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Poor pay the price of a minimum wage

Friday, 02 March 2018

Poor pay the price of a minimum wage

The link between a high minimum wage and unemployment was carefully explained during a Senate hearing this week. By Spiro Premetis.

Raising the minimum wage without improving productivity increases unemployment. This emphatic point was made by Dr David Gruen, Deputy Secretary (Economic) of the Department of Prime Minister and Cabinet, at Senate Estimates this week.

Close followers of the MRC will recall reading the same point here on February 2.

Dr Gruen made several important points:

  • In Australia, a substantial increase in the minimum wages would be expected to increase unemployment. This would affect some of the lowest paid workers in Australia.
  • Comparisons of US studies on the minimum wages and their effects on employment are not relevant to the Australian economy, partially because Australia has a substantially higher minimum wage (54 per cent of median earnings) than in the US (40 per cent).
  • That the UK Office of Budget Responsibility (OBR) has estimated that the UK Government’s proposal to increase the minimum wage will increase unemployment. The OBR estimates suggest increased unemployment levels in 2020 by somewhere in the range of 20,000 to 120,000 people.

Read the full testimony below.

CHAIR: Thank you for joining us, Dr Gruen. I just want to ask some questions about labour market issues. There was an article by Rob Harris published in the Herald Sun on 20 February which made some reference to advice provided by the Department of Prime Minister and Cabinet about the minimum wage. The article itself is not important; I'm just using that to jog your memory, perhaps, about the advice.

Dr Gruen : Yes.

CHAIR: So, you're familiar with that?

Dr Gruen : Yes. I am familiar with the article that Rob Harris wrote on 20 February.

CHAIR: Okay, thank you. I'm interested in the advice that the department might have provided or may provide on proposals to change the minimum wage. Are you aware of proposals that Australia should legislate for a living wage?

Dr Gruen : I'm not in a position to comment on advice that Prime Minister and Cabinet might have provided to the Prime Minister. Obviously, we provide advice on a frequent basis on a wide range of things. But I am aware of some suggestions to raise the minimum wage to something that might be called a 'living' wage—

CHAIR: Yes; it's been advocated by the ACTU, for example, and United Voice and other unions have put this forward.

Dr Gruen : I'm aware that it was advocated by United Voice in the 2016-17 annual wage review.

CHAIR: Yes. What would the effect of such a proposal be on employment?

Dr Gruen : The suggestion of United Voice was for a rise in the minimum wage to 60 per cent of the median income of medium wages by 2020. The current minimum wage is 54 per cent of median earnings in Australia. So that would represent a bit more than a 10 per cent increase relative to median wages over a couple of years.

The issue of the impact of rises in the minimum wage on employment has been a contentious one in the United States, where there is quite a lot of debate about the extent to which rises in the minimum wage have a deleterious effect on employment. But it's worth being aware that amongst OECD economies the US has the lowest minimum wage relative to its median wages. US minimum wages are something like 40 per cent of median earnings, whereas ours are 54. I suspect that the debate in the United States about the extent to which this has employment effects is less relevant in the situation where minimum wages are significantly higher than they are in the US.

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CHAIR: I will come back to the particular proposal in Australia. But, in abstract, if tomorrow the minimum wage were increased from where it is at the moment—at $18 or $19 an hour, depending on your age—to $100 an hour, what would you expect the employment effect of that to be?

Dr Gruen : From $18 to $100? Very substantial.


Dr Gruen : Very substantially negative.

CHAIR: Yes, indeed.

Senator Cormann:May I add to this? It's actually a very important point that is quite relevant to the conversation we are having about company tax cuts and the need for those. If you increase the cost of employment without also taking steps to improve the profitability and successfulness of the businesses that employ people in the private sector, then, all other things being equal, it means that you will see an increase in the unemployment rate. And as you see an increase in the unemployment rate and you have an increase in available supply of labour and a reduction in demand for labour, then obviously in the remaining part of the economy wages would be expected to trend down.

The reason we want to ensure that all businesses in Australia are not disadvantaged, vis-a-vis businesses in other parts of the world who have the benefit of lower business tax rates as we speak today, is because if we make it harder in Australia for our businesses to compete with businesses in other parts of the world because they have the benefit of lower business tax rates, it means they will be less profitable and less successful in future. This means they will be able to hire fewer Australians, which means that in the end wages will be lower than they otherwise would be. So it's very important for all of us to remind ourselves that just unilaterally increasing the cost of employment without taking steps to pursue reforms to improve the opportunity for business to be more successful and more profitable would have the effect of increasing unemployment and lowering wages across the economy, where what we want is the exact opposite.

CHAIR: Dr Gruen, obviously my example was an extreme example; I gave it to you for an illustrative purpose. Obviously the proposal by the ACTU and others is not of that magnitude, but it's still a significant increase, a legislated increase, in the minimum wage. What would you anticipate the effect of that would be?

Dr Gruen : The point I was making earlier was that although there is a lively debate about how big this effect is at much lower levels of the minimum wage, it seems to me very likely that that sort of minimum wage that we've got, namely a number like 54 per cent of median earnings rather than a number like 40 per cent, means that the employment effects are clearer and that significant increases in the minimum wage would have significant adverse employment implications.

CHAIR: Would it have implications for particular types of workers?

Dr Gruen : Clearly it would have implications for workers for whom the legislated increase applied, who tend to be lower paid workers and workers with lower levels of skill.

CHAIR: So an initiative ostensibly aimed at improving the pay and conditions of lower paid workers might actually have the opposite effect and cause them to lose their jobs altogether?

Dr Gruen : It would improve the living standards of those who kept their jobs, but it would clearly reduce the living standards of those who lost their jobs as a consequence of it.

CHAIR: It doesn't really sound like a sustainable way to lift wages.

Dr Gruen : I think it would have implications for the number of people who are employed at those skill levels, as in it would have adverse implications.

CHAIR: Yes; thank you for clarifying that. Do you know how many workers are currently affected by the Fair Work Commission's annual wage decision?

Dr Gruen : The number in my head for the minimum wage is around two per cent directly, but I don't have—if you're going to go further into this, I'll probably recommend you take it to the relevant department.

CHAIR: Yes. In fact, I'm a member of that committee and I plan to. But just while I've got the benefit of your advice here: my understanding is that, yes, it's about two per cent of workers who are directly affected by the setting of the minimum wage by the Fair Work Commission, but that a whole lot of awards are pegged to the minimum wage—

Dr Gruen : That's true.

CHAIR: and so a decision to legislatively increase the minimum wage would have flow-on consequences for a much larger number of employees.

Dr Gruen : It could well do, yes.

CHAIR: Is that your understanding?

Dr Gruen : Well it would depend on how you did it, but to the extent that by raising the minimum wage you swept up other awards that were between the old minimum and the new minimum, then clearly they would be affected. And to the extent that things are linked to awards further up, they will also be affected.

CHAIR: Thank you. The UK has been favourably cited as an example of how to implement a living wage. Are you familiar with how the UK has implemented its so-called living wage?

Dr Gruen : Not in detail, but I am aware that the Office of Budget Responsibility has provided analysis of the UK's proposed living wage arrangement, and has provided an empirical estimate of how many jobs it thinks would be lost. I don't have that number in my head, but I know that is what the Office of Budget Responsibility has done.

CHAIR: Perhaps you could provide that on notice to the committee.

Dr Gruen : Sure.

CHAIR: Are you familiar with what happened to welfare benefits under the UK proposal?

Dr Gruen : No, I'm not.

CHAIR: One of the constant refrains, in this debate, by unions and others is that the proportion of casual jobs as a portion of the overall market has been increasing. Is that correct?

Dr Gruen : I don't think that is true over the past run of years. I think the proportion of casualisation has been, roughly, constant. But I'd have to check that.

CHAIR: That's my understanding too. The use of labour hire: has that been increasing?

Dr Gruen : I'm not on top of that.

CHAIR: The use of independent contractors: do you know if—

Dr Gruen : Again, I'd have to check the detail.

CHAIR: Another claim that's been made is that jobs growth isn't keeping pace with population growth. Is that true?

Dr Gruen : Over the past year it's well and truly exceeded population growth. There have been 403,000 new jobs created—net—over the past year and that is very substantially more than population growth.

Senator Cormann:And when jobs growth exceeds population growth, as it has, substantially, over the past 12 months, the excess supply in the labour market reduces, and as the excess supply in the labour market reduces and competition for the remaining workforce increases you would expect wages to go up.

Dr Gruen : The other thing that we've seen is a big increase in the number of people entering the labour force, which is also a good thing. The female labour-force participation rate hit an all-time high, in the latest data, and participation rates of both males and females have been rising. So it's an encouraged-worker effect. The strong employment growth is bringing more people into the labour market.

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