Cross-posted from The Conversation:
Last week Australia’s Fair Work Commission increased the national minimum wage to A$16.87 an hour from 1 July, 2014. The usual suspects rolled out the usual arguments denouncing this initiative, and Treasurer Joe Hockey joined them, arguing it will cost jobs and hurt employment growth. The Australian Financial Review led on the argument Australia would become “entrenched as the most expensive labour market in the world” making a headline of the long established fact that Australia sets one of the highest rates of pay for the most vulnerable in the workforce.
It is a curious argument to make: cite the lower headline minimum wage rate in the United States, the United Kingdom and other developed countries as a sign that Australia is pursuing a flawed economic approach, as if Australia were not the OECD country with one of the world’s lowest unemployment rates.
But the facts do not support simplistic arguments about wages policy.
The AFR’s comparative analysis put Australia at the top of the list of “global” minimum wages by US dollars per month.
By comparison, it’s worth considering two fundamental points:
(a) The three countries with lowest minimum wages currently have the highest unemployment (i.e. Greece, Spain and Ireland).
(b) Amongst the countries compared in the table, those from the English-speaking world (Canada, UK, USA, NZ and Australia) have some of the lowest unemployment rates. The big difference amongst them, however, is proportion of low paid workers. As a general rule low minimum wages nurture high levels of low paid employment (defined by the OECD as those earning less than two-thirds of median earnings). Australia and New Zealand, with among the highest minimum wages in the world, have both low levels of unemployment and significantly lower levels of low paid employees.
Social safety net
These facts do not mean that high minimum wages are necessary to reduce unemployment and low pay. What they highlight is that the connections between wages policy and labour market outcomes are more complex than assumed by most critics of the FWC. This is something of which the FWC is acutely aware. It and its predecessors have spent over a century devising principles on how best to manage the complexities. Its decision last week was the latest development in its thoughtful and appropriate response to the complex matter of wages policy. Why is this the case?
First, why should Australia, given its strong economic fundamentals, see a high minimum wage as a source of shame or embarrassment? It is a policy that defends the value of hard work, encourages self-reliance by workers and their families, and that provides incentives for business and the economy overall to become more productive.
The United States and the United Kingdom provide plenty of evidence for what happens when minimum wages are too low for workers to support themselves and their families. At some point government steps in to prevent the entrenchment of social disadvantage and the educational, health and criminal justice costs that come with it. The burden of administering policies to help working families below the poverty line – such as food stamps or earned income tax credits – fall on government bureaucracies or the not for profit sector, can carry a social stigma for the affected families, and do nothing to affect the root cause.
The business case
Low minimum wages are not just socially damaging. Low minimum wages also harm other local businesses, by reducing the spending power of a community. This argument is transforming the debate in the United States and is one factor behind a number of successful initiatives at state and city level to increase the minimum wage well beyond the current US Federal rate of US$7.25 an hour. Recently, Seattle City Council voted to increase the minimum wage in its zone to US$15.00 an hour. It follows other areas, including the Washington D.C. metropolitan area, which has agreed to increase its minimum wage to US$11.50 an hour.
In the United Kingdom, where the current adult minimum wage rate is GBP 6.31, a living wage movement has successfully campaigned for public sector, local councils and other prominent employers to pay a higher “living wage” rate (GBP 7.65 outside London and GBP 8.80 in London).
Among the living wage’s supporters: Conservative Mayor of London Boris Johnson, who has said “Paying the London living wage is not only morally right, but makes good business sense too”. Higher minimum wages are a stimulant to work smarter, encouraging innovation, investment in technology and reorganising jobs and tasks to make the most of the capability of the workforce. As evidence, FWC cited the recent increase in labour productivity as one of its grounds for reaching its decision.
When trying to compare countries it is worth remembering that price should not be blind to quality. Even among low paid workers, the proportion of Australians with post-school qualifications is growing and, although there is room to improve, workplace literacy and numeracy standards are high comparatively. The recent OECD Survey of Adult Skills found that Australia combined above-average adult literacy scores with a high level of equity. Why shouldn’t Australian employers pay more when they are getting a higher quality product?
Forget the politics
Second, the real reason wage rates are so low in other countries is politics, not economics. In the United States, where the federal minimum wage is set directly by legislation, there have only been 29 increases since 1938.
Individual US lawmakers are too fearful of campaigning by corporate interests, even when they have the cover of a supportive president such as Barack Obama, who has endorsed an increase to US$10.10. A number of US states have adopted measures to automatically index minimum wage rates to resolve this problem. In the United Kingdom, there have been steady increases in the minimum wage since the Low Pay Commission was established in 1997.
These are precisely the factors that the Fair Work Commission takes into account each year in its minimum wage case and they are the reasons why the latest increase is entirely justifiable on economic as well as social grounds. Far from being ashamed or embarrassed by our wage rates, Australians should be proud of our minimum wage and the institution we as a nation have nurtured for over a century.