Would raising minimum wage really increase inflation?

It’s a commonly made argument that higher minimum wages will reinforce inflationary pressures in Australia’s economy. However, the research from a recent report says otherwise.

Each year, annual wage cases create a plethora of panicked announcements and fiery debates from various sectors of society. Often, business groups and company chief executives will leap to criticise raising the minimum wage, citing inflation as a key reason, claiming that it will only worsen its impact.

For example, last year's decisions to raise award rates (the minimum legal wage that must be paid by an employer to their employees) received criticism from the chief executive of the Australian Retailers Association, Paul Zahra, who stated: “The scale of this increase will be difficult to absorb for retailers.”

Another diatribe used to detract from the push for minimum wage increases is that it will erode competitiveness and create unemployment.

Pushing back on these narratives is a new analysis by the Centre for Future Work at the Australia Institute. The analysis examined the correlation between minimum wage increases and inflation, going back to 1997.

Some of the key findings of the report are as follows:

• Last year’s decision, which lifted the minimum wage by 8.65 per cent and other award wages by 5.75 per cent, offset some but not all of the effects of recent inflation on real earnings for low-wage workers. At the same time, inflation fell by 3 percentage points.
• There has been no significant correlation between rises in the minimum wage and inflation since 1997.
• Raising wages by 5 to 10 per cent this year would offset recent inflation and restore the pre-pandemic trend in real wages for award-covered workers.
• Even if fully passed on by employers, higher award wages would have no significant impact on economy-wide prices.
• A 10 per cent increase in award wages could be fully offset, with no impact on prices at all, by just a 2 per cent reduction in corporate profits – still leaving profits far above historical levels.

The report displays the lack of correlation between raising the minimum wage and the effect that it would have on inflation. With a cost-of-living crisis at hand, and the ramifications of current inflation rates, low-income workers are doing it tough.

“Australia’s lowest-paid workers have been hardest hit by inflation since COVID-19. There is a moral imperative to restore quality of life for these Australians and this analysis shows that there is no credible economic reason to deny them,” said co-author of the report, Greg Jericho.

So why is the narrative that minimum age directly affects inflation still being peddled? The report points towards the dramatic expansion of business profits, as organisations instead took advantage of the disruptions of the pandemic to increase prices far above operating costs (including wages).

The report highlights a clear disconnect between the common narrative (minimum wages) and what they perceive as the real issue of corporate greed.

“There is no reason to expect or assume that profits must remain at these elevated levels: in absolute terms, as a share of total revenue, or relative to national GDP. It would take only a small narrowing of current elevated profits to fully offset the impact on prices of even substantial increases in the minimum wage,” the report claimed.

It almost becomes a case of smoke and mirrors as corporate entities battle against the idea of increasing the minimum wage for workers who, in the current Australian economy, are struggling, claiming that the ripple effect will see an uptick in regard to inflation. In actuality, the research highlights that surplus amounts of corporate profits are what is keeping inflation as a roadblock towards economic growth.

The authors of the report concluded with the importance of providing support for low-income workers throughout Australia who need assistance to combat the cost-of-living crisis and other financial issues that they are enduring.

“It’s vital the Fair Work Commission ensure that the minimum wage not only keeps up with inflation but also grows gradually in real terms – as was the trend before the pandemic,” concluded Jericho.