Solid lift in the minimum wage
The Fair Work Commission grants the largest increase in the minimum wage since its introduction in 1997.
- The Fair Work Commission granted a $40 per week or 5.2% increase in the Minimum Wage.
- For those on a Modern Award Minimum Wage they receive a $40 flat increase up to those who on are paid less than $869.60 per week. Those paid more get a 4.6% increase.
- Westpac estimates that the average Minimum Wage/Award increase from this decision is 4.7%, not far off Westpac’s forecast of 5%.
- Compared to the 2021 decision we estimate it will contribute 0.7ppt to annual wage inflation.
The Fair Work Commission handed down it decision today for the Annual Wage Review 2021–22. They awarded a $40 or 5.2% increase in the National Minimum Wage lifting it to $A812.60 per week. This is larger increase than what some analysts were expecting but not too far off Westpac’s 5% expectation.
For the first time in a decade the Commission also made a split decision in terms of pay increase. Modern Award Minimum Wage rates above $869.60 per week will receive a 4.6% increase, wage rates below $869.60 per week will be adjusted by $40 per week thus there is a range of increases in award rates pay from a high of 5.2% for those on the lowest rates to 4.6% for those on higher rates.
There is no firm data on how the pay increases will be shared by the workforce. But we can make some assumptions to help refine our guess of the impact of this decision on wage inflation.
From the ABS Employee Hour Earnings data set we know that from a total workforce of 11.6 million, 2.7 million are on awards (23%), 4.1 million are on collective agreements (35%), 4.4 million are on individual arrangements (38%) and 0.5 million are owner managers (4%). How many are on the Minimum Wage and how many are on the Modern Award Minimum Wage is not known so we assumed that all those under 25 years old are on the Minimum Wage or Modern Awards they pay less than $869.60 per week and all those older are on Modern Awards paying more. We have also included an estimate of the some 10% to 15% of employees who pay rates are indirectly influenced by awards via enterprise agreements or individual contracts.
We accept this method is not perfect but it is the best guess we have for a breakdown of coverage of this decision.
On the basis, the average increase in award rates of pay in 2022 is estimated to be 4.7% compared to a 2.5% increase in 2021. This is the largest increase in the minimum wage since the introduction of this framework in 1997. The largest increase before this was 4.24% in the 2004 and 2006 decisions.
Using the above shares of wage setting arrangements we estimate that the 2022 decision contributes 1.5ppt to annual wage inflation compared to 0.8ppt in the 2021 decision. While there is a not a one to one transfer from these decisions to annual wage inflation as measured by the Wage Price Index, taken at face value this decision suggest the annual wage inflation should be 0.7ppt higher in 2022 compared to 2021.
Our current forecast for Wage Price Index inflation is 2.7%yr in June (1.0ppt higher than a year earlier), 2.9% in September (0.7ppt higher than a year earlier) and 3.3%yr in December (1.0ppt higher than a year earlier). Given that those on the minimum wage, awards or have their pay indirectly influenced by awards is about 32% of the workforce this suggests upside risk to our current wage inflation forecasts given that individual arrangement wage inflation is likely to be running somewhat faster than that. But before we get too excited we also remember that collective agreements generally run for 18 months to 2 years so around a third of the workforce will not see a significant, near term change in their rates of pay.
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