How inequality drives Australia's cost of living crisis

Have you seen the latest figures on Australia’s real household incomes? An analysis by the Australian Financial Review (AFR) paints a stark story behind the current cost of living.

It's the story of hard-working Aussies at the grocery store checkout, their eyes darting to the total as prices tick higher with each item. It's the young professional feeling priced out of a housing market built for inherited wealth. Worse, experts say the pain will continue—real incomes are likely to decline until mid-year tax cuts offer tiny relief.

Beyond just numbers, it indicts Australia's widening income gap. In the year ended September 2023, the AFR found a 6.1% household income slump—the sharpest fall recorded across nations that belong to the Organisation for Economic Cooperation and Development (OECD).

These moments of financial strain ripple throughout our economy, impacting everyday Australians and businesses alike.

READ MORE | How employers can support workers amid inflation

The impact of a two-tiered economy on rising costs

Groceries are taking most of the heat for the fast-rising cost of living in Australia today. While the studies about the impact of grocery prices on rising costs are true, many forget one other major contributor to the crisis Australians face today: the emergence of a two-tiered economy.

The widening gap between the high-income and low-income earners is a culmination of years of disproportionate wage gains. Think about it: those rising CEO salaries and surging shares that make headlines often mask the stark reality that too many of us are getting squeezed.

And those aren't just distant economics lessons – this growing disparity has genuine implications for every company in every industry. Over the past several years, income gains have flowed disproportionately to Australia's highest earners.

A September 2023 report by the Australian Council of Social Service (ACOSS) showed that the wealth of the top 20% earners increased by 82% from 2003 to 2022, faster than the 61% increase for middle-income earners and the 20% wage growth for the 20% lowest income earners.

This concentration of resources at the top fuels the growing divide between a shrinking upper tier that benefits from economic conditions and a much larger workforce segment squeezed by the ever-rising cost of living.

READ MORE | While employees face layoffs, these CEOs enjoyed salary increases

The impact of disproportionate wealth in Australia

The direct consequence of this trend is the emergence of a two-tiered economy. One tier enjoys increasing purchasing power and benefits from accumulating wealth. Meanwhile, most Australians find their budgets increasingly stretched by inflation while their ability to save and grow their assets diminishes. 

Companies across sectors, from small businesses to multinational corporations, cannot ignore the far-reaching effects of this economic duality.

1. Talent attraction and retention Crisis

Wages are expected to grow this year, but real income growth is unlikely due to rising costs. The Australian workforce will continue to lose purchasing power amidst inflation, putting companies in a very tight labour market.

The situation makes attracting qualified candidates who require competitive wages to maintain living standards more challenging. Retention also suffers, with valuable employees seeking employers offering better salaries to keep pace with the increased cost of living.

2. Morale and productivity losses

It's inevitable that morale erodes when employees see glaring wealth disparities while their economic positions deteriorate. 

Research from bodies like the Australian Human Resources Institute (AHRI) confirms the link between low or stagnant pay and a drop-off in worker engagement and productivity. This lack of motivation hurts the bottom lines and compromises a company's overall well-being.

3. Consumer spending takes a hit

The majority of the Australian workforce now has reduced purchasing power. As households are forced to stretch their budgets for essentials like food and energy, discretionary spending plummets.

This reduced spending hinders growth across industries, especially those reliant on consumer sales.

Strategies for navigating uncharted economic waters

Australian businesses would be foolish to ignore the escalating economic inequalities taking root. The fallout from the two-tiered economy isn't a theoretical threat. It's already here, and it's time for savvy leaders to chart a different course. 

Here are some proactive strategies to weather the storm and seize opportunities it presents:

1. Fair and targeted compensation reviews

Blanket salary adjustments no longer suffice. Regular compensation assessments are a must but with a strategic and purposeful approach.

Be bold enough to prioritise the most vulnerable members of your workforce, ensuring those hardest hit by inflation receive meaningful pay increases. Think of it as an investment – protecting the economic security of your frontline people protects your overall productivity.

2. Invest in upskilling and internal mobility

A survey by the Australian Bureau of Statistics (ABS) found that 42% of the surveyed employers are investing in upskilling their existing staff. Cultivating your talent is a smart move, giving employees tangible opportunities to expand their capabilities while helping your organisation adapt to the changing skill requirements of the modern workforce.

A strong focus on internal mobility counteracts a tough labour market and demonstrates to younger employees that you actively prioritise their growth.

3. Consider long-term business model shifts

For some enterprises, a high-wage business model isn’t simply ethical but strategically brilliant. In an environment where skilled workers have options, compensation is king. 

Realigning with this market reality attracts top-tier talent, strengthens employee loyalty, and resonates with an ever-growing socially conscious consumer base. Yes, there might be upfront costs, but the long-term benefit – genuine organisational sustainability – will make it all worthwhile.

More than survival, it's an opportunity

Let's not sugarcoat the situation: Australian businesses cannot single-handedly solve the problem of wealth inequality. But inaction simply isn't an option. This isn't just about navigating a crisis. It's about carving out a position of strength in a rapidly evolving economic landscape.

The reality is that those companies who actively adapt to the realities of the two-tiered economy have a golden opportunity. You demonstrate leadership even in difficult times with decisive shifts in compensation, proper investment in upskilling, and a willingness to explore bold business models.

It's more than protecting your bottom line. Think of those strategies as an investment in attracting the best talent, securing unwavering employee loyalty, and even setting yourself apart with a socially conscious next-generation workforce. 

It's not just the “right” thing to do – it's a brilliant strategy to fortify your enterprise for the future. Savvy business leaders know it well: adaptability translates to sustainability in a complex market. It lays the foundation for a more just and prosperous economic future for the entire Australian community.