Australia’s high minimum wage costs jobs

Recently, the Fair Work Commission (FWC) announced its decision to increase the minimum wage by 2.5 percent, alongside subsequent award wage rates. This has revived the debate on whether such policy is effective at helping workers at the bottom of the economic ladder. Unsurprisingly, the Australian Council of Trade Unions (ACTU) thought it wasn't enough, having pushed for a 3.5 percent rise in the lead up to the decision, while employer groups such as the Australian Chamber of Commerce and Industry (ACCI) argued for a lower increase than what the FWC delivered.

Australia has one of the highest minimum wages in the world. The FWC's decision increases the adult minimum wage from $19.84 to $20.33 per hour, or $772.60 per week for full-time workers (a 38-hour work week). Casual employees covered by the national minimum wage also receive at least a 25 percent casual loading on top (which brings the hourly wage up to $25.41). Moreover, taking into account penalty rates such as working on Sundays, the hourly wage could be more like $38 per hour for an entry level worker.

The Greens Party have committed to legislating an increase in the national minimum wage to at least 60 percent of the median wage. And because it has not reached this level, the party has asserted that Australia is starting to become a "US-style society", denouncing soaring profits and decrying inequality as "the highest it has been for 70 years."

"Building economic security for the lowest-paid workers in our society is at the core of the ACTU's objectives, and increasing the minimum wage is one of the most effective tools available to achieve this goal," claimed Sally McManus of the ACTU, who has slammed so called "extreme big business advocates" who dare pose arguments against increasing the minimum wage.

The charge that increasing the minimum wage is an effective tool to build economic security is wrong. Even the FWC, by delaying wage increases in industries most affected by lockdowns (tourism, hospitality, restaurants, fitness and aviation), has given some acknowledgement that their latest decision poses risks to small businesses. A solid body of evidence finds that higher minimum wages reduce employment and working hours, particularly for our most vulnerable socioeconomic groups; young people without any work experience, disability support pensioners, those just out of jail and single parents.

One of the more recent studies undercutting support for increasing the minimum wage was a 2015 analysis from the Productivity Commission. The researchers found that increasing the minimum wage in Australia caused a reduction in working hours for minimum wage workers relative to higher paid workers. In general, "adverse employment effects from minimum wage increases were felt more by 'would-be employees' (that is, the unemployed and those outside the labour force). For those already in jobs, the main consequence appears to have been a reduction in hours worked rather than job loss," they concluded.

These adverse effects are evident in other countries that mandate a federal minimum wage. Despite some commentators and economists claiming there is a new consensus that minimum wage increases do not cost jobs, this is simply untrue. Let's take the United States for example. Economists, Peter Shirley and David Neumark surveyed the authors of nearly all U.S. studies estimating the effects of minimum wages on employment published in the past 30 years. They found that 79 percent of the studies reported that minimum wages reduced employment, with almost half of them stating the negative effect was statistically significant. The push for a $15 federal minimum wage in the U.S. has not held up well to scrutiny, with a recent Congressional Budget Office report estimating 1.4 million jobs lost if the policy was signed into law.

Dr Andrew Leigh, a professor specialising in labour economics found that every 1 percent increase in the minimum wage would cost jobs by reducing labour demand by 0.29 percent. Given that there are around 13 million people employed in Australia, this means that a 2.5 percent increase in the minimum wage will reduce labour demand by 0.73 percent, which is just over 94,000 jobs. If the unions had their way, 132,000 jobs would be lost.

The pro-minimum wage side are likely to tout an analysis from the Reserve Bank of Australia, which found that increases in the minimum wage appeared not to have an adverse effect on job losses or hours cut. What they fail to take into consideration, however, is that the data analysed did not include juniors (aged below 21), the very group most likely to be negatively affected by minimum wage increases. Furthermore, the author cautioned that, "the adverse consequences of higher wage floors may be borne by job seekers, rather than job holders".

The evidence that does include young employees find that higher minimum wages particularly disadvantage this socioeconomic group. The most extensive study showing this was published in the Industrial and Labour Relations Review in 2004. The researchers surveyed 17 Organisation of Economic Coordination and Development (OECD) countries (including Australia) and concluded that, "Our results provide evidence that minimum wages tend to reduce employment rates among the youth population." Australia was one of the three countries that experienced the most significant disemployment effects in youth employment markets.

A high underutilisation rate of 38 percent in 2019 for 15 to 24-year olds reflect the negative effects caused by higher minimum wages. The underutilisation rate calculates both those unemployed and those who want to work more hours. For 20 to 24-year olds, it was 23 percent. This compares to the underutilisation rate for rest of the labour force, which was less than half of that. There is nothing natural about a youth unemployment rate twice that of the rest of the labour force. When the government dictates a wage floor above market value, this removes the first rung of the job ladder for many young people trying to enter the workforce, leading both to higher unemployment (do not have a job but are looking for one) and underemployment (have a job but desire more working hours). The government has known this for years, although they will never explicitly admit it. Schemes like the Youth Jobs PaTH program – by subsidising businesses to take on young trainees, recognise that the minimum wage is too high and that these unskilled workers are overpriced. Rather than using taxpayer dollars to cover part of the wage their productivity is not high enough to match, why isn't a young person permitted to gain work experience by accepting a lower wage an employer is willing to pay?

Despite the best intentions of activists and policy makers to help low wage workers, increasing the minimum wage is a grossly misguided policy. Most of the research points to either job loss or working hours being cut to absorb the rise in labour costs.

The federal government urged the FWC to take a "cautious approach" in its minimum wage decision. Despite the howls of outrage from unions and the Greens who cheerlead for a higher minimum wage, the government are absolutely justified in their concern. With many small businesses still struggling in an uncertain business environment, the FWC's recent decision will likely adversely affect Australia's economic recovery.

The best way to help workers is to increase productivity. This means cutting the corporate tax rate to incentivise business investment, reforming other parts of our archaic industrial relations system, and slashing red tape to relieve the regulatory burden and encourage innovation, particularly for small businesses and startups.