A note on the Fair Work Commission’s minimum wage review

The size of the increase in the minimum wage provided for in the Fair Work Commission’s review is at the higher end of expectations.

The Commission announced a ‘headline’ 5.75 per cent increase in the national minimum wage and for minimum rates of pay specified in modern awards to take effect from 1 July 2023.

However, a technicality means that the national minimum will increase by 8.6 per cent for those on the lowest awards. This is because the minimum wage was also realigned to the ‘C13 award classification’, which has a slightly higher rate than the C14 classification previously used.

The net effect is to increase the national minimum wage by $1.85 to $23.23 per hour.  For a 38-hour week, that equates to an increase of $70.30 per week, to $882.74.

The decision was always going to be a tough call, weighing up concerns about households’ cost-of-living pressures against any potential inflationary effect that would make the Reserve Bank’s efforts to rein in inflation more difficult and possibly prompt further interest rate rises.

With annual inflation currently running at around 7 per cent, we anticipated an increase something shy of full indexation, and in the vicinity of 5 to 6 per cent. That fits with the 5.75 per cent headline figure.

The 8.6 per cent increase in the national minimum wage for the lowest award holders is certainly a surprise, but the Commission argues the increase will not be inflationary. This is because less than 1 per cent of workers are on the lowest minimum rate and by far the majority – around 20 per cent – are covered by the minimum rates in modern awards.

One argument for neutrality is to increase minimum wages to match annual CPI. However, this invites as a second consideration whether the minimum wage increase should in some sense compensate for the previous year’s price inflation on the one hand, or reflect contemporaneous inflation on the other.

The recent Federal budget estimates annual CPI of 6 per cent over the year to June 2023, but projects prices to rise by 3.25 per cent over the 2023-24 financial year. In that sense, the 5.75 per cent increase to be received by most minimum award wage holders leans more towards the former.

While the decision should not put pressure onto the current rate of inflation, it does serve to put something of a floor under the rate, and this may make the job of bringing inflation down to the 2 to 3 per cent RBA target range harder.

Many minimum wage workers are in industries that are highly competitive, such as restaurants and hospitality, so there will be effects on businesses that will be exacerbated if the economy slows as expected over the coming year.

It’s worth remembering that adjustments to minimum wages are a rather blunt instrument for addressing families’ cost of living pressures.  Minimum wage workers do not necessarily live in low-income households.  Many are secondary income earners or students and are spread quite evenly across deciles of household income.

Professor Mike Dockery
Principal Research Fellow
Bankwest Curtin Economics Centre