The Irrelevance of Minimum Wages to Future Inflation

Minimum and award wages should grow by 5 to 10 per cent this year
by Jim Stanford and Greg Jericho

A significant increase to the minimum wage, and accompanying increases to award rates, would not have a significant effect on inflation, according to new analysis by the Centre for Future Work at the Australia Institute.
The analysis examines the correlation between minimum wage increases and inflation going back to 1997, and it finds no consistent link between minimum wage increases and inflation.

The report, co-authored by Greg Jericho (Policy Director) and Jim Stanford (Director), finds that a minimum wage rise of between five and 10 per cent in the Fair Work’s Annual Wage Review, due in June, is needed to restore the real buying power of low-paid workers to pre-pandemic trends, but would not significantly affect headline inflation.

Key findings of the report include:

  • Last year’s decision, which lifted the minimum wage by 8.65 per cent and other award wages by 5.75 per cent, offset some but not all of the effects of recent inflation on real earnings for low-wage workers.
  • At the same time, inflation fell by 3 full percentage points.
  • There has been no significant correlation between rises in the minimum wage and inflation since 1997.
  • Raising wages by 5 to 10 per cent this year would offset recent inflation and restore the pre-pandemic trend in real wages for award-covered workers.
  • Even if fully passed on by employers, higher award wages would have no significant impact on economy-wide prices.
  • A 10 per cent increase in award wages could be fully offset, with no impact on prices at all, by just a 2 per cent reduction in corporate profits – still leaving profits far above historical levels.

“Australia’s lowest paid workers have been hardest hit by inflation since Covid. There is a moral imperative to restore quality of life for these Australians and this analysis shows that there is no credible economic reason to deny them,” Jericho said.

“It’s vital the Fair Work Commission ensure that the minimum wage not only keeps up with inflation, but also grows gradually in real terms – as was the trend before the pandemic.

Full report