Labor’s proposal for above inflation pay rises could be “disastrous” for the economy as prices are expected to lift more than five per cent this year, a leading economist has warned.
The Albanese government will recommend the Fair Work Commission give minimum wage workers an “economically sustainable real wage increase”.
This would mean the minimum wage rise will exceed the rate of inflation – which is already well outside the Reserve Bank of Australia’s two to three per cent target band at 3.7 per cent.
Inflation is expected to surge upwards of five per cent due to oil supply constraints, which have caused petrol and diesel prices to surge.
Capital Economics head of APAC Marcel Thieliant warned of catastrophic consequences for the economy if Labor’s wishes are greenlit.
“If they’re calling for a hike of above inflation this year, that would be disastrous because on our forecast we have inflation averaging five per cent this year,” he told Business Now.
“If they want to beat that, they need to give an extraordinarily large minimum wage hike that would add to this inflationary spiral that we’re now seeing.”
The call for an above inflation pay rise comes as Australia’s productivity growth remains at one per cent per year.
Mr Thieliant said this made offering a minimum wage increases like the one Labor was calling for challenging.
“Even if you use last year’s (inflation) measure (of 3.8 per cent), it’s a bit difficult to justify an above inflation pay hike because productivity growth is still very weak,” he said.
“Politically, obviously they have no choice because people will scream if you don’t give an above inflation pay hike.
“But in terms of the underlying inflationary stance, restraint would be the right decision.”
Labor has not given a specific wage increase recommendation, but only said it should exceed inflation.
Employment Minister Amanda Rishworth and Treasurer Jim Chalmers issued a joint statement on Thursday saying the wage rises would help Australians battling myriad economic challenges.
“An economically sustainable real wage increase is consistent with underlying inflation returning to the Reserve Bank of Australia’s (RBA) target band in 2026-27 and will provide further relief to lower income workers who are still doing it tough,” the statement said.
“Conflict in the Middle East is compounding global economic uncertainty, and putting pressure on fuel prices, inflation and on family budgets.”
Discord has erupted between unions and employers over what an appropriate pay rise would be.
The Australian Council of Trade Unions has pushed for a five per cent lift in the minimum wage.
This would increase the minimum wage to $26.19 per hour and the annual full-time rate by $2,465 to $51,761.
Employers have called for a more modest wage increase and warned anything higher than inflation could add to price pressures.
The Australian Chamber of Commerce and Industry backed a 3.5 per cent increase while the Australian Restaurant and Café Association proposed a pay bump between 3.5 per cent and four per cent.
ACCI’s chief executive Andrew McKellar said the ACTU’s proposed five per cent bump was “completely unjustified”.
The Fair Work Commission last year lifted the minimum wage by 3.5 per cent when inflation was around three per cent.
Australians were delivered higher wage bumps in previous years.
Fair Work delivered a 3.75 per cent bump in 2024, a 5.75 per cent increase in 2023 and a 4.6 per cent hike in 2022.