Wage Rules:
Pain for No Gain

Australian Financial Review
15th March 2005

by Des Moore

Des Moore argues that the minimum wage simply keeps unskilled and low productivity workers out of a job

At first glance the ABS survey published on 11 March of persons not in the labour force in September last year has no implications for policies on workplace relations reform. After all, if these people are not in the labour force it seems they are not job seekers.

But the survey provides a stark reminder of the scope for removing oppressive regulatory conditions the Australian Industrial Relations Commission imposes on businesses when they are making employment decisions. The extraordinarily high minimum wage it determines is particularly pertinent.

A closer look at the survey reveals that 790,000 said they would be available to start work within four weeks. Why, then, are they not counted as part of the labour force and as unemployed? The short answer is that only 562,000 were then included as unemployed (or 5.5 percent) because only they said they were actively looking for work and available to start within a week. While this is the internationally accepted criterion for determining who is unemployed, there is no escaping the fact that 1.35 million were then available to start work, constituting about 13 percent of the workforce.

As a high proportion of the 13 percent would be either unskilled or have relatively low productivity, the demand for such workers is particularly sensitive to the lowest wage employers are able to offer. But Australia's minimum is currently set by the Australian Industrial Relations Commission at a rate ($12 an hour) that almost seems calculated to do most to deter employment. At 58 percent of the median wage it is the second highest amongst OECD countries and 75 percent higher than in countries such as Spain, Japan and the USA.

Although our minimum is but one of Australia's oppressive labour regulations, this situation provides a strong economic case for reform to allow employers to offer a much lower wage.

Some commentators argue that, if that were to happen, those currently on the minimum will either lose their job or experience a reduction in wages and hence in living standards. However, unless those presently employed on the minimum have an inadequate productivity performance, their wages and/or jobs should not be adversely affected. Moreover, although the minimum award by the AIRC covers about 1.5 million employees, official estimates suggest only about 150,000 are actually on the minimum itself. Accordingly, if there was no minimum or one closer to more sensible OECD countries, there is little if any potential for wages of existing employees to fall below the current rate.

The main outcome of a lower minimum would not be job replacement but additions to employment at wages lower than the current $12 per hour. The resultant job training would, in turn, provide considerable potential for higher wages down the track. Subsequent claims that "new" employees had "forced" wages down could scarcely engender a sympathetic response given that the previous minimum had obviously kept workers out of a job.

Indeed, the social case for having no minimum wage is strong. It is obviously grossly unfair to have a regulation that inhibits or prevents the legal employment of many at the bottom of the social spectrum. [The extent of the unfairness is illustrated by the fact that no wage can legally be paid between the minimum of around $24,000 a year and the unemployment benefit of about $10,000 (for a single adult) - excl by Ed].

Nor do current arrangements offer social fairness when they help the more than half of low wage earners who are in the top half of household incomes and who now receive a minimum wage. [Moreover, as wages provide only a very small proportion of low income households' incomes, the abolition or major reduction of the minimum wage could not be seen as taking away any important component of the social security safety net - excl by Ed].

That the existing regulatory arrangements are grossly unfair can be seen from the protection they provide to the insiders with jobs while excluding from employment those at the bottom end who are unable to penetrate the regulatory constraints. The existence of over 1 million jobless couples, many with children, highlights the problem and the need to introduce reforms (in both workplace relations and social welfare policy) likely to reduce it.

The living standards of lower productivity workers should be "protected", but not through minimum wage regulation. Instead, workplace relations reform should maximise their opportunities for employment or, failing that, the social security system should fulfil its function. The charade that industrial tribunals assist those on low incomes should be exposed for the sham it is. They display no capacity to take account of the widely different needs of individuals on such incomes, including the 1.35 million job seekers.