Minimum wage will rise 3 per

cent to $740.80 a week on Fair

Work ruling
Stephanie Chalmers on 30 May 2019
Australian Broadcasting Corporation
Minimum wage will rise 3 per cent to
$740.80 a week on Fair Work ruling
Around 2.2 million Australian workers will receive a pay rise after the Fair
Work Commission increased the national minimum wage by 3 per cent,
amounting to an extra $21.60 a week.
The commission's annual review decision takes the minimum wage to
$740.80 a week or $19.49 an hour.
The 3 per cent increase will apply to workers who have their pay set by the
national minimum wage or a modern award.
Delivering the decision, Fair Work Commission (FWC) president Iain Ross
said the economic conditions justified a lower increase than the 3.5 per cent
pay rise awarded last year.
Cont.
"We are satisfied the level of increase we have decided upon will not
lead to any adverse inflationary outcome and nor will it have any
measurable negative impact on employment," said Justice Ross.
"However, such increases will mean an improvement in the real wages
of employees who are reliant on minimum wages and an improvement
in their living standards."
The Australian Council of Trade Unions, which had called for a larger 6
per cent or $43 a week increase, labelled it a win for workers but said it
was not enough to be considered a 'living wage'.
Cont.
"This is a welcome pay rise for millions of low paid workers, especially in the face of
further penalty rate cuts in a few weeks," said ACTU assistant secretary Liam
O'Brien.
"We have a long way to go to ensure that the minimum wage is enough for workers to
live on and support their families.”
Justice Ross acknowledged that while living standards for the lowest paid workers
had improved, some continue to experience "significant disadvantage".
"Some low paid, award-reliant employee households have disposable incomes which
are less than the 60 per cent of median income relative poverty line," he said.
"This is unacceptable in a country like Australia. Australian workers should be able to
work full time hours and live free from poverty," said Mr O'Brien.
Cont.
No measurable impact on jobs: FWC
Business groups had called for smaller pay rises, arguing larger
increases could put jobs at risk.
However, FWC president Iain Ross said data shows the labour market
remains strong, despite slowing economic growth and previous pay
rises.
"No party identified any data which demonstrated adverse employment
effects arising from the previous two review decisions," said Justice
Ross, referring to the previous 3.3 per cent and 3.5 per cent increases.
Cont.
The Australian Chamber of Commerce and Industry (ACCI), which
argued for an increase of no more than 1.8 per cent, maintained that jobs
and the viability of some small businesses could be at risk.
"It's harder for small businesses in particular, it's harder for the
unemployed, and it's tougher for the underemployed," said ACCI chief
executive James Pearson.
The Australian Industry Group, which had called for a 2 per cent
increase, said it was pleased the FWC had returned to a "more moderate
level" compared to the previous two years' increases.
Cont.
"The impact of a 3 per cent wage increase on employers should not be
underestimated. The economy has slowed, businesses are struggling to
cope with high and rising input costs, especially energy costs," said Ai
Group chief executive Innes Willox.
"It is to be hoped that the Fair Work Commission has struck the right
balance."
The decision comes as wage growth remains stuck around historically
low levels, with the Bureau of Statistics' latest Wage Price Index
showing annual wage growth of 2.3 per cent for the third quarter in a
row.
Cont.
In February, Reserve Bank governor Philip Lowe told a parliamentary
committee a 3.5 per cent increase in the minimum wage would make
sense and argued stagnant household incomes were a threat to consumer
spending.
"Many people borrowed assuming their incomes would grow at the old
rate and they haven't," he said.
"They're having more difficulty, they've got less free cash and so they
can't spend, so this is why I've put so much emphasis on the need for a
pick-up in wage growth."
Key points
• Australia will increase its minimum wage by 3% from $18.93 to $19.49 on 1 July
2019 (“$” represents AUD unless otherwise stated)
• The increase will affect around 2.2 million workers currently employed at
minimum wage or modern awards
• The increase is lower than the 3.5% increase last year
• The Fair Work Commission states that the increase will not cause measurable
adverse effects on employment and inflation
• Unions expressed their support for the pay rise, though criticized it for bring
insufficient
• Business groups argue that the increase will harm businesses and workers alike,
instead calling for a lower 1.8% increase
Minimum wage
W
• A method of controlling wages S
by setting a limit on the
Wmin2
minimum wage that can be
charged by workers Wmin1
• Objective: to raise the wage of W*
workers
• For minimum wage to be
effective, it must be set above
D
the market equilibrium price
L
0 Qd2 Qd1 Q* Qs1 Qs2
Objectives
W
• Increase the minimum wage of S
workers (unskilled) improve
Wmin2
living standard Increase in minimum wage
• Improve income equality Wmin1
W*
• (Bonus: to facilitate inflation
 Reserve Bank of Australia:
“annual wage increases of 3%
and higher are needed to
D
achieve average inflation of
L
2.5%”) 0 Qd2 Qd1 Q* Qs1 Qs2
Effect on market
W
 Increase in wage: S

• W*  Wmin1 ($18.93) Wmin2

• Wmin1  Wmin2 ($19.49)

Wmin1
W*

D
L
0 Qd2 Qd1 Q* Qs1 Qs2
Effect on market
W
 Decrease in quantity S
transacted:
Wmin2
• Q*  Qd1 (Qt1)
Wmin1
• Qd1 (Qt1)  Qd2 (Qt2) W*
•  Employment decreases

D
L
0 Qd2 Qd1 Q* Qs1 Qs2
Consequences for stakeholders
Effect on workers
W
 Change in total wage earnings S
is uncertain
Wmin2
• Better off for those who can  Increase in total earnings
keep their jobs  income Wmin1
increases W*

• Worse off for those made

redundant  income decreases  Decrease in total earnings
(esp. low-skilled)
D
•  discrimination in labour
L
market (unskilled, elder workers 0 Qd2 Qd1 Q* Qs1 Qs2
may lose their jobs)
But…
• As mentioned earlier, the FWC claims that:
"We are satisfied the level of increase we have decided upon will not
lead to any adverse inflationary outcome and nor will it have any
measurable negative impact on employment," said Justice Ross.

 If this is really the case, the labour market will have a very very
inelastic demand, but it is still impossible for there to be absolutely no
impact
Effect on firms
 Worse off
• Employ less people at higher costs
• Higher labour cost  higher production cost  reduction in supply of
goods
Effect on consumers
P
 Worse off
S2
• Reduction in supply of goods S1
•  higher product prices +
lower quantities
P2
P1

Q
0 Q2 Q1
Other consequences
Labour surplus
W
 The market is out of S
equilibrium
Wmin2 surplus2
• Surplus is created
Wmin1
• Surplus increases from surplus1
W*
surplus1
 surplus2
•  unemployment of workers
arises
D
•  Discrimination in labour
L
market 0 Qd2 Qd1 Q* Qs1 Qs2
Illegal workers
• Some workers will illegally work under minimum wage
• Usually involves illegal immigrants willing to work at very low wages
• Government resources to combat black market  government is
worse off
Misallocation of labour resources
• Industries relying heavily on unskilled workers will hire less unskilled
workers
• These workers become unemployed  waste of labour resources
• Average labour productivity for low-skilled workers decreases
Allocative inefficiency (negative welfare
impact)
W
 The labour market is inefficient S
• Q* (efficient level) > Qt1&2 Wmin2
• At Qd: MB>MC
Wmin1
• Underproduction 
W*
unemployment/underemployment
occurs
• Labor resources allocated under
optimum Q D
• DWL1=blue L
0 Qd2 Qd1 Q* Qs1 Qs2
• DWL2=blue+pink
Inflation?
“The pay hike, which is above the industry rate of 2.3%, will, however,
be welcomed by the Reserve Bank of Australia (RBA), which believes
annual wage increases of 3% and higher are needed to achieve average
inflation of 2.5%, the mid-point of its target band.”
- A Reuters article talking about the same issue
Consumer spending?
“In February, Reserve Bank governor Philip Lowe told a parliamentary
committee a 3.5 per cent increase in the minimum wage would make
sense and argued stagnant household incomes were a threat to consumer
spending.”
Evaluation
Why I believe that Australia would be better off increasing its minimum
wage…
Yes, there are definitely drawbacks
• Labour discrimination
• Some may be unemployed or underemployed
• Higher costs for businesses to run
• Worse off for consumers
• Black market issues
• Allocative inefficiency

 On face value, the increase harms most stakeholders…

But…
• The objective of increasing the living standards of those working on
minimum wage + higher income equality is achieved:)
• As said, the impact on workers is negligible  problem mitigated
• The taxpayers’ money used to monitor black market  justified
because it does not only help one industry, but the people of lowest
income (function of government to ensure the basic standard of living
of all Australians)
For the greater good?
• 3% increase in minimum wage is needed to achieve inflation target 
improves the wider economy and makes Australia a competitive
exporter (24.1% of Australia’s GDP depends on exports)
• Consumer spending must be sustained through increased incomes
(because inflation makes money less valuable in real terms)  people
have sustained purchasing power  benefit businesses in return
Questions?