On Penalty Rates

The economy runs on sales. That may sound trite, but it is a fundamental truth. When you cut wages, you cut aggregate spending power. At the macro level, the outcome will be reduced sales, which leads to reduced production, which leads to greater unemployment, which cuts aggregate spending power, and so the vicious cycle continues.

What the businesses championing this reduction in wages fail to appreciate is that their wage costs are also the source of their profits. Clearly they expect to cut their own wage costs and rely on every other business not doing the same so that spending power remains constant or growing and profits continue. That’s some pretty magical thinking.