Is Australia’s minimum wage too high?

By Leith van Onselen

The Guardian’s Greg Jericho has produced an interesting and well-reasoned article on why policy makers, and Australians more generally, should not fear a modest rise in the minimum wage:

…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…

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

Many business groups and leaders argue that higher minimum wages lead to higher unemployment.

…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…

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…

Chasing competitiveness through lower wages leads invariably to a decrease in the wages of the lower 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.

Jericho’s arguments are certainly an interesting counter-point to Maurice Newman’s call for a cut to the minimum wage in a bid to raise Australia’s competitiveness:

…consider Australia’s minimum wage at US$33,355 for a 38-hour week against other countries with mature economies. For instance, Canada, our closest competitor has a minimum wage of US$22,766, for a 44 hour week. The European minimum is around $US 22,000, New Zealand is $ US23,000 and the United States, $US15,000, all rounded and for 40 hour weeks. A British worker receives about $US20,000 for a 38.2 hour week. On top of our minimum awards Australian employers must pay 10 per cent of their payroll in workers compensation insurance premiums, a 9.25 per cent compulsory superannuation surcharge, sick leave, overtime penalty rates and holiday loadings.

While any discussion in Australia about industrial relations evokes screams of outrage and the spectre of work choices, we cannot hide from the fact that Australian wage rates are very high by international standards…

My own view is that the minimum wage is a peripheral issue. The broader problem is that Australia’s non-mining economy has become uncompetitive, adversely impacted by a broad range of factors like the high Australian dollar, inflated land prices, and overly concentrated market structures.

It is a problem that can only be solved via a broad-based program of reform aimed at knocking-down barriers to competition, improving productivity and innovation, in addition to targeting a lower currency via macro-prudential controls on higher risk lending. Only by lowering the nation’s cost of production, and improving competitiveness, can Australia’s non-mining sectors hope to compete in the globalised world.

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