Bill Shorten disregards a basic law of economics

The whole idea of a living wage is a complete crock. What’s a living wage for a single person living in Melbourne is not a living wage for a woman with a dependent partner and two kids living in Mudgee.

Bill Shorten says the idea of a living wage has changed. He’s dead right, but his reasoning is completely wrong. When the basic wage was introduced in 1907, following on from the Harvester decision, the weekly wage figure was calculated to meet the needs of a full-time male worker supporting a wife and three kids. There were no welfare payments to supplement the family budget.

There was also no part-time work to speak of. Today, part-time work is close to one-third of total employment. When the National Minimum Wage is increased, there is scope for some employers to adjust workers’ hours to accommodate the cost impost. The hourly rate might go up, but the effect on the total weekly wage is less certain.

While the Opposition Leader is completely clueless on these issues, former ACTU secretary Bill Kelty gets some of it. He knows that there are real dangers of pushing up minimum wages too much and too fast outside the context of productivity improvements and a strong economy. He rightly warns that economic conditions are currently quite soft; it is a time to proceed carefully.

He is more confused about minimum wages acting as an anti-poverty measure and he mentions the furphy that higher spending associated with higher minimum wages would boost employment. We don’t live in a closed economy and excessive minimum wages will lead to a fall in investment.

There are a few inviolable rules in economics and one of them is this: firms will employ workers up to the point where the wage is equal to the market value of one additional unit of output (the marginal revenue product).

A higher minimum wage runs the risk that it becomes unprofitable for firms to keep workers on or to maintain working hours. Bill Shorten blathering about a need for a living wage doesn’t eliminate this iron law of economics.