Anthony Albanese wants a 5.1% lift in the minimum wage — but how would that affect the economy?
Looking at jobs, inflation and poverty, uncertainty and paradoxes mean there are arguments a motivated person could use for or against.
Effect on jobs
Economics 101 says higher minimum wages will make businesses employ fewer people. The problem in Australia is not enough people have taken economics 201, which says that economics 101 is an oversimplification.
Its logic, though, is appealing: higher labour costs mean firms hire fewer staff. But economics aspires to be a science rather than a system of belief, and the evidence points in the opposite direction to the logic. This evidence is both global and local, industry-wide and industry-specific. It finds no good evidence that higher minimum wages destroy jobs.
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For example, what happened to jobs when Sunday trading penalty rates disappeared? The answer is: employment didn’t improve.
“We demonstrate conclusively that the phasing in of wage premium (penalty rate) reductions from 2017 did not impact positively on employment in retail and hospitality sectors,” employment and economic experts Ray Markey and Martin O’Brien wrote in The Sydney Morning Herald last year.
But that’s just one change in one industry. The best work on minimum wages in Australia was done in 2018 by a young man who is now the head of the Reserve Bank’s economics research department, James Bishop. He ran a lot of heavy maths on the history of Fair Work Commission wage increases, and found “that award changes are almost fully passed through to wages, and have no statistically significant effect on hours worked or the job destruction rate”.
Bishop looked not only at the minimum wage, but all the awards that could be affected by changes in it — of which there are a lot, as the next chart shows. Up to 40% of wages in Australia are affected, directly or indirectly by changes in the minimum wage.
Like all social research, it comes with caveats. The wage rises used as inputs were mostly small, about 2.5%. Bishop says the results ”may not necessarily generalise to large, unanticipated changes in award wages”.
If you wanted to argue against a wage rise of 5.1% you could say Bishop’s evidence doesn’t apply. And you could be right or wrong. Bishop doesn’t specify what counts as “large and unanticipated” because the evidence doesn’t tell us that. It’s uncertain. It’s also possible an effect of minimum wage rises is not destruction of existing jobs but a slowdown in creating jobs. That’s very hard to measure and so also uncertain.
That uncertainty is a characteristic of economic policymaking. Economics is a young science and ultimately a social science. Unlike in physics or chemistry, the rules governing cause and effect are poorly understood and, worse, can change over time. So it is possible to have a result in the real world that contradicts even the absolute best gold-standard evidence.
Just because past wage rises have not destroyed jobs, doesn’t mean wage rises will never destroy jobs. We need to act on the best available evidence, but we need to remain open-minded if and when new evidence appears.
It won’t solve poverty
Cranking up wages won’t solve poverty, because most people in poverty aren’t on wages. Solving poverty is about lifting welfare payments and/or getting people into jobs.
Higher minimum wages might even increase poverty if it reduces job creation, or if welfare payments increase by a fixed amount and higher wages flow through to higher inflation, meaning people on welfare have less buying power.
Which leads us to inflation.
Higher wages have to come from somewhere. For businesses, they need to fund those wage increases by reducing profits or charging higher prices. Profits are good right now, but some increase in prices is likely. The UK finds that prices go up more in months where the minimum wages increases, by 0.08 percentage points.
So what’s the job of the Fair work Commission: to control inflation or raise wages? What matters most? There’s no evidence that raising wages will hurt employment. Is that its priority?
It is not the only policy priority at the moment. We’re in an inflation spiral that the RBA is suddenly working very hard to control. The paradox here is that wage rises both contribute to price inflation and help compensate working households for inflation.
Is it better to have inflation that lasts longer but cuts less deep for wage earners? If you’re a wage earner you probably have a different answer than if you’re on a fixed-payment pension.
Or is it better to have inflation that is briefer, but cuts the buying power of wage earners?
The answer is not given to us by economics; these are questions of values and priorities. It’s great news that Albanese has taken a position on the topic in an election campaign because it lets us use the election campaign to vote for our priorities and values.
This article was first published in Crikey.