National Minimum Wage – role and rationales

This is a guest post by Rob Bray, economist and research fellow in the School of Business and Economics, Australian National University. Thanks to Rob for his contribution to an important conversation.

Courtesy Matt Cowgill

Courtesy Matt Cowgill (click image to view legibly)

Last week the Fair Work Commission announced the outcome of the 2012-13 Annual Wage Review. In addition to providing an increase of 2.6% in minimum wages, almost half of the statement was dedicated to what they called “a final matter we wish to raise”.

This ‘final matter’ is effectively a blunt statement of the impasse they face in attempting to set the minimum wage in the context of their obligations to take account of the ‘the performance and competitiveness of the national economy’, ‘social inclusion through increased workforce participation ‘ and ‘the relative living standards and needs of the low paid’.

[I]ncreases in minimum wages are a blunt instrument for addressing the needs of the low paid.

In it the Commission reports that over the past decade minimum wages have fallen relative to other earnings and earnings inequality has increased. The Commission however points out that “increases in minimum wages are a blunt instrument for addressing the needs of the low paid. A significant proportion of low paid adult employees live in middle to high income households. The tax transfer system can provide more targeted assistance to low income households and plays a significant role in alleviating the impact of earnings inequality and supporting the living standards of low-paid workers.”

This is a subject I have discussed in a recent paper I prepared on the Minimum Wage in Australia for the HC Coombs Policy Forum at the ANU. The paper is a mix of history of the Australian minimum wage, its current role, and a literature review of recent international research on the minimum wage.

Looking over a longer period than that focused on by the Commission, the paper reports that the minimum wage is around the same real value today as it was 25 years ago. However, as a result of government increases in support to families, the income of a classic single breadwinner working on the minimum wage supporting a partner and a couple of young kids would have grown by 70% over this period.  A single person on the same wage would have seen their incomes increase by 9% – as a result of tax changes.

This I see as being a quiet bit of micro-economic reform, the final transformation of the minimum wage from its original conception as a family wage to a wage for a single person.

It is also a change which has been impacted on by many other changes in the labour force.  This includes shifts in the pattern of workforce participation and in the characteristics of who receives the minimum wage. The single breadwinner model, which even as late as 1983, was still the form of half of Australian families with children, has been displaced by two income households.  Further, as identified by the Commission, the minimum wage has most frequently become a supplement to other earnings within a household, and flows to households across the income distribution.  My estimates are that just 30% of the earnings of adult minimum wage earners flow into the poorest 20% of working households while 15% go those in the second to top quintile and 9% to the top. The single breadwinner couple family with children reliant upon the minimum wage has become almost extinct – with just 1.1% of couple families with children now taking this form.

In looking back at the past 25 years, the paper then turns to the future – what should happen to the minimum wage over the next 25 years.  Assuming that the past institutions of a highly unionised workforce which allow trade-offs between the wages of the highly paid for the lower paid are gone I suggest 3 options:

The first is to seek to boost the productivity of minimum-wage workers by increasing their skills and capacity. This would allow the minimum wage to increase along with the earnings of others. Yet despite many investments in training, it is not clear that this can be effective. The risk is that if the skills of the least productive cannot be enhanced, then their jobs will be lost, and they will find themselves excluded from the labour market.

The second is to just hold the minimum wage steady in real terms, as has effectively been done. This will minimise pressure on employment, and because so many minimum-wage earners are in higher-income households, may not result in much disadvantage. However, for single persons and others without children who seek to live on the minimum wage, it means an increasing gap between their living standard and that of the rest of the community.

The third path also involves holding the real minimum wage stable, but to complement it by a program such as an Earned Income Tax Credit (EITC), that is a government transfer payment, to boost the incomes of those households reliant upon the minimum wage.

It is this third path which I think is the most probable – and potentially the most challenging.  It is also the logical consequence of the questions being asked by the Fair Work Commission.

While in one way this is just an extension of what has already occurred for families with children, in another it is a radical departure. It implies that, for some people, the purpose of full-time work may not be to earn an income to live upon, but is rather a partial contribution towards this, with their effort being recognised and complemented by support from the community through an EITC or similar measure.

In effect it transforms work from being a means of supporting oneself to a form of mutual obligation in exchange for a conditional Guaranteed Minimum Income.

In effect it transforms work from being a means of supporting oneself to a form of mutual obligation in exchange for a conditional Guaranteed Minimum Income.

Is this then the form of Australia’s post-industrial welfare state?

If it is then there are many questions we need to consider.  Some of these are philosophical around the nature of work, others concern the relationship between a worker and an employer when it is no longer the wage paid by the employer which may be the principal motivation for employment.  Should a person who cannot work receive less than a person who can work if it is not the value of the labour which is important? Do we really have a cohort of people who lack the skills and abilities to produce enough in the workplace to justify a higher wage – and if we do – why? Should the state oblige such people to spend their days at work, and even more so for the profit of others – or is there some real benefit for them from working?

There are also many practical questions. How much work should a person be required to perform as part of this mutual obligation? Should the same support be provided to someone working fewer hours at a higher hourly rate as someone working more hours at a lower rate?

These are clearly questions which go well beyond the Commission’s request that the Government discuss the interaction of the tax-transfer system and minimum wages for the 2013-14 wage review.  While in the short term it might be possible to squeeze a bit more from the current tax-transfer system in the longer run new structures will be needed.

Finally is the question as to whether a minimum wage is still needed?  My answer to this is yes.  It is a necessary complement to any EITC, if nothing else to prevent employers rent seeking through lowering wages and expecting the government to compensate for this.  It also sets a wider floor in the wages system and in establishing benchmarks for income support.

About Ken Parish

Ken Parish is a legal academic at Charles Darwin University, with research areas in public law (constitutional and administrative law) and teaching & learning theory and practice. He has been a legal academic for almost 12 years. Before that he ran a legal practice in Darwin for 15 years and was a Member of the NT Legislative Assembly for almost 4 years in he early 1990s.
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11 Responses to National Minimum Wage – role and rationales

  1. The Penguin says:

    Very interesting article!

    Thinking in particular about this notion of the minimum wage plus EITC for the underproductive as welfare, how it could be difficult to accept for the recipients. I imagine many minimum wage earners would reject the idea that they would be on welfare. What do you think would be the political issues associated with the introduction of an EITC and so the admission that this group of low-productivity workers are unable to support themselves through their labour?

    • Rob Bray says:

      One of the interesting things about this debate is that since EITCs are most frequently pitched as being a way of helping the low paid and as a virtuous act by government with the objective of making work pay the other side of the coin – that of work not paying in its own right doesn’t seem to come out.

      If we think about what has been done with family payments virtually no one raises the question that these effectively mean that people are not supporting themselves. Rather the government makes a virtue of the fact that a single breadwinner with kids effectively pays no tax until they are on an income of $60,816 – and no one thinks of it as welfare.

      One of the questions I am trying to get to grips with in all of this is the extent to which this approach is the best. Are we better off just taking the line that we are helping out the low paid – or should we say the world has changed and this includes the role of employment.

  2. derrida derider says:

    Rob makes the correct point that an EITC approach implicitly says that paid work has value beyond the production of the person engaging in it (and we all have met people whose marginal product in any workplace is negative – they reduce the productivity of those around them). Personally I’ve long been a basic income person – I’ve never understood this fetishization of the employee-employer relation as being something that has social value beyond the income it generates. You’d think we’d want to keep those people with very low or negative marginal product in the workplace out of the workplace – unless we’re valuing something quite other than marginal product.

    But the point here is that if, as neoclassical wage theory predicts, people tend to be paid their marginal product then when the min wage is lowered the rents captured by employers soon get competed away – that is, there is an increase in demand for unskilled labour which mops up involuntary unemployment, leaving only voluntary unemployment by a minority whose reservation wage is higher than the new minimum (hence the lowering may have to be accompanied by an EITC or by welfare cuts, to lower that pre-tax reservation wage). Advocates of lowering or abolishing minimum wages argue that precisely this will happen.

    Of course the “New Labor Economics” people argue that this does not in fact happen because local monopsony of the employers (due to it being hard for people to find new jobs, and also the productivity benefits of enforcing employee loyalty by non-wage means) lets them keep the rents. Now to me one reason to think the NLE people might have a point is precisely how keen employers, plus members of the better-off classes seeking domestics, are to lower min wages. If the gains to employers would just be competed away why are employers so keen on it?

  3. Gummo Trotsky says:

    A few quick (but considered) points.

    First, on Rob’s final paragraph:

    Finally is the question as to whether a minimum wage is still needed?  My answer to this is yes.  It is a necessary complement to any EITC, if nothing else to prevent employers rent seeking through lowering wages and expecting the government to compensate for this.  It also sets a wider floor in the wages system and in establishing benchmarks for income support.

    This sort of rent-seeking is already happening: employers who take on NewStart recipients as casual employees for
    cash-in-hand payment and even employers who take them on – again as casuals – under lawful arrangements are effectively expecting the government to compensate for their employment practices.

    Under an EITC employers will not be prevented from rent-seeking; those who want to will rent-seek by holding back pay increases for their more highly skilled workers until their wages hit the minimum wage floor.

    Earlier in the post, Rob writes on the subject of what should happen to the minimum wage:

    The first is [we should] seek to boost the productivity of minimum-wage workers by increasing their skills and capacity. This would allow the minimum wage to increase along with the earnings of others. Yet despite many investments in training, it is not clear that this can be effective. The risk is that if the skills of the least productive cannot be enhanced, then their jobs will be lost, and they will find themselves excluded from the labour market.

    This strikes me as an example of something that social psychologists call ‘The Fundamental Attribution Error‘. Minimum wage earners are not necessarily people with limited skills and capacities; they are people who work in jobs where there is no requirement for an extensive range of skills and capacities. The guy who kills the chickens in a poultry processing plant, for example.

    He’s probably on minimum wage – the lowest paid worker in the plant and the least welcome in the lunch-room. After all, you’d have to be some sort of psycho to take a job where you spend all day killing chickens, wouldn’t you? See also Sam de Brito on garboes.

    Finally, I’ve decided I don’t much like the idea of working on the minimum wage as a form of mutual obligation undertaken in return for welfare support. It sounds too much like boon work to me.

    • Rob Bray says:

      Gummo – thanks for your very well considered comments.

      Your statement

      Minimum wage earners are not necessarily people with limited skills and capacities; they are people who work in jobs where there is no requirement for an extensive range of skills and capacities

      raises a couple of questions for me.

      Why work in a job with no requirement for skills and capacities if you have them? One answer of course is the classic labour market concept of stepping stones – that this work gains you the accreditation and contacts to move up in the labour market. This is of course a frequently used argument for a low minimum wage – people do not stay in the jobs for long so it doesn’t matter if they do not pay much. Also that keeping minimum wages low maximises the number of the entry positions.

      Another is insufficient aggregate demand (or an inflexible labour market). The other is that the skills they do have are simply not valued in the workplace – which is the same as saying they do not have skills – but that they do potentially have the capacity – which leaves open the training option.

      Your final statement of course hits at the heart of the questions I am asking – yet as I suggested above to The Penguin it is somewhere close to where we are with some families already – but we just don’t talk about it this way.

      Rob

      • Gummo Trotsky says:

        Why work in a job with no requirement for skills and capacities if you have them?

        Here’s my personal answer as someone with skills and capacities he doesn’t monetise. It’s a lifestyle choice. Years ago, with the blessing of my head-care specialist, I gave up on using my skills and capacities to gain filthy lucre because, however well rewarded a life divided between working hours plagued with anxiety and leisure hours plagued with suicidal ideation might be, it’s not a pleasant one.

        I’ve heard of other people taking the same route – for example the professional photographer turned security control room operator because the demands of running a photography business beat him. Probably still takes excellent professional quality photos just doesn’t make a quid out of it.

  4. derrida derider says:

    Chicken slaughterers, Gummo, are not usually on the minimum wage. Good old neoclassical theory says they are unlikely to be, actually – google the term “compensating differential” (it’s really just a formalisation of “where there’s muck there’s money”).

    • Gummo Trotsky says:

      I’d say that would depend on the employer dd. The example was inspired by memories of working in the CES and having to handle a vacancy for a chicken slaughterer where the employer was looking for a sixteen to eighteen year old so he could pay junior wages.

      On the compensating differential – one effective way to keep it as low as possible is to stigmatise the people who work in the ‘money for muck’ jobs like Aussie garboes and Japan’s Burakumin. Erodes mass support for higher wages in those sectors.

      • derrida derider says:

        Ah, but that would have been in the days of very high youth unemployment – say the early 1980s. You wouldn’t do it now, when reasonable quality (from an employer’s perspective) 16-18 year olds willing to work full time for minimum wages are in much shorter supply. Today you generally have to pay the compensating differential, unless you can find a visa overstayer or convince DIAC that it’s a skilled job that needs a 457 migrant.

        There are several reasons for that shorter supply (demographics, more students, etc) but unfortunately all those nasty right wingers were right that one reason for the then high youth unemployment was the series of wages cases in the late 70s-early 80s that massively boosted junior award rates compared to adult ones.

        Unemployed factory-fodder yoof who only needed a good kicking by a suitably profit-motivated employer (or by Centrelink acting on their behalf) in order to instil industrial discipline are no longer so abundant. In fact as I suggested above our minimum may now be low enough that further falls would not be productive of more jobs.

  5. Ken Parish says:

    I just posted a couple of comments on Paul Frijters’ most recent article about mental illness that I think are also relevant to the discussion here.

    • Gummo Trotsky says:

      I’ve had a few thoughts on this myself (443 words of them and counting) so it looks like I’ve got a post or two in the works. Working title ‘The Work Imperative’.

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