Minimum wage hike won't be inflationary, academic says
The chances of a wage-price spiral following the federal government’s push for a minimum wage are “negligible,” an academic explains.
The federal government’s proposed increase to the minimum wage will not trigger a wage-price spiral, associate professor at the University of Sydney, Chris F Wright, explained.
Inflation is not a wage problem. Research suggests that it has more to do with “substantial” corporate profits, he said. “There’s just no evidence that we’re seeing a wage-price spiral … it’s really on the business profits side.”
Fears of a wage-price spiral have resurfaced recently, following the federal government’s announcement it would look to match minimum wage increases with annual inflation.
The current inflation rate is 4.1 per cent. The Australian Council of Trade Unions (ACTU) has called for an increase in minimum and award wages of 5 percent to avoid real wage losses.
The Australian Industry Group, which advocates on behalf of 60,000 businesses across the country, has rejected bids to go anywhere above a 2.8 per cent wage rise.
“An increase of less than 2.8 per cent would … raise the likelihood of an earlier reduction in interest rates by lowering the inflationary pressures that would flow from a higher increase,” said Australian Industry Group CEO Innes Willox.
To accede to the ACTU’s 5 per cent hike would be “reckless”, he said.
A recent Australia Institute report found that a 5 per cent minimum wage rise, higher than the government’s proposed hike, would “not significantly affect headline inflation”.
“Contrary to employer concerns, there is no consistent link between minimum wage increases and inflation in the modern Australian context,” it found.
Wage-price spirals have not been a real threat since the “stagflation” era of the 1970s and 1980s, explained Wright. The concerns harken back to a time when labour unions had the power to effect economy-wide changes.
In today’s labour market, the chances of a repeat are “negligible”.
Aged Care Minister Anika Wells told Sky News: “We don’t have inflationary problems in this country because our lowest-paid workers are being paid too much.”
“Both the RBA governor and the Treasury secretary have said that we aren’t in a wage price spiral in this country,” she added.
Treasurer Jim Chalmers has been criticised for adding wage increases onto the outsized relief reserve for Australia’s lowest earners under stage three tax cuts.
Wright said the two sides of the same coin, explaining both business (by paying more for their workers) and government (by providing tax relief) have a role to play.
Asked what he made of the argument that increases were not necessary given that Australia’s minimum wage was high by international standards, Wright said: “Australia is high-cost country.”
“Consumer goods are very expensive here too, and that’s not driven by wages.”
The more relevant reference point, he said, is how the minimum wage compares to the median wage. Here, Australia places around the middle of the OECD pack.
In proportion to the median full-time salary, Australia’s minimum wage fell by 5.9 per cent from 2005 to 2021. Across the same period, roughly half of the OECD saw “substantial upward movements” in minimum relative to median earnings.
Two years ago, the EU issued a directive stating that it would consider a member state’s minimum wage satisfactory only if it was equivalent to 60 per cent of the gross median wage.
In Australia, the figure sat at 53.6 per cent in 2022.
Businesses have argued that a higher minimum wage would only exacerbate the country’s productivity issues. According to Wright, the opposite seems to be the case.
“A high minimum wage is actually going to be good for productivity, not bad for it,” he said, adding a low minimum wage disincentivises lower earners to enter the labour force.
“[Job] satisfaction and retention are important to productivity. Satisfied workers are more productive, if they’re being retained, businesses won’t have to commit resources to hiring and training new workers.”
