Increasing the minimum wage wouldn’t lead to a wages blowout but it would keep a lid on the number of working poor

In the first half of every year the Fair Work Commission (formerly Fair Work Australia) takes submissions on the annual wage review which sets the minimum wage. Lobbying often begins early and this year is no exception. Last week the Australian Financial Review reported that “business groups are demanding that any increase in the minimum wage be modest or deferred this year.”

Such a report is roughly as surprising as “man notices sky is blue”, but at least the business groups cited didn’t, as has been the case with executives such as Rupert Murdoch and Maurice Newmann, call for a cut in wages.

Business groups never support a more than modest wage increase. The economy is either not strong enough, or it is strong but the only way to keep it so is not to raise wages too much.

As I noted in November, Australia’s wage growth has remained quite modest since the GFC. The low inflation period of the past five years has been matched by low wage increases.

But often, increases in the minimum wage are viewed as a talisman for those wishing to paint Australia as a “high wage/ low competition” economy. Australia’s minimum wage is indeed among the highest in the OECD, but it is worth noting that, relative to median Australian wages, the minimum wage has been declining over the past 30 years.

In 1985, when Australia was about to enter a current account crisis, during which the value of our dollar fell sharply, a case could be made that our wages were too high. Certainly the minimum wage, at 65% of median earnings, was easily the highest in the OECD. At the time, the US minimum wage was about 38% of median wages in America.

Now Australia’s minimum wage is about 52% of median wages, a ratio which puts us as the 8th highest in the OECD.

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Many business groups and leaders argue that higher minimum wages lead to higher unemployment. This argument has received a pretty strong run in the US in the past year as President Obama sought to increase the national minimum wage there from US$7.25 to US$10.10 an hour.

The logic is that if labour is more expensive, employers will employ fewer workers. This seems reasonable enough, except the evidence that modest minimum wage increases do lead to higher unemployment is pretty sketchy to say the least. One study by the Center for Economic and Policy Research actually found there was no impact on unemployment levels of a modest minimum wage in the US.

Clearly the contested word is “modest”. Last year, Australia’s minimum wage was increased by 2.6% to $16.37 per hour. Given inflation in the past year has increased by 2.2%, this was a slight real wage increase. Given as well that inflation is expected to remain around 2.5%, it is unlikely the Fair Work Commission would go much higher than that this year.

But business leaders are often concerned also that an increase in the minimum wage will cause a concertina effect which will lead to increased wages all the way up the scale, and thus will reduce Australia’s competitiveness due to the dreaded “wages breakout”.

A study by the University of Sydney’s Workplace Research Centre for the Fair Work Commission, cited in the same AFR article, perhaps gives such views some credence.

The AFR noted that “new research reveals how annual increases to the minimum wage accelerate salary growth across the entire workforce, not just among the 1.5m lowest paid”. The study found that “one in three private sector employers pass on minimum wage rises to workers who are already paid at above-award rates”.

But the study’s conclusions are rather less clear cut than such a retelling would suggest.

The study actually found that the minimum wage increases were used mostly to just “set the framework” for wage negotiations of above-award employees. It also found that “wage increases were ultimately achieved by bargaining around hours, penalty rates and other employment conditions rather than stemming directly from the [minimum wage] decision”.

Moreover, the industries which were most likely to “pass on” minimum wage increases to other workers were, not surprisingly, the industries with the highest proportion of workers on award-level wages, such as retail trade and accommodation and food services.

Employees in these two industries have the lowest average weekly earnings of all industries in Australia. Thus it is quite reasonable that minimum wage decisions would have a close impact on the wages of other workers in those industries.

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But even here, the impact of the minimum wage is limited. The study, for example, examined independent grocery retail businesses and found that wage increases for their over-award employees were “informed primarily by competitor wage movements and the need to link over-award payments closely with individual performance reviews”.

The study also found that minimum wage increases “neither discouraged nor encouraged enterprise bargaining at the workplace level”.

Overall, the study found that while “there was some association between [minimum wage] increases and enterprise agreement wage outcomes in some industries” the “extent and nature of any association” remained uncertain.

Regardless, there is little reason to celebrate having a low minimum wage. Cutting the minimum wage might even lead to higher employment, but to what end? Around a quarter of employees in the US are low paid. In 2011 in Australia, 16.9% of workers were low paid, up from 13.9% in 2001.

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Chasing competitiveness through lower wages leads invariably to a decrease in the wages of the lower paid. And given the limited link between minimum wage decisions and above-award wage increases, this decrease doesn’t flow through to the higher paid.

It leads to an increase in the working poor, and also in the nation’s inequality. Chasing international competitiveness through lower wages, as Adam Posen wrote in The Economist last year, “is not the basis on which a rich nation should compete”. And neither should we fear increases in the wages of those earning the minimum leading to unjustified increases for everyone else.