Australia’s biggest minimum wage rise in 33 years will only lead to more interest rate rises and spark a recession, a leading expert fears.
The Fair Work Commission on Friday awarded an 8.65 per cent increase to Australia’s lowest paid workers, two days after another inflation shock.
This was the most generous annual wage review increase for the likes of retail and hospitality workers since 1990, back when extremely high interest rates from the Reserve Bank of Australia led to a recession a year later.
Justice Adam Hatcher, the Fair Work Commission’s new Labor-appointed president, argued the big increase would only affect 0.7 per cent of Australian workers on July 1, with just 184,000 employed under the national minimum wage.
‘Because of the negligible proportion of the workforce to which the national minimum wage applies, this outcome will not have discernible macro-economic effects,’ his judgement said.
But AMP chief economist Shane Oliver said while only a small number were directly affected, the huge increase would encourage the 35 per cent of Australian workers employed under collective enterprise bargaining agreements to demand higher wages.
‘The problem is there’s an influencing effect,’ he told Daily Mail Australia on Friday.
Australia’s biggest minimum wage rise in 33 years will only lead to more interest rate rises and spark a recession, a leading expert says (pictured is a Sydney bartender)
‘That will influence wage demands right through the economy and therefore run the risk that we’ll end up with much higher wages growth than the RBA is comfortable with.
Historically big rises in the minimum wage
1990: 9.2 per cent as minimum wage increased to $311.30 from $285.10 but the increase was staged in six-month blocks
2023: 8.65 per cent as minimum wage increased to $882.89 from $812.60 based on new classifications; 5.75 per cent for those on modern awards
2006: 5.7 per cent as the minimum wage increased to $511.86 from $484.40 during mining boom
2022: 5.2 per cent as the minimum wage increased to $812.60 from $772.60 which was slightly above inflation, than at a two-decade high
Source: Fair Work Commission’s The History of the Australian Minimum Wage; Annual Wage Review for 2022-23
‘Only 0.7 per cent of people get the minimum wage but people see the headlines – “8.6 per cent rise in the minimum wage” – that affects people’s expectations more generally and that’s what will worry the RBA.
‘It means more interest rate hikes, so the RBA is worried if wages growth keeps accelerating, then it will bake in higher inflation because companies will just put their prices up.’
ANZ on Friday adjusted its forecasts to have the Reserve Bank of Australia increasing interest rates two more times, to 4.35 per cent, which would be the highest since December 2011.
It had previously expected one more rate rise, like National Australia Bank, on the existing 11-year high rate of 3.85 per cent.
Two more 0.25 percentage point rate rises would mean an average borrower with a $600,000 mortgage would see their monthly repayments climb by another $195 to $3,828, up from $3,633 now for a home owner on a six per cent variable rate.
This dire forecast means this borrower with a 20 per cent deposit would have seen their annual repayments soar by $18,264 since early May 2022, back when the RBA cash rate was still at a record-low of 0.1 per cent and the banks were offering variable rates starting with a ‘two’.
Dr Oliver is forecasting a 4.1 per RBA cent cash rate – enough to spark a recession – but said it was possible the Reserve Bank would raise rates even higher.
‘We’re just debating whether the next hike is going to be in July or June – they’re obviously moving to another hike,’ he said.
‘Each incremental rise in interest rates brings us closer to recession.
‘It’s quite possible now we’ll get two more – I can’t rule that out.
‘It’s a terrible situation for home owners – some might of them see a wage rise from this but it won’t make up for extra amount they’ve got to pay in their mortgages.’
Justice Adam Hatcher, the Fair Work Commission’s new Labor-appointed president, argued the big increase would only affect 0.7 per cent of Australian workers, with just 180,000 employed under the national minimum wage
The RBA has already raised rates 11 times during the past year and could do so again on Tuesday, after new official data showed inflation in April rising to 6.8 per cent, up from 6.3 per cent in March.
‘We’re already seeing a lot of evidence the evidence that the economy is starting to weaken – retails sales, obviously housing construction is falling rapidly, business investment plans are starting to slow down,’ Dr Oliver said.
The monthly figures from the Australian Bureau of Statistics showed the consumer price index uncomfortably above the RBA’s two to three per cent target.
The RBA’s rate rises since May 2022 are the most severe since the RBA adopted a cash rate target in January 1990.
Back then, the cash rate was at 17.5 per cent, with inflation at 8.7 per cent during the March quarter of 1990.
Inflation more than halved to 3.3 per cent by the June quarter of 1991 but by then, Australia was already in recession.
ANZ is now expecting the Reserve Bank of Australia to increase interest rates to 4.35 per cent – level unseen since December 2011 (pictured is a Brisbane shop front for lease)
Australian worker pay arrangements
MINIMUM WAGE: 0.7 per cent
AWARDS: 23 per cent
COLLECTIVE AGREEMENT OR ENTERPRICE BARGAINIING: 35 per cent
INDIVIDUAL CONTRACT: 41 per cent
Source: Westpac summary of Australian Bureau of Statistics data. Figures are rounded.
Dr Oliver fears the Reserve Bank’s focus on reducing inflation – which in 2022 hit a 32-year high of 7.8 per cent – could see history repeat and spark another recession.
‘We know from the late 80s, early 90s – when interest rates went up dramatically, a bit like now, everything’s okay until it’s not,’ he said.
‘Then you suddenly find you’re in recession.
‘I must admit I am getting quite worried about the outlook.’
The Fair Work Commission on Friday granted a 5.75 per cent increase in the minimum wage and national awards, which will affect the pay of 2.67milion Australians – or one in four workers.
But a change in industrial classifications means the small number on the national minimum wage are effectively getting an 8.65 per cent boost on July 1.
The national weekly, minimum wage is increasing by $70.29 a week to $882.89, based on this higher number, sparking fears of an inflation breakout and more interest rate rises as annual, full-time salaries rise to $45,910, up from $42,255.
The annual wage review decision directly affects 184,000 workers on the minimum wage in the retail, hospitality, tourism and aviation sectors but has flow-on effects for many more on national awards from the start of next month.
AMP chief economist Shane Oliver said while only a small number were directly affected, the huge increase would encourage Australians employed under enterprise bargaining arrangements to demand higher wages – leading to higher inflation and more rate rises
More than 20 per cent of Australian workers, or 2.5million in the labour force, are on modern awards, compared with 35 per cent employed under enterprise bargaining and 41 per cent on individual contracts.
The RBA is expecting the wage price index – covering all workers – to hit four per cent this year for the first time since 2009, during the Global Financial Crisis.
This includes the effect of a 15 per cent wage rise for aged care workers and an end to the 2.5 per cent wage cap in NSW and a similar 1.5 per cent restriction in Victoria.
An absence of productivity growth during a wages surge worsens inflation.
‘You need to have an element of productivity growth to support the higher wages, otherwise companies just see their costs going up, without any offsetting productivity savings, and therefore they just pass that on to customers,’ Dr Oliver said.
While Australia experienced a Covid lockdown recession in 2020, it hasn’t had a technical downturn from higher interest rates since 1991 – during an era of double-digit unemployment being almost triple today’s 3.7 per cent jobless rate.