Business myth of minimum wage rises, recessions |
In life, it is nice to have things you can count on, and every year at this time you can absolutely be guaranteed to hear business groups and their friendly economists screaming in fear that the ACTU and the Labor government’s recommendation for an increase in the minimum wage will cause a recession.
This year the noise is a bit more hysterical than in the past couple years, but consider this opening in the Australian Financial Review:
“Employers and economists have warned the 7 per cent minimum wage rise demanded by unions would make it impossible to contain inflation, tipping the nation into recession.”
Oh wait. Sorry that was from 2023 when the ACTU was pushing for a 7 per cent increase. Let’s try again:
“Employers have warned that the union movement’s claim to increase minimum wages to cope with higher inflation could trigger further rate rises, while unions say that bosses are ignoring productivity gains.”
On dear. I have to apologise again. That was from 2022 when the ACTU was pushing for a 5.5 per cent increase.
OK, third time’s the charm. Because this year the ACTU is pushing for a 5 per cent increase, and the government supports an above inflation increase (with inflation forecast to hit 4.2 per cent — so 5 per cent is roughly what it supports):
“The Albanese government’s demand for an above-inflation wage increase for almost three million workers in the middle of a global oil price spike risks repeating the mistakes of the 1970s stagflation shock, economists warn amid predictions Australia could have one of the highest inflation rates among advanced economies.”
Sigh. It’s a veritable greatest hits of business scare quotes – stagflation, the 1970s highest inflation…
Let’s have a look at what is being asked.
The Reserve Bank in February, before the Iran war began, forecast that inflation by June would hit 4.2 per cent. We know this is going to be wrong – it will be closer to 5 per cent, but let’s go with it.
The ACTU is calling for a 5 per cent increase in the minimum wage and award wages. This is for the lowest paid workers in Australia – those who really have no bargaining power and is the minimum you can get paid for doing each type of work.
Each year, the Fair Work Commission raises the minimum wage and award wages to recover value lost due to inflation. Usually it also gives a small real increase to help improve their cost of living and to take account of productivity improvements.
This means that when you chart the real minimum wage and award wages on a graph it looks like a sawtooth pattern:
As you can see during the pandemic and when inflation took off in 2022, the value of award wages and minimum wages collapsed (as they did for all wages).
The ACTU is proposing a 5 per cent rise, but because of inflation this would end up really being just a 1.4 per cent real increase.
But here’s the thing – the value of the award wages would still be lower than it was in 2020!
Business groups would want you to believe that giving Australia’s lowest paid workers a pay rise that still leaves them worse off than they were six years ago will be the end of times.
Australia Institute research has shown there is no link between increases in the minimum wage and future inflation because, guess what – most people don’t actually compare themselves to those on the lowest wages in Australia.
Also, we know what is causing the current increase in inflation – the oil crisis and company profits.
You can pretty much break down the cause of inflation to wages, profits and government taxes and subsidies. And in the last part of 2025, wages went down in real terms and profits began to rise significantly:
The good news at least is that we are not the only ones noting this. The AFR’s own scare article quotes former deputy governor of the RBA Luci Ellis, now chief economist for Westpac. She says:
“Unit labour cost growth has been slowing and productivity growth in the market sector has been growing at a decent clip, contrary to some more alarmist commentary.
“Australia faces numerous cost and price challenges at the moment, but a wages breakout is not one of the most important.”
Republished from The Point
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