Two Experts Weigh in: Should Prices Increase to Cover the Minimum-Wage Hike?

Sep 19, 2022

With the rise of the minimum wage, Australian Retailers Association’s CEO Paul Zahra and financial services industry leader Peter Knight discuss what it means for your business, and whether you should raise prices to cover it?

When the minimum wage was increased by 5.2 per cent in July, there were questions about the effect this would have on prices for goods and services. Many argued prices would skyrocket by the same amount, lifting the price of a coffee, say, from $4 to $7.

Research from the Australia Institute painted a different picture, arguing that boosting all workers’ wages by 5 per cent – not just those on the minimum wage – would lead to an increase in prices across the economy of about 2 per cent. Meaning your $4 coffee should only increase by around 9 cents – not $3.

The reality is that businesses need to factor in a range of other cost increases in the current climate, which could contribute to price increases, says Paul Zahra, CEO of the Australian Retailers Association.

“It’s an incredibly challenging environment for businesses right now, with a number of cost pressures associated with fuel, energy, supply chains and rent, along with labour-cost increases and skill shortages that are preventing retailers from trading at their full potential,” he explains.

While retail sales have been at record levels, this is not an accurate picture of sector performance given the inflationary landscape businesses are trading in, he adds.

“Consumers are paying more for everyday items, while at the same time, business operating costs have increased significantly.”

The price is right

Before deciding whether to pass on an increase in costs to customers, financial services industry leader Peter Knight, of Knight Partners, says some businesses need to look at every aspect of the business and determine where efficiencies can be found.

“It’s almost the easy option to just put your prices up, but it might not be the best option for everyone,” he notes. “Some people just can’t afford to increase their prices or they’ll lose customers.”

But concurrently, there are higher costs that businesses may have no alternative other than to pass on. While the hourly figure may have risen by $1 to $21.33, there are additional costs to factor in, such as increased superannuation, payroll tax and pay-as-you-go tax.

“Super has risen to 10.5 per cent so you’ve got a higher rate now being paid on a bigger wages bill, it’s a double whammy,” says Knight. “And depending on the size of the business, there could also be an increase in payroll tax to factor in.”

There’s no hard and fast rule to follow when it comes to managing price increases, he adds, pointing to the environment immediately after the recent floods and fires on Australia’s east coast.

“People were definitely asking themselves, do I put my prices up or do I absorb that increased cost? Small businesses were saying they wanted to support their communities so weren’t going to put prices up for a period of time to retain loyal customers.

“That’s a decision to make, your margins will be squeezed if you don’t cover your increase in costs. And if you do, you might lose sales because people might decide to just get the coffee and not the muffin today.”

It’s a valid point. Which is why Knight encourages businesses to do research and be clear on the total impact an increase in wages will have on the costs of running a business.

For Zahra, business owners also need to factor into their decision the pressures everyday consumers are facing.

“We also know that consumers are feeling anxious with the rising cost of living and interest rates and that is likely to impact spending in the coming months as mortgage repayments increase, and as Australians start to tighten their household budgets,” he says.

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