Wed Jun 15

This 5.2% decision on the minimum wage could shift the trajectory for all workers

Written by: John Buchanan, Professor, Discipline of Business Information Systems, University of Sydney Business School, University of Sydney

Barely a month ago Anthony Albanese was derided as a “loose unit ^[1]” for endorsing a 5.1% increase in the minimum wage.

His rationale was, with 5.1% inflation, the incomes of the lowest-paid Australians at least shouldn’t be going backwards.

Now the Fair Work Commission’s expert panel, which reviews the minimum wage each year, has announced a 5.2% increase.

A “loose” decision? No. The reasons for lifting the pay of workers on the minimum wage by $40 a week are laid out in a long document ^[2]. The essence is this: even with rising inflation, the economy is strong. If we can’t lift wages to stop the lowest paid going backwards in these conditions, when will they ever rise?

Reasons for the rise

The economic factors considered by the expert panel include:

real wages have fallen by about 2.5% over the past two years
economic growth is strong and appears set to continue
employment and vacancies are growing
unemployment and underemployment are falling
productivity has returned to steady growth of 1–2% a year
profits increased by 25% in the past year.

While precise estimates are difficult, the minimum wage increase will affect about 2% of Australian workers. The sectors most impacted will be retail and hospitality ^[3].

However, the Annual Wage Review ^[4] also decides pay rates for those on awards. This is about 23%^[5] of Australian employees (19% of males, 27% of females). To these workers the panel has granted a 4.6% pay rise.

This will help workers in aged care, disability care and other forms of non-government provided (but predominantly government-funded) care work.

Indirect impacts

For the majority of workers – about 35% of whom ^[6] are covered by an enterprise bargaining agreement and 38% on over-award payments or individual contracts – the decision’s impact will be indirect, though potentially significant.

Wage setting involves a combination of both market and institutional forces.

The lower bound of wages is set by the social security system – unemployment benefits, aged pensions and the like. The upper bound is set by profitability in the most prosperous enterprises.

Institutional forces such as employers’ policies, unions, labour laws and customary notions of “the going rate” – as well as the level of supply and demand for workers with particular skills – shape the ultimate outcome within these upper and lower bounds.

This is where the expert panel’s decision is significant. It has implicitly challenged the strictures placed on wage increases by both federal and state governments over the past decade.

Annual wage review 2021-22 decision.

Protecting a principle

The panel’s decision follows a long-standing principle of Australian wages policy – pursued at least since the 1990s, when enterprise bargaining became the primary basis for wage increases.

This principle holds that some workers don’t and never will have the capacity to bargain effectively with their employers. They need to be protected. As the decision states:

We agree with the RBA’s assessment and remain of the view that moderate and regular increases in minimum wages do not result in significant disemployment effects.

This point doesn’t apply just to the lowest paid.

Reading the nation

Most Australians are concerned about the cost of living.

After more than a decade of stagnant wages, people are looking for new directions. Albanese’s election campaign recognised this, and pushed the issue constantly.

When Scott Morrison derided Albanese as a loose unit for endorsing a $40-a-week pay rise for the lowest paid, he fundamentally misread the national mood.

The Fair Work Commission’s expert panel has not.

This decision is a welcome continuation of its role to protect the lowest paid. It could well contribute to moving Australia to a trajectory of higher, but sustainable, wages growth.