Tuesday, June 2, 2015

Australia’s Annual Wage Review 2015: Low Wages In A Low Inflation Economy

For 2015 the Fair Work Commission has decided to increase Australia’s minimum wages by 2.5 per cent. This is the lowest annual increase in minimum wages since no increase was given in 2009. The Australian Council of Trade Unions’ Secretary, Dave Oliver, said that the decision would widen the gap between the minimum wage and average wages.

It does at first glance look like a low increase. In justifying the level of the increase the Fair Work Commission note that the most significant developments since 2014 have been the reduction in inflation and low aggregate wages growth. Consumer price inflation over the year to the March quarter 2015 has been 1.3 per cent. Underlying consumer price inflation – which better measures the ‘trend’ increase in prices – is somewhat higher, at a bit below 2½ per cent. Even so the 2.5 per cent increase in minimum wages looks enough to cover, on average, the increases in prices faced by low-paid workers.

Nor do the ACTU’s fears about minimum wages lagging further behind average wages seem to hold. The Wage Price Index increased by a very low 2.3 per cent over the year to the March quarter 2015, while the more volatile average weekly (ordinary time) earnings for full-time employees measure increased by 2.8 per cent over 2014. An increase of 2.5 per cent, while slightly lower than the latter measure, is not that far off, and allowed the Commission to give a ‘round’ increase of $16 per week to the standard minimum wage.

Given that minimum wages are only adjusted once a year, there is some uncertainty about whether the Commission should consider changes in prices and wages over the past year or over the next year. Oliver’s point may be stronger if inflation and wage growth are forecast to be higher in 2015-16. According to the most recent Budget papers though, the Australian Treasury forecasts inflation and the increase in the Wage Price Index to be 2½ per cent in 2015-16. Hence, looking forward does not substantially strengthen the ACTU argument. The Fair Work Commission itself prefers actual data to forecasts [para. 9 of the Decision].

Low inflation and wage growth aside, an argument could be made for a higher increase in wages for low-paid employees if their incomes and living standards were lagging behind the rest of society, and/or they were experiencing particularly acute financial stress. None of those things look to be particularly the case [paras. 404-417]. Therefore, while at first glance the Commission’s increase this year looks to be somewhat miserly, on closer inspection it seems broadly consistent with what is going on in the rest of a rather weak Australian economy.

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