7% Minimum Wage Rise Would Tackle Inflation, not Feed it: Research

Australia Institute

A 7% National Minimum Wage rise for low paid workers would help tackle the rising cost of living for those on award wages while having a virtually undetectable impact on economy-wide prices, new research from leading economists at the Centre for Future Work has found.

The data comes as the Fair Work Commission deliberates about how much to boost the nominal wages for some of Australia’s lowest paid workers including cleaners, early childhood educators, hospitality workers and carers who are struggling in the cost of living crisis.

Key Points:

  • The national minimum wage (NMW) has increased less than inflation for the past two years.
  • By June the NMW will be at least 4.2% in real value below where it was in 2020.
  • Despite this business groups continue to advocate for another below inflation increase.
  • Research from the Centre For Future Work reveals that the impact of a NWM rise on inflation is negligible and much less than that driven by profits.
  • Over the past 25 years there has been no correlation between increases in the NMW and inflation growth over the following year.
  • The ACTU’s call for a 7% rise would at most cause economy-wide prices to increase by an average of 0.4% – even if wage increases were fully passed on to consumers by companies.
  • That increase in prices would fit easily within the RBA’s inflation target range (2.5% plus or minus 0.5%).
  • With company profits at historic records, companies could readily absorb the costs of a higher minimum wage, rather than passing them on to consumers. They could fully absorb those costs through a reduction of just 1.4% in total company profits.
  • Suggestions that business can’t afford a 7% increase are false.
  • Suggestions that it would set off inflation are wrong.

“This research shows that for low paid workers struggling with the cost of living a 7% wage is a solution to, rather than the driver of, inflation,” said Dr. Greg Jericho, Policy Director at the Australia Institute’s Centre for Future Work.

“Over the past 25 years there has been no correlation between increases in the National Minimum Wage and inflation growth in the following year.

“We need to move from thinking that workers are the ones who must always carry the burden. After 3 years of soaring profits during the pandemic, many sectors of the economy can afford to slightly reduce their margins and still make strong profits.

“Low-paid workers have suffered a massive loss of real wages at the same time company profits have been rising. The 7% rise would be a small recompense for the workers who have seen their living standards deteriorate over the past two year.

“Previous Australia Institute research has demonstrated how excess corporate profits, not wages, are driving post-pandemic inflation in Australia.

“The fact is that average real wages in Australia fell 4.5% last year, the largest drop in a single year on record. That needs to be fixed, starting with the lowest paid who are carrying Australia.”

The past two years have seen the minimum wage rise by less than inflation, causing a significant decline in the real purchasing power of millions of workers covered by the Modern Award system. This marks the first time in a quarter-century that the minimum wage has had a deflationary impact on the economy (that is, increased by less than the inflation rate) over successive years.

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