An increase to the minimum wage won’t affect Reserve Bank decisions on whether to cut interest rates, economists say, despite warnings of low productivity.
The Fair Work Commission lifted the minimum wage by 3.5 per cent on Tuesday, with almost three million low-paid workers set to earn an extra $32 a week.
The changes will come into effect from July, with the minimum wage rising to $24.95 an hour, benefiting more than one-fifth of the workforce.
While the boost in pay packets is set to lead to small growth in the wage price index, economists say the change won’t be substantial enough to alter the likelihood of the Reserve Bank cutting interest rates later this year.
NAB senior markets economist Taylor Nugent said there would be little impact to the wage price index, which is examined by the central bank when deciding to lower the cash rate.
“We don’t see any implications of (the Fair Work Commission’s) decision for our own or official wages growth forecasts,” he said.
“At 3.5 per cent, the increase matches what was delivered in 2017 and is not far above broader wage price index growth.”
CreditorWatch chief economist Ivan Colhoun said the commission’s decision is set to put a lower limit on inflation.
“(The) decision of a real wage increase will tend to put something of a floor under inflation without an improvement in productivity performance,” he said.
“By the same token, real wage increases will be somewhat supportive for consumer spending and economic growth.”
The business sector has hit out at the wage decision, saying the increased labour costs would result in many employers having to lay off staff.
The Council of Small Business Organisations had argued for a wage rise of between two and 2.5 per cent.
Mr Colhoun said the commission’s decision sought to strike a balance between a wage rise for workers alongside uncertainty in the global economy.
“I see some real wage catch up as another important part of rebalancing the economy, though I’m not as convinced by the commission’s argument that this inflationary episode is now behind us,” he said.
“Living costs and business costs remain very elevated and have been a very large part of the pressures on many businesses in this cycle. The rise makes it more important that businesses pursue productivity improvements.”
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