Fact check: Does the minimum wage increase unemployment?

Updated

Opposition Leader Bill Shorten is anticipating a fight with the Abbott Government over the minimum wage.

In January the Productivity Commission flagged that the minimum wage would be part of its review of Australia's industrial relations system.

The commission is currently accepting submissions into the review, which is expected to report back to the Government in November 2015.

The claim: Opposition Leader Bill Shorten says the evidence from Europe shows the minimum wage doesn't contribute to unemployment levels.

Opposition Leader Bill Shorten says the evidence from Europe shows the minimum wage doesn't contribute to unemployment levels. The verdict: Mr Shorten's claim is backed up by the research on overall employment levels, but when looking at young people or the level of the minimum wage it's not so straightforward. There's more to the story.

Mr Shorten told ABC radio that the Government believed the minimum wage was killing jobs in Australia, and wanted to reduce it. But Mr Shorten said the minimum wage is a job creator.

"With the minimum wage, I don't accept the case has been made that it contributes to unemployment levels in this country. The experience in Europe where they have started to increase or introduce the minimum wage has been exactly the opposite."

He criticised the Coalition Government and said: "Periodically, you see outbreaks from the Liberals and the Institute of Public Affairs say the minimum wage is killing things, killing jobs in Australia."

ABC Fact Check investigates whether the minimum wage costs jobs, and what the experience has been in Europe.

Australia's minimum wage

Australia first introduced a minimum wage in 1907, as a result of the Harvester Judgment in the Commonwealth Conciliation and Arbitration Court.

The court ruled that a wage that would allow a man to support his family with necessities and "in a condition of frugal comfort" was required.

The original minimum wage was set at seven shillings a day and over the past century has evolved to include rulings about equal pay for women and indigenous workers.

The Fair Work Commission reviews the minimum wage every year. The national minimum wage is currently $16.87 per hour or $640.90, before tax, for a 38 hour week but is lower for some groups including young workers under 21.

Difference of opinion

Sorry, this video has expired Video: Watch John Barron present the facts (ABC News)

Fact Check asked Mr Shorten what evidence he had based his claim on, and his office provided a report citing research published in March 2014 by the Low Pay Commission in the United Kingdom, where a national minimum wage was introduced in 1999.

The report says: "Since 1999 the Low Pay Commission has commissioned over 130 research projects that have covered various aspects of the impact of the national minimum wage on the economy. In that period the low paid have received higher than average wage increases but the research has, in general, found little adverse effect on aggregate employment."

The European Commission undertook a review of studies on the employment effects of European Union member state minimum wages in 2014.

The review said: "In terms of empirical studies of the effects of minimum wages in practice, the impact of a minimum wage in overall labour costs is on the lower paid end of the labour market and research tends to support the view that the impact is rather small.

Since 1999... the low paid have received higher than average wage increases but the research has, in general, found little adverse effect on aggregate employment. UK Low Pay Commission

"A series of recent studies have strengthened the view that minimum wages have only a small negative effect on employment, not usually found to be statistically significant."

The European Commission paper says it "seems clear" that businesses have a variety of ways of maintaining competitiveness and profitability in the face of minimum wages which allow employment to be maintained.

It lists "efficiency/productivity gains, passing on costs in the form of small price increases, acceptance of reduced profits, cost reductions due to reduced labour turnover, reductions in the overall wage bill due to wage compression (lowering of wages of higher earners), or cutting labour-related in-kind benefits to reduce costs" as examples.

An extensive 2007 paper by David Neumark and William Wascher presents an opposing view. Having concluded that minimum wages in the United States have disemployment effects, although these may be small overall, the report questions the findings of research carried out in the United Kingdom, which the authors say "seems to be widely cited as providing evidence that an increase in the minimum wage does not reduce employment".

They say that research in the UK "has been limited to estimating short-run effects, and, in our view, the question of the longer-run influences of the national minimum wage on UK employment has yet to be adequately addressed".

The report says that due to the "variation in the estimated effects across studies" and, in the authors' view, a shortage of research into the long-term effects of minimum wages, it is not possible to "state definitively that the evidence for the United Kingdom points unambiguously in one direction or the other".

Not easy to track the impact

One reason why there is disagreement over the impact of the minimum wage on employment is because it is difficult to measure what effect a change to the minimum wage has on employment levels.

David Metcalf from the London School of Economics noted in a 2006 paper that because employment responds gradually to changes in the minimum wage, it is difficult to confirm exactly what changes in employment are associated with minimum wage policies.

"The longer the time horizon, the more other factors come into play to also influence employment," Professor Metcalf wrote.

Hielke Buddelmeyer, senior research fellow at the Melbourne Institute's Labour Economics and Social Policy Research program, told Fact Check that "30 per cent of minimum wage workers live in the poorest 20 per cent of families".

However, minimum wage workers make up a relatively small proportion of all workers in the economy, and the impact on unemployment for these workers can therefore be "swamped" by other factors influencing the broader employment conditions in an economy.

Professor Metcalf notes in his 2006 paper that there is "some evidence of adjustment in hours rather than workers" in response to the minimum wage. So while overall employment may appear to be unchanged by the minimum wage, employers may reduce the hours of low-skilled workers.

What's more, the research suggests that some employers simply don't comply with the law, and there is evidence that illegal collusion between employers and workers to avoid the minimum wage, is "certainly growing".

These factors can minimise the employment effects of the minimum wage, and make it difficult to determine the actual effects of minimum wages on employment in an economy.

High minimum wage could increase unemployment

The Organisation for Economic Cooperation and Development collects extensive data on the minimum wages and employment levels in its 34 member states. In a comprehensive study of employment markets published in 1998, when 17 of its member countries had minimum wages, the OECD said there was general agreement that a minimum wage set at a high level would reduce employment.

But it concluded that this would not happen if a minimum wage was set at a reasonable level. The paper said that "for prime-age adults, the most plausible specifications suggest that minimum wages have no impact on their employment outcomes".

Jan Rutkowski of the World Bank came to a similar finding in a 2006 paper. "If the minimum wage is set at a moderate level then it does not cause significant employment losses," Professor Rutkowski wrote.

Professor Rutkowski explained that a minimum wage set too high compared to median earnings made the minimum wage binding on a greater proportion of workers in the economy. Small changes therefore have a greater "bite" on employers and risk increasing unemployment.

The effect on young jobseekers

One area where a minimum wage appears to have an impact is for younger workers and there's evidence that even moderate minimum wages can increase the rate of youth unemployment.

A 2014 International Monetary Fund study into youth unemployment in advanced European economies found the effect of higher minimum wages relative to median wages had an "insignificant" effect on adult employment.

But it said that young workers, who make up a large proportion of low-skilled, low-pay workers in an economy, can be adversely affected by even small increases in the minimum wage.

The OECD study also said the results of its research suggested that a rise in the minimum wage had a negative effect on teenage employment.

Many European economies introducing or increasing the minimum wage have experienced increased unemployment in low-skill, low-pay positions.

In general, our results provide evidence that minimum wages tend to reduce employment rates among the youth population. David Neumark and William Wascher

Youth employees (those below the age of 21, or in some countries aged 18 and below) fill a disproportionate number of low-skilled positions for their relative population size, and therefore are most severely affected by the introduction or increase of the minimum wage.

The IMF study calculated the effects of changes in the minimum wage on youth unemployment. It found a one per cent increase in the minimum wage relative to the median wage increased youth unemployment between 0.4 and 1.2 per cent in European economies.

Similarly, an extensive study by Professors Neumark and Wascher published by the US Federal Reserve in 2003 surveyed 17 countries, including 13 in Europe and Australia, and concluded: "In general, our results provide evidence that minimum wages tend to reduce employment rates among the youth population."

Professors Neumark and Wascher said from their sample, the most significant disemployment effects in teen or youth employment markets were experienced in Greece, the Netherlands and Australia.

The Melbourne Institute's Professor Buddelmeyer told Fact Check that while many reports focus on the effect of the minimum wage on young workers, older workers with "low levels of formal schooling" and those with non-transferable qualifications from overseas can also be adversely affected by the minimum wage.

The verdict

Studies into the effects of minimum wages on employment vary considerably in their methodology and findings. While the debate continues, there are many recent research papers that have found moderate minimum wages have little effect on overall unemployment in European countries.

So, while the evidence does show that the overall unemployment level is often unaffected by changes to the minimum wage, people employed in low-skill and low-paying positions experience greater adverse effects. Mr Shorten's claim that the evidence from Europe shows the minimum wage doesn't increase unemployment is backed up by the research on overall employment levels, but when looking at young people or the level of the minimum wage, it's not so straightforward. There's more to the story.

Sources

Topics: industrial-relations, government-and-politics, alp, bill-shorten, australia

First posted