Why the big minimum wage rise will push Australia into recession as inflation, interest rates rise

Australia’s biggest minimum wage increase in 33 years will only lead to more rate hikes and trigger a recession, a leading expert fears.

The Fair Work Commission granted an 8.65 percent raise to Australia’s lowest-paid workers on Friday, two days after another inflationary shock.

This was the most generous annual pay review for retail and hospitality workers since 1990, when extremely high Reserve Bank of Australia interest rates led to a recession a year later.

Judge Adam Hatcher, the new Labor-appointed president of the Fair Work Commission, argued that the big increase on July 1 would affect just 0.7 percent of Australian workers, with just 184,000 workers below the national minimum wage.

“Because of the negligible share of the labor force to which the national minimum wage applies, this outcome will have no observable macroeconomic effects,” he said.

But AMP chief economist Shane Oliver said while only a small number were directly affected, the huge increase would encourage the 35 per cent of Australian workers who work under collective bargaining agreements to demand higher wages.

“The problem is there is an influencing effect,” he told Daily Mail Australia on Friday.

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That will impact wage demands across the economy and run the risk of seeing wage growth much higher than the RBA is comfortable with.

“Only 0.7 percent of people are getting the minimum wage, but people are seeing the headlines — “8.6 percent increase in minimum wage” — that affects people’s expectations in general and that’s what worries the RBA.

“It means more rate hikes, so the RBA is concerned if wage growth continues to accelerate, it will fuel higher inflation because companies will simply raise their prices.”

ANZ on Friday revised its forecasts to allow the Reserve Bank of Australia to raise interest rates twice more, to 4.35 per cent, which would be the highest since December 2011.

Previously, it had expected another rate hike, as did National Australia Bank, at the existing 11-year high of 3.85 percent.

Two additional rate hikes of 0.25 percentage points would mean that an average borrower with a $600,000 mortgage would see their monthly payments increase by another $195 to $3,828, up from $3,633 now for a variable rate homeowner of six percent.

This gloomy forecast means this borrower with a 20 percent down payment would have seen annual repayments increase by $18,264 since early May 2022, when the RBA cash rate was still at a record low of 0.1 percent and banks were floating rates. offered. starting with a ‘two’.

Dr. Oliver forecasts a cash rate of 4.1 percent of the RBA cent — enough to spark a recession — but said it was possible the Reserve Bank could raise rates even further.

“We’re just debating whether the next increase will be in July or June — they’re obviously moving to another increase,” he said.

“Each incremental rise in interest rates brings us closer to a recession.

“It’s quite possible we’ll get two more now – I’m not ruling that out.

“It’s a terrible situation for homeowners – some may see a pay rise from this, but it won’t make up for the extra amount they have to pay on their mortgage.”

The RBA has raised rates 11 times in the past year and could do so again on Tuesday after new official data showed inflation rose to 6.8 percent in April from 6.3 percent in March.

“We’re already seeing a lot of evidence, evidence that the economy is starting to weaken — retail sales, home construction is clearly falling rapidly, corporate investment plans are starting to slow down,” said Dr. Oliver.

Monthly figures from the Australian Bureau of Statistics showed that the consumer price index was uncomfortably above the target of two to three percent of the RBA.

The RBA’s rate hikes since May 2022 are the most severe since the RBA set a target for cash interest in January 1990.

At the time, the spot rate was 17.5 percent, with an inflation rate of 8.7 percent in the March quarter of 1990.

Inflation had more than halved to 3.3 percent in the June quarter of 1991, but by then Australia was already in recession.

Dr. Oliver fears the Reserve Bank’s focus on reducing inflation – which reached a 32-year high of 7.8 percent in 2022 – could repeat history and trigger another recession.

“We know from the late ’80s, early ’90s — when interest rates rose dramatically, kind of like now, everything is fine until it’s not anymore,” he said.

‘Then you suddenly realize that you are in a recession.

“I have to admit I’m starting to worry a lot about the outlook.”

The Fair Work Commission on Friday granted a 5.75 per cent increase in the minimum wage and national rewards, which will affect the wages of 2.67 million Australians – or one in four workers.

But a change in industry classifications means the small number on the national minimum wage will effectively receive an 8.65 percent increase on July 1.

The national weekly, minimum wage rises with $70.29 a week to $882.89, based on this higher number, raising fears of an outbreak of inflation and more rate hikes as annual full-time salaries rise to $45,910, up from $42,255.

The annual wage review decision directly affects 184,000 minimum wage workers in retail, hospitality, tourism and aviation, but will affect many more workers on national awards starting early next month.

More than 20 per cent of Australian workers, or 2.5 million of the workforce, receive modern pay, compared to 35 per cent working under corporate bargaining and 41 per cent on individual contracts.

The RBA expects the wage price index — for all workers — to reach 4 percent this year for the first time since 2009, during the global financial crisis.

This includes the effect of a 15 per cent wage increase for aged care workers and an end to the 2.5 per cent pay cap in NSW and a similar 1.5 per cent restriction in Victoria.

An absence of productivity growth during a wage rise exacerbates inflation.

“You have to have an element of productivity growth to support higher wages, otherwise companies will just see their costs go up, without any productivity savings to offset, so they’ll just pass that on to customers,” said Dr. Oliver.

While Australia went through a covid lockdown recession in 2020, it hasn’t experienced a technical downturn from higher interest rates since 1991 – in an era of double-digit unemployment that’s nearly triple the current unemployment rate of 3.7 percent.