Labor’s ‘Living Wage’ Will Hurt The Poor, Unemployed

True to form, the unions are using clever marketing to beat the drum for a lousy idea. And true to form, that lousy idea is finding its way into the policy platform of the Australian Labor Party.

Yesterday, opposition workplace relations spokesman Brendan O’Connor hinted that Labor could adopt the Australian Council of Trade Unions’ calls for what they refer to as a ‘living wage’. This comes a day after Bill Shorten used his National Press Club address to declare that ‘[o]ur goal should be a real, living wage – effectively raising the pay of all Australians’.

But by ‘living wage’ Labor and the unions just mean a massive hike in the minimum wage. It’s a cute motherhood statement that disguises a policy which will lock even more Australians out of the labour market.

Currently, the minimum wage is set by the Fair Work Commission in accordance with the Fair Work Act. It’s far from perfect, but at least requires that the FWC consider a range of economic factors in determining the minimum wage. Importantly, one criterion is ‘promoting social inclusion through increased workforce participation’. In other words, the FWC must set the minimum wage with at least some consideration of unemployment, with a view to getting more Australians into the workforce.

The ACTU’s ‘living wage’ would scrap this system, and instead peg the minimum wage at the arbitrary level of 60 per cent of median wages. Under this formula, the minimum wage would rise substantially from its current levels.

Labor and the unions claim that driving up wages so dramatically is urgently needed to achieve greater ‘fairness’ and ‘equality’. But conveniently, they are ignoring several facts.

The minimum wage is already high

Even under the current system, Australia’s minimum wage is among the highest in the world.

In fact, according to the latest-available OECD data, our minimum wage is the third-highest in the developed world, a fraction behind Luxembourg and the Netherlands.

Hourly minimum wage, as at 2016 levels, shown in US dollars (based on 2015 purchasing power parity)
Source: OECD

In real terms, minimum wage earners receive almost as much – or more than – the unions are asking for anyway

The ‘living wage’ envisioned by the ACTU, as explained above, would require that minimum wage earners receive 60 per cent of median wages.

But the ACTU is ignoring the substantial impact of Australia’s tax-and-transfer system – that is, tax revenue collected by government and redistributed in the form of cash transfers, largely to lower income-earners.

OECD figures show that, taking into account tax and transfers, minimum wage earners receive close to, or in excess of, 60 per cent of median wages.

Income levels provided by full-time minimum wage employment, value in percentage of median household incomes, 2015
Source: OECD

Few Australians are actually on the minimum wage

As high as it is, the minimum wage is becoming increasingly irrelevant as fewer and fewer Australians are actually on it.

As the IPA wrote in its report last year, Fair Work and the Right to Work:

[The minimum wage is] being rendered increasingly meaningless by ‘creep’ in pay and conditions contained in awards… The 122 ‘modern’ awards created under [the] Fair Work [Act] almost all contain pay above that set by the FWC. As a result, the award system creates a ‘shadow minimum wage’… across a range of low-paid and low-skilled jobs… Of the 2.3 million Australians on awards, 92 per cent receive pay in excess of the statutory minimum.

Minimum pay per week (lowest classification, excluding trainee rates) under various awards, compared with the statutory minimum wage.
Sources: Annual Wage Review 2015-16 [2016] FWCFB 3500; Restaurant Industry Award 2010; Building and Construction General On-site Award 2010; Clerks – Private Sector Award 2010; Cleaning Services Award 2010; Australia Post Enterprise Award 2015; Waste Management Award 2010; Fast Food Industry Award 2010; Banking, Finance and Insurance Industry Award 2010.

In short, for all the bleating of Labor and the unions about how low the minimum wage is, the fact is that the vast majority of Australians earn a wage far in excess of it.

A higher minimum wage will drive up unemployment

Of course, any wage rise is good news for someone who already has a job. But the benefits to workers are far outweighed by the consequences for the unemployed, as higher minimum wages effectively raise the barriers preventing people from entering the workforce.

As IPA Research Fellow Matthew Lesh wrote last year:

The minimum wage prices out people from the employment market. That is, if the minimum wage is $17 an hour, but a person’s work is only worth $16, they will simply be unable to get a job. Pushing people out of employment and onto inevitably lower unemployment assistance is a guaranteed strategy to increase poverty. Stuck in the welfare trap, these workers cannot build on workplace skills that provide the human capital necessary to increase the value of their labour and secure higher incomes in the future. A low-wage job is just a start on the income ladder. A higher minimum wage cuts off the bottom rungs.

Accordingly, for the sake of the more than 700,000 people in Australia currently looking for work – not to mention the hundreds of thousands more who have given up on looking altogether – Australia must resist driving up statutory minimum wages. The only truly equitable industrial relations system is one that gives everyone the chance to enjoy the dignity of work.