Playing catch up on wage growth

ANZ Research expects the Expert Panel of the Fair Work Commission (FWC) to award a 4.0–4.5 per cent nominal increase to the national minimum wage (NMW) and modern award minimum wages in its 2021-22 Annual Wage Review.

Click image to zoom Tap image to zoom

For the NMW, this would equate to an increase of 81 to 91 cents per hour from the current $A20.33 per hour. This would be the largest percentage increase since 2010 when there was some catch-up following the freeze in the wake of the Global Financial Crisis.

“ANZ Research thinks the Fair Work Commission will recognise the need for some “catch up” for minimum and award wage earners after two small increases in the past two years during the pandemic.”

However, as it would be less than current headline inflation, it would still amount to a cut in real wages, especially as inflation continues to accelerate.

The average nominal increase to the NMW between 2010 and 2019 (pre-pandemic) was 3.1 per cent. The wage price index (WPI) averaged 2.6 per cent year-on-year growth over the corresponding period. When the average increase in the NMW was a larger 3.8 per cent between 1999 and 2009, average WPI growth was a much stronger 3.7 per cent year-on-year.

Middle ground

ANZ Research has been factoring in an increase of 4.0–4.5 per cent to the NMW and minimum award wages for some time. This would be somewhere in the middle of recommended increases from unions and business/employer groups

  • ANZ Research thinks the FWC will recognise the need for some “catch up” for minimum and award wage earners after two small increases in the past two years during the pandemic. A key argument used against larger rises in those reviews was the risk that it would result in lower labour demand and a slower employment recovery but with 423,000 job vacancies currently, that is not an issue.
  • The stronger economic position and tightness in the labour market are further reasons for a larger increase.
  • The highest inflation in two decades, and how it affects both businesses and workers, will be a key consideration for the panel. In the 2020-21 review, the FWC noted awarding an increase which is less than increases in prices and living costs would amount to a real wage cut. Such an outcome would mean that many award-reliant employees, particularly low-paid employees, would be less able to meet their needs. For some households such an outcome would lead to further disadvantage and may place them at greater risk of moving into poverty.
  • The FWC will also take into account the 0.5 percentage point increase in the Superannuation Guarantee from 1 July as it did last year.

ANZ Research does not expect further deferrals for some industries as were seen in the past two years due to the exceptional circumstances of the pandemic. A minimum and award wage increase of 4.0–4.5 per cent is an important assumption in forecasts for nominal wage growth to accelerate above 3 per cent year-on-year this year.

If the increase undershoots our expectations, wages growth will likely be weaker than expected. And vice versa.

Independent decision

The FWC is required to conduct an annual review of the NMW and modern award minimum wages. As part of this review, federal and state governments, unions/employee groups, business/employer groups, social services groups and other parties make submissions on what the FWC should consider in its decision. In some cases, this includes a quantified recommendation on the size of any variation.

In the current 2021-22 review, quantified submissions range from no increase to 6.5 per cent. The Australian Council of Trade Unions has recommended a 5.5 per cent increase, slightly above first quarter headline inflation, while recommendations from some major business groups like the Australian Industry Group (2.5 per cent) and the Australian Chamber of Commerce and Industry (up to 3 per cent) have been larger than usual.

Most governments do not tend to quantify a recommended change but the Victorian Government has recommended a rise of at least 3.5 per cent. Prior to the election, when the Coalition was in government, its submission did not quantify a recommended change but noted “the outcome of the Annual Wage Review should support the economy and labour market, balancing improving living standards for Australians with ensuring the viability of employing businesses.”

Labor did not make a submission to the review prior to its election (and a majority Labor government has not yet been confirmed at the time of publishing) but, during the campaign, now Prime Minister Anthony Albanese said he “absolutely” supports a 5.1 per cent increase to the NMW (not award wages). This would be in line with first quarter annual headline inflation. It is unclear whether Labor will formally recommend this to the FWC.

Australian Treasurer Jim Chalmers has said the Labor Government “intend[s] to make a submission” but this followed his earlier comments that “the Fair Work Commission already knows our view”.

Young, female and low-paid

The FWC’s decision affects the minimum wage and award wage system, although changes determined can be different for each.

Almost a quarter of non-managerial employees in Australia have their pay set according to minimum or award wages. Some enterprise bargaining agreements (EBAs) are also affected by minimum and award wage rates. Overall, the Reserve Bank of Australia (RBA) estimates up to 40 per cent of employees in Australia are directly or indirectly affected by the review.

A much higher proportion of wage-earning women (28.1 per cent) are on award wages compared with men (21.0 per cent). Women are also more likely to have their pay set under EBAs. Consequently, a much lower share of women are on individual arrangements than men. Younger workers and employees of small-to-medium-sized businesses are also disproportionately likely to be on award wages.

By industry, accommodation and food services has the highest share of workers on award wages at 63.0 per cent while the two largest employing industries (health care & social assistance; retail) are also well above average. Workers in lower paid occupation groups like community and personal service workers (44.5 per cent), labourers (42.3 per cent) and sales workers (34.4 per cent) are also more likely to be on awards.

The average weekly total cash earnings of a male full-time employee on award wages is $A1,275.30, well below the $A2,016.30 for those on collective agreements and $A1,926.10 on individual arrangements. It’s a similar case for females, although the gaps are materially smaller. Interestingly, average weekly total cash earnings for full-time workers are higher for females ($A1,322.10) than males.

The propensity for different groups to be on award (or EBA) wages versus individual arrangements is important because RBA research shows “wages growth in individual agreements is most responsive to changes in labour market conditions”. This is the case now.

Wage growth in individual arrangements is accelerating and increasing its contribution to overall wage growth in response to the tightness in the labour market whereas wage growth in awards and EBAs is not. This suggests for younger, female, lower-paid workers, average wage growth will be slower to pick up and more dependent on the size of the NMW and award wage outcome.

Watch this space

The closing date for final submissions to the FWC’s review is 7 June, following the national accounts data on 1 June. Changes need to be in effect from 1 July “absent exceptional circumstances” and the FWC needs to give employers sufficient time to make these changes.

In 2020, the deadline for final submissions was 9 June with the decision announced on 19 June. In 2021, it was 8 June and 16 June respectively. As such, while there is no set date for the decision, ANZ Research expects it will be announced in mid-June.

Catherine Birch is Senior Economist at ANZ

The views and opinions expressed in this communication are those of the author and may not necessarily state or reflect those of ANZ.

editor's picks

23 May 2022

Election aftermath: a new era of policy

Richard Yetsenga | Chief Economist, ANZ

ANZ Chief Economist Richard Yetsenga examines the issues that will dominate the economic agenda post-election.

02 May 2022

Economic shorts: watching rates, inflation

Adelaide Timbrell & Catherine Birch | Senior Economists, ANZ

There is a lot of focus on inflation and cash rates in Australia today – and there will be more. But what happens when they move and how does it impact the economy?