Don’t let businesses and big bosses scare you too much. The workplace umpire earlier this week made a call that upset some people.
Mostly, those who were disgruntled were business groups arguing the Fair Work Commission’s decision to raise minimum wages by 4.75 per cent (and by 6 per cent for the lowest-paid workers) from July was far too much.
Employers had wanted an increase closer to 3.5 to 3.9 per cent, and warned the latest decision would push some firms out of business while forcing others to raise their prices. It’s one of the few times they’re happy to draw attention to higher prices.
Why? Because it’s (seemingly) out of their control: blame the commission and higher wages! And it’s a good way to soften up customers for future price hikes – whether they’re caused by higher wages or not.
Now, it’s not all a lie. Higher wages, to the extent that they apply, will come at a cost to businesses. But don’t buy into it too much.
One of the arguments businesses make is that they shouldn’t have to pay their workers so much more when growth in productivity (our ability to make and provide goods and services) has been stagnant for a long time. If workers aren’t getting any better at doing what they’re paid to do, they argue, it doesn’t make sense to have to pay them more.
Business groups are right when they say the country’s productivity growth has been in the gutter for some time (although the way we measure productivity is not perfect). That is, we’re not becoming that much better at using our limited resources – including ingredients, materials and workers’ time – to make more, or better quality, products, or provide more or better quality services.
And as the Reserve Bank and government have been insisting for a while, the key to lifting our living standards – whether that’s being able to consume more goods and services, or working fewer hours while getting just as much done – is through lifting productivity.
This is especially important when it comes to tackling inflation: the rising level of prices for goods and services. Why? Because prices tend to climb as a response to demand outstripping supply. If we improve our productivity, we can increase supply, helping to push price growth down while fulfilling our wants and needs.
In short, business groups argue that increasing their costs (the wages they pay employees) when there’s been little productivity growth is bad for all of us because it will just lead to higher prices and very little change to supply.
But what if the equation actually worked the other way? What if getting businesses to pay employees more actually led to productivity improvements?
There are two ways this can happen.
First, there’s the “efficiency wage” theory. Basically, better pay can reduce staff turnover. If you’re getting paid a decent amount, especially – but not necessarily – compared to other firms, you’re less likely to jump ship to another job because you’re already able to meet your basic needs and maybe a bit more.
Job switching is not necessarily a bad thing (sometimes it helps people find jobs that better suit their skills or spread knowledge across a sector). But if workers are constantly switching jobs or spending time looking at and applying for new roles, that can eat up a lot of time and also lead to higher staff turnover, meaning the firms they work for have to divert more of their resources towards recruiting and retraining staff (not an especially productive use of time).
Higher wages can also reduce how often people call in sick. Why? Because they are less likely to suffer from mental or physical health issues if they’re able to put aside money for preventative healthcare, and are less likely to be exhausted from working a second job to make ends meet or commuting long distances because they can’t afford to live closer to the workplace.
Workers are also likely to want to work harder. When we feel valued and appreciated, we tend to have higher job satisfaction, more trust in management, and are more likely to want to show up and put in the work. We’re also less willing to risk being fired – and more motivated to protect our well-paid job.
Second, if businesses are forced to pay higher wages, it pushes them to find ways to get more out of their workers. That is, it nudges them towards spending on things that might help their workers to complete their work more easily and efficiently.
As the Australia Institute’s director Richard Denniss puts it: “Why would a business invest in a bulldozer if they have cheap labour at their disposal and can just buy some shovels instead?” From a business perspective, there’s less urgency to invest in helping their workers to perform better if they can get away with spending very little on them.
Productivity gains are often made through spending on technology and ensuring workers have the tools they need to do their jobs better. A cafe with two coffee machines shared among six staff, for example, will probably be able to serve more coffees than a cafe with one machine.
If businesses care so much about productivity gains, maybe it starts with paying higher wages. This is especially true given many of Australia’s sectors are dominated by a handful of big firms and lack the strong competition needed to push businesses to innovate and invest.
It’s also worth remembering that only one in five Australian employees are paid according to minimum and award wages. And because a lot of them work on a part-time or casual basis, and are relatively low-paid, their wages only make up about 11 per cent of the country’s total wage bill.
There is, of course, the argument that raising the minimum wage provides a benchmark for other workers across the economy when they look to negotiate their salaries this year: if these award and minimum wage workers got 4.75 per cent, why shouldn’t we?
But especially given the weakness of unions in many industries compared to much of the 20th century (when union membership was higher), the negotiating power of workers is probably not strong enough to see this wage increase flow on in full to the rest of the economy.
That’s another reason why higher minimum wages aren’t likely to have a huge effect on overall wages and – even if we assume higher wages lead to higher prices – we’re not likely to see the sky fall in.
Business groups argue that increasing the minimum wage by more than the inflation rate over the most recent 12 months we have data for – and by higher than the rate forecast by Treasury and the Reserve Bank in the coming year – will lock in expectations for higher wages and higher prices, leading to what’s called a “wage-price spiral”: where workers demand higher wages to keep up with rising prices, and firms raise prices to cover that additional cost.
But as economists at the Reserve Bank have written, this doesn’t happen if the people believe the central bank will clamp down and keep inflation within target. The bank’s willingness to raise rates recently – while painful for those with home loans – probably contributes to people generally believing inflation will return to somewhere between the 2 to 3 per cent target in the near future.
And, of course, a large part of the reason why the Fair Work Commission lifted minimum wages was to make sure that those who are among the lowest-paid in our economy can keep up a decent standard of living.
So while businesses might bemoan the 4.75 per cent increase as overcompensating for inflation, many people are actually still worse off than they were before the pandemic because their wages have grown more slowly than prices have for several years.
While the minimum wage increase might push a few firms out of business, we should be sceptical about their warnings that higher pay will lead to higher prices, and that we need to see productivity improvements before we award wage increases. The logic might actually work the opposite way.
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Millie Muroi is the economics writer at The Sydney Morning Herald and The Age. She was formerly an economics correspondent based in Canberra’s Press Gallery and the banking writer based in Sydney.Connect via X or email.
