Businesses say higher wages will lead to higher prices. Be suspicious

Don’t let businesses and big bosses scare you too much. The workplace umpire earlier this week made a call that upset some people.

Mostly, those who were disgruntled were business groups arguing the Fair Work Commission’s decision to raise minimum wages by 4.75 per cent (and by 6 per cent for the lowest-paid workers) from July was far too much.

Employers had wanted an increase closer to 3.5 to 3.9 per cent, and warned the latest decision would push some firms out of business while forcing others to raise their prices. It’s one of the few times they’re happy to draw attention to higher prices.

Why? Because it’s (seemingly) out of their control: blame the commission and higher wages! And it’s a good way to soften up customers for future price hikes – whether they’re caused by higher wages or not.

Now, it’s not all a lie. Higher wages, to the extent that they apply, will come at a cost to businesses. But don’t buy into it too much.

One of the arguments businesses make is that they shouldn’t have to pay their workers so much more when growth in productivity (our ability to make and provide goods and services) has been stagnant for a long time. If workers aren’t getting any better at doing what they’re paid to do, they argue, it doesn’t make sense to have to pay them more.

Business groups are right when they say the country’s productivity growth has been in the gutter for some time (although the way we measure productivity is not perfect). That is, we’re not becoming that much better at using our limited resources – including ingredients, materials and workers’ time – to make more, or better quality, products, or provide more or better quality services.

And as the Reserve Bank and government have been insisting for a while, the key to lifting our living standards – whether that’s being able to consume more goods and services, or working fewer hours while getting just as much done – is through lifting productivity.

This is especially important when it comes to tackling inflation: the rising level of prices for goods and services. Why? Because prices tend to climb as a response to demand outstripping supply. If we improve our productivity, we can increase supply, helping to push price growth down while fulfilling our wants and needs.

In short, business groups argue that increasing their costs (the wages they pay employees) when there’s been little productivity growth is bad for all of us because it will just lead to higher prices and very little change to supply.

But what if the equation actually worked the other way? What if getting businesses to pay