Minimum pay rise overdue amid inflation, rising rates

As mortgage repayments, rents, power bills, groceries and other everyday expenses soar, low-paid workers were overdue a good pay rise. Sluggish wages growth has been a problem for a long time. In 2019, the Reserve Bank devoted its annual conference to the subject. Low wages, it was told, weighed heavily on household spending, demand and economic activity. It also had broader implications as “one of the reasons why some in our community question whether they are benefiting from our economic success’’, as RBA governor Philip Lowe had said the previous year. On Wednesday, the 5.2 per cent increase granted by the Fair Work Commission for the nation’s 235,000 lowest-paid workers was the largest increase in 16 years. It will lift the minimum wage from July 1 by $1.05 an hour from $20.33 to $21.38 an hour. It’s far from a king’s ransom. But as Anthony Albanese, who was elected on a promise of low-paid workers no longer going backwards, said: “$1.05 an hour, or $40 a week … makes a difference to people who are struggling with the cost of living.’’

Modern award minimum rates will also go up 4.6 per cent for 2.7 million employees, with a minimum increase of $40 a week, but workers in Covid-prone industries such as tourism, hospitality and aviation will not receive their increases until October. That arrangement, criticised by ACTU secretary Sally McManus, will help businesses still getting on their feet after the pandemic.

In handing down the decision, FWC president Iain Ross acknowledged inflation affected both businesses and workers. “The cost of business inputs increases, which, depending on the capacity to pass on those costs, adversely impacts profitability,’’ Mr Ross said. “Inflation erodes the real value of workers’ wages and reduces their living standards. The low-paid are particularly vulnerable in the context of rising inflation.” Striking a balance was essential, he said.

The wages decision comes amid a gathering storm of economic problems – inflation, rising interest rates and the energy crisis. The Australian Energy Market Operator’s decision to suspend the entire national electricity market to create a “secure electricity system” to ensure supply and avoid blackouts is likely to make power prices stay high, or perhaps increase.

The wages decision carries risks – to the economy, to jobs and to workers themselves in the form of higher interest rates to combat any inflationary effect. Alexi Boyd, chief executive of the Council of Small Business Organisations Australia, said most small businesses would be concerned about the viability of their businesses. “If we were talking about wages as a stand-alone issue, it would be a different conversation,” she said. “But the business situation at the moment is increased input costs – increases to freight, fuel, energy.’’ And with compulsory superannuation rising to 10.5 per cent in July, small businesses are being hit hard.

In Gladstone for cabinet, the Prime Minister had a message for small businesses. “What I’d say is that those small businesses all rely upon their workers who are really struggling with the cost of living,” he said. “Let’s be clear what this debate has been about. It’s about whether people who are on the minimum wage should have a real wage cut. These people are really struggling.’’ Fair enough. But if small business costs are pushed too far, the price will be loss of jobs, social disruption and a rising welfare bill.

Affected businesses, where possible, will likely pass on the wage rises to consumers. As UBS chief economist George Tharenou says, the minimum wage decision “raises the risk of a wage-price spiral, and hence the possibility the RBA will be forced to hike rates more aggressively”. On Tuesday, Dr Lowe said inflation was “too high” and would pass 7 per cent this year. It was unclear, he said, how high interest rates would need to go up to reduce inflation to its target range of 2 to 3 per cent.

Deutsche Bank chief economist Phil Odonaghoe said there was now a chance that the RBA could deliver a triple rate hike at one of its forthcoming meetings, for the first time since 1994. In that year, mortgage rates rose from 8.75 per cent to 10.49 per cent. A larger-than-anticipated inflation number for the June quarter this year could trigger a 0.75 percentage point increase at the August RBA board meeting. In addition to squeezing household budgets and hard-pressed small businesses, sharp interest rate rises could trigger a slump in property values. Investment bank Jarden fears a peak-to-trough fall in house prices of as much as 20 per cent in Sydney and Melbourne as rates rise. If so, investors and homebuyers who bought near the top of the market will be in the painful predicament of negative equity – owing more than their properties are worth. Amid such tensions, it is no surprise that consumer confidence has been hammered down to recessionary levels in Westpac’s latest monthly survey of 1200 households, taken from June 6 to June 9. As it prepares its October budget, the Albanese government faces hard decisions.