Note: Where available, the PDF/Word icon below is provided to view the complete and fully formatted document
Wages profits and investment: the government view

Download PDFDownload PDF


EMBARGO 9-10: anr 8 Jun 1977 '

NO. 62




Wages, profits and investment are three of the most crucial

elements in the working of our economic system.

I therefore welcome the opportunity of putting the Commonwealth

Government's views on how these elements, and the relationships

between them, influence the prosperity of all of us.

Let me say something first about profits.

I know that "profit” is still regarded by some as a dirty word.

Recent experience should have gone a long way towards

dispelling that attitude. For if the experience of the last

three years has taught us anything it is that when profits

become too difficult to make the costs are borne by the

whole community, not just by shareholders and self-employed


Those who bear most hardship are the employees who lose

their jobs, have their overtiine reduced or forego wage

increases that could be paid were profits higher - in .

other words, the very group that some ,

say must do battle with the owners of* capital for a

bigger dice of the national economic cake.

What then is the role of profits in the economy?

Profits are important for two distinct reasons.

One reason is that they signal the directions in which

human effort, capital and natural resources should be

channelled if we are to make the most of the resources

available to the nation. - We all know that profit signals

cannot perform this task alone. But as even the Russians

are acknowledging by giving a larger role to markets and

profits in deciding on production patterns, profit incentives

have a vital role to play in the enormous task of deciding

what use is made of a country's resources.

But fundamental though it' is, it is not this allocative role

of profits that I wish to focus upon today. Rather, ί wish

to state the Government's view on the role of profits in

determining the level of economic activity and employment.


Simply stated, our view - indeed our strongly held conviction ·

is that the outlook for the economy can only be bright if

profits are adequate.

Unsatisfactory profits mean reduced production of goods and

services for current .consumption - not least by industries

facing keen competition from imports.

It also means reduced investment, both because poor profits

make expansion of productive capacity or development of

new projects unattractive, and because low profits reduce

the major source of funds available to business for investment

Unsatisfactory profits mean fewer jobs now. And by slowing

investment and productivity.growth, an inadequate level of

profits means.fewer jobs for the future - as well as a

reduced scope for growth in real Wages. .

It used to be said that .the year BHP failed to earn a record

profit would be the year Australia started to run down.

I would not suggest that Australia's future in the 1970's

is tied as closely as that to the profit performance

of a single company, no matter how large.

But the general point stands.

Steady growth of aggregate profits is essential if our capacity

to invest, to employ an expanding work force and to pay

rising real wages is to be achieved.

The Australian Government is therefore committed to

establishing an economy that generates confidence in future

growth and encourages investment and risk-taking in search

of profits.

But even in countries with a socialist economy, profits

are recognised as important for economic health and progress.

This is not just because they make the job of deciding

what to produce easier. It is also because even those

socialist governments that show little enthusiasm for letting

the private sector get on with the job recognise that the

alternative to financing plant replacement and business

expansion largely from profits is massive contributions from

the Budget which the community as a whole must pay for

in one way or another.

I turn now to look specifically at the Australian experience.

The present Government inherited an unenviable set of economic

circumstances when it assumed office at the end of 1975.

A relationship between profits and wages that was out of kilter

was just one element in this, though a. very important element.


The Budget deficit was running out.of control at around

$4 billion a year. \ / .

Inflation was running at:an annual rate of 14 per cent or

more. This was largely caused by the increases in wages

and by the huge Budget deficit.

Against that inheritance, the task of the present Government

has been clear from the start. The task,was to bring down

the rate of inflation to levels that would no longer act

as a hindrance to economic activity* It was essential to

restore an environment in which economic growth could and

would once again be generated in the private sector.

We acknowledged in our policy statements before the 1975

election that the path towards full economic recovery would

be long and difficult. We spoke of a three-year program.

But we recognised that even three years was too short a

time to achieve fully the conditions for sustainable

economic progress..

However, looking back on the Government1s first eighteen

months in office, no reasonable doubt can be held about the

progress made. .

In 1975-76 the Budget deficit w e.s 53·6 billion. This year

we budgeted for $2.6 billion. We will be reducing the figure


further in 1977-78, even though personal tax indexation,

the trading stock valuation adjustments for businesses

and other tax measures will mean a cost to revenue of something

approaching $2 billion in the year.

I could mention a number of price indexes that indicate the

progress made in reducing inflation. But let me remind

you of just one.

The deflator for major components of gross national expenditure

recorded successive increases in th e four qiarters of 1976

of 4.0, 2.8, 2.1 and 1.4 per cent. Over the year to the

December quarter the rise was 10.7 per cent - a very significant

advance indeed on the rises of 15.8 per cent recorded in

1975 and 20.7 per cent in 1974.

I now come back to the important relationship between wages

and profits.

Wages and profits were so out of. line in 1975 that Mr Hayden

felt compelled to make the following observation in his

Budget Speech of that year;

" is clear that some wage and salary pressures

are unrealistic and, when successful, harmful. It

does employees generally no good to get higher and

higher money incomes if the results are just higher


prices, a severe squeeze on profits, a slump in hew

investment and a contraction of job opportunities."

What was the background to Mr Hayden's accurate diagnosis?

Let me present a few figures.

In just one year from December 1973 *° December 1974 male

award wages increased by 3# per cent.

In the same year female rates grew by no less than 43 per


If one allows for the inflation that took place in that year

one can calculate that real male awards grew by 17 per cent

in the year, and real female awards by 24 per cent.

Examination of the period from 1961 to 1973 indicates that

an annual increase of 2 or 3 per cent in real awards was

about average.

In other words, more than five years* normal growth in real

wages was crammed into the one year of 1974.

. ' . ' ■ ■ . ' ' ■ &

Smaller but still significant increases in real wages occurred

after 1974.


In late 1976 a slight fall occurred in real wages. But in

spite of that, real male wages were still 10 or 15 per cent

higher than they would have been had the more normal real

wage growth that took place between 1961 and 1973 continued.

Because of equal pay'female wage rates have increased in

even more spectacular fashion. Real female wage rates are

still more than JO per cent above the 1961-1973 growth


Inevitably there have been market reactions to the strong

growth in real award wages. Overtime worked has been

reduced, and overaward payments have increased less than

award wages. But these things have not been able to undo

the demage caused by the strong rises in real award wages.

Looking at household disposable income, the real value of

this.vas nearly 4 per cent higher in 1976 than in 1974, the

year vhen the great upsurge in wages was taking place.

Tax indexation and new family allowance arrangements introduced

from 1 July 1976 were in some measure responsible fi>r this.

In summary then, while some progress towards normality has

been made, real wages have not been restrained sufficiently to restore

profits and confidence in future stability to levels that

ensure a sound economic future.


Without wishing to criticise, I make the observation here that

the lack of thought given to the introduction of equal pay

was a significant factor in Australia's wages exjjbsion and

subsequent economic problems. It might have been wise to

move to this desirable objective more gradually. There

certainly should have been wider recognition of the fact

that equal pay could be reached without disruptive effects

only if male workers sacrificed part of the wage increases

they could otherwise have enjoyed. To the ultimate cost

of us all, equal pay was too widely and unthinkingly regarded

as an impost to be borne by businesses out of profits.

To what extent have profits recovered?

From the low-point of 12.3 per cent of non-farm gross

domestic product in 197^ they increased to about 14-g- per

cent in the latest December quarter.

This is still well below the average of 17t per cent for

the period 1968-69 to 1972-73.

The need for wage restraint remains urgent.

In this regard, the recent decision in the March quarter

national wage case was disappointing. The increase of 1.9

per cent in awards up to $200 per week may seem small. But

it amounted to 93 per cent of full indexation if one acknowledges,


as the Arbitration Commission did, that the identifiable

contribution of devaluation to the Consumer Price Index -

that is 0.4 per cent of the 2.3 per cent increase in the

index - should be deducted to get a starting figure for

wage indexation purposes.

The Government is encouraged, however, by the fact that

the Arbitration Commission accepted the principle of

removing the observable effect of devaluation on the

Consumer Price Index for wage indexation purposes.

It is important that the reason for doing this be widely

apprec dated.

The devaluation was intended to stimulate production, investment

and employment in the import-competing and export industries. ' ■ - . . \ · ·

These industries, competing with foreign producers in the

Australian and overseas markets, had been severely disadvantaged

by cost increases over the last several years.

Devaluation has improved their profitability. But if this

gain is to be retained, it is essential that the cost pressures

inevitably generated by devaluation be contained.

This cannot be achieved if consumer price increases associated

with devaluation are indexed into wages, pushing up the whole

cost structure. · . · . . ·

There is another way of stating this point if one acknowledges,

as we must, that the devaluation was necessary largely

because Australian real wages had been running ahead of

wages in the countries with which we compete. Devaluation

tends to reduce real wages by raising consumer prices of

many items - imports, locally-made goods that compete with

imports and some export-type items. This needs to be

seen as a cost of the earlier advances in wages. It is a

cost which, if devaluation is to be effective, cannot be

off-loaded onto employers through indexation into wages of

devaluation-induced price rises.

This brings me to a more general point that is also in

need of wider acceptance. It is misleading to see the

determination of rewards for labour and for the owners

of capital as a simple process of competition for a given

national economic cake or national income.

It is possible to increase wages temporarily at the expense

of profits. But as our experience since 1975 shows, that

carries a heavy price if the reallocation to labour produces

a fundamental imbalance in the relationship between wages • -» '·' ■ ■ .'· ■ · '

and profits.

I have already mentioned the effect of unrealistic wage

increases on unemployment. Employers cannot be expected

to play the role of a social welfare department. The more


the price of labour rises, the larger the number of employers

who will be unable, through no fault of their own, to make

use of labour in a profitable fashion.

Rapid wage increases encourage firms to restructure production

operations along less labour-intensive lines. Substitution of

capital for labour in turn means higher unemployment - and

higher unemployment of a kind that it will not be easy to

get rid of in better times.

As a last resort, some, firms may transfer their operations

overseas to countries with lower labour costs - which effectively

means that jobs are exported.

Through the three effects I have just mentioned, the escalation

in labour costs is central to the problem of unemployment

in Australia today.

Labour-shedding has been unavoidable at prevailing wage

levels because many workers were adding less to the value .

of output than they added to their employers' costs. ,

Although the higher wages have stimulated replacement of

labour with machinery, they have reduced the total amount

of profits available for investment.


The Government has followed two approaches in order

to raise investment and thereby expand employment opportunities.

First, it has sought to restore the profit share to a more

normal level. It has done this particularly through its

submissions to the Arbitration Commission in quarterly wage


Second, it has given incentives to investment through the

tax system. I have already mentioned some of these. They • . ' ' . : ■ ■ ■


. the investment allowance;

. the trading stock valuation adjustment;

. increase in the retention allowance for private Ϊ


Personal tax indexation also provides an indirect stimulus

to business investment.

In these two ways, and through gradually remedying the basic

malady - inflation - the Government is helping to restore

the private sector's confidence in the future. These two

approaches also ensure that industry has the capacity to

undertake investment as the outlook improves. The ultimate

consequence is redpction of unemployment.

· ■ · ,

The Government is following responsible policies that will

ensure that economic recovery is enduring.

Because of the large imbalance introduced in the shares of

wages and profits in 1974, and its substantial perpetuation

through wage indexation since then, the turnaround in unemployment

will be slow. How slow will depend on movements in wages.

By keeping real wages restrained we can help to put people

back in jobs, and keep them there.

But regardless of how tightly wages are restrained, it is

possible - though by no means certain - that the amount

of unemployment which is likely to remain, even in times

of steady but not inflationary economic activity, may have

shifted upwards as it is said to have done in other


The best, and in the Government's view the only, prospect

for uninterrupted growth in real wages and profits is the

restoration of a more normal relationship between the two -

and subsequent growth in both that is in line with expansion

in the economy's productive capacity.

I hope that all parties will take the opportunity provided

by the Arbitration Commission's forthcoming inquiry into

wage-fixing principles to consider how this might best be



8 Jun1977