Every year, employer groups say the same thing: a pay rise for low paid workers will raise unemployment and the sky will fall on small businesses across the country. Every year, the sky fails to fall in and small businesses continue to open their doors

This year they've followed the usual script, with Joe Hockey, the treasurer, chiming in from the sidelines. Although the 3% increase in wages for the low paid awarded by the Fair Work Commission is barely enough to keep up with the cost of living, business and the Abbott government think it’s too high.

They’re wrong. A 3% increase is, if anything, too modest. The expert panel of the Fair Work Commission, the body responsible for setting minimum wages, has examined the evidence about the effect of minimum wage rises on employment. They found that “modest minimum wage adjustments lead to a small, or zero, effect on employment”.



Minimum wage rises don’t necessarily cost jobs in theory, and a growing body of evidence suggests they don’t cost jobs in practice. The labour market isn’t well described by simple supply and demand diagrams. Employers have power in the labour market, which means they’re often able to get away with paying workers less than they’re worth. As a result, it’s possible for minimum wages to secure a fair wage for the low-paid without harming employment.

Evidence from overseas supports this view. A famous 1990 study, by David Card and Alan Krueger, compared fast food employment in New Jersey and Pennsylvania after one state increased its minimum wage and the other didn’t. They didn’t find a significant effect on employment.



Another landmark paper looked at US restaurant employment in 288 different pairs of adjacent counties that had different minimum wages. They found that minimum wages are effective in boosting pay, but they don’t harm employment.

These studies aren’t alone. A paper in the British Journal of Industrial Relations examined 1,494 estimates of the employment effect of US minimum wage rises published in 64 different papers. They found that there was virtually no employment effect from minimum wage rises.



Similarly, in the UK, the evidence has been clear. When the UK first introduced a minimum wage in 1999, the British government took a cautious approach. They were worried about the sort of negative effects that the likes of Hockey and ACCI warn about. But they never arrived. The UK’s minimum wage is now 75% higher than it was when it was introduced, while the UK CPI has risen by just 37% over the same period.

This large rise in the real value of the UK minimum wage hasn’t cost jobs. The UK Low Pay Commission has now commissioned over 130 pieces of research from accomplished academic economists, which finds minimum wages boost workers’ pay, but don’t harm employment.



In Australia, there’s less evidence about the effect of minimum wages on employment. The evidence that is available suggests that past increases haven’t cost jobs. A 2011 paper in the British Journal of Industrial Relations found no significant effect of Australian minimum wage rises on teenagers. Another paper looked at the effect of youth award rates and found no evidence that they reduce employment. Research from academics at ANU suggests that Australian employers have power in the labour market.



It’s true that Australia’s minimum wage is relatively high. That’s something we should be proud of. America’s low minimum wage, which entrenches the working poor in that country, didn’t stop American unemployment reaching 10% in their recent recession. Australia’s employment and unemployment figures have been the envy of the developed world, not just in the wake of the financial crisis but before that as well.



Don’t listen to the doomsayers like Joe Hockey, who claim the sky will fall in if the pay packets of the low paid keep up with the cost of living. The evidence overwhelmingly shows that it won’t.

