Australian Economy

Australia must avoid entrenching a US-style ‘working poor’

A once-off outsized increase in the minimum wage in 2022 is an important ingredient in achieving both these objectives over the next three years.

The only way to ensure that inflation in Australia is brought under control is to return monetary policy to a neutral setting as quickly as possible. This means raising the cash rate by at least another 2 per cent over the next 2 years.

Supporting household incomes through a period of rising interest rates is our best chance of keeping the economy on an even keel.

Supporting household incomes through a period of rising interest rates is our best chance of keeping the economy on an even keel.Credit:iStock

Supporting household incomes through a period of rising interest rates is our best chance of keeping the economy on an even keel.

Raising the minimum wage may seem counter-intuitive if inflation control is the ultimate objective. But supporting household incomes while raising interest rates gives us our best chance of getting monetary policy settings right for the long-term.

Maintaining a strong baseload demand in the economy through maintaining the real wages of low and middle income households will alleviate the risk of a widespread fall in consumer spending as interest rates rise.

Higher wages will also send a powerful signal to business to invest in labour-savings technologies and ultimately boost productivity growth.

Rising labour costs are not going away any time soon.

Rising labour costs are not going away any time soon.Credit:Tamara Voninski

Rising labour costs are not going away any time soon. The upward pressure on inflation from pandemic-related supply chain disruptions and fiscal stimulus will pass in time, but businesses will be grappling with rising labour costs for years to come.

We are now in a new demographic cycle of rising dependency. Worker scarcity is the new normal, not just pandemic-related.

Organisations right across Australia will have to confront this reality whether they like it or not. Government policy should not be resisting these underlying forces that are putting upward pressure on wages.

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Policy needs to be directed to supporting organisations, most importantly small businesses, to mitigate these rising costs. Increasing the flexibility of the labour market, reducing compliance burdens and even cutting small business tax rates are much more effective ways of supporting businesses than cutting real wages. For those wages come back as business revenues.

Employers must be encouraged to invest in new plant and equipment, digital capacity and software development as well as the skills and training of staff. Business must make the most out of every hour of labour input they employ.

It is this productivity that will underpin a sustained increase in real wages once again.

A one-off 5 per cent lift in wages will not have an adverse impact on economy-wide unemployment. The labour market is white-hot and more than likely running beyond its capacity. What better time to reset real wages than when the unemployment rate is near 50-year lows.

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Market-determined wages are clearly rising in 2022. Labour shortages are ubiquitous and high inflation is driving wage claims towards 5 per cent for many workers on incomes well above the minimum wage.

Increasing the minimum wage will directly boost the wages of almost a quarter of the workforce as well as act as a benchmark for other wage negotiations currently taking place. After years of concerns about wages growth being too low, this is too good an opportunity to pass up.

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