No, Raising the Minimum Wage Won’t Spur Inflation

With inflation on the rise, Australian unions are calling for a modest pay increase for minimum-wage workers. The government, backed by bosses and bankers, says such a move will increase inflation, but the truth is they just don’t want to pay.

A substantial wage rise would provide a much-needed solution to increasingly pressing economic problems. (Michael Macor / the San Francisco Chronicle via Getty Images)

The Australian Council of Trade Unions (ACTU) recently announced that it will push for a 5.5 percent pay increase for minimum wage–earning workers in the Annual Wage Review. The ACTU’s reasoning is simple: the cost of living is going up, outstripping wage growth. Headline inflation rose by over 5 percent over the last year while nominal wages only grew by a measly 2.3 percent. Real wages actually fell by 0.8 percent.

The future projections aren’t looking good either as the Reserve Bank of Australia (RBA) predicts that nominal wages will only grow by around 3 percent, far below the forecasted inflation rate of 6 percent. When you consider the fact that the RBA has a track record of making overly optimistic wage growth predictions, it’s not unreasonable to think that our wage stagnation problem is even worse than it seems.

Meanwhile, the share of national income going to capital owners through profits and realized capital gains has increased in proportion to the share of income going to workers. The problem is clear: workers are being made to bear the full brunt of inflation and desperately need a pay rise to keep up with the rising cost of living.


Anti-Worker Alarmism

This sounds like a totally reasonable idea. So, when Labor leader Anthony Albanese declared his support for a slightly lower minimum-wage rise of 5.1 percent, you’d be forgiven for assuming it was an uncontroversial “small target” take. But the idea that workers should be entitled to what amounts to a one dollar an hour wage rise sent Australia’s bosses, bankers, and pundit class into a frenzy.

The Australian Chamber of Commerce and Industry’s CEO Andrew McKellar told the Australian Financial Review that “aggressive wages growth will only spur further inflation growth.” That same publication’s chief political correspondent, Phillip Coorey, went as far as to claim that wages keeping up with the rate of inflation would be “a one-way trip to a Weimar Republic.”

They claim that raising wages to move them closer to the inflation rate would greatly exacerbate inflation through a “wage-price spiral.” Conservatives believe that inflation is caused by workers being able and willing to push for higher wages. This creates excess consumer demand, they argue, forcing business owners to increase prices to keep making a profit. In turn, this is supposed to encourage workers to push for further wage rises to accommodate for higher prices.

This alarmism is unconvincing. Workers’ wages have been stagnant for decades now, so it’s clear that wage growth did not cause this current round of inflation. Furthermore, it’s simply untrue that modest demands for a 5.1 percent or 5.5 percent pay rise will have this effect — they would still be below the forecasted inflation rate.

Inflation is a complex phenomenon, but one thing that’s clear is that the pandemic caused global supply chain problems. It’s much more reasonable to think that those problems are causing inflation than to lose sleep over demands for small wage rises.

Blame the Bosses and the Government

Indeed, it’s more reasonable still to blame inflation on bosses desperate to push up their profit margins at any costs. Alison Pennington, senior economist at the Centre for Future Work calls it a “profit-price spiral.” Low wage growth allows for record-high profits and increases the capital share of income at the expense of labor’s share.

A recent study from the Bank for International Settlements suggests that firms have historically unprecedented level of price setting and wage setting power, allowing them to attack wages and increase prices simultaneously. The study argues:

In a high inflation environment, higher markups could fuel inflation as businesses pay more attention to aggregate price growth and incorporate it into their pricing decisions.

Conservative pundits love to fearmonger about the inflationary effects of “unreasonable” wage demands. They seem less interested, however, in calling on the government to restrain big businesses and demands for ever higher profits.

It’s not as though the government is blameless, however. The “stage 3” tax cuts for people earning over $200,000 will exacerbate inflation far more than a one dollar per hour raise to the minimum wage. These tax cuts, supported by both major parties, are effectively a massive pay rise for the rich that will cost the government $22 billion of lost revenue within a year of their implementation.

A 5.1 percent increase in the minimum wage will leave full-time minimum-wage earners roughly $2,000 a year better off. At the same time, thanks to the stage 3 tax cuts, a politician earning $211,250 a year will be $9,075 a year better. People earning more than that will save even more money.

If anyone should be sacrificing anything to curb inflation, it should be the bosses that have benefitted from decades of wage stagnation and record profits. This is why the ACTU and Labor should be demanding a far higher wage rise. Workers’ wages ought to outpace the current round of inflation and have needed a big rise for decades now.

Indeed, far from causing economic harm, a substantial wage rise — something leftist parties like the Greens and the Victorian Socialists are demanding — would provide a much-needed solution to increasingly pressing economic problems. The longer wages are suppressed, the more people will be pushed into poverty, unable to pay for necessities.

This is especially the case given that inflation isn’t the only thing pushing the cost of living up. Rising house and rent prices have made housing increasingly unaffordable. Aggressive student debt repayment cliffs hurt low- and middle-income workers entering the full-time workforce. Fighting for higher wages is not reckless or irresponsible, it’s actually the best thing we can do to improve workers’ living conditions.