, there are other relevant profit connections not discussed here, for example, prices, taxes and subsidies; nor is competition.

I welcome any improvements you might suggest.

Total profits – no problems there

There are several different ways in which profits are measured. I have chosen the basic and most common, following the approach that is commonly used in submissions to the AWR.

The first graph shows that total gross profits are going very well. Of course, the story might be different in some specific industries, but that is a separate story for another time.

You will see a spike that happens straight after the previous Morrison government’s JobKeeper scheme in 2020 to rescue itself from the mess it made in the first few weeks of the covid pandemic. The Australian Council of Trade Unions (ACTU) explains what this means for wage claims now in its final submission to the AWR.

Also, you can see that in 2019, before the pandemic, profits were starting to slow although still relatively high. Back then, some more mature mainstream commentators had started talking about the prospect of a downturn and just possibly a recession.

For employers, the pandemic became an opportunity to rescue their profits, while none of them actually worked to support the people through the pandemic.

Is it possible that the new burst of profit-taking contributes to inflation?

Where did these profits come from?

The pandemic reinforced that economic activity, including profit-taking, depends on the availability of workers. Employers do not produce goods and services, workers do. During their time at work, all workers produce new value and out of that the employer pays them for a part of what they have produced and takes the rest for themselves. That is what profits are. Thus, exploitation is the essence of the profit–wages relationship. Even employer investment comes from this exploited working-class effort.

This next graph shows the rate of exploitation that delivered the profits.

The mainstream way of showing the relationship is wages share of Gross Domestic Product (GDP) and profits share of GDP. That is, the relationship is represented as with GDP, the value of all new wealth produced over the relevant period. Of course, that also shows the profit share going up relative to the wages share. However, it also disguises the reality it is based on the exploitation of the workforce.

The idea that there can be a “fair share” is entrenched. Mainstream commentators always have real problems answering the question: “What is a fair share?” That’s because there isn’t one. The purpose of the “fair share” message is to reduce workers’ determination and confidence to win a pay claim or an improvement in conditions of work.

What did the employers do with the profit increases?

For the overall health and future potential of the economy, the important question is: how much of the profit is being invested in new productive capacity? This is a big deal in the context of what s needed for a rapid transition to renewable energy systems. But it’s a sorry story.

In Australia, like any capitalist society, the golden rule is that each employer has dominant control over how to use the profits he/she takes. The workers who produced the value from which the profits have been taken are excluded. Democracy is excluded from the workplace. But workers must deal with the consequences of employer control in so many ways.

The most important indicator of new productive capacity is how much profits are being spent on structures, both engineering and buildings (factories etc), equipment and machinery. Some other categories are important also, e.g. computer software, but these must have suitable locations and equipment to work effectively.

The next graph shows 2 measures of the mass of new investment quarter by quarter in this century. Note the falling away and stagnation after the 2008-9 economic crisis. (The ABS’ annual national accounts show the same thing.)

There has been no recovery leadership from employers.

The next graph (starting in 2000) shows this falling investment level relative to the profits taken. The sorry story continues.

Where were these profits going instead? For some debt was being paid off, which is profitable of course for the banks and other financial businesses that loaned the money.

There was lots of unproductive investment, kicked along by the Reserve Bank’s quantitative easing policies; that is, gambling on the stock exchange and bond markets. And increased taking of personal wealth, as shown in the Recent AFR Rich 200 list. Almost certainly overseas investment features, especially by transnational corporations, Australian and otherwise. Remember CSL opening its new vaccine factory in the USA, for example?

Despite the fall in the rate of productive investment, there was still an increase (although slowing) in the total capital stock, including its essential productive components.

So, where are we up to so far?

Growing profits based on suppressed wages and high rates of exploitation but less returned at a slower rate to the productive capacity of the society.

We come now to the most important question?

Why is investment stagnant when profits and exploitation are high, and wages suppressed?

The answer lies in this graph based on data produced in the Penn World Tables, an economics database used by mainstream economists that collate economic performance for just about every country in the world.

It shows Australian profitability falling during this century. Profitability is total profits relative to the total investment, measured either as profits relative to productive fixed assets investment or, relative to wages paid plus fixed assets investment.

The trend is not determined by the kind of government that has been elected. It could recover, as it has in the past.

The idea is simple. Every worker knows that their employer wants a profit relative to their investment, and one that is better than their competitors.

What drives any employer to invest more or at all? They want a profit on that investment. The rate of profit will decide their investment. If that profit return is too low, they will reduce investment, seek government subsidies, shift the investment somewhere else, or not invest at all.

Accumulating more and more fixed assets is at the same time the reason and condition to exist and a problem for each employer because it could reduce profitability. The answer is to suppress wages and that includes, turning to their friends in parliament to make laws that help make that happen, and create a judiciary that enforces those laws.

A closing note on productivity and the cost of labour

Just a brief observation because they deserve a separate part of the story.

Until the pandemic not much changed on the productivity front. Since the pandemic, the upward spikes have tended to be somewhat bigger and the downward marginally more. Grizzling about productivity should not be the main game except insofar as it flows from the weakness in the volume and quality of new production facilities and equipment.

Nor can the employers and their cheerleaders whinge about labour costs. Unlike some other developed nations (eg USA) they have been heading downwards for 2 decades, reinforced by deliberate design in the industrial relations laws that prevent freedom of association, deny collective bargaining and the right to strike.

Summing up

So, that's the core story of profits in Australia so far. As mentioned there are other bits to throw into the mix at another time.

Overall employers can afford a big increase in wages at this year's annual wage review. Of course, the zombie companies who are not solving their problem of competition will have their problems. But that's never been the case and if it is regarded as a factor in setting wage increases, Australian workers would be on the convict rations that were at the heart of the labour that enabled the colonial invasion.

What do you think?