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Pain for poor people in minimum wage

By Des Moore - posted Tuesday, 26 September 2006

The appointment of a minister to assist the Minister for Workplace Relations, Kevin Andrews, highlights the Federal Government's apparent inability to advance many of the substantive arguments for a more deregulated labour market, leaving it all too often on the defensive in the debate on the WorkChoices legislation.

It has exacerbated this by making a submission to the Fair Pay Commission strongly supporting an "appropriate" increase in the minimum wage for the low paid while, at the same time, telling the commission that its predecessor treated unemployed people as "peripheral" to the argument about minimum wage levels. Hence, the submission advises, the new commission should have regard to "the capacity for the unemployed and the low paid to obtain and remain in employment".

This creates utter analytical and common sense confusion.


First, how will the commission help unemployed people obtain jobs by increasing the minimum wage when Australia already has the second highest minimum among OECD countries - 57 per cent of the median compared with 29 per cent in Spain, and 32 per cent in the US? Economic analysts (including one contributing to the submission) who are not trade union sympathisers support the common sense view that, with a minimum wage over $10,000 a year higher (relatively) than in such countries, Australia is denying the opportunity of employment to many.

In addition to our officially unemployed people of more than 500,000, Australia has another 700,000-plus who want to work and would be available to start within four weeks. This group of 1.2-1.3 million are generally lower skilled people and employers are less likely to offer them work at the current federal minimum of over $25,000 a year.

That the government also asks the commission to continue to regulate certain wages above the minimum is farcical. Only about 150,000 receive the minimum itself, but under the no losers undertaking another 1.4 million employees presently receiving higher than the minimum under some 4,000 existing awards will also have their own (higher) minimums!

Particularly with an economy operating close to capacity, and the Reserve Bank increasing interest rates because of concern about emerging inflationary pressures, there is thus an almost unarguable economic case for allowing employers to offer a wage no higher than the existing one. That the government submission did not acknowledge this represents a dereliction of duty.

Second, why does the WorkChoices legislation allow employers and employees to agree at an individual level on wage rates - through Australian Workplace Agreements - but only when wages are set above minimum rates? The failure to allow individual agreements at wages below the minima is a tacit admission of the trade union case that employers have greater bargaining power and can force wages (or other conditions) down. Yet the government itself argues that those employed on AWAs are better off than they were on awards.

Moreover, the greater employer bargaining power argument is fallacious. With over one million employers, and no evidence of collusion in setting employment conditions, there is in reality competition for labour needed to run businesses. So, while employers can (and do) sack individual employees, the continued increase in aggregate employment shows that those made redundant are replaced and redundant employees almost always obtain other jobs. And about 60 per cent of those who change jobs during a year do so voluntarily.


In short, while employers change employees, so too do employees change employers. When that happens with an employee who has had experience in the job it can disadvantage the employer.

Third, does the acknowledgement in the government submission that low paid people receive various types of targeted transfer payments, and that the chief cause of poverty is joblessness, mean that the commission is being told to largely ignore the WorkChoices legislation requirement to have regard to providing a safety net for low paid people? The idea that any wage safety net is needed for low paid people not only overlooks the situation of the 1.2 million jobless people who are not paid wages at all, but also the safety net already provided through transfer payments such as the Newstart Allowance of about $11,000 (for a single adult).

It is plain wrong to characterise the minimum wage as a safety net when more than half the recipients are in the top half of household incomes. Further, only a very small proportion of the income of households on low incomes comes from wages.

The living standards of lower-productivity workers should be protected by allowing them to compete in the labour market. The commission should recognise that the minimum wage prevents that and is contrary to the interests of poor people. For its part the government should lodge a supplementary submission that, at the very least, asks the commission to limit any wage increase to those on the minimum itself.

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First published in The Age September 5, 2006.

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About the Author

Des Moore is Director, Institute for Private Enterprise and a former Deputy Secretary, Treasury. He authored Schooling Victorians, 1992, Institute of Public Affairs as part of the Project Victoria series which contributed to the educational and other reforms instituted by the Kennett Government. The views are his own.

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