Home > Economic policy, Economics in Two Lessons > A data point on minimum wages

A data point on minimum wages

April 29th, 2016

I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents

The standard minimum wage for workers aged 21 and over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.

More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:

* “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
* For workers employed on a regular basis, protection against unfair dismissal.

The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.

Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.

* Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.

  1. Ikonoclast
    April 29th, 2016 at 09:19 | #1

    From what I have read, an acceptable living minimum wage is not demonstrably deleterious to the economy or to employment outcomes. Given this, there are other good reasons to pay an acceptable living minimum wage. Inequality will be reduced.

  2. Peter T
    April 29th, 2016 at 09:27 | #2

    You’ll probably include it, but a key point here is that when employers pay below the cost of living, someone else picks up the difference. Can be parents providing rent-free accommodation, loans and use of a car, charities, government or fellow employees (food bins at Walmart). There is a floor, although determining where exactly it is is difficult. Wages below it are a demand for subsidy.

  3. john
    April 29th, 2016 at 10:54 | #3

    A good read relating to these sorts of issues is – Going to Extremes by Barbara Ehrenreich

  4. derrida derider
    April 29th, 2016 at 11:16 | #4

    I used to believe supporters of high minimum wages were just engaging in wishful thinking (which many still are). The weight of evidence was that min wages did indeed price people out of work, and unemployment is so devastating that it well outweighs any good higher wages could do.

    But in the last 20 years the empiric evidence, explained by more sophisticated theory (those search models you decried so much John), is that the cost of a modest minimum wage comes out of employer match rents, so doesn’t affect employment much and in some quite plausible circumstances can even raise it. So as Keynes once said “When the facts change, I change my mind. What do you do, sir?”.

    Now whether US$15 counts as “modest” I’m not sure. I suspect the problem there, much more than here, is not the level per se but its national nature – it’s probably too low for New York, too high for Mississippi. IOW it will have little effect good or bad in NY, but will well exhaust any match rents in Miz.

    All that said I’m sceptical that a feasible enforceable minimum wage can do much about overall US inequality – it aint the best tool for “predistribution” even if you think predistribution is feasible (about which I’m mildly sceptical). At very best it can modestly improve the position of the poor relative to the middle class, but it does nothing about the runaway gains by the top 1% . For that there is no alternative to “make banking boring again” style regulation, on the one hand, and Piketty-style wealth taxes on the other.

  5. Jim Birch
    April 29th, 2016 at 11:44 | #5

    I’m interested in how a minimum wage compares economically to negative income tax. My instinct would be that the latter would be preferable.

    I’d also be very interested to read a post on basic income proposals.

  6. john
    April 29th, 2016 at 12:34 | #6

    I do feel for those that are still renting in their retirement as sometimes thru no fault of their own they find themselves in that situation. Those that have several mills in super receiving tax free income from super in distribution mode should really be paying tax on that income. They do not need support from the govt and taxpayers should only support those in a real need.

  7. Bruce Bradbury
    April 29th, 2016 at 16:03 | #7

    Note that the Australian minimum wage only applies to people aged 21+. For example, the minimum wage for an 18 year old is 68.3% of the adult minimum.

  8. John Quiggin
    April 29th, 2016 at 17:25 | #8

    Bruce @7 I’ve edited to respond to this point.

  9. Stockingrate
    April 29th, 2016 at 18:37 | #9

    Further to [email protected] the minimum wage is often less than the minimum legal wage, such as when the worker does not have the legal right to work,or to work those hours, or has a visa related non-wage reward for working.
    Similarly the minimum reward for labour can be less than the minimum wage through non-employee contracting arrangements such as piece work, nannying etc, nail salon work etc.

  10. James Wimberley
    April 30th, 2016 at 03:20 | #10

    The Australian minimum wage comes bundled with other entitlements, which together reduce the vulnerability snd ststus inferiority of those concerned. Dignity is as important as money.

  11. Collin Street
    April 30th, 2016 at 09:48 | #11

    I’m interested in how a minimum wage compares economically to negative income tax. My instinct would be that the latter would be preferable.

    There’s no reason you can’t have both. And you really, really want a minimum wage, because of what Peter T wrote about subsidy; if labour doesn’t have a floor price borne by the employer, the employer will use labour wastefully.

    The logic of the market is, things get done if people are willing to pay the cost; the cost of a full-time worker is the cost of a living wage. If the consumers aren’t willing to pay the employer enough for the service to cover living wages for the employee… then ipso-facto the consumers don’t actually want to pay what the work will cost and, in the only meaningful sense, don’t actually want the job done at all.

    Negative income taxes are fine for guaranteeing income to part-time or what-have-you workers, but this is fundamentally a different problem to the externality-capturing effects of minimum wages.

    [and, besides: we have minimum wages and we have welfare for low-income workers. The system already has all the controls we need; do negative income taxes offer enough of an advantage over transfer welfare to pay the costs of the changeover? What’s the payout time, here?]

  12. Ikonoclast
    April 30th, 2016 at 13:00 | #12

    Peter T has made a good point which derrida derider seems to ignore: “when employers pay below the cost of living, someone else picks up the difference.”

    Another term for a living wage is the “reproductive cost of labour”. There is an approximate amount, which is relative to the cost of living in a given economy, which a person needs to earn to be able to feed, clothe and house a family, and educate at least 2 children. If this cannot be done then labour cannot be reproduced. The working population cannot be reproduced.

    It is blatantly obvious that if the employer does not pay the reproductive cost of labour someone else must. Somebody else must pay the subsidy through taxes and then welfare to make up the difference. An employer who does not pay a living wage is bludging on the rest of the community. If a business cannot pay a living wage to all its workers then it deserves to go out of business. Otherwise, better businesses who pay living wages and pay more taxes as well are subsidising that inefficient, low-paying business. Businesses which do not pay a living wage are free-riding on other, better businesses.

    We would be better served setting a livable, minimum wage and reducing welfare concomitantly where possible. This would reduce the churn in taxing to pay welfare to subsidise inadequate wages.

    In addition, the federal government should become the employer of last resort via a Job Guarantee Scheme. The Federal Government could provide as many minimum wage jobs as necessary to secure unemployment at a frictional minimum of about 2%. In doing so, it could also set a minimum wage floor. Such a scheme is fully feasible and our economy would work better for it, not worse.

    “The job guarantee proposal is particularly associated with certain post-Keynesian economists,[2] particularly at the Centre of Full Employment and Equity (University of Newcastle, Australia), at the Levy Economics Institute (Bard College) and at University of Missouri – Kansas City including the affiliated Center for Full Employment and Price Stability.[3]

    JG draws from a social justice tradition of right to work, such as the United Nations Universal Declaration of Human Rights and the US Employment Act of 1946, and an early form was proposed by Hyman Minsky.[4][5]

    The JG proposal was conceived independently by Mitchell (1998)[6] and Mosler (1997–98).[7] It has since been developed further by authors, including Wray (1998)[8] and a comprehensive treatment of it appears in Mitchell and Muysken.” – Wikipedia.

    A JG would work and be highly beneficial for our society and our economy. The theory is clear but I leave people to research and read the theory for themselves.

    Simple logic demonstrates that we must and do support all people in our society anyway. By and large, we support the unemployed anyway (though maybe not well enough in all cases). If we support them why not utilise them? If we utilise them then production increases and we pay them a minimum wage. It’s a no-brainer. It’s obvious to all but the ideologically brainwashed and the plutocrats that a Job Guarantee system is better than an unemployed reserve welfare system.

  13. Charlene MacDonald
    April 30th, 2016 at 13:51 | #13

    If a business cannot pay a living wage to all its workers then it deserves to go out of business.

    Humm…. but it seems to be those businesses that pay the lowest which, rather than go out of business, become the biggest.
    E.g. Walmart, McDonald’s, Coles, etc.

  14. Ikonoclast
    April 30th, 2016 at 14:42 | #14

    @Charlene MacDonald

    Exactly, that is the case because these businesses are subsidised. If they are not paying living wages, then the income for those workers is paid from other sources. These businesses are getting subsidised workers. The subsidy comes from welfare which comes from taxes. Those taxes come from better paid workers and from more profitable businesses which do pay taxes. And if a business pays low wages and then pays some taxes and then some of these taxes go back to pay supplementary welfare (like family payments) then that is “churn”. The extra steps to move money away from workers and back to them via the state as taxing/welfare paying entity is churn in a situation where churn need not occur or at least not occur to the same degree. The extra churn is an extra economic and social overhead. It is both inefficient and demeaning.

    All of these facts are absolutely clear and plain except to those in denial about the manifold absurdities and inequities of our current system.

  15. James Wimberley
    April 30th, 2016 at 17:08 | #15

    The classical historical reference here is the English village of Speenhamland, ca. 1800.

  16. April 30th, 2016 at 17:13 | #16

    I like Collin Street’s point. Having a low minimum wage allows weak businesses to carry on when the efforts of all involved would be better employed elsewhere. A high minimum wage means you move on from failing businesses.

    I note one recent attack on minimum wages in the university sector. Casual markers are told that it is expected they will mark “n” essays per hour, and that determines their pay. Some markers devote only the given amount of time to each essay, and of course can’t do a good job in that time. So they don’t get given more work. The result is an actual pay rate a lot lower than the quoted pay rate.

  17. Collin Street
    April 30th, 2016 at 17:35 | #17

    > A high minimum wage means you move on from failing businesses.

    Gets better: a high minimum wage drives capital-for-labour substitutions — including workforce training — boosting productivity and increasing potential-GDP-per-capita.

  18. Peter T
    April 30th, 2016 at 20:04 | #18

    James

    iirc Speenhamland is blamed for setting wages unaffordably high. But note that detailed studies suggest that over 10 per cent of the English population at the time were malnourished to the point of not being able to work at all. This was a huge waste in itself, and a tragedy. It is also a load no modern industrial economy can support.

    Note that wages, cost of living and “reproduction of the labour force” are not related in simple ways. They are about different things. For one thing, many modern and pretty much all pre-modern economies did not reproduce their entire available labour forces. Many young adults can find no place in the productive economy, and either migrate or die (often both). This is common practice for most species. For a second, wages is about access to money – around half the work done in the economy is not paid at all, and the labour force cannot be reproduced without both components. Third, as you note, cost of living is as much about social participation as subsistence.

  19. Ikonoclast
    April 30th, 2016 at 20:58 | #19

    I notice the idiots in charge of this country have now driven our economy into deflation and yet they still want to run a budget surplus! They are complete economic illiterates. If they get in again we will end up in a serious economic depression.

  20. BilB
    May 1st, 2016 at 01:50 | #20

    The one thing that makes the minimum wage non crippling in one way in the Australian context, is real estate prices. I just had a look and ……..man have those baby boomers had a ball with their negative gearing…… WOW.

    Sydney, Newtown (nothing very much in suburban charm) $500,000 per room.

    Rental in the same area is around $350 per room/person.

    Its not the minimum wage that is funding those sorts of property excesses. So what make the whole thing tick? Time. The bulk of the properties were bought at different times with purchase prices ranging from $50,000 per room up to $600,000 per room now, giving a broad range of perceived property values. This in turn provides rental flexibility nearly enough to house every one right down to the minimum wage. And then there are the far out suburbs where there are cheaper properties for those prepared to drive the distance.

    With politicians it is as much about the words they don’t use. Turnbull’s “Mom and Dad” investors,…the missing word is “rich” Mom and Dads whose property values he is terribly concerned about.

    I really don’t see how you can discuss minimum hourly rates without looking at it in the context of property values and rents.

    When the GFC took hold average minimum wages in the US were around $7.5 per hour, but many of the problem properties were around the $100,000 mark.

    It is not just the money you earn, it is what you have to do with it.

    For anyone interested in Social Innovation, have a look at

    http://eai.eu/organization/social-innovation-europe

  21. Zucchini
    May 1st, 2016 at 16:51 | #21

    But what about illegal migrants? A substantial increase in the minimal wage would make the hiring of illegal migrants much more attractive in the US, which in turn would lead to a substantial increase in illegal migration (which has been low, or even negative recently). This does seem like an important difference between Australia and the US.

    Another issue is the enormous gaps between normal wages between places like New York and San Francisco and places like Arkansas and West Virginia. No one size fits all solution is likely to work well.

  22. May 1st, 2016 at 19:54 | #22

    @Zucchini

    Within a country you can have a “one size fits all solution”. People from Arkansas and West Virginia should leave. In the short term, taxes from the wealthier areas can provide some assistance. If it weren’t like this, you’d expect Tasmania and South Australia to have a lower minimum wage. This just keeps the misallocation of resources (including labour) going.

  23. Jim Rose
    May 6th, 2016 at 10:50 | #23

    I do agree with you on the mining sector been thoroughly overblown in Australian economic discussions. detrended data shows that you cannot find the mining boom in Australian real GDP data

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