Why the big minimum wage rise will push Australia into recession as inflation, ... trends now

Why the big minimum wage rise will push Australia into recession as inflation, ... trends now
Why the big minimum wage rise will push Australia into recession as inflation, ... trends now

Why the big minimum wage rise will push Australia into recession as inflation, ... trends now

Australia's biggest minimum wage rise in 33 years will only lead to more interest rate rises and spark a recession, a leading expert fears.

The Fair Work Commission on Friday awarded an 8.65 per cent increase to Australia's lowest paid workers, two days after another inflation shock.

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

Justice Adam Hatcher, the Fair Work Commission's new Labor-appointed president, argued the big increase would only affect 0.7 per cent of Australian workers on July 1, with just 184,000 employed under the national minimum wage.

'Because of the negligible proportion of the workforce to which the national minimum wage applies, this outcome will not have discernible macro-economic effects,' his judgement 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 employed under collective enterprise bargaining agreements to demand higher wages.

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

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Australia's biggest minimum wage rise in 33 years will only lead to more interest rate rises and spark a recession, a leading expert says (pictured is a Sydney bartender)

Australia's biggest minimum wage rise in 33 years will only lead to more interest rate rises and spark a recession, a leading expert says (pictured is a Sydney bartender)

'That will influence wage demands right through the economy and therefore run the risk that we'll end up with much higher wages growth than the RBA is comfortable with. 

Historically big rises in the minimum wage

1990: 9.2 per cent as minimum wage increased to $311.30 from $285.10 but the increase was staged in six-month blocks

2023: 8.65 per cent as minimum wage increased to $882.89 from $812.60 based on new classifications; 5.75 per cent for those on modern awards

2006: 5.7 per cent as the minimum wage increased to $511.86 from $484.40 during mining boom

2022: 5.2 per cent as the minimum wage increased to $812.60 from $772.60 which was slightly above inflation, than at a two-decade high

Source: Fair Work Commission's The History of the Australian Minimum Wage; Annual Wage Review for 2022-23

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'Only 0.7 per cent of people get the minimum wage but people see the headlines - "8.6 per cent rise in the minimum wage" - that affects people's expectations more generally and that's what will worry the RBA.

'It means more interest rate hikes, so the RBA is worried if wages growth keeps accelerating, then it will bake in higher inflation because companies will just put their prices up.' 

ANZ on Friday adjusted its forecasts to have the Reserve Bank of Australia increasing interest rates two more times, to 4.35 per cent, which would be the highest since December 2011.

It had previously expected one more rate rise, like National Australia Bank, on the existing 11-year high rate of 3.85 per cent. 

Two more 0.25 percentage point rate rises would mean an average borrower with a $600,000 mortgage would see their monthly repayments climb by another $195 to $3,828, up from $3,633 now for a home owner on a six per cent variable rate.

This dire forecast means this borrower with a 20 per cent deposit would have seen their annual repayments soar by $18,264 since early May 2022, back when the RBA cash rate was still at a record-low of 0.1 per cent and the banks were offering variable rates starting with a 'two'.

Dr Oliver is forecasting a 4.1 per RBA cent cash rate - enough to spark a recession - but said it was possible the Reserve Bank would raise rates even higher.

'We're just debating whether the next hike is going to be in July or June - they're obviously moving to another hike,' he said.

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

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