Don’t let business and big bosses scare you too much. A workplace referee earlier this week made a call that angered some people.
Often, those who were dissatisfied were business groups debating the Fair Work Commission’s decision to raise the minimum wage for 4.75 percent (and by 6 percent for the lowest paid workers) from July was too much.
Employers wanted the increase to be closer to 3.5 to 3.9 percent, and warned the latest decision would push some companies out of business while forcing others to raise prices. It’s one of the few times they’re happy to draw attention to a high price.
Why? For reasons (apparently) out of their control: blame the commission and high salaries! And it’s a good way to soften customers for future price hikes – whether caused by higher wages or not.
Now, it’s all not a lie. Higher wages, to the extent that they are asking for them, will cost the business. But don’t buy into it too much.
One of the arguments made by businesses is that they shouldn’t pay their workers more when productivity growth (our ability to make and deliver goods and services) has stagnated for so long. If workers don’t do well what they’re paid to do, they argue, it makes no sense to pay them more.
Business groups are right when they say productivity growth in the country has been the talk of the town for some time (although the way we measure productivity is not perfect). That is, we are not getting better at using our limited resources – including ingredients, materials and labor time – to make more, or better quality, products, or to provide better or better services.
And as the Reserve Bank and government have been emphasizing for some time, the key to raising our living standards – whether it’s being able to consume more goods and services, or working fewer hours while doing more – is through raising productivity.
This is especially important when it comes to dealing with inflation: the rate at which the prices of goods and services rise. Why? Because prices tend to rise as a response to demand outstripping supply. If we improve our production, we can increase supply, thereby helping to reduce price growth while meeting our wants and needs.
In short, business groups argue that increasing their costs (the wages they pay workers) when there has been little productivity growth is bad for all of them ours because it will result in higher prices and very little change in supply.
But what if the equation worked the other way around? What if you get a business to pay more employees really really guided for productivity improvement?
There are two ways this can happen.
First, there is the “efficiency wage” theory. Basically, better pay can reduce employee turnover. If you are paid a decent amount, especially – but not necessarily – compared to other companies, you are less likely to jump to another job because you can already meet your basic needs and maybe a little more.
Changing jobs is not a bad thing (sometimes it helps people find jobs that better suit their skills or spread skills across industries). But if employees are constantly changing jobs or spending time looking for and applying for new roles, that can be time-consuming and also lead to overstaffing, meaning that the companies they work for have to direct more of their resources towards hiring and retraining employees (not a productive use of time).
A higher salary can also reduce how often people call in sick. Why? Because they are less likely to suffer from mental or physical problems if they can set aside money for preventive health care, and they are less likely to tire of working a second job to support themselves or commuting long distances because they cannot afford to live close to work.
Employees are also likely to to want work harder. When we feel valued and appreciated, we 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 have to pay higher wages, it pushes them to find ways to get more from their workers. That is, it pushes them towards the use of things that can help their employees complete their work more easily and efficiently.
As Australia Institute director Richard Denniss says: “Why would a business invest in a bulldozer if they have cheap labor and can buy some plows instead?” From a business perspective, there is less urgency to invest in helping their employees perform better if they can avoid spending too little on them.
Productivity gains are often achieved through the use of technology and ensuring employees have the tools they need to do their jobs better. A cafe with two coffee machines shared among six employees, for example, will probably be able to serve more coffee than a cafe with one machine.
If businesses really care about productivity gains, it probably starts with paying higher wages. This is especially true given that many Australian industries are dominated by a few large companies and lack the strong competition needed to drive businesses to innovate and invest.
It’s also worth noting that only one in five Australian workers is paid according to the minimum wage and awards. And because most of them work part-time or casually, and are underpaid, their wages are about 11 percent of the country’s total wage bill.
There is, of course, an argument that raising the minimum wage provides a benchmark for other workers across the economy when they want to negotiate their wages this year: if these workers on the award and minimum wage earned 4.75 percent, why shouldn’t we?
But mainly due to the weakness of unions in many industries compared to most of the 20th century (when union membership was higher), the bargaining power of labor is probably not strong enough to see this wage increase fully spread throughout the economy.
That’s another reason why higher wages are unlikely to have a big impact on overall wages and – even if we assume higher wages lead to higher prices – we’re unlikely to see the sky fall.
Business groups argue that raising the minimum wage by more than the rate of inflation in the most recent 12 months for which we have data – and higher than the level predicted by the Treasury and the Reserve Bank in the coming year – will hinder expectations of higher wages and higher prices, leading to what is called a “wage price spiral”: where workers demand higher wages to compensate for companies’ prices to increase prices.
But as Central Bank economists have written, this is not happening if people believe that the central bank will reduce and keep inflation within the target. The willingness of banks to raise rates recently – a painful time for those with mortgages – probably contributes to people generally believe inflation will return to somewhere between the 2 to 3 percent target in the near future.
And, of course, a big part of the reason why the Fair Work Commission raised the minimum wage was to ensure that those who are among the lowest paid in our economy can maintain a decent standard of living.
So while businesses may bemoan the 4.75 percent increase as overcompensating for inflation, many people are still worse off than they were before the crisis because their wages have grown more slowly than prices for several years.
While minimum wage increases may drive a few firms out of business, we should be skeptical of their warnings that higher wages will lead to higher prices, and that we need to see improvements in productivity before awarding wage increases. Logic can actually work in reverse.
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Millie Muroi is an economics columnist for The Sydney Morning Herald and The Age. He was previously an economics journalist based at the Canberra Press Gallery and a banking correspondent based in Sydney.Connect through X or email address.
