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Guides / hsc economist

[HSC] Economist: 27th June

A summary of this fortnight's Economics news: minimum wage and sanctions!

Zack Bolland 99.80 ATAR, Dux, 8th in NSW for Econ

Over the last two weeks, all the talk has been about the minimum wage increase. Will there be an Australia-wide wage-price spiral? Will the minimum wage increase translate to all workers? Beyond Australia, the G7 ignited discussions about the future of Russian sanctions, agreeing to block all Russian gold exports and devising a plan to prevent Russian oil exports. Whilst these sanctions have proven to accelerate inflation, unemployment and have led Russia to default on its foreign debt obligations for the first time, other economic indicators (e.g. exchange rate) prove that Russia have persevered in the face of these economic challenges. Thus, this fortnight’s article will analyse the potential implications of the recent minimum wage hike and will assess the effectiveness of economic sanctions on the Russian economy.

The Recent Minimum Wage Increase And The Never-Ending Debate About It

A day after last fortnight’s article, the Fair Work Commission made the decision to increase both the national minimum wage and the award minimum wages. This came as no surprise, as headline inflation in Australia hit 5.1% over the year to the March quarter, alongside underlying inflation, which reached 3.7%. These two inflation statistics have surpassed the ‘stable’ target of 2-3%, as set out in the early 1990s. Phillip Lowe confessed in a recent speech that the rate of inflation is “much higher than we [the RBA] had earlier expected”.

Since being elected, the Labor Government have backed a pay increase for low-wage workers, who have been disproportionately affected by the rising cost of living in Australia. Whilst the Fair Work Commission usually act independently without much interference from Government, the Commission accepted the request of the Government, announcing a 5.2% increase to the National Minimum Wage two weeks after Labor’s request. This works in tandem with the 4.6% increase to the award minimum wages, meaning that minimum wage workers will be earning an additional $40 per week.

However, some have criticised this decision, for two different reasons: (1) the minimum wage increase will not flow to workers who are not covered by awards and (2) the minimum wage increase will actually lead to higher inflation and a wage-price spiral.

Firstly, Sally McManus, the secretary of the ACTU, argued that most workers have their pay set out by deals negotiated between employers and employees. This is corroborated by the fact that 20% of Australian workers are on awards, compared to the 40% that are on enterprise bargaining agreements. However, experts have argued that requesting a pay rise is completely acceptable, as inflation has surpassed the wage price index of 2.4% and surpassed Phillip Lowe’s recommended wage growth of 3.5%. Heavily unionised industries are also requesting wage increases of up to 6%, but many industries are reluctant to grant these requests.

Secondly, the RBA has projected inflation to reach 7% by the end of the year, leading many employers to deny wage increases. Treasurer Jim Chalmers has hinted that it may exceed the 7% expectation, causing many employers to freak out at the thought of a wage-price spiral. To break it down, a wage-price spiral occurs when employees receive higher wages, causing businesses to pass on additional costs to consumers. In response, employees demand even higher wages because their initial request has resulted in higher inflation. However, Greg Jericho argues that a wage-price spiral is unlikely, and any further inflation will be a result of “weird consumption habits” and supply chain issues. We won’t see the full effects of a wage-price spiral for a while. Right now, all we can do is wait, demand higher wages and see if the wage-price spiral actually comes into fruition.

The G7 Meetup And The Future Of Russia

Moving away from Australia, the G7 had “very constructive” discussions on imposing a cap on Russian oil imports, pressuring Russia over its invasion of Ukraine. Whilst some nations have already banned Russian oil, namely the US, Canada and Britain, other nations are reluctant to do so. Hungary’s prime minister, Viktor Orbán has already expressed his dissatisfaction with the EU’s proposal to cut off Russian exports, as Hungary receives more than 60% of its oil from Russia. Regardless, the G7 announced that they would ban the import of Russian gold, with the broader aim of deteriorating the Russian economy and enforcing punishment for their invasion of Ukraine.

Russia holds around 10% of the world’s gold and has been able to triple its holdings of gold since its annexation of Crimea in 2014. Russia’s central bank is also said to rely heavily on gold assets, thereby emphasising the importance of the decision. Whilst European Union leaders have agreed on an embargo on Russian oil, which will be fully enforced by the end of 2022, Russia argues that the sanctions are having little to no effect.

Despite the introduction of hard-hitting sanctions, Russia’s ruble reached 52.3 cents to the dollar last week, hitting its highest level since 2015. And whilst sanctions aren’t fully enforced yet, Russia is still making $35 billion a month from oil and gas exports. Not only is Russia still able to pay off its international debt obligations, but Russia’s central bank is actually trying to curb the rapid appreciation to prevent the nation’s exports from becoming uncompetitive.

Whilst Russia did see soaring inflation of 7.6% in March, there are economic indicators that show sanctions aren’t having the dramatic effect we all expected them to have. Undeniably, there is mass uncertainty, rising unemployment and rising inflation in Russia. But at the same time, Russia’s external stability has persevered and is proving resilient. The G7 are yet to enforce its ban on Russian gold imports and the group is still trying to figure out a way to cap Russian oil prices. Until these sanctions are fully implemented and the G7 makes a decision, we truly won’t know how effective these forms of protectionism are on a country like Russia.

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