Minimum-wage freeze will keep people in jobs

By Mark Wooden

The Australian Financial Review
27 March 2009, p. 59

Any minimum wage increase now would cause more job losses, writes Mark Wooden. We are constantly being reminded, especially by our Prime Minister, that the world is now in the grip of the worst economic recession since the 1930s. We are told Australia cannot escape the global economic turmoil, but are then reassured that the government will do whatever "is necessary to support growth and jobs" (to quote Treasurer Wayne Swan).

It is against this background that I find the government's recent submission to the Australian Fair Pay Commission on minimum wages somewhat confusing. While it has deigned not to recommend a precise figure, and while the need for wage restraint has been stressed, it is nevertheless clear that an increase, but a "considered one" (is there any other type?), is what it believes fair and appropriate.

Since its first decision just three years ago, the commission has awarded increases that have ensured the federal minimum wage (FMW) has kept pace with inflation. Such increases have repeatedly been justified by the observation that the Australian economy has been very strong and that modest increases can be afforded.

But 2009 is different; the world's worst recession in more than half a century is at our door. If there was ever going to be a time when the economy could not afford an increase in the FMW, it is now.

The government submission also recognises what business owners have long known - there is a negative relationship between wage increases and employment. So if jobs really are the priority for this government, it should be arguing for a freeze on minimum wages.

The ACTU leadership is horrified by such views, and clings to the defence that there is no credible evidence to support them, and indeed you will find no reference to any such evidence in their submission. This stands in stark contrast to ACTU submissions made to the safety net reviews of the late 1990s. Then, the ACTU would cite ad nauseum the research of two US economists - David Card and Alan Krueger - who reported evidence that minimum wage rises in the US actually caused employment to increase.

These controversial findings helped inspire a new wave of research into the effects of the minimum wage.

Summarised in a recent book by yet another two US economists - David Neumark and William Wascher - the eight of this new research has restored the neoclassical consensus. It turns out that minimum wage increases do cost jobs after all.

On a very different tack, Sharan Burrow and Jeff Lawrence tell us that an increase in the minimum wage will have economic effects not dissimilar to the recent fiscal stimulus measures. It puts more money in the hands Australian workers who will then spend it on Australian-made goods and services. Wage increases are thus good for the economy. Try telling that to business owners struggling to pay creditors and facing gaping holes in their order books.

One problem with this argument (among others) is that the relationship between wages and income for minimum wage earners is very weak.

The Fair Pay Commission can affect only the minimum hourly wage rate. How much, if any, of this increase finds its way into increased household income depends on the rate of tax levied, the rate at which government benefits are withdrawn as income rises, and the number of hours worked. The last point is especially Minimum-wage freeze will keep people in jobs or the number of hours worked, the annual earnings of at least some minimum wage workers will decline.

Very differently, the ACTU also argues that increases in the minimum wage in line with increases in prices, which is roughly what a $21-a-week increase equates to, is only fair and reasonable given government benefits supporting people out of work are indexed to prices.

But people in work are very different to those out of work. Research has consistently shown that unemployment has a scarring effect. That is, episodes of unemployment beget more episodes of unemployment, often leading to long-term welfare dependency.

In contrast, and as demonstrated by new research based on Household, Income and Labour Dynamics in Australia Survey data, low-wage employment does not have these scarring effects. Yes, it is true that many workers in low-wage jobs can expect to remain in low-wage jobs from one year to the next, but just as many others will experience marked increases in their earnings as they accumulate greater skills and experience.

Further, low-wage jobs are almost as good a protection against unemployment as higher paid jobs. Government should thus be doing its utmost, especially when employment opportunities are relatively scarce, to encourage employers to both retain and take on workers. Minimum wage increases do exactly the opposite.

So my advice to the Australian Fair Pay Commission when making its next decision would be to pay heed to its charter and "have regard to the capacity for the unemployed and the low paid to obtain and remain in employment", something the government also urges it to do. Unlike the government, however, in my view the only well considered outcome can be no increase.

Mark Wooden is Professorial Research Fellow and Deputy Director, Melbourne Institute of Applied Economic and Social Research, The University of Melbourne.