GOVERNMENT POLICY

2020 Minimum Wage Increase

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What Has Happened?

In mid-June, the Fair Work Commission (FWC) announced a 1.75% increase in the National Minimum Wage, a $13 per week increase to $753.75 per week. This coincides with a proportional 1.75% increase in award wages, which set the minimum wage for a profession or industry, although award wages are usually above the National Minimum Wage.

Unlike previous minimum wage increases, the 2020 increase does not apply immediately to all employees from July 1st. Instead, the increases will be rolled out across three stages, with industries more affected by the COVID-19 pandemic receiving minimum wage increases as late as February 1st next year. The reasoning for this is to lesson wage pressures on business owners in more affected industries.

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Low-earning workers

Increases in the minimum wage primarily impact those earning the National Minimum Wage itself (around 250,000 workers), and those on award wages (another 2.3 million workers). Nonetheless, it should be noted that many award workers do not earn substantially above the minimum wage, with one-third of award workers earning within $2 per hour of the minimum wage. Therefore, this much smaller increase in the minimum wage (compared to 3% last year) is expected to lead to slow real wage growth for lower-income earners.

Indeed, a 1.75% increase in the minimum wage is equal to a 1.4% after taxes have been considered. Because minimum wage increases are determined in nominal values (disregarding the impact of inflation), the real increase in income is even lower. For example, underlying inflation in the year to the end of March 2019 was 1.8%, and the RBA “bravely” forecasts the headline inflation (measured by the percentage change in the CPI) to be 2.75% in the year to June. Since both these figures exceed the percentage increase in the minimum wage, it is possible that the real minimum wage is falling. This means that many lower-income workers can afford less goods and services with the money they earn. However, the pandemic-induced economic downturn is expected to lead to lower inflation and possibly minor deflation, so workers may receive a slight increase in their real wage. The impact is hard to predict at this current stage.

The FWC, in its consideration of this year’s wage increase, stated:

“Any increase in the award which is less than increases in prices and living costs would amount to a real wage cut … for some households, such an outcome would lead to further disadvantage [and] greater risk of moving into poverty.”

Nonetheless, a common view is that minimum wage increases are not particularly effective in assisting the low-paid, since changes in real income are modest. Instead, measures such as transfer payments and tax offsets are much more effective. This is because they can be targeted to assist the low-paid to a significantly greater degree than a minor increase in the real wage.

Minimising involuntary unemployment

Unlike previous renditions of the minimum wage, the 2020 increases are divided into three stages:

Stage 1: Industries less affected by the pandemic and frontline workers such as healthcare workers and police. This group receives an increase on July 1st.

Stage 2: Industries moderately affected by the pandemic, such as construction and manufacturing.  This group receives an increase on November 1st.

Stage 3: Industries heavily affected by the pandemic, such as retail, tourism and food services. This group receives an increase on February 1st of next year.

The intuition behind this staggered increase is to minimise increases in unemployment that result from already struggling employers having to pay higher wages. The Fair Work Commission, in its summary, stated that it intends to:

“Prioritise keeping Australians in jobs and maintaining the viability of businesses.”

By minimising the increase in labour costs, increases in involuntary unemployment (the result of an excessively high labour price or wage) are minimised.

Limited wage-push inflation

The 1.75% increase in the minimum wage is likely to have limited impact on inflation. Theoretically speaking, very strong increases in the minimum wage lead to wage-push inflation as employers pass on higher labour costs to consumers in the form of higher prices. However, the 1.75% increase is fairly modest, and is significantly less than 1.75% in real terms (taking into account the impact of inflation itself). Therefore, businesses will face relatively negligible increases in operating costs associated with the minimum wage increase.

Despite Australia’s very high minimum wage, there is limited evidence that these high wages translate to wage-push inflation. Indeed, Australia has recorded an average inflation rate of around 2.5% since inflation targeting began in the early 1990’s.

Instead, the main influences determining the inflation rate during the predicted recession will be the deflationary effects of spare capacity in the labour market and a reduction in aggregate consumption. These may act as deflationary influences.

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