Increasing minimum wage would not drive inflation up: new report

Australia Institute

The analysis, The Irrelevance of Minimum Wages to Future Inflation, examines the correlation between minimum wage increases and inflation going back to 1997.

It finds that, contrary to employer concerns, there is no consistent link between minimum wage increases and inflation in the modern Australian context.

The report finds that a minimum wage rise of between five and 10 per cent in the Fair Work’s Annual Wage Review, due in June, is needed to restore the real buying power of low-paid workers to pre-pandemic trends, but would not significantly affect headline inflation.

Key points:

  • Last year’s decision, which lifted the minimum wage by 8.65 per cent and other award wages by 5.75 per cent, offset some but not all of the effects of recent inflation on real earnings for low-wage workers.
  • At the same time, inflation fell by 3 full percentage points.
  • There has been no significant correlation between rises in the minimum wage and inflation since 1997.
  • Raising wages by 5 to 10 per cent this year would offset recent inflation and restore the pre-pandemic trend in real wages for award-covered workers.
  • Even if fully passed on by employers, higher award wages would have no significant impact on economy-wide prices.
  • A 10 per cent increase in award wages could be fully offset, with no impact on prices at all, by just a 2 per cent reduction in corporate profits – still leaving profits far above historical levels.

“Australia’s lowest paid workers have been hardest hit by inflation since Covid. There is a moral imperative to restore quality of life for these Australians and this analysis shows that there is no credible economic reason to deny them,” Australia Institute and Centre for Future Work Chief Economist Greg Jericho said.

“It’s vital the Fair Work Commission ensure that the minimum wage not only keeps up with inflation, but also grows gradually in real terms – as was the trend before the pandemic.

“Whenever wages go up, the business lobby cries wolf, claiming it will cost people their jobs, shutter businesses and stifle competition.

“The business lobby always has some reason that wages should be suppressed. But the historical data prove that concerns about inflation are not a credible excuse to deny low-paid workers a much-needed pay rise.

“Even if businesses respond to minimum wage rises by charging consumers more, it would have a minuscule effect on inflation because it would be subsumed by much larger factors including chain disruptions, energy shocks, and corporate profits.”

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