Minimum wage rise

What rise in the minimum wage is consistent with keeping real income of the workers in Australia on that wage constant? According to the Fair Pay Commission, it is a rise about $27 per week or the current wage earnings at the minimum wage adjusted for the full CPI increase.

While that is a common approach, I am not sure it is correct and, in fact, I think it will result in a rise in real income. The reason is this: because of Australia’s superannuation laws, some proportion of all wage earners’ incomes are saved. Those savings earn a return which automatically adjusts for inflation (whether it be interest payments or capital returns). With a minimum of 9 percent going into those savings that means that to keep real income constant, the total wage needs to rise by 0.91*CPI/(1+0.09*CPI) [I am pretty sure that is right; notice that if there are no savings then wages have to rise by the CPI]. So for a CPI of 4%, this should mean a wage rise of 3.6%.

From this perspective, the FPC has been more than generous in its offering.

[Update: some folks with more knowledge of these things than I have pointed out to me that the CPI increase only applied to the lower end of the minimum wage scales with a smaller adjustment at the higher end. This it seems to me is consistent with the idea that those on higher awards likely save more.

However, what this means is that with a CPI increase of 5.4% over the last 18 months, a real income constant wage rise would have been about 4.89% whereas, in fact, they have received a 3.9% rise. So their incomes are not being maintained in real terms.
Also, in terms of the number of people on the minimum wage, I had initially picked a number of one million but, in fact, that is not correct and there are far fewer on the minimum wage itself.]

5 thoughts on “Minimum wage rise”

  1. Nonsense!

    (1) Not even Treasury believes that more compulsory super represents pure additional saving. Most, quite possibly all, of it just represents diversion of saving from other forms. For example, banks are more willing to give bigger mortgages than they otherwise would, and workers take out these mortgages, because they know there’s a lump sum waiting to be drawn on at 60. A lot of the super levy has already been indirectly capitalised in house prices.

    Put another way, rise in super would result in bigger loans at the margin – it’s awfully hard to force people to save in deregulated credit markets.

    (2) What you’re saying really is that, in order to keep real incomes constant, we’d need to *not* index the flow in to super. I agree, but I’m surprise to hear you decry forced super contributions this way.

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  2. I am hardly decrying forced saving. I was just pointing out that it exists and so we have to take it into account when benchmarking increases in the minimum wage and their impact on real income (as opposed to comparisons with CPI).

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  3. No, my point is that additional compulsory super does *not* represent additional forced saving. An increase in compulsory super contributions, whether due to wage indexation or something else, will just be offset by more dissaving, so the real income from super returns won’t rise.

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  4. But doesn’t it make a difference that super will on average be accessed in 20 years or so, while the pay increase will arrive immediately?

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