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Why we need to freeze the minimal wage

24 March 2020

5:00 AM

24 March 2020

5:00 AM

Master Grocers Australia, the Australian Industry Group and others should be applauded for their calls to freeze minimum wage increases for the next 12 months, one of the few sensible policy proposals to emerge during the coronavirus crisis.

Australia is very likely to see negative economic growth, and to minimise the impacts businesses need to be able to address cash flow issues. A wage hike will deliver exactly the opposite and put at risk hundreds of thousands of jobs. 

Right now, businesses need cash flow relief. That was partly the aim of the government’s stimulus package, but businesses will not see the cash injections until the beginning of April. For many, this will be too little, too late. They will have no choice but to reduce their costs or close their doors. 

In this environment, jacking up the minimum wage will have a disastrous effect. If the Fair Work Commission, who decide the annual increase, want to drive businesses broke and workers onto the dole, another three per cent rise should do the trick. 

Minimum wage earners can afford to not have a wage increase this year. In fact, they will benefit more if the government allows for a more flexible labour market, where wages are determined by market forces rather than bureaucratic edict. 

Australia already has the highest minimum wage in the world, according to data from the OECD. It has been increased substantially over the past few years, with a 3.3 per cent increase in 2017, a 3.5 per cent increase in 2018, and a three per cent increase in 2019. Meanwhile, inflation was only 1.9 per cent in 2017 and 2018, and 1.6 per cent in 2019. This means that over the past three years the minimum wage has increased 81 per cent faster than prices. 

These increases are unsustainable, and if Australian businesses and workers are to make it through the current downturn relatively unscathed the minimum wage cannot increase again. 

Increasing the minimum wage also jeopardises the role that it plays in society as the first rung in building a successful career. 

Research from the Institute of Public Affairs has demonstrated this point, highlighting that people earning minimum wage quickly move into higher-paid work. After one year, half of low-paid workers move into higher-paid work. After two years this increases to 64 per cent, and after five years a staggering 75 per cent have moved into higher-paid employment.  

As the minimum wage is increased, this first rung becomes more difficult for those entering the workforce to reach. And without it, they are unlikely to gain the necessary skills to move up the income ladder. 

The call from Master Grocers Australia was met with a typical response from Victorian Trade Hall Council secretary Luke Hilakari, who said that “while everyone is trying to pull together, these guys are using the virus as an opportunity to try and cut wages.” 

This trite response demonstrates a complete misunderstanding of the conundrum facing businesses and workers: when cash flows are tight businesses have no choice but to cut costs. Does Hilakari seriously want to see businesses shut down and their workers unemployed for the sake of an increased wage on paper? 

Rigid labour markets are a source of “enormous stress” for many businesses, according to respected Sydney industrial relations lawyer Kyle Kutasi. “I’m getting a call every half an hour from a client who is worried about cash flow,” he says. “They tell me that their shops are empty and that they’re not going to have the money to keep workers on while they wait out the crisis, but if that they let them go then they’ll get done for unfair dismissal. 

“It’s a travesty, and it’s only going to increase and prolong the pain experienced by business owners when they lose their livelihood, and workers when they are forced out of their job.” 

The reality for most small and family businesses is that Australia’s complex industrial relations system makes employing anyone far too expensive. This forces owners to work longer hours, often eating into their nights and weekends when they should be able to focus on spending time with their families or having some downtime. 

According to the World Economic Forum’s Global Competitiveness Index 2019, Australia is ranked an appalling 95th for flexibility of wage determination, out of a total of 141 countries. The high minimum wage creates a structural issue. Australia must improve its ranking if it wishes to see more people employed, allowing them the opportunity to work their way up the income scale as they develop more skills. 

Addressing this structural issue is vital, but that quagmire of a debate can be saved for another day.

The focus right now must be getting through the economic crisis brought about by coronavirus. And to do this, businesses need to be able to adapt their cash flows in order to keep their employees on the payroll.  

Increasing the already-high minimum wage will be devastating for workers and businesses alike. 

John Gray is the executive director of the H.R. Nicholls Society. 

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