Home Business amount Will a 5% wage increase for workers increase the cost of your coffee and gasoline by the same amount?

Will a 5% wage increase for workers increase the cost of your coffee and gasoline by the same amount?

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The headlines were scary.

They warn that consumers may have to pay $7 for a coffee and $3 for a liter of unleaded gasoline by the end of the year.

Although these forecasts are largely due to factors such as high shipping costs and international movements in the price of oil, the political debate in recent weeks has shifted to the impact that an increase in the wages of workers could have on the costs of daily goods and services. .

Business groups and some of our political leaders have suggested that if the minimum wage increased by around 5%, to keep pace with the skyrocketing cost of living, that would in turn lead to much higher prices for everyday goods and services.

Labor leader Anthony Albanese backed a 5.1 per cent pay rise to keep up with inflation, saying that without it it would mean an effective pay cut for those on minimum wage.

Labor leader Anthony Albanese backed a 5.1% pay rise to keep up with inflation.(ABC News: Nick Haggarty)

“What we are talking about here are the lowest paid workers in Australia… workers who are paid $20.33 an hour, only to be paid $1 more. That is what this debate is about “said Mr. Albanese.

But Prime Minister Scott Morrison argued that it would hurt the economy, as an increase of this magnitude would send the economy into an inflationary spiral.

Scott Morrison gestures as he speaks to a camera while seated in an office
Prime Minister Scott Morrison fears that wage increases of around 5% could be inflationary.(ABC News: Matt Roberts)

A new report from the Australia Institute released today aims to give a real figure on how these goods and services could increase with a 5% increase in wages.

He suggests that raising worker wages by 5 percent — for all workers, not just those on minimum wage — would raise prices across the economy by about 2 percent.

This would mean that a 5% pay rise could mean that a $4 cup of coffee should only go up about 9 cents.

“There is simply no way that a 5 percent increase in all wages, much less a 5 percent increase in the minimum wage alone, could result in price increases of the order of 5 percent,” says one of the report’s authors, The Richard Denniss, chief economist of the Australia Institute.

A man in a blue shirt stands in front of a building.
Richard Dennis says that companies exaggerate the impact of wage increases on their costs as an excuse to increase their profits.(ABC News: Ian Cutmore)

He argues that companies exaggerate the impact of wage increases on their costs as an excuse to increase their profits.

Wage hikes won’t lead to higher interest rates: report

The report suggests that wages make up around 25% of business costs in Australia, meaning that for an average business, a 5% increase in total payroll would only increase costs by 1.3%.

Even in labor-intensive industries like retail, wages represent only 38.8% of total costs, which means that a 5% increase in all retail wages would result in a cost increase of only 1.9%.

And since wages are only 35% of the restaurant industry, a $4 coffee would only need to increase by 9 cents to cover the wage increase.

He said the analysis likely overstates the impact of higher wages on costs for a number of reasons, including that “we ignore the benefits to employers of labor productivity growth, which reduces labor costs by more than 1% per year, and we assume that all of the price increases in the supply chain occur instantaneously rather than being spread out over the next few years.”

Chart
The Australia Institute says a 5% increase in workers’ wages will only lead to a 2% increase in most goods and services.(Provided.)

Salary growth forecasts

On Wednesday, the ABS will release its latest Wage Price Index data, and in June, the Fair Work Commission will release its ruling on the minimum wage.

Most economists expect the quarterly and annual numbers to rise, but don’t expect them to be so high that they will force the Reserve Bank to raise rates more aggressively than expected.

ANZ Chief Economist Catherine Birch says there are huge economic benefits to ensuring people on low wages don’t see their wages fall as much as they would without a solid wage increase. minimum wage.

“If there was the 5.1% increase in the minimum wage that Mr. Albanese talks about, there would be inflationary effects, but the increase in inflation would be less than the increase in nominal wages. [that is the increase without adjusting for inflation].

Catherine Birch, ANZ Chief Economist, types on her laptop at her dining table.
Catherine Birch says Wednesday’s payroll data is expected to show only a modest increase in wages.(ABC News: Peter Healy)

ANZ predicts that by the end of the year, wages will have reached 3.5% and next year, 4%, which will have an inflationary impact. They take into account that the Reserve Bank will raise rates to 2.25% by May next year.

But Ms Birch suggests Wednesday’s data should show only a modest increase in wages.

“We only have 2.5% [annual rate] taken into account. But we are forecasting a quarterly increase of 0.8% and if we get that, it would be the strongest result in nearly a decade.

She says the figure would have to be higher than the Reserve Bank’s to raise rates higher than expected.

Barrenjoey Capital Partners’ chief economist, Jo Masters, said they were also factoring in an annual rate of wage growth of 2.5%.

And that means they are sticking to their expectation that the Reserve Bank will raise rates by 25 basis points in June, which would push the cash rate up from 0.35% to 0.60%.

But if the payroll data beats market economists’ expectations of a 2.5% increase, it suggests rates could hit 0.75% in June.

Ms. Masters argues that the problem is whether real wages increase, but productivity does not.

Barrenjoey Capital Partners' chief economist, Jo Masters, sits next to a window.
Jo Masters says the inflationary problem occurs if real wages increase, but productivity does not.(ABC News: John Gunn)

“Wages contribute to inflation in two ways,” she says.

“The first is direct. We know that for merchant services – things like hairdressing, vets, dry cleaning and haircuts – those salaries are a big part of the cost. And so when you get growth wages, if it is not offset by productivity gains, these companies must increase their prices.

“Right now, supply is disrupted by global events, including a supply chain distortion. But low productivity growth means you’re not driving the supply side of the economy. Basically, for a business, if productivity is as fast as wage growth, it’s not as inflationary.”

“Productivity is notoriously difficult to measure, but over the past 5-10 years Australia has had very low productivity growth.”

A generic photo of a hotel employee
Salaries represent approximately 35% of the costs of the restaurant industry.(Photo: Unsplash.com)

Ms Masters says that during the pandemic Australian businesses have been unable to pass on price increases.

“An ABS survey released last week found that 50% of companies that [saw an] rising production costs had passed on some or all of that,” she says.

But she said Wednesday’s payroll data likely won’t show the full impact of wage increases in the economy, but data for the September quarter, which will take into account the minimum wage increase, will. .