Benefits of widespread wage rises must be balanced against business viability

Incoming Treasurer Jim Chalmers in his electorate of Rankin. Picture: Lyndon Mechielsen/The Australian

All Australians, but particularly incoming Treasurer Jim Chalmers, must now prepare for the potential ramifications of a widespread 5 per cent national wage rise. Those ramifications range from good outcomes to potential serious national disasters.

The promise of a wage rise to match inflation was a linchpin undertaking by the ALP and underlined to many Australians that their standard of living is being reduced by cost of living increases not matched by wage rises.

On Saturday night during vote counting, both the incoming Deputy Prime Minister Richard Marles and Jim Chalmers reinforced that such a wage rise was a fundamental pillar of the ALP’s plan.

And that dedication to a 5 per cent wage rise was endorsed by the incoming Prime Minister Anthony Albanese in his address to the nation. Such a united declaration by a newly elected government means that Fair Work is highly likely to endorse the policy in the minimum wage hearing and the rise will spread quickly to vast areas of employment and contracting. I am going to divide the ramifications into good, dangerous and potentially disastrous.

The Good

A great many skilled Australians have already enjoyed much higher incomes in the last year or so — led by many trades, accountants, lawyers, computer skilled people and other professions. But a large number of Australians are really struggling to make ends meet as the cost of living swamps their stagnant income.

They will be major beneficiaries and in turn this will boost retail sales and national prosperity, covering a wider area than the retailers that currently benefit from those whose incomes have already been boosted. Normally labour shortages boost wages but this time around enterprises are simply shutting their doors when there is not enough staff rather than seek additional staff by offering more money — a key reason why wage increases have so far not responded to the fall in unemployment and the unfilled job vacancies

In addition, many large enterprises have agreements offering wage increases that are now well below CPI increases.

Many enterprises believe that they can simply increase their prices so are welcoming the wage rise and the consequent increase in consumer spending. Others will struggle. But there is a surprise benefit: it will accelerate the drive for more productivity.

The current shortage of labour has forced a large number of enterprises to invest in technology or change their business model to operate with a smaller labour force. The Coalition government’s immediate plant write-offs have been a big help in this area.

Many cut back on essential maintenance to artificially maintain profits in the Covid times. They are now catching up and maintenance contractors are booming.

Those enterprises that don’t have unlimited pricing power will need to make their operations a lot more labour efficient and so the wage rise has the potential to spark a long overdue productivity rise in Australia. It’s good news.

The Dangers

Those that don’t either adapt via price rises or invest in greater efficiency will suffer much lower profits and may go out of business.

To the extent that prices are boosted, then the current official inflation rate of 5.1 per cent (the real rate is over 8 per cent) will be forced higher, assuming other components like food and energy keep rising. The only anti-inflation weapon the Reserve Bank has is higher interest rates, which may rise further than the Reserve Bank currently plans if the wage rise boosts prices.

Accordingly, those who have overborrowed must also brace for what is ahead.

In the campaign the Coalition was never able to link such a big rise in wages to higher interest rates, and the impact that will have on the large on number of families who borrowed some $650bn, or 30 per cent of the total loan book, in the last two years to buy dwellings. The largest lender, Commonwealth Bank, is warning that if interest rates rise by more than 1.25 per cent then these borrowers will be seriously impacted and cut back their spending — with significant blows to the total economy. This is very dangerous and I believe the Reserve Bank understands the dangers. Conceivably they may even contain interest rates and let inflation rip.

Anthony Albanese plans a big company-big union conference talk about enterprise bargaining but among many family employers enterprise bargaining was thrown out the door long ago. They don’t want to bring it back, along with its union driven complexity. But to avoid that pressure family enterprises will need to meet the wage rises.

The Potential Disaster

Many enterprises are still caught with fixed priced contracts that never allowed for the huge rise in costs that took place, particularly in the building industry. Many were ashen faced during the vote count when they heard the remarks of Messrs Marles, Chalmers and Albanese. If the wage rises get into the building industry, then there is great danger that it will to send a vast number of struggling Australian building enterprises to the wall.

Many are already teetering. A very large number of Australians who are currently contracted or in the process of building a house will hit serious trouble. And the domino effect will quickly move through the commercial building sector.

Chalmers and the state governments most affected will need to decide whether or not to undertake complex rescue packages,

I don’t think neither the Coalition nor the ALP have any concept just how serious the situation is in many areas in the building industry.

It’s possible the unions will understand the crisis and hold back but I wouldn’t bet on it. Small contractors may be able to make their employees understand the potential disaster for home building families and the national building industry.

Shareholders in all companies need to look through their company reports to assess vulnerability and make sure their directors understand this new agenda and can adjust the productivity of their business to reduce the impact of higher wages.