Anthony Albanese backs lifting wages by 5.1 per cent – but economists and employer groups warn it could led to higher inflation, interest rates

Anthony Albanese’s support for a 5.1 per cent wage hike in line with current inflation has been slammed by economists and employer groups who warn it will lead to job losses and even higher inflation and interest rates.

Opposition Leader Anthony Albanese has backed lifting wages to match inflation but his support for such a pay increase has been called into question by economists and employer groups.

Mr Albanese on Tuesday said he “absolutely” supported a wage hike by 5.1 per cent – the current annual rate of inflation – but there are warnings lifting pay by that much could push inflation even higher, leading to further increases in interest rates.

“We think no one should go backwards. People should be at least keeping up with the cost of living,” he told reporters in Melbourne. 

The Labor leader was later asked: “You said you don’t want people to go backwards, does that mean you would support a wage hike of at least 5.1 per cent just to keep up with inflation?”. 

“Absolutely,” Mr Albanese responded.  

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His comments came after the ACTU this week said it had “revised its Annual Wage Review claim from 5 per cent to 5.5 per cent” – more than double what industry groups are calling for – “to ensure that the quarter of the workforce who rely on pay increases provided by the Review do not go backwards”.

The Fair Work Commission is currently in the process of carrying out the Annual Wage Review for 2021/22, which impacts the national minimum wage and all award wages. 

The review in 2019 resulted in a 3 per cent pay increase, while in 2020 the increase was 1.75 per cent, and in 2021 the increase was 2.5 per cent. 

Steven Hamilton, Assistant Professor of Economics at George Washington University, told Sky News Australia’s Kieran Gilbert pay increases in response to a “very large inflationary spike” could result in a “wage price spiral”.    

“I think it’s important to start by taking a step back – there are no easy solutions to this problem. We have a very significant inflationary spike, the largest that we’ve had since the mid-90s I think aside the GST,” Mr Hamilton said. 

“And nobody can just wave that away immediately. We have a war in Ukraine putting big pressure on energy prices, we have supply constraints in Shanghai because of lockdowns that are putting big restrictions on supply.

“Nobody can fix that so we have this big shock on prices. If those prices get fed through to higher wages then those higher wages will then get fed through to higher prices and we’re at risk of a sort of an inflationary wage price spiral.

“So the Reserve Bank would be very concerned about significant wage rises putting pressure on inflation and they would respond by raising interest rates.”

Mr Hamilton said wage increases should be matched to productivity as opposed to the rate of inflation.

“Think of it this way, if an inflationary shock is temporary, when that inflationary shock dissipates you have deflation,” he said. 

“So you don’t want to raise wages for a temporary shock which will go away because wages aren’t going to go back down again.”

Asked “would it cost jobs if you did it in that way, for the temporary shock”, Mr Hamilton said “absolutely”. 

“The point we need to be focused on here… there is no simple solution to this short-term cost of living pressures, there’s nobody who can say goodbye to the cost-living pressures,” he said. 

“They’re there, I think what I want to see is a focus on medium term beyond this sort of short term shock, in a year, a year-and-a-half, two years to make sure we grow the economy, increase supply, increase productivity.

“Because then we can have very significant wage increases without having to worry about inflation.”

The Australian Industry Group on Tuesday put forward a “revised proposed minimum wage increase”, from 2 per cent, to 2.5 per cent due to the rise in inflation and interest rates but wared against an “excessive minimum wage increase” due to its impacts on inflation and interest rates.    

“Since we filed our initial submission which proposed a 2 per cent increase in minimum wages, there has been an increase in the Consumer Price Index (CPI), and the Reserve Bank of Australia (RBA) has also made a decisive change in the stance of monetary policy,” Ai Group Chief Executive Innes Willox said.  

“The change in inflation has prompted the RBA to raise its inflation forecasts, including for underlying inflation.

“Despite the changed economic circumstances, it remains critical for the FWC’s Expert Panel to adopt a cautious approach in adjusting wages.

“An excessive minimum wage increase would fuel inflation and lead to higher interest rates on mortgages, personal loans and credit cards than would otherwise be the case. Higher inflation and higher interest rates would have a particularly harsh impact on the low paid.”

Prime Minister Scott Morrison launched a blistering attack on Mr Albanese over his support for lifting wages in line with inflation.  

“Labor talks about making things better,” he said. 

“But if you cannot manage money, if you make things up as you go along as we heard him doing today, making things up on the run about what he thinks wages should be, without talking to people, without actually thinking through the consequences of the things that he’s talking about, just running off at the mouth on important issues like our national economy and national security.

“These type of things need careful, experienced, discipline people who know how to manage an economy and a security environment which is under incredible threat.” 

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