Wage price spiral or price wage spiral? - The role of profits in causing inflation

Small business cannot afford it.”2 While employer groups typically oppose calls for increases in the minimum wage regardless of whether inflation is high or low it is significant that the recent surge in inflation has been driven by a range of supply side factors including the impact of the pandemic on the supply of some materials, and the increase in the price of crude oil. [...] Table 1 shows the 10 industries with the highest labour/cost ratios and the likely impact of a five percent increase in wages on the total costs of each of those industries assuming that there was zero labour productivity growth over the next year. [...] As the average labour/cost ratio of all of Australian businesses is only 25.3 percent (well below the 50 percent that would be required to justify a 2.5 percent price response to a five percent increase in labour costs) an economy-wide 2.5 percent Wage price spiral or price wage spiral 8 increase in prices in response to an economy-wide five percent increase in wage costs would mean a significant. [...] Across the economy, Table 7 shows that after the second round impacts of input price increases are added to the first round impacts of a five percent wage rise the average price increase is estimated to be 3.73 percent,7 significantly higher than the 1.8 percent which would have resulted if firms had confined themselves to only passing on the actual increase in costs that a five percent increase i. [...] Conclusion While significant concerns have been raised about the inflationary impacts of a five percent increase in the minimum wage, in reality the direct inflationary impact of a five percent increase in all wages is only 1.27 percent, and even when the second round impacts are included the increase in price level would likely only be 1.85 percent.