Whenever inflation starts to rise, the desire to blame wage increases is an itch that employers’ groups and those representing them in politics and the media cannot resist scratching. Wednesday’s decision by the Fair Labor Commission to raise the minimum wage by 5.2% has once again seen employers suggest dark days ahead. And yet, for workers, inflation has not been good.
Perhaps less than six months ago, the idea that the Fair Work Commission would raise the minimum wage from $ 20.33 an hour to $ 21.38 – an increase of 5.2% (technically 5.16%) – would have been unthinkable. It is the largest increase since 1991 and more than double the 2.5% increase last year.
Of course, it irritated business groups. This is not a shock: business groups always argue that the minimum wage should not rise more (and usually much less) than inflation.
The Australian Chamber of Commerce and Industry suggested that “it is too much in the midst of current economic pressures and uncertainty” and that “they run the risk of causing higher inflation, rising costs for consumers and making it harder for companies to hold back.” the workers “.
Australian industry group chief executive Innes Willox argued that “it will fuel inflation and lead to even higher interest rates; even more difficulties for people with mortgages.” 2.5% increase.
It really is quite incredible that a 5.2% increase in the minimum wage triggers higher inflation, when inflation by March had already risen by 5.1% and on Tuesday the governor of the Reserve Bank of Australia told the ABC in the 7.30 that “at the end of the year” expected “inflation to reach 7%.”
What a wonderful world we live in where an increase in wages below inflation will apparently lead to higher inflation!
In fact, the $ 1.05 per hour increase will cause the minimum wage to fall in real terms. And if there is 7% inflation growth in December, real minimum wages will return to 2017 levels at this time next year:
If the graph is not displayed, click here
At least they won’t return to 2015 levels, which is what would have happened if the commission had decided to go for AiG’s 2.5% increase proposal.
Growing wages less than inflation is a real concern, especially considering that wages were once the big metric the RBA cared about when deciding whether to raise interest rates.
The governor’s June 2021 statement concluded that the RBA “will not increase the cash rate until real inflation is sustainably within the target range of 2 to 3%. For this to happen, the labor market will have to “be adjusted enough to generate materially higher wage growth than it currently is. It is unlikely that this will be until 2024 at the earliest.”
Now, a year later, inflation is well above 3%. But what about salaries?
A year ago wages were up 1.7%; they are now at 2.4%. This is a significant increase, but not close to the level normally associated with inflation above 3%.
The latest data show that those who did receive a salary increase in the first three months of this year had an average increase of 3.4%. This was the largest increase since June 2013. The problem is that inflation then rose to 2.4%, not the current 5.1%:
If the graph is not displayed, click here
This means that inflationary pressures do not come from wages, but from blockages in the supply of products and also from our strange consumption habits.
The pandemic has massively changed the way we spend our money. In fact, we are spending less than we would have expected at the time before the pandemic, but that is only because we have taken our spending far further away from services.
Our purchases of goods are about 3.5% above the five-year trend before the pandemic, but our spending on services is more than 6% below that level.
If the graph is not displayed, click here
It means that we are buying goods as if the world is about to run out, and not buying services, as if we believe we could spread a virus if we do.
This pressure on demand for goods helps to fuel inflation, which is even higher because the price of stocks, which is the cost of things that are sold or used to turn them into things that are sold, has increased markedly last year.
But at the same time the cost of labor does not. In the last nine months, the cost of stocks has increased by 11.7% while labor costs have only increased by 1.5%:
If the graph is not displayed, click here
The problem is that rising interest rates are affecting both prices and wages.
We have hot inflation, due to our changed spending habits, the lack of spending we did during the pandemic confinements that are taking place and because the cost of doing things (especially with products from abroad) has increased.
Rising interest rates will reduce our ability to spend (because we will have to pay more on our mortgages and, in turn, rents), but it will do little to reduce the cost of making products that depend on world prices. .
Rising rates will slow wage growth, although they show no signs of causing inflation. Workers and their wages are the collateral damage of the war on inflation.
At this time next year, if inflation rises as estimated by the RBA, the minimum wage will be 3.7% lower in real terms than in September last year.
At this time, we expect inflation to decline.
And right now, you can bet that employers will argue that those with the minimum wage need another real pay cut.
Greg Jericho is a Guardian columnist and director of policy at the Center for Future Work