Election on jobs a good wager

Abandoning minimum wages rates should be a make or
break item on the political agenda, writes Des Moore

Australian Financial Review 22 January 2003

Even with last year’s apparently strong employment increase of 3 per cent, the December unemployment rate of 6.2 per cent was only 2 percentage points lower than when the Howard Government took office over six years ago. Using a fairly new Australian Bureau of Statistics series, an underlying rate nearer 12 per cent can be derived.

Why has the labour market continued to perform quite poorly despite the strong economic growth? Why do countries with similar political structures, such as the US, the UK and New Zealand, have higher proportions of their working age populations in employment? Australia’s employment proportion should be above those countries as we have relatively more who are employable (because of our higher average literacy and numeracy).

Much focus has rightly gone on reducing disincentives to work and Workplace Relations Minister Tony Abbott drew attention recently to the government’s welfare reform paper canvassing possible further changes in benefit and tax arrangements to improve incentives. With over $30 billion a year of social security and health benefits going to upper income groups, there is certainly a strong case for reductions in eligibility for such benefits, and for moving towards a flat rate income tax.

But while such policy changes would encourage employment, it would be a major mistake to limit reforms in this way. Indeed, with over a million people already looking for work, measures concentrating on further increasing the supply of labour could even result in higher unemployment.

Instead, early in the next parliamentary session the Government should introduce a major legislative package containing measures to increase both the demand for and supply of labour and, assuming the Senate continues its dirigiste attitude, to then use that package as a trigger for a double dissolution election.

Importantly, the package should transform the AIRC from being an interventionist outsider, able to decide what it thinks is best for many employees and employers, to being a mediator with no powers to impose employment conditions. That should be accompanied by the abolition of the federal minimum wage, which is currently a demand-inhibiting 58 per cent of the median wage. This wage greatly increases the difficulty of obtaining jobs for the 60 per cent of our unemployed in the unskilled and inexperienced category [Edited from article: not to mention the many not officially unemployed but also wanting work].

The ACTU claims that increasing the current minimum of around $11 per hour would have only a ‘negligible’ employment impact and is necessary to protect living standards of low paid workers and to maintain income equality. Neither claim is justifiable.

As more than half of low wage earners are in the top half of household incomes, raising the minimum is obviously not an appropriate component of welfare policy [Edited from article – and it actually increases the inequality of incomes]. As wages provide a mere 8 per cent of average incomes of households in the lowest income group, the social security system is the basic protector (albeit undesirably) of living standards for that group, providing 70 per cent of its income.

[Edited from article: Assessments of employment demand must focus on the near certainty that] minimum wages have large adverse effects for unskilled labour, particularly ‘outsiders’ not officially unemployed but still wanting a job. It is absurd that both the commonwealth and the ACTU advocate a higher wage at the bottom end, putting more people on social security and fewer in employment.

Unsurprisingly, the ACTU has resorted to research by US economists Card and Krueger suggesting a "moderate" minimum wage could even have positive employment effects. Since this C&K research was published, analysis by [Edited: Professor] Richard Burkhauser of Cornell University (and colleagues) has exposed major flaws in it. Burkhauser is one of many well-qualified US labour economists continuing to support the conventional view that even the low US minimum wage significantly reduces employment of the most vulnerable groups. The AIRC needs to catch up on this analysis and the commonwealth government should use it to argue for no minimum increase in the forthcoming Safety Net case.

A double dissolution reform package could offer higher employment and lower unemployment through measures allowing wages to be market-determined, while providing even enhanced protection to those on low incomes through a pruned-eligibility social security system. It could be an election winner.

Des Moore is Director of the Institute for Private Enterprise. ( Edited: His paper on "Minimum Wages: Employment and Welfare Effects, or Why Card and Krueger were Wrong", has been published in the September 2002 Australian Bulletin of Labour, out this month].