‘Over-the-top alarmism’: economists dismiss concerns wage rises cause inflation

The recent spurt in inflation has little do with workers being paid more, economists say, warning the claim that wage increases could set off inflation is “over-the-top alarmism”.

Debate over how much the lowest-paid workers should receive has flared during the election campaign after the ACTU this week raised its minimum wage claim to the Fair Work Commission to 5.5% from an earlier goal of 5%, after March-quarter consumer prices spiked.

The Labor leader, Anthony Albanese, on Tuesday said he “absolutely” supported wages keeping up with inflation, prompting the government to accuse him of making up policy on the run.

Jim Stanford, an economist and director of the Centre for Future Work, said worries that a wage-price escalation would kick off if wage increases reached 5% a year were overblown. Such increases had been “normal” in the first decade of this century, with three years of such rises, and the economy could cope with their return.

“This over-the-top alarmism shows how much the goalposts have shifted after nine straight years of historically weak wages growth,” Stanford said. “In most countries it would be seen as desirable that wages would finally show some vitality.”

OECD data also showed the minimum wage – set by the commission at $20.33 an hour for the current fiscal year – has been falling as a proportion of median Australian wages since 1999. Australia’s ratio is now near the OECD average, and lower than countries such as the UK, which has lifted the ratio from 41% to 58% over that time.

The seven-member Fair Work Commission panel will announce its minimum wage verdict by late May or early June. Typically, they take into account the five minimum wage objectives and consider the headline CPI and underlying inflation rate, which were 5.1% and 3.7%, respectively, in the March quarter.

The current year’s increase of 2.5% from 2020-21 was higher than the 1.1% annual headline and trimmed mean inflation rate recorded in the March quarter of 2021, the most recent data before the commission a year ago.

Business bodies such as the AiGroup and the Australian Chamber of Commerce and Industry have made separate submissions to the Fair Work Commission, saying the minimum wage increase should be no more than 2.5% and 3%, respectively. They argue workers will receive an extra 0.5 percentage point in superannuation contributions from 1 July and many will also share the benefits of the government’s extended low-middle-income-tax-offset (LMITO).

“Adding these increases to our [2.5%] proposal would result in the equivalent of a 4.3% increase in pre-tax remuneration for low-paid employees,” AiGroup’s chief executive Innes Willox said. “In the current circumstances, there is a clear risk that a high increase in wages without improved workplace productivity would fuel inflation and increase the likelihood of a steeper rise in interest rates to the detriment of growth and job creation.”

ACCI chief executive Andrew McKellar said an increase of 5% or more “would inflict further damage on small business, and the millions of jobs they sustain and create” as companies struggle to recover from the Covid pandemic disruptions.

“While cost-of-living issues have taken centre stage in the federal election campaign, what we’re not hearing enough of is the rising costs businesses are facing,” he said.

However Stanford, a co-author of a wage crisis report released by the Australia Institute on Wednesday, said the super increase wouldn’t help workers repay bills. Similarly, firms relying on a tax offset to bolster staff wages were unlikely to compensate workers once the offset runs out next financial year.

“Do we actually think it is the government’s responsibility to subsidise the failure of business to pay a living wage by handing out tax year after year?” he said.

“They want workers to experience a continuing real wage cut because they think that’s the way to solve this inflation issue even though this inflation has nothing to do with wages,” Stanford said. “No one has argued that this inflation has been caused by domestic wages.”

Alan Oster, NAB’s chief economist, said there was no wage-price spiral under way, but said the RBA would lift rates faster if it thought inflation expectations were settling in.

“The reality is [real wages are] going backwards,” Oster said. “But then again, you don’t want to spark expectations that if you can get a 5% increase in the national wage case, then everybody else should shoot for 5%. That I think would be more of an issue.”

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Oster expects the wage price index for the March quarter to show a rise of 0.6-0.7%, implying a year-on-year increase of 2.5%, when the ABS releases the figures on 18 May. That outcome implies a drop in real wages of 1.2% when compared with the underlying inflation rate, or double that if the headline CPI is the contrast.

Oster says Australia had three labour markets. The national wage case will probably see an increase of 3% or more. Then there’s the state governments and their public sectors facing salary caps of 2.5% but soon to rise, if they haven’t already.

Then there’s rest of the economy where workers in manufacturing, construction and some other sectors could command rising salaries. Staff in hospitality and – somewhat surprisingly – mining were yet to see much in the way of higher wages.

“That’s got really low numbers,” he said. “So it’s almost like they’re saying, ‘I’ll give you more shifts. I won’t pay you an hourly rate that’s any bigger’.”