What is the meaning of Andrew Leigh's pay cut?

Bookmark and Share Economics & Deregulation | Sinclair Davidson
Australian Financial Review 26th July, 2016

Word is that all Labor MPs have to be a member of a trade union. It is surprising then that Andrew Leigh's union haven't been knocking on Bill Shorten's door. Perhaps they are planning a picket for the first day of parliament.

Andrew Leigh has just had to accept a $40,000 pay cut while remaining in the Labor shadow cabinet - he has also had his portfolio responsibilities increased. Any other employer increasing an employee's workload while cutting wages would quickly find themselves victims of an orchestrated outrage campaign. Yet the usual suspects are all lauding Leigh for "not being in it for the money".

Well, yes. Good for him. But this instance illustrates more than a politician "doing the right thing" or being "committed to public service".

Bill Shorten's predicament - wanting to employ Leigh but only able to afford him at a lower salary - is a problem many employers face every day. Similarly Leigh's predicament - wanting to work in a particular job, but having to take a pay cut to do so - is a problem many unemployed workers face every day. Inflexible labour laws - advocated and legislated by the Labor party - prevent potential employers and employees from making precisely the deal Bill Shorten and Andrew Leigh have made.

This is not just a charge of hypocrisy against political elites. The fact is that we're better off having Andrew Leigh on the Labor front bench. Shorten knows this - and Leigh wants to do the work. Some might argue that this simply demonstrates that all politicians are overpaid. But there are deeper lessons to be learned.

Greater prosperity

We are all better off when more people work. The late James Buchanan, the 1986 economics laureate, argued that work generates positive externalities leading to a bigger economy and greater prosperity for all. To be sure many people would generally prefer to work less and they are induced to work more by money.

In our society we also have people who would like to work but are priced out of the market by government regulation or perhaps they are excluded by various societal prejudices. Labour market regulation prevents these groups of individuals from taking a pay cut in order to work. The moral choice to exclude some people from employment has both an economic cost and a human cost. If Leigh is genuinely happy to work at a lower wage who are we to deny that privilege to anyone else?

Ironically Andrew Leigh is the Australian expert on labour market discrimination. Having had to take a pay cut to keep his job, simply because he isn't a member of any Labor faction, is exactly the sort of labour market discrimination he researched as an academic, and publicised in these pages as a columnist.