Pay increases don’t help the unemployed

A few weeks ago, the Australian Council of Trade Unions announced yet another 'living wage' claim. It plans to seek, in 2003, a $24.60 per week pay rise for all award workers, bringing the minimum wage to $456.00.

The living wage claim is intended to boost the incomes of low-paid workers and thereby to keep their families out of poverty. The problem is that award minimum wage increases don't help alleviate poverty but may well make it worse.

On the one hand, the assumption underlying the living wage claim-that all low-paid individuals are struggling to make ends meet-is quite simply misguided. Award minimum wage increases, on the other, exacerbate unemployment by destroying employment opportunities for low-skilled workers. This in turn adds to poverty-because joblessness is a major cause of poverty.

The low-paid and the poor aren't necessarily the same group of people. To begin with, well over 50% of poor individuals are unemployed and therefore receive no wage whatsoever. Award minimum wage increases are totally irrelevant to them.

Many low-paid individuals, in fact, live in households that enjoy relatively high standards of living. An estimate shows that, in 1994-95, approximately 40% of adults receiving the minimum wage or less were found in the top half of the household income distribution. These adults included those who didn't earn a lot themselves but had some other members in their families-typically their spouses-bringing home a fair amount of money.

Young low-wage earners that are found in low-income households aren't necessarily poor, either. The Australian Bureau of Statistics' surveys, which are a common data source for Australia's social policy research, record young low-wage earners as constituting a separate household even when they actually live with their parents. They most likely receive some financial support from their parents and are thus far from destitute.

The primary cause of a low income is joblessness, not a low wage.

For poor households that do contain low-wage earners, minimum wage increases provide very little relief. When the incomes of such households increase, they will lose part of means-tested benefits, which they might have previously been entitled to; they will also have to pay a little more in income tax.

All things considered, minimum wage increases widen, rather than narrow, income inequality.

The low-paid are usually low-skilled, and so minimum wage rises increase the cost of employing low-skilled workers. Firms may respond by, for example, substituting machines for low-skilled workers. Unemployment thereby results.

Moreover, minimum wage increases flow through to workers who aren't on the minimum wage. As of 30 September 2001, there were, for instance, about half a million employees who were covered by federal enterprise agreements and could be affected by award minimum wage increases.

Minimum wage increases also have the effect of increasing 'labour on-costs'-such as leave entitlements, superannuation contributions and workers' compensation premiums-which are in many cases proportional to wages.

Thus, even a small increase in the award minimum wage can trigger a large increase in the national wage bill.

Counterintuitive as it may sound, it is a decrease, not an increase, in the minimum wage that will help marginal labour market participants. The reason is simple: a reduction in wages for low-skilled workers won't only prevent unemployment among, but also boost employment opportunities for, these workers.

From such a standpoint, the 'Five Economists', a few years back, proposed a temporary wage freeze-or a real wage reduction-for low-skilled workers.

Some might suggest that more low-paid jobs for low-skilled workers may lead to a permanent 'underclass', but this is very unlikely. Low-wage earners don't necessarily become locked in low-paid positions. Just over 50% of them eventually move into higher-paid positions after gaining on-the-job skills. Minimum wages that are too high will, by destroying jobs, deprive the low-skilled of opportunities to climb up the wage ladder. Worse, unemployment will increase their risk of falling into poverty.

Clearly, minimum wage increases run counter to the supposed objective of helping the most disadvantaged. The living standards of households depending on low wages should instead be protected through the tax-transfer system. In the past, many commentators have repeatedly made similar arguments but to little avail. Now is the time to take them seriously-rather than continually fiddle with the level of the minimum wage.

Kayoko Tsumori is Policy Analyst at The Centre for Independent Studies.

Poverty in Australia: Beyond the Rhetoric  by Peter Saunders and Kayoko Tsumori is published by the Centre for Independent Studies (www.cis.org.au).