5% Pay Rise Would Still See Big Business More Profitable Next Year

Research released today reveals that companies like Woolworths and the Commonwealth Bank are under no pressure to pass on a 5% increase in the minimum wage as a 5% increase in their prices.

The research finds that boosting workers’ wages by 5%  would lead to an increase in prices across the economy of less than 2%. This would mean a 5% wage increase would mean a $4 cup of coffee would increase by about 9 cents. This conservatively accounts for all workers receiving a 5% wage increase, not just those on the minimum wage as has been recently debated.

Key Findings:

• Wages account for only 25.3% of business costs in Australia which means that for an average firm a 5% increase in all of their workers wages would only push up costs by 1.3%.

• Even in labour intensive industries like retail, wages only account for 38.8% of total costs meaning a 5% increase in all retail workers wages would see costs rise by only 1.94%

• As wages account for only 35% of the food and beverage service industry a $4 coffee would only need to rise by less than 10 cents to cover increased wages.

• Between 2020 and 2021 Woolworths profit rose by $797 million but if all of its wages had grown by an additional 5% the extra cost would have been only $430 million meaning it could easily meet an increase in the minus wage while still delivering profit growth.

• Businesses exaggerating the impact of wage rises on their costs as an excuse to boost profits is more likely to put pressure on inflation and interest rates than a 5.1% increase in the minimum wage.

• Even when the ‘second round’ impact of wage increases on the entire supply chain are included the impact of a 5 % increase in all workers wages on prices is less than 2%, well below the RBA target range of 2-3%.

“Our research shows that if companies like Woolworths or the Commonwealth bank increased their wages by 5% across the board, they would still make more profit next year than they did this year,” said Dr. Richard Denniss, Chief Economist at the Australia institute.

“Because labour costs account for only 25.3% of the total costs of Australian business, a 5% increases in their wages would only lead to a 1.85% increase in their labour costs, even after taking into account the impact on wages in the supply chain.

“While it’s true that some industries are more labour intensive than others, even for the cafe industry, which is more labour intensive than average, workers only account for 35% of total costs.

“Even when the impact of higher wages are included into all the entire supply chain, the cost of a $4 coffee should only rise by 2.3%, or less than 10 cents. And keep in mind, that’s assuming all workers got a 5% pay rise, not just those on the minimum wage which has been the main debate recently.

“Our analysis shows that even if all workers got a wage rise of 5% it would lead to a small increase in inflation that is below the RBA target range and, of course, if the wage rise was restricted to those on the minimum wage the impact on costs would be much smaller.

“Our analysis likely overstates the impact of a wage rise on costs for a number of reasons including that we ignore the benefits to employers of labour productivity growth, which lowers labour costs by over 1% per year and we assume that all of the increased prices in the supply chain happen instantly rather than being spread out over the next few years.

“There is just no way that a 5% increase in all wages, let alone a 5% increase in the minimum wage alone, can lead to price increases of anything like 5%.

“Inflation in Australia is more at risk from a profit grab than it is from a wage breakout, and it’s irresponsible that so many firms would be using small wage increases to justify big increases in their profit margin.”

The report, ‘Wage Price Spiral or Price Wage Spiral? The Role of Profits in Causing Inflation’, by Matt Saunders and Richard Denniss, was released today by the Australia Institute. It uses the Australian Bureau of Statistics Input Output Tables to calculate the labour/cost ratio for 153 industries and in turn estimate the likely increase in costs for each industry of a 5% increase in labour costs.

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