A Question for the Labour Market Economists

Much of the talk about IR Reform is based on assertion – and misinformation, or perhaps creating an impression which proves to be untrue on closer inspection, if that’s a different thing. The current contention that a panel of experts is needed to assess the economic impact of federal minimum wages, because the AIRC is unduly legalistic and acts only by picking a figure between submissions between the parties’ ambit claims, is quite wrong in fact.

The Workplace Relations Act 1996 (Cth) already contains this provision in S.3(a), the Principal Objects of the legislation:

…encouraging the pursuit of high employment, improved living standards, low inflation and international competitiveness through higher productivity and a flexible and fair labour market…

and the Commission takes into account the impact on employment in the National Wage Case each year, and hears economic evidence. This is perfectly clear if one goes to the AIRC’s website and reads the submissions on the current National Wage Case and the reasons for decision from previous years’ determinations. But you’d never know it if you listened to the disingenuous rhetoric from the Government and Business groups. On Lateline just now (I imagine the transcript will be available tomorrow morning), a business spokesperson claimed that business “usually” supports a small rise. In fact, the pattern over the life of the Howard years more often than not has been for business to argue for no rise, the government to argue for a small one, and the ACTU to argue for a modest rise. The impression was also created by Professor Mark Wooden, who should know better, that the Commission meets in a trice and plucks a figure out of the air somewhere between those advocated in the submissions before it. In fact, the hearings go for months, and a wide range of parties outside the “IR Club”, including church social welfare bodies, small business groups, ACOSS, state governments and others are represented and heard. Inevitably, if a board of some sort composed of Treasury and Reserve Bank officers takes over the task, the process will be both much less transparent and much less open to different perspectives.

As I’ve recently argued, all this is really just about ratcheting down returns to labour at the lower end of the job market.

It’d be nice to get some actual arguments and facts going in this “debate”. At least in the late 1980s and early 1990s, the BCA and other lobbies felt they had to commission research and publish books and papers to bolster their IR arguments. Now they can’t even be bothered doing that, just banging on with the endless repetition of the mantra of “reform”, and warnings to the government not to waste its Senate majority accompanied by lengthy wishlists and making faith-based ideological assertions in the hope that no-one will be the wiser.

I have another question for the labour market economists, based on the constant position of business for years, and the current rhetoric of the government – if the effects of the Commission’s setting minimum wages have had such a baleful impact on employment for so long, then why is unemployment so low?

About Mark Bahnisch

Mark Bahnisch is a sociologist and is the founder of this blog. He has an undergraduate degree in history and politics from UQ, and postgraduate qualifications in sociology, industrial relations and political economy from Griffith and QUT. He has recently been awarded his PhD through the Humanities Program at QUT. Mark's full bio is on this page.
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Geoff Robinson
2022 years ago

Hear, hear! what is remarkable is how none of the instant experts have ever read a safety net wage case, which consider employment issues at great length, or shown any knowledge of the debate on the employment impacts of minimum wages. Brad Norington in The Oz today is an example. Why are journalists so lazy?

Robert
2022 years ago

The dead-tree edition includes an interesting table alongside Norington’s piece, which compares Australia, the US and the UK, and seems to show that unemployment is not clearly linked to increases in the minimum wage.

Steve Edwards
Steve Edwards
2022 years ago

Leaving aside for a moment whether unemployment is linked to recent rises in the minimum wage, you need only go to the RBA to find out that unemployment certainly does fluctuate with unit labour costs. Depending on labour demand elasticity at the bottom end of the labour market, it is delusional to suggest that there is no relationship between labour costs and employment per se.

The real issue is the extent of the relationship. John Quiggin wrote an economics paper that suggested that labour demand elasticity was pretty low. I don’t recall if he actually segmented the labour market, or took it as a whole.

Of course, if demand elasticity is very low at the bottom end of the labour market, then increases in the minimum wage will have a small effect on employment. On the other hand, increases in labour supply (assuming the market is allowed to clear) will have a disproportionate downward effect on wages, with clear implications for immigration policy.

Michael Warby
2022 years ago

It has been suggested that Australia tends to be a very large user of machines — e.g. in ticketing — which suggests systematic substitution of capital over (too expensive) lower end labour. I don’t know if there are any figures to back that up.

I am interested in the ‘unemployment so low’ suggestion. Unemployment is low by the standards of post-1973. But it still seems striking that, after 14 years of economic expansion, unemployment is around the 530,000 to 580,000 mark, even on OECD definitions used by ABS. That is a lot of unemployed people, actually. Add in underemployment and marginal attachement, and there is a lot of unused labour supply out there.

Though I will concede, this economic cycle does seem to have broken the post-1973 pattern of the base unemployment rate being higher than at the end of the previous cycle, it has taken a very long economic expansion to do so.

I am also sceptical of inferring effects from official aims. I am even more sceptical of having lots of different aims you are supposed to go for at the same time. That strikes me as a way to evade accountability — if anyone complains about performance on one objective, you just say you were aiming for one of the others.

Personally, I would prefer not to use wage setting as social policy. I am not convinced that wages are sufficiently different from other prices. Let them go where they go and use tax-and-welfare system to provide a social safety net, including for low-income workers.

Mark Bahnisch
2022 years ago

Michael, there was some irony in my comment. There are indeed a large number of unemployed people, and an unacceptably large number of long-term unemployed people given the state of the economy. In addition, the basis of the OECD definition masks the fact that many people who have some contact with the labour market, or who are in casual or part time work, would like to work more hours. Not to mention the issues to do with churning people into short term work through Job Network agencies we discussed recently. As part of the point I was trying to make was that the arguments put forward are specious, I thought I’d phrase the question in terms of the government’s contention that unemployment is very low.

There is no doubt that issues to do with whether the appropriate way of assisting low-income people is through regulation of the labour market, or through some combination of tax and welfare policy (and certainly a combination that doesn’t provide the disincentives currently embedded to work is urgently needed) are worth debating, and I’m also disappointed that the focus is narrowly on the effects on employment, and not on restructuring the tax/welfare intersection. In other words, it’s another instance of how this debate is far too simplified and misses the two key issues – getting people into work and supporting people through a safety net by putting up a straw man about how the AIRC is inefficient, legalistic, part of the IR club, etc. This leads one to conclude that the debate is pro forma and really just ideologically driven rather than motivated by good public policy grounds.

derrida derider
derrida derider
2022 years ago

I’d much prefer to live in a world where people were paid according to the value of their innate dignity as human beings rather than the value of their marginal product, but unfortunately god didn’t put us in such a world.

Australia has either the highest or second highest minimum wage in the world, depending how you measure it (France is our only real competitor – the rest are a long way behind). Because this wage is invariant across states and regions in Oz, and because our min wage is explicitly varied according to market conditions, it is technically very hard to measure what effects this has (no variation across regions makes it hard to fit a regression, while the endogeneity means time series approaches aren’t much use either). And because it is so unusually high, international experience doesn’t help a helluva lot (we’re basically out of sample) (this last, BTW, is really important to remember when looking at the US – our min wage is too high for Card and Kreuger type oligopsony effects to apply).

So both sides of this debate really have to resort to a priori reasoning a bit. Here’s mine:

– Unemployment is extremely efficient at generating poverty.

– OTOH, in Oz low wages are very *inefficient* at generating poverty (again, unlike the US); most of those earning at or near the min wage are living in multi-person households that have a relatively healthy total income (eg young people living at home in middle class families).

– This difference in efficiency means that if a cut in the mimimum wage causes only a small decrease in unemployment it will cause a net decrease in poverty.

So, yeah, put this labour economist down as one who thinks we should cut our minimum wages a bit. How you achieve that is another matter (a wage-tax tradeoff is probably the way to go). I don’t think this debate is pro forma and ideological for me – believe me, I’m no rightist on most issues.

Steve Edwards
Steve Edwards
2022 years ago

We may not have to reduce minimum wages per se. The real issue is unit labour costs on one hand, and the difference between the minimum (weekly) wage and average weekly earnings on the other.

So long as the latter is growing, we do not need to cut minimum wages, merely to curtail their growth.

Jason Soon
Jason Soon
2022 years ago

mark
derrida derider has summarised my own views on this very well, though he obviously knows far more about the econometrics of this better than me. the card krueger results are not fully applicable to australia for the reasons he states. on the other hand other factors matter and some countries with at least nominally highly regulated labour markets have good employment outcomes (eg the scandinavian countries). thus i accept that wage cuts will not have as large an effect on employment as some of the more hardcore boosters of deregulation suggest but still think for the reasons DD cites that a far more rational system for addressing poverty would tolerate more working poor in return for a more all-encompassing tax credits system that reduces effective marginal rates of tax on the poor

Rafe
2022 years ago

“if the effects of the Commission’s setting minimum wages have had such a baleful impact on employment for so long, then why is unemployment so low?”

Maybe it is underestimated in the official statistics.

Rafe
2022 years ago

What reason do employers have for ratcheting down the cost of labour? Henry Ford famously put the wages up to reduce the cost of labour turnover, but of course he demanded performance in return. Employers want productivity and stability in their workforce more than just about anything else and one way to boost productivity is to pay on the basis of output rather than just the time spent on the job. What is being done by the trade union movement and other supporters of the centralised wage fixing process to boost productivity?

Mark Bahnisch
2022 years ago

“Maybe it is underestimated in the official statistics.”

Yes, but you’d hardly be likely to get an admission of this from a board composed of Treasury officials and RBA staffers.

On the price of labour and why it might be ratcheted down, there’s an excellent article in today’s Age:

http://www.theage.com.au/news/Kenneth-Davidson/Howards-plan-to-make-life-hard-for-the-jobless/2005/03/09/1110316088729.html

Alex
Alex
2022 years ago

“Maybe it is underestimated in the official statistics.”

Yes, but it always has been. This is well recognised and the point is that the official statistics are not an exact measure, but a useful proxy. What matters more is that the officially measured “unemployment” is heading in the right direction.