Australia’s top industry group wants just a 1.8% increase in the minimum wage this year

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  • Australia’s Fair Work Commission awarded a 3.3% increase in Australia’s minimum wage rate for the 2017/18 financial year.
  • The Australian Industry Group says the increase should be significantly lower this year given margin pressures on business and still elevated levels of underutilised workers in the Australian economy.
  • Recent data suggests non-mining profitability is improving with business conditions the strongest that they’ve been since before the GFC.

Australia’s peak employer body, the Australian Industry Group, wants the minimum wage raised by just 1.8% this financial year, arguing inflation remains weak and that businesses are struggling with a recent rise in energy costs.

Such an increase would be near half the 3.3% increase awarded in the 2017/18 financial year.

“The Australian Industry Group’s submission in this year’s Annual Wage Review, which will be lodged this afternoon, argues that a modest wage increase of 1.8% is warranted. This equates to an increase of about $12.50 per week in the National Minimum Wage and about $14.60 per week at the base trade level,” said Innes Willox, CEO of the Ai Group.

After employment jumped by over 400,000 in 2017, the largest increase in a calendar year on record, Willox says another hefty increase in the minimum wage rate would risk slowing employment growth in the period ahead, creating headwinds for reducing labour market underutilisation, a key ingredient required to help to bolster broader wage pressures.

Unions, on the other hand, are calling for the minimum weekly pay to increase the rate from $694.90 to $744.90, a $50 per week increase, equivalent to a 7.2% increase.

“The Expert Panel of the Fair Work Commission needs to take a cautious approach when determining the quantum of this year’s minimum wage increase. An excessive increase would reduce the job security of low paid workers and reduce employment opportunities for the unemployed and underemployed,” Willox says in a statement today.

“Despite some improvements in GDP and employment growth, national disposable income growth remains weak, and unemployment and underemployment rates continue to indicate considerable spare capacity.”

Willox also suggests that businesses are doing it tough following steep increases in energy costs at the start of July last year, creating pressures on margins given an inability to pass cost increases on to consumers.

“Businesses are under pressure,” he says.

“Steep energy price rises are proving difficult to pass on to customers and are squeezing margins across a wide range of industries.

“Also, productivity growth has been exceedingly weak over the past decade and over the current productivity growth cycle.”

Given those headwinds, and with inflationary pressures already so low, the Ai Group argues that even a small increase in the minimum wage rate would still deliver real wage growth to workers.

“Background inflation in Australia is weak and this means that a smaller minimum wage increase will generate real wage increases for workers, including those in low-wage jobs. Now is not the time to take risks with minimum wage setting,” Willox says.

“The 3.3% minimum wage increase awarded by the Panel last year was exceptionally high and out of step with economic factors.

“It is essential that the increase awarded by the Panel this year is much more modest.

“When all of the relevant factors are weighed up, a 1.8% minimum wage increase is appropriate.

While a valid argument, it’s not all surprising that the Ai Group is arguing for lower pay increases given the members it represents.

The counterargument, especially given the weakness in household income seen in recent years, is that low wage increases are a major factor behind the performance of the Australian economy since the GFC, creating headwinds for consumption growth, and as a consequence broader economic growth, given the sheer importance of household spending for the economy.

That, in turn, has kept inflationary pressures muted, ensuring that Australian interest rates remain at the lowest level on record.

Appearing before lawmakers earlier this year, RBA Governor Philip Lowe states that annual growth in wages in the vicinity of 3.5% over several years was likely required to return inflation to the mid-point of the RBA’s 2-3% target.

It currently stands at just 2.08%, largely reflecting stronger gains in public sector wages, masking ongoing weakness in wages for private sector workers, the largest cohort in the Australian economy.

As for the argument put forward by the Ai Group that another large increase in the minimum wage rate could risk slowing employment growth, some may point out that even with the large 3.3% increase introduced in July last year, employment still surged in late 2017.

There’s also valid questions on how tough Australian businesses are doing it at present following recent economic indicators.

The National Australia Bank’s monthly business survey indicates that confidence levels among businesses are well above historic norms with trading conditions the strongest that they’ve been since before the GFC.

Data released by the ABS earlier this month also revealed non-mining corporate profits rose by 1.2% in the December quarter last year, leaving the increase from a year earlier at 5.8%.

Given those trends, it suggests business is doing fairly well right now even with higher labour costs.

Having a strong business sector is undoubtedly a positive for the Australian economy, but so too is having an healthy household sector. In the end it’s a symbiotic relationship with divergences between the two unlikely to last for a protracted a period.

If household balance sheets remain under pressure from weak growth in household incomes, that will undoubtedly limit the potential strength for business operating conditions and profitability.

Australia’s Fair Work Commission annual minimum wage review is usually conducted from March to June, with the end decision coming into effect on July 1.