Why Increasing Minimum Wage Would Be a Disaster

Running a business is never easy. In fact it’s bloody hard. You might be a business owner. If you are, you probably just shouted out ‘amen brother!’

If you’re not a business owner then imagine you are for just a moment. I want to explain how life just got a lot harder for businesses, right when you thought things couldn’t get any worse.

On Tuesday, The Fair Work Commission decided that from July 1 the minimum wage will be $17.70 an hour. That’s $672.70 per week. In percentage terms it’s a rise of 2.4%

Now let’s not forget that in the last quarter prices fell. The inflation rate fell to 1.3%. That means, overall, prices are going backwards. Yet basic wage is on the up. That might sound great for the ‘little guy’ on first glance. But higher wages and deflation aren’t good for an economy and aren’t good for businesses.

Eventually something has to give. Wages have to stand still for a while, or fall. Or somehow the economy has to find growth from somewhere. But the growth isn’t coming. And it doesn’t look like wages are going to budge — especially if unions have anything to do with it.

If you’re a small business owner the ‘Fair’ Work decision is a punch to the stomach. Even if you’re a large business owner, things aren’t looking so flash.

A storm is brewing, but no one really wants to admit that it’s coming.

The little guys wins but everyone loses

The biggest expense most businesses have is employees. After all, without employees, a business is hard to maintain. Now for businesses that are facing an uncertain future, things just got incredibly harder.

Of course even with ‘above inflation’ wage rises trade unions aren’t happy. But then again when’s a trade union ever been happy? The Australian Council of Trade Unions (ACTU) wanted double what they got. They were hunting for $30 a week pay rise.

With the Australian economy in the position it’s in, that’s just insanity. But I guess the Unions give little care for the future of the country. They’re just interested in the here and now. After all, they are only there for the best interests of their members. Or are they?

Also on Tuesday the Fair Work Commission published a recent decision. The decision was that the enterprise bargaining agreement (EBA) between Coles and the Shop Distributive and Allied Employees Association (SDA) was invalid.

The SDA is supposed to look after its members. Instead, Fair Work found the EBA left thousands of workers, ‘worse-off’. This EBA covers around 77,000 workers. The problem here is that it wasn’t the union that went after Coles.

No, the SDA was happy with the EBA. It was a student, Duncan Hart, who works at Coles part-time. He felt he was worse off under the EBA, so decided to do something about it. And he won.

Coles has 10 days to rectify the situation. Speaking about the situation Hart said, ‘I think that what the SDA have done in this case has been pretty atrocious, there’s no real other way to describe it.’

This could have ramifications for all retail, fast food or warehouse companies with workers under SDA EBAs. All of a sudden your wages bill is about to skyrocket.

What does this lead to?

Well the minimum wage is on the up. And businesses are about to cop a higher wages bill. Many small retail businesses (and large ones) rely on minimum wage earners to remain efficient.

The result is that private sector business will suffer. Their costs will rise. They will have to pass on the costs to consumers. Or they’ll cut jobs.

Now this leads to a bigger problem. You see, since the beginning of this year there are 45,700 people who are no longer in full-time employment. Full time jobs in the economy are falling.

Part time jobs have increased. But if a large sector of industry might now have to cut part time jobs, then things don’t look so rosy.

And with fewer full time and possibly also fewer part time jobs, how do people pay for things like a mortgage, car loan, boat loan, school fees…food?

Let’s not forget that household debt to GDP is at an all-time high.

Source: Trading Economics
Click to enlarge

To make matters worse, consumer credit stands at $2.465 trillion.

Let me put this simply. Australia is a country built on debt.

Now if you’ve got any sense, you will be listening to what Vern Gowdie has to say about the levels of debt in the Aussie economy. Vern’s predictions can be confronting, but you’ve got to consider everything he says and predicts might just be 100% right. He writes regularly in our sister publication, Markets and Money. If you don’t read that already, you can find Vern’s articles here.

Two debt funded houses and jet-skis

What’s worse is that with the upcoming election there appears to be no direct route out of Australia’s dilemma. My colleague Jason Stevenson yesterday made a point of this, saying,

Most politicians are out of touch with reality — their only concern is getting re-elected. For this reason, they’ll listen to you and agree with what you’re saying. But, at the end of the day, unless they’ll get votes from it, your effort really means nothing.

Consider on one side of this equation is Union heavyweight Bill Shorten. If he makes it into office, perhaps the ACTU will get that $30 a week rise…

And as for Turnbull? Well he says we should live within our means. That’s true. But if the ‘means’ continues to artificially rise like they are, then no one learns anything.

Then if you continue with easy access to debt and credit then those ‘means’ quickly turns into two debt funded houses and two jet-skis parked in the garage of an outer suburban ‘Aussie dream’.

Look, what’s happening here is that, in a time of impending economic crisis, the country needs a way out of its own mess. It’s unsustainable to have slow economic growth, rising debt, and a private sector that is facing harsher headwinds.

Increasing minimum wage might sound like the right thing to do. But the real way out of this mess is to encourage private business sector growth. Support, invest, incentivise business to succeed and grow. That’s what will help drag the country forward.


Sam Volkering,
Editor, Money Morning

Sam Volkering is an Editor for Money Morning and is small-cap, cryptocurrency and technology expert.

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