Businesses say higher wages will lead to higher prices. Be suspicious
Don’t let businesses and big bosses scare you too much. Earlier this week the workplace referee made a call that upset some people.
Mostly disgruntled were business groups who argued that the Fair Work Commission’s decision to increase minimum wages by 4.75 per cent (and 6 per cent for the lowest-paid workers) from July was too much.
Employers wanted an increase closer to 3.5 to 3.9 percent and warned that the latest decision would push some firms into bankruptcy and force others to increase their prices. This is one of the rare times when they are happy to point out high prices.
From where? Because this is (apparently) out of their control: blame the commission and high fees! And that’s a good way to cushion customers against future price increases, whether they come from higher fees or not.
Now these are not all lies. To the extent that they are implemented, higher fees will come at a cost to businesses. But don’t believe this too much.
One of the arguments put forward by businesses is that they should not have to pay their employees so much more at a time when growth in productivity (our ability to produce and provide goods and services) has long been stagnant. They argue that if workers aren’t getting better at doing the job they are paid for, it doesn’t make sense to pay them more.
Business groups are right to say that the nation’s productivity growth has been stagnating for some time (although the way we measure productivity isn’t perfect). That is, we are not getting that good at using our limited resources, including materials, ingredients, and employee time, to produce more or better quality products or provide more or better quality services.
As the Central Bank and the government have been insisting for some time, the key to raising our living standards is to increase productivity (whether that means being able to consume more goods and services or doing the same amount of work by working fewer hours).
This is especially important when it comes to combating inflation: the increasing level of prices for goods and services. From where? Because prices tend to rise in response to demand exceeding supply. If we increase our productivity, we can increase supply and reduce the price increase while meeting our wants and needs.
In short, business groups argue that it is bad to increase their costs (the wages they pay employees) when there is little productivity growth. All Because this will only lead to higher prices and little change in supply.
But what if the equation actually worked differently? What if you actually got businesses to pay employees more? caused to productivity improvements?
There are two ways this can happen.
First, there is the “efficient wage” theory. Essentially, better pay can reduce staff turnover. If you’re earning a good amount of salary, especially compared to other firms – but not necessarily – you’re less likely to jump into another job because you’re already able to cover your basic needs and maybe a little more.
Changing jobs isn’t necessarily a bad thing (it sometimes helps people find jobs that better suit their skills or spread knowledge across an industry). But if workers are constantly changing jobs or spending time looking at and applying for new roles, this can consume a lot of time and also lead to higher staff turnover, meaning the firms they work for need to direct more of their resources towards hiring and retraining staff (not a particularly efficient use of time).
Higher wages could also reduce the frequency with which people call in sick. From where? Because if they can set money aside for preventive health care, they are less likely to suffer from mental or physical health problems and less likely to be exhausted by working a second job or commuting long distances to make ends meet because they can’t afford to live closer to work.
Workers are probably request work harder. When we feel valued and appreciated, our job satisfaction increases, we trust management more, and we are more likely to want to show up and get to work. We are also less willing to risk getting fired and more motivated to keep our well-paying jobs.
Second, businesses are forced to pay higher wages, pushing them to find ways to get more from their employees. So it encourages them to spend on things that can help their employees complete their jobs more easily and efficiently.
As Richard Denniss, director of the Australia Institute, puts it: “Why would a business invest in a bulldozer if it had cheap labor on hand and could just buy a few shovels instead?” From a business perspective, if employees can get away with spending very little, there is less urgency to invest in helping employees perform better.
Productivity gains are often achieved through spending on technology and ensuring workers have the tools they need to do their jobs better. For example, a cafe with two coffee machines shared by six staff will likely be able to serve more coffee than a cafe with a single machine.
If businesses care so much about increasing productivity, perhaps this could start by paying higher wages. This is particularly true given that many industries in Australia are dominated by a handful of large firms and lack the strong competition needed to push businesses to innovate and invest.
It’s also worth remembering that only one in five workers in Australia is paid minimum wage and bonus pay. Because many work part-time or on a temporary basis and are relatively poorly paid, their wages make up only 11 percent of the country’s total wage bill.
There is, of course, an argument that raising the minimum wage provides a reference point for other workers in the economy who want to negotiate their wages this year: If that’s the reward and minimum wage workers are getting 4.75 percent, why shouldn’t we?
But workers’ bargaining power is likely not strong enough to see this wage increase fully pass through to the rest of the economy, especially given the weakness of unions in many industries compared to much of the 20th century (a period when union membership was higher).
This is another reason why higher minimum wages are unlikely to have a huge impact on overall wages, and – even assuming higher wages will lead to higher prices – we’re unlikely to see the sky falling.
Business groups argue that raising the minimum wage by more than the rate of inflation over the last 12 months for which we have data (and higher than the rate the Treasury and the Central Bank have forecast for next year) would lock in expectations for higher wages and higher prices, leading to a “wage-price spiral”: workers demand higher wages to keep up with rising prices, and firms raise prices to cover this additional cost.
But as economists at the Federal Reserve write, this doesn’t happen If people believe that the central bank will limit inflation and keep it within target. The bank’s recent willingness to raise interest rates – although painful for those with home loans – is likely contributing to people believe in general Inflation will return to the 2 to 3 percent target in the near future.
And of course, a big part of the reason why the Fair Work Commission abolished the minimum wage was to ensure that the lowest paid in our economy could have a decent standard of living.
So although businesses complain that the 4.75 percent increase overcompensates for inflation, many people are actually worse off than before the pandemic because their wages have been rising more slowly than prices for several years.
While a minimum wage increase could drive a few firms into bankruptcy, we should be skeptical of warnings that higher wages will lead to higher prices and that we need to see productivity gains before rewarding wage increases. Logic can actually work the other way around.
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Millie Muroi is the economics writer for The Sydney Morning Herald and The Age. He was previously an economics correspondent for the Canberra Press Gallery and a banking writer in Sydney.Connect with: X or email.
