This was published 6 years ago
Opinion
Mandatory wage hikes could see employees priced out of jobs
By John Slater
It’s easy to assume the Fair Work Commission’s decision lift the minimum wage by 3.5 per cent is a positive step towards improving the plight of low-paid workers. But contrary to the claims of the ACTU, mandatory wage hikes are the wrong solution for bettering the lot of the low-paid and the more than 500,000 Australians currently out of work.
ACTU snap rally outside the Fair Work Commissison. Credit: Justin McManus
The ruling follows months of campaigning by the ACTU and Labor Party to boost the minimum wage by as much as $50 a week to provide working families with a true "living wage" to ease mounting cost of living pressures.
Apart from the social dividend, ACTU secretary Sally McManus claims an aggressive wage hike of more than double the weekly increase of $24.30 would "supercharge" the creation of 57,000 new jobs by stimulating demand in the local economy.
At face value, the ACTU presents a compelling proposition. But examined in terms of its broadest consequences, the case for any raise in the minimum wage above inflation fails on both social and economic grounds.
Wholly ignored in the ACTU’s heroic projections of a pay rise-induced jobs boom is the impact on the very businesses assumed to be funding these raises. Considering that wage elasticity – the effect of wage increases on demand for labour – is among the most talked about concepts in modern economics, this oversight is more than trifling.
As it happens, the leading Australian authority on wage elasticity is Labor’s shadow assistant treasurer, Andrew Leigh. Leigh’s peer-reviewed research has found that Australia’s labour force has a wage elasticity of 0.29 per cent, meaning a 1 per cent increase in the minimum wage will be met with a 0.29 point fall in employment. On Leigh’s own sums, this latest increase of 3.5 per cent is likely to see about 123,000 jobs disappear.
Theory aside, the ACTU’s unshakeable belief that wages can be jacked up with no knock-on effects to employment is at odds with the tough trading conditions faced in industries that support hundreds of thousands of entry-level jobs.
According to the ABS, restaurants and cafes average profits of just 4 per cent or $26,864 each year – roughly half the margin netted by businesses in the wider economy. If the hospitality award were increased by $1.50 an hour, a cafe with average turnover, employing three staff over a 12-hour day, would see their operating costs balloon by $19,710. Assuming nothing else changed, their profits would be shaved down to just $7154.
The union movement’s push for an immediate pay hike is just the first step in its ambitious plan to boost the earnings of the low paid by $194 a week by 2020 – a mammoth increase of 28 per cent. The ACTU’s own history is a cautionary tale on the risks of forcing businesses to shoulder hefty wage hikes in the name of worker welfare. When the Whitlam government took up the ACTU’s proposal to lift the minimum wage by 27.5 per cent in 1973, unemployment doubled within just 18 months. Facing soaring rates of joblessness, even Whitlam, an avowed Keynesian, later admitted that "employees can price themselves out of the market".
Putting aside the issue of unemployment, the ACTU’s pitch that a wage hike is needed to stop workers falling into poverty is based on a deceivingly downcast picture of the lives of minimum wage workers. In reality, Australia’s minimum wage is the second highest in the developed world and already 70 per cent higher than the United States, United Kingdom and Japan.
But more to the point, the vast share of minimum wage earners do not rely on their pay cheque as their sole source of income. According to the Melbourne Institute, only one in 10 minimum-wage earners live within the bottom 20 per cent of households measured by overall income. Indeed, nearly half of workers classified as low paid are in the top 50 per cent of household income.
If we truly want to help the disadvantaged, we need to ensure increases to the minimum wage remain affordable in line with the prevailing economic climate. At more than double the rate of inflation, the ACTU’s proposed hike would exacerbate the greatest inequality in society: the gap between those with a job, and those without.
This presents a clear imperative to expand opportunities for work wherever possible. That means cutting taxes, and easing the regulatory burden on business to create an environment that rewards risk-taking and entrepreneurship.
John Slater is a research associate at the Menzies Research Centre.