Resistance to raising the minimum wage reflects obsolete economic thinking
- Written by Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of Sydney
Fewer than 2% of Australian employees work for the minimum wage (now $19.84 an hour). But the federal Fair Work Commission’s annual decision on how much to increase the minimum wage also helps determine pay rises for up to a third of Australian workers.
The adjustment, which comes into effect on July 1, flows through to those paid under awards, many on individual contracts and even some enterprise agreements (whose wage increases effectively track the minimum).
Last year’s increase of 1.75% was the smallest in 12 years.
That modest increase, which was delayed several months for most workers, was justified by the dramatic fall-out of the COVID pandemic. But with employment now rebounding – the jobless rate in February was 5.8%, down from its peak of 7.4% in July 2020 – we should expect a stronger “catch-up” increase.
That’s what happened after the Global Financial Crisis, with no change in the minimum wage in 2009, followed by an almost 5% increase in 2010.
But many employer groups are pushing for an outright freeze.
The federal government has implicitly sided with them. Its submission to the Fair Work Commission last week warned a higher minimum wage could “dampen employment” and impose a “major constraint” on the post-COVID recovery.
But this argument is based on outdated economic ideas. The evidence from economic research over the past few decades suggests boosting wages back to a normal trajectory would strengthen aggregate demand and consumer confidence, help keep inflation on target, and bolster government revenues at a vital moment in the post-COVID recovery.
Read more: Why kickstarting small business exports could boost stagnant wages
Consistently opposing increases
The Australian Council of Trade Unions has argued for a 3.5% increase. This is well within the normal historical range. It also aligns with the historical view of Reserve Bank of Australia governor Philip Lowe, who in 2018 said annual wage increases of about 3.5% were necessary to meet the bank’s 2.5% inflation target.
It’s not often the union movement and the central bank sing from the same hymn book.
As my colleague Alison Pennington (senior economist with the Centre for Future Work) has written, the Coalition’s position is consistent: it argues against wage increases “whether the economy is weak or strong”.
Long before COVID-19, Australia was already experiencing the weakest wage growth since the 1930s. Since end-2013, wage growth has averaged just 2.1% a year. Rosy predictions of an imminent rebound, issued with each federal budget, have never come to pass.
- ^ 2% of Australian employees (www.fwc.gov.au)
- ^ up to a third (d3n8a8pro7vhmx.cloudfront.net)
- ^ on July 1 (www.fwc.gov.au)
- ^ of 1.75% (www.fairwork.gov.au)
- ^ pushing for an outright freeze (www.theaustralian.com.au)
- ^ submission (www.fwc.gov.au)
- ^ Why kickstarting small business exports could boost stagnant wages (theconversation.com)
- ^ a 3.5% increase (www.fwc.gov.au)
- ^ who in 2018 said (rba.gov.au)
- ^ whether the economy is weak or strong (www.theguardian.com)
- ^ 2.1% a year (www.abs.gov.au)
- ^ each federal budget (d3n8a8pro7vhmx.cloudfront.net)
- ^ CC BY-SA (creativecommons.org)
- ^ So much for consensus: Morrison government's industrial relations bill is a business wish list (theconversation.com)
- ^ groundbreaking US studies (press.princeton.edu)
- ^ Reserve Bank agrees (www.rba.gov.au)
- ^ There's an obvious reason wages aren't growing, but you won't hear it from Treasury or the Reserve Bank (theconversation.com)
- ^ record business profitability (www.abc.net.au)
Authors: Jim Stanford, Economist and Director, Centre for Future Work, Australia Institute; Honorary Professor of Political Economy, University of Sydney
Read more https://theconversation.com/resistance-to-raising-the-minimum-wage-reflects-obsolete-economic-thinking-158622