Crikey! Fake Left goes after wage gains

More good work from Bernard Keane at Crikey today:

If the wage denialists in business, the government and at the Financial Review are going to make the case that there’s no need for action on wage stagnation, they’re going to have to do a little bit better than rehashing the claim that minimum wage rises — as proposed by Labor — cost jobs. It’s lazy and, more to the point, now debunked.

The Business Council’s Jennifer Westacott was out of the blocks this week claiming that wage rises will lead to business “sacking people” and that the minimum wage shouldn’t be increased because we’d “get a year or so of higher wages at the minimum wage end only to see job losses in two or three years time”.

The hospitality sector wants to slap a real wage cut on its workers. Scott Morrison repeated the business line, claiming Bill Shorten was “going to force small and family businesses all around the country to sack people, in order to possibly give some others a few more dollars”.

Morrison even called Labor’s talk of a higher minimum wage “a curse on small business and family businesses”. And at the very home of wage denialism, Labor was declared to be “completely wrong on the minimum wage”. A minimum wage rise would price workers out of a job.

Traditionally the issue of whether minimum wage rises increase unemployment has been dogged by a lack of empirical evidence. Three and a half years ago, the Productivity Commission argued “there are also ongoing disputes among economists about how minimum wages affect employment and poverty. Economic theory and some international empirical studies suggest that increases in minimum wages can reduce jobs and/or hours worked, but they also indicate that employment gains are possible in some circumstances.”

But several years on, the empirical data is in, and clear — minimum wage rises not merely don’t harm employment, they may even increase it. Much of the evidence comes from the US, which has a federal minimum wage of US$7.25 per hour. But states and even cities can set their own minimums, and in recent years many have increased minimum wages significantly. There are now 10 major cities in the US that have minimum wages between US$12-15.

The result? An academic study last year found “we cannot detect significant negative employment effects. Our models estimate employment effects of a 10 percent increase in the minimum wage that range from a 0.3 percent decrease to a 1.1 percent increase, on average.” In one of the cities, Seattle, the increase made a huge difference in the earnings of low-income workers.

But what about real workers, doing it tough in Trump’s America? For them, we can go to the great state of Arkansas, which in 2014 voted to increase the minimum wage there to US$8.50 — well above the minimum in the states surrounding it. Based on the logic of Scott Morrison, the Business Council and the Financial Review, that should have seen Arkansas employment growth slow below that of its neighbours. Except, the result was…

From 2014 to 2017, unemployment in the state dropped from 6 to 3.7 percent, for a total year-to-year decline of 38.3 percent. Only Tennessee experienced a larger decline in unemployment among Arkansas’ six neighboring states. Significantly, among the seven states, Arkansas and Tennessee tied for lowest unemployment in 2017… Arkansas hit its lowest unemployment rate since the agency started its current state unemployment data series in 1976.

So damaging was Arkansas’ flirtation with a higher minimum wage that last year Arkansans voted to increase the minimum wage again to $11 by 2021. Counties in neighbouring states are now lifting their minimum wages. And a number of other states have been doing the same.

This, incidentally, completely demolishes the nonsensical line currently being run by the AFRthat America’s recent wages growth, which has finally edged above 3% after several years of record low unemployment, has been because of Trump tax cuts (which in fact led to such massive share buybacks — $1 trillion and counting — that Republican Marco Rubio wants to curb them!).

Great see the Fake Left turning onto the class war!

However, things are not quite so simple. The US example of wage gains for the lower paid relies upon two forces not one. The first is the minimum wage hikes at the state level. The second is the economic tightening that came about over the business cycle, aided even by the Trump tax cut. Sure, the last is a sugar hit and offers little in terms of economic multipliers. It would have been much better spent as investment incentives and low paid tax cuts. But a raging stock market did lift demand.

The key point is that US minimum wage gains happened within an accelerating and then booming cycle. Nor did they hurt competitiveness much given they were so low to begin with post-GFC.

When we transplant the idea into Australia’s case, the circumstances are different. We have a weakening economy and private sector at death’s door. It is about about get even weaker still as the house price crash continues.

Hiking wages into that circumstance will cost jobs. Especially since many of the business where wages are lowest – the bullshit jobs of the gig and services economies – will take a double hit from crashing demand and rising costs. A plethora of supply chains built out this cycle made the assumption of coolie labour forever. Supply created demand, as it were. As those wages rise during consumer belt-tightening, the sectors will get routed and jobs go.

There is also the fact that Australia remains extraordinarily inflated owing to the mining boom. For those that know their history, one of the breakthrough policies of the Hawke/Keating reform era was the wages accords between Labor and the ACTU, from Wikipaedia:

The Prices and Incomes Accord was an agreement between the Australian Council of Trade Unions and the Australian Labor Party government of Prime Minister Bob Hawke and Treasurer (later Prime Minister) Paul Keating in 1983. Employers were not party to the Accord. Unions agreed to restrict wage demands and the government pledged to minimise inflation. The government was also to act on the social wage. At its broadest this concept included increased spending on education as well as welfare.

This was seen as a method to reduce inflation without reducing the living standards of Australians. At the beginning of the Accord, only one union, the New South Wales Nurses Federation, voted against the Accord. The Accord continued for the whole period of the Labor government through seven stages including, after 1993, enterprise bargaining.

The first Accord secured for all workers a 4.3% pay rise (September 1983), a 4.1% pay rise (April 1984), and a deferred 2.6% pay rise over the initial 3-year period, improvements in family payments and child care, and the introduction of Medicare. Unemployment also fell from over 10% (in the 2nd quarter of 1983) to just under 8%.

The accords were eventually effective in killing off the inflation surges of the seventies and helping restore Australian competitiveness after the Japanese-related mining booms. A similar position to where we are today.

Could such agreements be helpful again? Via The Australian:

Former ACTU secretary Bill Kelty has cautioned that Labor’s proposed living wage must be phased in sensibly and responsibly, and be linked to productivity gains, or it could risk a wages blowout and a “cost spike” for the economy.

The long-time union chief and architect of the 1980s and 90s ­Accord supported the living wage proposal, saying it would be beneficia­l for the country, provid­ed that it was economically affordable and absorbed into the wages system.

“Labor and the unions need to take into account the economic capacity of the nation and of ­industry to afford a minimum wage increase,” Mr Kelty said. “The economy is slowing, or growing moderately, and productivity has to lift to afford an increase in the minimum wage.”

Quite right. Though today, of course, the political problem is not too much inflation but too little even if the economic issue is still the repair of the real exchange rate after a mining boom. There are further falls ahead in national income as China slows into the 2020s.

Some kind of accord between Labor and the ACTU could be useful to deliver a middle ground outcome of sustainable wage gains. But it must be noted that union membership is much lower today and the impact of any kind of deal on wages will be commensurately smaller as well. Moreover, rampant wage theft and the labour supply shock associated with mass immigration will limit the efficacy of any new accord even more. And, as said, as wages rise into increasing economic slack, lifting unemployment will kill them anyway.

Sadly, I do not think that forced wage hikes will last. Much more is needed to lift multi-factor productivity for that:

  • competition must be restored to the oligopoly economy;
  • innovation must be super-charged;
  • venture capital must be liberated;
  • automation and digitisation should be welcomed. They are the saviour for wages not another problem, as well as the answer to an aging population;
  • energy prices must be lowered via domestic gas reservation;
  • the green energy revolution in networks, households and transport must be incentivised;
  • infrastructure investment must be more rigorous;
  • mass immigration must be halved to de-bottleneck cities;
  • horizontal fiscal imbalances must be smoothed;
  • GST should be hiked and income taxes cut.

The list is endless…all of it hard. Nor is much of it on Labor’s agenda and no start has even been made on explaining just how much national endeavour will be needed.

Indeed, the “fairness” rhetoric of the Shorten Government in waiting is probably raising false hope in the polity. There’ll be a sting in that tail.

David Llewellyn-Smith
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  1. kannigetMEMBER

    I am fairly sure that if Labor bring in the Minimum wage they are talking about there will be job losses, but I am also fairly sure they will have nothing to do with the requirement to pay more. They are going to happen as construction eases off, discretionary spending contracts ( if it even exists at the moment ) and business turnovers collapse. Paying people a little extra wont make much difference one way or another.

  2. The fake Left has so many elephants in the living room that they may as well open up as a wildlife park.

    It’s a zoo. With the hyenas of the radical Left yapping about their PC agenda and ignoring mass immigration and the the large wallowing hippo (Dr Liz) generating gas (hippos fart a lot) and making nice with the Scottish jackal (Willox), who’s busy guarding his carcass while his entire family get their fill – it’s fun for the entire family.

    And then there are the mystery hybrids, like the the McManapus, It should not be possible for a leader of the labour movement to be in the business of destroying its own habitat, but there you go. Ain’t nature wonderful.

  3. Why is it accepted that productivity needs to increase in order to pay for the increase in minimum wage, when productivity gains have been divorced from incomes for decades, captured by capital? Wouldn’t this suggestion just leave the inequity between capital and labour at current levels (i.e., not address the class war)? Or is the way to rebalance declining wages not through wage growth, but by some other approach? The reason I ask is that data shows productivity and wages no longer seem connected, but people pretend they are?

    • Exactly. Company profits are still going strong especially at the big end of town despite a housing bust and the household sector completely tapped out. The article misses one point – what’s the point of innovation and trying new business ideas when the household sector doesn’t have any spare income to purchase anything? We’re seeing the same thing in a number of places globally with companies hoarding cash not seeing any investment worth what shareholders expect on their capital. In this environment we may see wage rises create economic activity if it means company profits flow back to the household sector and allow the wheel to keep on turning. When households have cash businesses will think of ways to get their hands on it.

  4. Jumping jack flash

    Raising minimum wage can’t actually happen without business owners taking an initial hit.

    All things being equal and if this were a proper economy then there would be little problem with the “fat cat” employers taking that initial hit to boost wages.

    After all it is absolutely correct that boosting wages will boost consumption.

    The problem is the debt. We cant afford to cut the wages of the employers because the debt and the gouging (due to debt) has placed a floor under their wages. With the effect of the debt considered you’re effectively robbing peter to pay paul.. also consider that with the enormous debt everyone has, a good proportion (possibly all) of that wage rise will not be used for consumption, it will either be used to pay down debt or absorbed by the gouging of living costs (also due to the debt).

    Theres just too much debt for anything to work now. Cutting rates at the same time may break the cycle but only if that doesn’t cause a new wave of nonproductive debt. And wages will only be able to rise as much as the reprieve on debt service the gougers and the employers receive, which probably wouldn’t be much.

    • Even StevenMEMBER

      I largely agree with this. Most small business owners aren’t exactly rolling in it. Why take the risk of setting up and operating a business (and stress), when instead you can just be an employee making OK money serving plates in a cafe. It’s a tricky problem.

      I don’t think the small business owners are (generally) the fat cats. I think the owners and operators of large corporations are the fat cats. No easy solutions.