Tuesday, March 25, 2014

Previewing the 2014 Annual Wage Review Decision

The Fair Work Commission has commenced its annual wage review for 2014, with a decision on how much Australia’s award/minimum wages will be adjusted likely to be made in June.  I’m now almost two years removed (!) from working specifically as a labour economist, but I was involved for six years with the minimum wage review, so like a long-term ex I’ll probably continue to take a bit of an interest in it and pontificate about it for a while yet.

I have said on this blog before that I think there is a reasonable case for increasing minimum wages by more or less average wage growth each year, as that keeps the ratio of minimum wages to average wages fairly constant over time (assuming that ratio is about ‘right’). Recently though average wage growth in Australia has been low – the Wage Price Index increased by only 2.6 per cent over 2013, the smallest rise since the index began in 1997. (The March quarter 2014 figure will come out before June, but it would take a strong quarterly result just to get the year-ended rate back over 3 per cent.) Other measures of earnings are growing at around 3 per cent on their most recent results. Thus, an increase in minimum wages similar to the increases of the past two years - 2.9 per cent in 2012, and 2.6 per cent in 2013 – is likely to keep the minimum wage/average wage ratio at about the same level.

I should point out here that, on the basis that I have suggested minimum wages should primarily be adjusted, one could argue that some ‘catch-up’ is also required, as the 2012 and 2013 increases probably mean that minimum wages fell further relative to average wages. However, I can’t see that happening, even if FWC did come to hold the view I’ve expressed, as it would require them to essentially conclude that those previous decisions had been ‘wrong’. (And hey, if they ever did happen to come across this blog, they could well argue that it is my view that is off the mark, or at least a bit reductionist.)

An increase in the high 2-low 3 per cent range would also compensate minimum wage employees for the increase in inflation. Over 2013, this was 2.7 per cent – again though, the March quarter 2014 figure will come out before June, and that might well push the year-ended figure a bit higher. Usually, increases in average wages are somewhat higher than the increases in prices, as wages growth also captures increases in the productivity of workers. However, wages growth has been about the same as inflation lately, despite increases in output per hours worked, which is often thought of as a measure of labour productivity. One possibility is that the decrease in the exchange rate is pushing up inflation through higher prices for imports at a faster-than-usual rate.

In short though, with inflation and wages growth around the high 2-low 3 per cent range, I expect FWC to award an increase to minimum wages in June 2014 of about that amount. Add to that there is still some caution about the Australian economy - in particular, around the unemployment rate - and it seems unlikely to me that the increase will be much higher or lower than that amount. Though I do hope that for the sake of the employees and employers involved, and the parties who do put a lot of effort into their submissions, this year’s review will not have as much a sense of going through the motions as I’ve probably just made it sound.

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