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ABC News
business reporters Michael Janda and Rhiana Whitson

Will lifting the minimum wage worsen inflation and raise interest rates?

Unions say the minimum wage should rise by 5.5 per cent, while employer groups want no more than 3 per cent. (Unsplash: Pema Lama )

Wages have become the latest battleground in the election, with debate raging about how much extra workers can get paid without sending businesses broke and consumer prices soaring.

On one side, the Australian Chamber of Commerce and Industry (ACCI) is proposing a lift in minimum and award wages of up to 3 per cent. 

"Business is doing it tough. They've had two years of pandemic where they've struggled to keep people in their jobs," ACCI chief executive Andrew McKellar told RN Breakfast.

On the other is the Australian Council of Trade Unions (ACTU), which is calling for a 5.5 per cent pay increase for the 2.3 million workers covered by awards or the minimum wage.

"Businesses are not just recovering, they're recovering very well," ACTU secretary Sally McManus said. 

"The bigger risk is that a whole heap of people, i.e. the one in four workers that are on the minimum wage [or awards], their real wages go backwards, because that means you'll have less to spend in businesses because they depend on consumer spending."

How much should the minimum wage go up?

In June, the Fair Work Commission will make its determination about how much extra those workers should get in their pay packets from July 1.

Should the government intervene?

The latest political controversy is whether the federal government should make a submission calling for a specific wage increase.

Labor leader Anthony Albanese has been criticised by the government for saying it should at least match inflation, currently 5.1 per cent.

"No Australian government or opposition has ever put a figure on the rate of the annual wage increase and yet Mr Albanese today has done just that," Finance Minister Simon Birmingham said.

However, Professor John Buchanan from the University of Sydney's Workplace Research Centre said that is incorrect.

"If you look back at over 100 years of wages policy, governments have usually put in a clear statement of what they think the state of the economy is and what the quantum of the wage increase should be," he told ABC News Channel.

ACCI's Mr McKellar said he did not have a problem with the government putting a figure on the minimum wage rise.

"They've got every right to," he said.

"They've got many analysts at their disposal, many good economists, I think it's entirely reasonable for government to pull up that data and information together and express a view about what is supported by the facts."

Whether the government puts a specific recommendation before the commission or not, in the end the commissioners will make the final call.

Economist Steven Hamilton from George Washington University, currently a visiting fellow at ANU, said the commission was likely to agonise over its difficult decision.

"We should remember that the minimum wage case is ultimately a value judgement," he told ABC News.

"And I think being explicit about that is really important."

Professor Buchanan said it is a critical judgement, not just for those on the minimum wage and awards, but because it feeds through to pay expectations in the community more broadly.

"That notion of a community norm has a very big influence, and when setting that community norm, it listens very closely to the arguments of unions, employers, but fundamentally governments are regarded as a key player in the game," he said.

So what are the key economic issues and values that will shape this key judgement?

Cost of living?

Alison Pennington, senior economist at the Centre for Future Work with The Australia Institute, said the minimum wage increase must be higher than inflation, or low-paid workers would effectively be taking a pay cut.

Alison Pennington, senior economist at the Centre for Future Work, Australia Institute, says a wage rise below inflation is a pay cut. (ABC: Dylan Anderson)

"The ACTU's proposal of 5.5 per cent lift is entirely reasonable in the context of both the COVID pandemic shock and this inflation shock," she said.

Ms Pennington pointed to New Zealand, which is experiencing slightly higher inflation than Australia, and recently decided on a 6 per cent increase for minimum wage earners.

"Australia needs real wage increases. That's the short of it," she said.

Dr Hamilton has a different point of view and argued a wage rise of between 4 and 4.5 per cent is a good middle ground for this year, but with the promise of similar wage rises for at least a couple more years.

"I believe we should not deliver a wage increase for 2.3 million Australians on minimum wage and awards of more than the current CPI [Consumer Price Index]. That's my judgement," he said.

"Instead, what I think is a more sensible change is being able to commit to... an above-inflation increase in the following two years. So, in a sense, to sort of smooth out the wage impact over time."

Ms McManus said without a real wage rise more workers would consider strike action.

Transport workers, teachers, nurses and aged care workers have recently gone on strike for better pay and conditions. 

"It's all because employers are still insisting on real wage cuts and people are suffering." she said.

Wage spiral and interest rate rises?

Mr McKellar said people deserve and need a pay rise, just not one that worsens inflation.

Some economists are concerned that a bigger wage increase might result in a so-called wage price spiral. 

This is a feedback loop, and occurs when increasing wages push up business costs, which are then passed on in rising consumer prices, and so on.

Dr Hamilton said this may cause the Reserve Bank to hike the cash rate faster and to a higher peak.

"We kind of don't know the equilibrium interest rate necessary to arrest that kind of spiral. And so there is a chance that that interest rate is really high," Dr Hamilton said.

"And it could be there's some potential that the interest rate increases sufficiently high that it it reduces employment."

He said, in an extreme case, interest rates might have to rise so high to contain inflation that they cause the economy to shrink into a recession.

On the other hand, Dr Hamilton said if wages persistently failed to keep pace with price rises that would dent consumer demand and could also trigger an economic downturn.

"There's risks on both sides. Too high and too low," he added.

Ms Pennington disagreed with the idea that inflation would worsen if minimum wage workers get a real pay rise.

"Real wages have declined by 2 per cent in the last 12 months, and that brings us back to 2014 levels," she observed.

Ms Pennington said there was a "scare campaign with claims of wage price spirals based on 1970s institutions".

"For a wage price spiral to occur there would need to be higher levels of unionisation and stronger mechanisms for awarding wage increases," she argued.

Are workers getting their fair share?

Professor Buchanan and Ms Pennington do not think so, and they think bosses can afford a pay rise as a result.

"The average Australian worker now is producing about 50 per cent more than they did 30 years ago for the same amount of effort," Professor Buchanan said.

Ms Pennington said profit share of GDP was around post-World War Two record highs.

"When people claim that any increase in labour costs will necessarily mean higher prices, they're assuming that the constant is the company's profit rate," she said.

But Dr Hamilton warned that wages are normally rigid — meaning they rarely fall, even in response to a drop in demand for workers.

He said that means that if current supply disruptions are the key cause of inflation at the moment and price rises are temporary, higher wage rises might end up locking in uncompetitive labour costs.

"This is kind of why you want the wage regime to look through the short term shock, and why I would be a little cautious about overdoing it in the short run," he said.

"Because what happens is, when the supply shock is gone, basically the minimum wage is too high and you'll end up with an effect on employment."

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