Australian Economy

Business power causes higher prices, weak wages: Sims

Wages growth has been subdued for a decade and wages grew 2.4 per cent in the year to March 31, less than half the pace of headline inflation. The spike in inflation, driven by high fuel costs, took down real wages to 2014 levels.

Labor leader Anthony Albanese is campaigning on falling real wages and has argued for the minimum wage rise to keep pace with inflation.

The Coalition government and Reserve Bank of Australia have said pushing down unemployment below 4 per cent will increase competition for workers and encourage bosses to pay workers more.

Mr Sims said a lack of competitive pressure among Australia’s oligopolistic businesses had also stifled innovation and productivity because there was less competitive pressure to invest.

Investment in new technologies drives productivity growth, which is a key determinant of real wages.

“These problems will not be properly addressed, however, until we recognise that high industry concentration and the resulting lack of competitive pressure reduces the incentives to invest and create new products,” Mr Sims said.

“And it is hard for new entrants to gain a foothold.”

Globally, economists in academia, the International Monetary Fund and the Organisation for Economic Co-operation and Development have argued that growing industry concentration and a lack of business competition is hurting wages, consumers, investment and productivity.

The concept has particularly gained traction in the United States, where so-called “superstar” firms such as Amazon, Apple, Facebook and Google are gaining a larger share of the market.

But research also shows that incumbent firms in the airlines, beer, pharmaceuticals, hospitals are increasing price mark-ups.

Labor’s shadow assistant minister for Treasury, Andrew Leigh, has similarly argued that there is too much local industry concentration in beer, baby food, insurance and internet providers.

Trade unions are weaker in the US and workers can be subject to “non-compete clauses” in routine jobs, which prevent them switching to a competitor after they quit a job – reducing their labour market bargaining power.

“The labour market is really different in Australia,” said University of NSW economics professor Richard Holden.

Professor Holden said labour markets and product markets were different because workers could move to other industries.

Australian National University visiting fellow Steven Hamilton said it was not clear the same competition problems applied in Australia.

Economies of scale

Australia had a relatively small population of about 25 million people across a large land mass, so it was more challenging to sustain a higher number of businesses in industries such as supermarkets and banking, Dr Hamilton said.

Businesses had fixed costs, so spreading the expenses over a larger number of firms and losing economies of scale could lead to higher prices for consumers.

Mr Sims has argued for Australia’s merger laws to be strengthened to make it easier to block corporate consolidation, after the ACCC lost several high-profile court cases during his 11 years at the helm.

“We have seen prices rise after mergers in the electricity industry and with mobile phone service providers,” said Mr Sims, now an ANU professor in the practice of public policy and anti-trust.

“Post-election our merger laws and the effective working of our competition laws need to be debated at length.

“There is also another role for government here. We need laws that promote competition rather than protecting existing large firms.”

The new head of the ACCC, Gina Cass-Gottlieb, is yet to publicly express a view on the state of competition and the merger laws.

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