My post last week on the decision to decrease the real wages of those reliant on awards for their pay by the so-called Fair Pay Commission sparked a somewhat heated thread, largely around the contention by some commenters that it was some sort of undisputed law that a rise in minimum wage rates leads to greater unemployment. Apparently, too, anyone who advocates anything other than a real wage cut for workers on low pay is morally bankrupt, and personally responsible for unemployment.
So, I was interested to read Ben Eltham’s piece in New Matilda today, which covers the FPC decision, and also segues into a valuable discussion of other aspects of employment in Australia. But what is key in the current context is Eltham’s citation of a study by John Quiggin and Steve Dowrick:
When John Quiggin and Steve Dowrick analysed the literature on minimum wages in 2003, they found little relationship between minimum wages and employment levels, but a very strong relationship between low minimum wages and increasing inequality.
Countries like the United States with low minimum wages had much greater levels of inequality than countries with higher minimum wages like Australia and the members of the European Union. The reason appears to be that holding minimum wages low doesn’t destroy many jobs, but it does have a broad impact on inequality by holding the wages of low-paid workers down across the board. “There is little reason to expect strong employment benefits from freezing minimum wages in nominal terms, that is, reducing minimum wages in real terms,” Quiggin and Dowrick concluded.
The Quiggin and Dowrick paper can be found here [link to pdf].
Julia Gillard has criticised the decision of the Fair Pay Commission to award no increase in the federal minimum wage. She accurately notes that the decision will have an impact on other workers as well, because the safety net is the floor which underpins bargaining.
However, Gillard and Kevin Rudd might themselves bear some of the responsibility for this decision, which will – rightly – be a political problem for the Labor government. The Commission was heavily criticised by Labor in opposition, and next year it’s due to be abolished, its functions rolled into the AIRC’s replacement – Fair Work Australia. If the criticisms made of the process and of the narrow economic orthodoxy of its chair, Professor Ian Harper, have merit, it surely should have been open to the ALP to hand back the wage setting powers to the AIRC earlier. The ’softly, softly’ approach to IR reform is full of contradictions, one of which will unfortunately now impact on those least able to afford to shrug their shoulders at the political game. It isn’t a good look for a Labor government.
Elsewhere: Via Andos in comments on another thread, a link to a useful interview on ABC Radio with ACOSS. The point is made that research from the OECD (and from other sources, I might add) debunks the notion that there is a strong correlation between small rises in minimum wages and unemployment.
Update: Matt C notes in comments that the FPC’s own modelling of its previous decisions shows only a minimal effect on unemployment of a decision not to increase the rate.
Elsewhere: Rob Corr.
Update: New post.
There’s a bit of chat around the shop today that one of the mooted new stimulus measures the Rudd government might undertake – bringing forward tax cuts and LITO changes for low income earners – could be a way of counterbalancing an anticipated small increase in the minimum wage from the Fair Pay Commission. The suggestion seems to have arisen from the eminently well-connected Heather Ridout of the Australian Industry Group.
The Australian characterised such a move as a “wage/tax tradeoff” – ala the Accord, and Simon Jackman alludes to “corporatism”. However, there are some significant differences from the Accord – the most important contrasts with the 80s in Australia are that the reach of wages policy is much smaller (because movements in the minimum wage are relevant really only for “award-only” workers who are a smallish minority, and there’s little chance of flow on increases) and it’s less well thought out because it’s more ad hoc and there really isn’t a “social partner” actually representing the low paid to negotiate with, or the quasi-institutional structures for concerted policy formulation which existed in the past.
Continue reading ‘Corporatism redux?’
The economic news of the day was a fall in the number of jobs advertised – as measured by ANZ – to “recession levels” – the eighth successive monthly drop. A number of economists extrapolated this to an unemployment rate of around 7% by year’s end. Of course, the trend may not be a straight line, but these things have a habit of being self-reinforcing. It’s interesting to note that the Federal Opposition could currently have their own favourite line of 2008 turned around on them – they’re arguably “talking up” unemployment at the moment. Julie Bishop might like to take a lesson from any number of Labor shadows from their decade plus in opposition – this doom and gloom isn’t necessarily smart, particularly when you’re briefing your mates in the press about how exciting it is that you might be back in power after only one term.
But of more moment, probably, is the response of those who actually make decisions about the labour market. Predictably, the Howard era Fair Pay Commission Chair, Ian Harper, warned that the low paid couldn’t expect much. This, despite the fact that the pay rises awarded by the FPC over the past two years failed to have the dire impact on employment predicted by business lobbies. It was interesting in this context to read a good piece by Mike Steketee in The Australian last week:
Some economists argue that cutting wages, particularly for the unskilled and low skilled, is the surest way of keeping more people in work. Quite apart from the fact that Labor’s ruling out such an option helped it win the last election, the main problem facing businesses is lack of demand for their products.
Cutting wages would reduce consumer demand further and it would run directly counter to the Government’s policy of putting more money into people’s pockets to try to put a floor under demand. In any case, the wages share of national income is the lowest for a generation, suggesting labour costs are less of a burden for business than in the past.
Continue reading ‘Unemployment and social responsibility’
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