IPA uses minimum wage as fodder in interest rate war

Labor leader Anthony Albanese continues to attract scrutiny over his push for the minimum wage to be increased in line with the inflation rate.

The Institute of Public Affairs (IPA) estimates that a 5.1% increase in the minimum wage would add about 2.25% to the inflation rate over the next 12 months. It would, therefore, see mortgage interest rates increase by 57 basis points, which would cost the average homebuyer an additional $3,279 a year in mortgage repayments.

Daniel Wild from the IPA warns that Labor’s proposal would risk a return to “the bad old days” of spiralling inflation and surging interest rates:

The IPA research concludes “an across-the-board wage hike of 5.1 per cent to keep up with inflation would push inflation from 5.1 per cent to at least 7.36 per cent over the 12 months following the wage increase”.

The IPA said in its report, given to The Australian, such a rise in inflation “would push mortgage rates up by 57 basis points, taking the average mortgage rate from the current rate of 4.52 per cent to 5.05 per cent”.

Such a rise in inflation is calculated to “cost the average mortgage holder an extra $273.27 per month in higher mortgage payments, which is $3279 per year” the IPA said…

“Rapid and unanticipated hikes to wages risk sending Australia back to the bad old days of spiralling inflation and rocketing interest rates which will put mortgage holders and small businesses on their knees,” [Director of research at the IPA Daniel Wild said]…

The preliminary IPA analysis is based on the historical relationship between increases to the wage price index, inflation, household mortgage rates and small business lending rates over the two decades from 2000 to 2020.

The Guardian’s Greg Jericho provided a nice counter-point to the IPA’s scaremongering:

It is a true sign of just how so many political and economics journalists are captured by business lobby groups that this is even a story…

Do you think the real wages of the lowest paid in Australia should go backwards?

Do you believe that the solution to rising inflation is that the standard of living of the poorest workers in the country should decline?…

I know I have said this before, but it bears repeating – if wages grow in line with increases in inflation and productivity, they are not inflationary.

Don’t take my word for it – listen to the man appointed by Scott Morrison as the head of the Department of the Treasury. Steven Kennedy said the same in February when testifying before the Senate economics estimates committee: “If we can achieve productivity growth of 1.5%, then [assuming 2.5% inflation] nominal wages can grow at 4% and put no pressure on inflation.”

It’s pretty easy: wages growth = inflation + productivity growth…

Aside from a period during the GFC and just before the pandemic when productivity hit pitiful lows, real wages have consistently grown by less than productivity…

Productivity versus wages

In the 1970s real wages had outpaced productivity, but since the turn of this century? Nope:

Real wages vs productivity

Currently the Reserve Bank of Australia is predicting inflation growing by 5.9% in the 12 months to December and then down to 4.3% by June next year. That means a 5.1% increase would have seen inflation growing faster than or equal to the minimum wage for two years:

Minimum wage vs inflation annual growth

…Even a 5.1% increase won’t make up for the rise in prices…

Real minimum wage

As it is, even a 5.1% increase would see the real minimum wage by next June at a level last seen in 2017…

Wages should grow faster than inflation and if you don’t believe so at least be honest and say you believe living standards should fall – and in this case for the poorest paid workers.

Spot on. In theory, workers should be compensated for inflation plus any labour productivity. Viewed this way, the ACTU’s 5.5% wage claim is not outlandish as the IPA and employer groups claim.

The FWC should ignore the vested interests in the business lobby and examine the macroeconomic data.

At an absolute minimum, the minimum wage should be lifted in line with the inflation rate.

Unconventional Economist

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