Minimum wage adjustments unlikely to drive inflation, study finds

Recent analysis in Australia shows no consistent link between minimum wage hikes and inflation, challenging traditional economic narratives.
By: | March 25, 2024

Amidst discussions surrounding potential increases to the minimum wage and adjustments to the pay rates, an analysis by the Centre for Future Work at the Australia Institute suggested that such adjustments are unlikely to significantly impact inflation.

Titled The Irrelevance of Minimum Wage to Future Inflation, the study examined data since 1997, revealing no consistent correlation between minimum wage hikes and inflation in Australia’s contemporary economic context.

The study indicated that last year’s increase in the minimum wage by 8.65% and other award wages by 5.75% partially mitigated the impact of recent inflation on low-wage employees. Despite this adjustment, inflation saw a decline of three percentage points. This challenges the traditional narrative linking minimum wage hikes to inflationary pressures.

The study further argued that a 5-10% increase this year would not only counteract inflation but also bring low-wage employee salaries back in line with pre-pandemic trends. Even if employers raise prices in response to a wage hike, the overall impact on inflation is predicted to be minimal.

The Centre for Future Work took the analysis a step further, suggesting that a 10% wage increase could be entirely absorbed by a modest 2% reduction in corporate profits, which remain historically high.

READ MORE: Australian wages and demand for labour expected to grow in 2024

Greg Jericho, Chief Economist for the Australia Institute and Centre for Future Work, said, “Australia’s lowest paid employees have been hardest hit by inflation since the pandemic. 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.”

“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.”