Fair Work minimum wage
ACTU Assistant Secretary Liam O'Brien addresses the media following the Fair Work ruling. (Image: AAP/David Crosling)

You have to wonder whether Iain Ross and his Fair Work Commission colleagues have actually read anything the Reserve Bank has said recently about the Australian economy and why household income growth has been so low in recent years.

Yesterday, the commission decided to give the 20+% of Australian workers on minimum wage a 3% wage increase. That sounds good given the inflation rate in the March quarter was just 1.3% — and unlikely to reach 2% this year, or maybe even next. But it’s less than the 3.5% the Commission gave minimum wage workers last year. And it it will do nothing to lift the currently official level of wages growth, which has been stuck at 2.3% for several quarters, courtesy of the government’s policy of wage stagnation.

Why only three per cent? Here’s the decision:

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“We have decided to award a lower increase this year than that awarded last year having regard to the changes in the economic environment (in particular the recent fall in GDP growth and the drop in inflation) and the tax-transfer changes which have taken effect in the current Review period and which have provided a benefit to low-paid households. We are satisfied that the level of increase we have decided upon will not lead to any adverse inflationary outcome and nor will it have any measurable negative impact on employment.”

The problem is, the primary change in the economic environment over the last twelve months has been low household income growth — at least according to RBA governor Philip Lowe, who recently observed:

[T]he main reason for the shift in momentum in the Australian economy is a slowdown in household consumption growth. Over the second half of 2018, household consumption increased by just .75%, which is an unusually soft outcome.

So the reaction of the FWC to the problem of lower household consumption is to… lower household consumption, by ordering a lower increase in the minimum wage than the previous year. What restrained the FWC from at least handing out a 3.5% increase again this year, or even higher? The only clue is that the 3% increase “will not lead to any adverse inflationary outcome and nor will it have any measurable negative impact on employment”.

So let’s talk about inflation for a moment given Ross mentioned it. Did last year’s 3.5% minimum wage rise have any impact on inflation? Absolutely zero. Inflation has actually fallen in the wake of the 3.5% increase, from 2.1% to 1.3%. The 3.5% didn’t touch the sides! And what about that “measurable negative impact on employment”? On that, at least, employers would agree with them, because the usual suspects like James Pearson of ACCI attacked 3% as putting jobs in danger, let alone anything higher (then again, anything but a major wage cut would have Pearson et al warning economic apocalypse is nigh).

Only problem is, the link between increasing the minimum wage and higher unemployment is a complete furphy busily being disproved every day in the United States, where states are significantly increasing minimum wages and not merely not seeing any negative employment effects, but seeing employment increases that have made their neighbours decide to lift wages as well.

In the RBA’s recent Statement of Monetary Policy, the bank made this observation:

Uncertainty about expected household income growth continues to be important for the outlook for consumption. Should households conclude that low income growth will be more persistent than previously expected, households may adjust their spending by more than currently projected and consumption growth could remain weak for a longer period.

Ross and Co have done their little bit to ensure that dismal scenario comes true.

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Peter Fray
Peter Fray
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