Workplace relations reform: examining the economic data

In the Australian context, recent studies suggest increases in the minimum wage have adversely affected employment. A 2003 study of the impact of six increases in the WA minimum wage between 1994 and 2001 by Andrew Leigh suggested that a 1 per cent increase in the minimum wage leads to a 0.15 percentage point fall in employment. Don and Glenys Harding, who were commissioned by the Commonwealth Government to survey the impact of “safety net” adjustments on small and medium businesses, found that a 1 per cent increase in the minimum wage reduced employment by about 0.2 per cent. Both of these studies were the subject of methodological criticisms and were given short shrift by the Australian Industrial Relations Commission in this year’s safety net review, as was most of the international evidence on this subject.

Nonetheless, the commission has allowed the minimum wage to decline from 60.6 per cent of median earnings in 1996 to 58.4 per cent in 2004, or from 51.9 per cent to 49.2 per cent of full-time adult average weekly ordinary time earnings over the same period.

In some ways, the debate over whether the minimum wage should be set by the AIRC, or by the Fair Pay Commission envisaged by the Government, seems to be a cover for a debate about whether this trend should be accelerated or not.

Of course the Australian minimum wage has its origin, nearly a century ago, in the notion of an income sufficient to allow a man to support his wife and three children in “frugal comfort”, which may explain why the Australian minimum wage has historically been higher relative to median earnings than in other countries.

(It is interesting to recall that the 1907 Harvester Judgment was premised on a creative extension of the Commonwealth’s excise power, just as the Howard Government’s WorkChoices package is partly grounded on an extension of the corporations power.)

However, the labour market is no longer comprised predominantly of married men supporting stay-at-home wives and dependent children. In reality, more than half of low-wage earners are located in households in the top half of the income distribution, while the bottom quintile is dominated by those in receipt of social security payments. For this reason, many economists (myself included) believe that support for low-income earners is more appropriately provided through the income tax and social security systems than via the industrial relations system. In that context, I think it is unfortunate that the Government’s WorkChoices proposals haven’t been accompanied by reforms in these areas.

Summing up

My interpretation of the economic data is that it lends some support to the Howard Government’s proposed reforms, but that support is neither unequivocal nor incontestable. The economic evidence also suggests that goals of increasing participation in the labour force, reducing long-term unemployment and reducing poverty require reforms in other areas in addition to workplace relations, including tax, social security, and education and training.

In the end, attitudes to the Government’s proposed reforms are probably informed more by politics than economics, and I doubt there is anything any economist can say to alter that.