Pay Ruling Hardly Helpful

By Mark Wooden

The Australian Financial Review,
28 October 2006, p. 82

If the Government were expecting things to change when they transferred responsibility for setting minimum wages from the Australian Industrial Relations Commission to a newly created Australian Fair Pay Commission, then they received a rude shock yesterday.

The AFPC increased the Federal Minimum Wage (FMW) by $27.36 per week, or 5.6 per cent, which just happens to be the rate of increase over the last 18 months in the Consumer Price Index (released on Wednesday). Whether by chance or design, the AFPC has handed down an increase which ensures that the real living standards of minimum wage workers remain unaffected.

This seems like exactly the sort of decision the Industrial Relations Commission might also have handed down. In other words, apart from a greater burden for taxpayers in the form of extra Commissioners and another layer of bureaucracy, little has changed.

In hindsight, we perhaps should not be so surprised by the outcome. The way the AFPC reached its decision was very much in line with the directions provided it by the Work Choices legislation. Furthermore, based on the initial reaction of the Prime Minister you would be forced to conclude that the decision was entirely expected (but that could just be the political spin doctors at work).

Needless to say, there will be much debate about the merits of this decision. The ACTU should be delighted. They were seeking $30, and they got almost everything they asked for. Employer groups, on the other hand, will be very dissatisfied, and possibly a little mystified. Wasnt Work Choices supposed to deliver more diverse pay outcomes in return for greater employment?

Ultimately, however, all parties union, employers and governments alike place too much weight on minimum wages as a tool for affecting economic and social outcomes.

The increase will not, for example, make much difference to work incentives. No one would argue with the proposition that raising the wage enhances the attractiveness of working. Nevertheless, for some groups, even a $27 per week rise in the minimum wage is unlikely to make much difference. Think, for example, of the stereotypical working man supporting a wife and children. For this type of person holding down a minimum wage job, only a small fraction of any FMW increase accrues as an increase in disposable income. The AFPC, however, dismisses such concerns because so few minimum wage earners are in this situation. But that is the whole point faced with the choice between a minimum wage job and life on income support, many sensibly choose the latter. That said, it is clear that income support levels place an effective floor on the FMW and so without any fundamental change in the tax transfer system, a time will come when the FMW will either become irrelevant or will need to be indexed to prices. Apparently that time is now.

Increases in the FMW also do not do much to help the poor. Minimum wage workers, by definition, are at the bottom of the earnings distribution, but this does not mean they are poor. Minimum wage workers are found scattered throughout the income distribution, and are not overwhelmingly concentrated in the poorest households. Most live in households with incomes that put them well above the poverty line.

More importantly, most low-income households are households where nobody works. Minimum wage increases, by definition, do nothing to help those without jobs. Indeed, they can only make things worse, by pricing some low skilled people out of the labour market. The best way to help the poor is thus to directly assist those without jobs.

Employers, of course, will tell you that rises in labour costs will adversely impact on the demand for labour and thus employment. I agree. Nevertheless, for rises in minimum wages to impact on labour costs, minimum wage laws must be binding, and it is not obvious that compliance with minimum wage laws in Australia is high.

Research undertaken by the Melbourne Institute and commissioned by the AFPC, for example, found that in survey data collected from employers by the Australian Bureau of Statistics in 2004, close to 6 per cent of all full-time employees and almost double that proportion of part-time employees were being paid below the FMW that prevailed at the time. While there are good reasons why some workers in 2004 could be paid such low rates, it is difficult to escape the conclusion that there is a good deal of non-compliance.

The decision announced yesterday, of course, will provide yet further incentive for many employers to remain non-compliant.

Mark Wooden

Professorial Research Fellow and Deputy Director, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne