RBA rate rise pain: is a wage increase worth a recession?

Large wage rises putting further upward pressure on interest rates increase recession risks, and there is one big question to ask.

Here’s a curly question: would you give up your next pay rise if it would help prevent our nation sliding into recession and tens of thousands of fellow Australians from losing their jobs?

Most likely your answer would depend on your own financial situation, whether you believe you get paid enough already, and perhaps a sense of duty.

It’s easy to think a job is just one among millions so any wage rise won’t matter. But if every one of Australia’s 15.7 million jobs pays the extra 5.75 per cent wage rise that was recently announced by the Fair Work Commission, there is no chance of the Reserve Bank of Australia getting inflation back to its 2-3 per cent target range.

And if inflation stays high, it will keep pushing up interest rates. And if that happens, a recession appears almost certain, with painful consequences for Australians’ financial and mental wellbeing.

The Fair Work Commission says minimum award wages will rise by 5.75 per cent from July 1, while the National Minimum Wage – paid to people who are not covered by an award or agreement – rises from $812.60 per week to $882.890, an 8.6 per cent jump.

I imagine Australia’s economy and finances as a giant noisy machine full of buttons, cables, levers, pulleys and pipes. Pull a lever here and a pipe over there spits out smoke, press a button here and a cable stops working over there.

Australia’s economy is closer to recession than it has been since Covid’s peak. Picture: iStock

At the bottom of the machine are two doors: one spits out cash to happy households while the other delivers punches in the face.

Aussie home loan customers are getting punched in the face right now after a dozen RBA rate rises since May 2022 have pushed up repayments on a majority of mortgages by at least $1000 a month.

Many of Australia’s 2.5 million small business owners are being hit by a one-two punch, quickly followed by another one-two punch because:

• They are battling surging repayments on their personal mortgages, just like every borrower.

• They also have business loans, and the interest rates for those are rising too.

• Wage increases are being forced upon them through either award wage rises or their need to retain staff.

• Rising interest rates are damaging consumer spending, leading to lower sales and lower profits.

Surprise RBA rate rises in May and June have dramatically increased Australia’s chances of a recession, which is typically defined as at least six months of negative economic growth, where businesses will collapse and many more people will lose their jobs and homes.

RBA governor Philip Lowe warned last week that the latest minimum wage rise was higher than it had factored into its forecasts, although it was just one factor affecting rate rise decisions along with house prices, exchange rates and high inflation here and overseas.

The Reserve Bank wants inflation to fall, and its only tool to achieve this is the blunt instrument of interest rate rises. Seemingly working against it is the Fair Work Commission, which doesn’t want people’s wages to fall behind.

Both organisations – and the government – want the best for Australians, regardless of the criticism they cop.

A big danger right now is Australia slips into a wage-price spiral, where wages rise to match inflation, but businesses have to put prices up to pay those wages, then wages rise again, and so on.

There was a wage-price spiral in the 1970s with high inflation and high wage increases, and it came with a recession, rising unemployment and a sinking stock market.

The bottom line is that you can’t get paid more money if you don’t have a job. But it’s also highly unlikely that anyone would give up a pay rise.

It’s in Australians’ nature to gamble, but if we enter a wage-price spiral, everyone will lose.

Originally published as RBA rate rise pain: is a wage increase worth a recession?