Wage growth must be tied to productivity, not just inflation: small business

While the Australian government has pushed for an annual wage increase that keeps pay apace with inflation, small businesses have warned low productivity will make substantial increases unserviceable.

The Fair Work Commission (FWC) is set to determine the national minimum wage and award rates in the coming months.

The Council of Small Business Organisations Australia (COSBOA) – the nation’s peak body representing small businesses – has called upon the FWC to keep any increase within the RBA’s targeted inflation range of 2 to 3 per cent, citing low productivity.

Annual inflation currently sits at 4.1 per cent. It’s this figure, granting any fluctuation in the intervening period, that the government has called upon the FWC to match in its wage increase.

The government’s position is “all about making sure that low-paid workers in this country don’t go backwards,” said Treasurer Jim Chalmers.

Last year, the Commission upped the minimum wage by 8.6 per cent and the award rate by 5.75 per cent. This was the largest increase on both fronts in years.

“Another excessive increase runs the risk of compounding ongoing input pressures for Australian businesses, in particular small businesses who are struggling to maintain employment in an already complex environment,” said Australian Chamber of Commerce and Industry (ACCI) chief executive Andrew McKellar.

The debate is being fought on two fronts. First, there is the battle between inflation and productivity for the top spot in terms of wage-setting considerations.

Business groups are urging the Commission to keep wage increases at a level that reflects Australia’s lagging productivity. The government’s focus, on the other hand, appears to be on keeping wages in line with inflation.

“The RBA and Productivity Commission have repeatedly emphasised that wage growth should be linked to productivity for it to be sustainable in the long term,” wrote COSBOA in its submission.

McKellar, for his part, said any wage increase “must be linked to productivity to be sustainable. A failure to align wage growth with genuine productivity improvements will add to inflationary pressure.”

Similarly, Ai Group said that the FWC should "heed the productivity performance of the Australian economy, which provides the foundation for sustainable increases in real wages."

This point was not lost on the government in its annual wage review submission. It said it will be focusing on “sustainable real wages growth through the implementation of its five pillar productivity agenda.”

Productivity, it said, has now been increasing for two consecutive quarters (by 1 per cent in the September quarter of 2023 and 0.5 per cent in the December quarter).

“While this is encouraging, quarterly movements can be volatile and it will take some time to turn around longstanding weaknesses,” it said.

It also made the case that better-paid workers are more productive and that better pay will incentivise more people to join the workforce.

Underlying this position is a belief that “moderate” increases to the minimum wage tend to have “negligible” employment impacts.

“Australian studies show that moderate increases to the minimum wage have resulted in a mix of small negative and statistically insignificant employment impacts,” it said.

In February, the Productivity Commission’s annual productivity report concluded that “labour productivity fell sharply in 2022-23, as a record-breaking increase in hours worked failed to generate a similar increase in economic output.”

Second, the government appears to be more optimistic when it comes to the general small business outlook.

In its submission, the government acknowledged the ongoing, albeit moderating, pressures on small businesses, through labour shortages, rising insurance costs, and so on.

That said, it made the case that SMEs report that their business conditions “remain manageable,” thanks to targeted government relief through, for instance, investments in small business cybersecurity, skills and training, asset write-offs, and energy transition capabilities.

It cited the NAB Quarterly SME Survey which reflected normal business conditions, adding that employment continues to increase across small businesses.

Considered alongside COSBOA’s characterisation of the small business landscape, the two seem irreconcilable.

In its submission, it cited Xero’s Small Business Index which, in December of last year, recorded the greatest one-month decline since April 2020, “when the economy was essentially closed down by the [COVID-19 pandemic].”

It added that ASIC data for January of this year marked the greatest number of insolvencies since 2015. “Australian small businesses face a critical cost-of-doing-business crisis, exacerbated by inflation and rising operational costs,” it wrote.

“This situation has led to a stark decrease in business confidence and an increase in insolvencies.”

Labour costs, it added, are a significant source of the distress.

In February, ASBFEO’s Small Business Matters report found that 43 per cent of small businesses were not making a profit, while the majority of owners were overworked and earning below their average annual earnings. Taken together, said COSBOA, this represents a “cost-of-doing-business crisis” for smaller organisations.

Treasurer Jim Chalmers has been adamant in his belief that wage increases and tax cuts are separate levers and that offering one does not derogate from the appeal of another.

Others think differently.

The Australian Retailers Association – which advocates for over 120,000 retailers – pushed for a 3.1 per cent minimum wage increase. In making its case, it said any increase should “be considerate of the impact of the stage 3 tax cuts.”

Stage 3 tax cuts deliver the greatest relief to those on the lower end of the income scale. ACCI said the benefits to low-income households “should also be factored into the AWR decision.”