If your pay has gone up but you still feel like you’re going backwards, you’re not imagining it.
The missing piece is inflation. A pay rise only helps if it’s bigger than the increase in the cost of living. If your wages rise by 3% but prices rise by 5%, you’re still worse off in real terms.
That’s one of the ideas economist Evan Lucas unpacks in the second episode of the Get Rich Slow Club’s four-part economics series, along with interest rates, government policy, tax, university debt and productivity.
Wages going up doesn’t always mean you’re better off
Inflation is the rate at which your money loses purchasing power.
For instance, if prices rise by 2%, the same dollar won’t buy quite as much as it did the year before. That’s not automatically bad. Evan says inflation of around 2-3% can signal a growing economy, with businesses producing more, wages rising and people spending.
The problem is when prices rise faster than wages.
That’s where real wage growth comes in: your wage growth after inflation is taken into account. If your pay rises by 4% and inflation is 2%, your real wage growth is roughly 2%. But if your pay rises by 2% and inflation is 4%, you’re effectively taking a pay cut.
That’s what many Australians have been dealing with. Your salary might be higher, but if everything else has gone up by more, it doesn’t feel like a win.
The RBA is trying to fix the economy with a sledgehammer
When inflation gets too high, the Reserve Bank’s main tool is the cash rate. When it raises interest rates, borrowing becomes more expensive. Mortgage repayments rise, businesses may take on less debt and households generally have less money to spend. When rates fall, borrowing gets cheaper and people tend to have more room in their budgets.
Evan describes this as “doing fine art with a sledgehammer.” The RBA has one main lever, but it affects everyone differently. A household with a large mortgage can feel a rate rise immediately. Someone with no debt and money in savings might barely notice, or could earn more interest.
So when someone says “the economy is doing well” or “the economy is struggling”, it’s worth asking: which part of the economy are we talking about?
The same rate rise can feel completely different
Evan compares a young family with a large mortgage to an older person who owns their home and has money in the bank.
For the family, a rate rise could mean hundreds of dollars less to spend each month, while for the retiree, higher rates might mean more income from savings. Same interest rate, completely different experience.
That’s the tricky thing about using rates to control inflation. The RBA can’t target only the people spending the most. The impact depends on your debt, savings, income and stage of life. Evan’s point is that interest rates are the best tool we currently have, even if they’re far from perfect.
The government has levers, too
There’s also fiscal policy, which is the government’s side of things: taxes and spending.
Evan uses childcare to show how messy this can get. You might look at a high-income couple receiving a childcare subsidy and wonder whether they need help. But if that subsidy disappears, childcare could become too expensive for one parent to keep working.
That affects more than the family. If fewer people work, the government collects less tax and there’s less money flowing through the economy.
This is one of Evan’s big themes: people respond to incentives. Change the incentive and you can change the outcome – sometimes in ways nobody expected.
The tobacco tax is a good example
The tobacco excise was designed to raise government revenue and make cigarettes more expensive, encouraging people to smoke less. But when legal cigarettes became extremely costly, people looked for cheaper options.
Evan points to the growth of illegal tobacco and organised crime as unintended consequences. He also says the government has lost around $8 billion in expected tax revenue as people moved away from legal cigarettes.
His summary is simple: “Show me the incentive and I’ll show you the outcome.”
That doesn’t necessarily mean the original policy was wrong, but that people don’t always respond as policymakers hope.
Bracket creep can quietly eat into your pay rise
Australia’s tax brackets don’t automatically move with inflation. As your income rises, you can end up paying a higher rate of tax even if your purchasing power hasn’t improved much. That’s bracket creep.
There is an argument that this can help with inflation: if people pay more tax, they have less money available to spend. But if more of your extra income disappears in tax, you might feel less motivated to work overtime, take on responsibility or chase a higher-paying role.
That leads into another question Evan explores: what actually makes an economy grow?
A degree doesn’t guarantee the same return it used to
Evan talks about the changing economics of university education.
The old idea was that a degree would give you a significant earnings advantage over someone who didn’t go to university. He says that advantage used to be around 50%, but is now closer to 33%.
At the same time, student debt has grown. Evan says debts that might once have been around $40,000 to $100,000 are now more likely to sit between $80,000 and $250,000.
That doesn’t mean university isn’t worth it. Some careers require a degree, and many people get a lot from higher education. But if the cost is higher and the earnings boost is smaller, the return on that investment isn’t as obvious as it once was.
Being busy isn’t the same as being productive
Evan makes a useful distinction between being busy and being productive.
You can spend all day doing things and still not create much value. Productivity is about getting more from the resources you already have – finding a better, faster or smarter way to do something.
AI is a good example of this in practice: if an AI tool handles a 15-minute admin task, that doesn’t necessarily mean someone loses their job. It could give them 15 minutes to spend on something more useful.
Evan uses the internal combustion engine as a bigger example. Machinery allowed people to produce far more than they could through human and animal labour alone. It didn’t just make people busier, but it also increased what they could produce – and he thinks AI could have a similar effect.
Could AI make us more productive?
Evan isn’t saying AI will transform the economy overnight, but he sees potential for it to help people do higher-value work. A data analyst, for example, might spend less time collecting and cleaning information, and more time working out what it means and what a business should do next.
That’s the optimistic version of the AI story: not humans being replaced, but humans being able to do more. If productivity improves, businesses may produce more, make more money and potentially pay higher wages. Whether those benefits are shared evenly is another question, but the potential is there.
What should you actually take away from all this?
Economics can start to feel like one giant chain reaction. Interest rates affect mortgages. Mortgages affect spending. Spending affects inflation. Inflation affects wages. Wages affect tax. Tax affects incentives.
Evan’s advice is to zoom out and look at history. Interest rates rise and fall. Inflation rises and falls. Economies move through cycles.
That doesn’t make the tough parts easy. Evan says getting inflation under control could involve higher unemployment and economic weakness. But those periods don’t last forever. As he puts it, “all cycles come to an end.”
You don’t need to predict exactly what happens next. You just need to understand what’s going on well enough to make sensible decisions with your own money.
Prefer to listen? Access this episode of the Get Rich Slow Club here. You can also follow us at @getrichslowclub, and send your topic suggestions to @tashinvests and @anakresina on Instagram.
Happy investing!
Tash and Ana
