The “living wage” proposed by the Australian Council of Trade Unions would increase poverty and make the poorest in our society worse off.
The ACTU is calling for the replacement of the existing minimum wage, which is set by the Fair Work Commission balancing both macroeconomic performance and living standards, with a living wage focusing exclusively on living standards. The unions say this is necessary because of rising costs of electricity, health and housing.
The ACTU’s living wage, a direct British import, is actually just a minimum wage set at an arbitrary point, 60 per cent of median wages. The ACTU has called in the past for the minimum wage to be set at just this level in submissions to the Fair Work Commission. Now, unable to persuade Fair Work, the ACTU is calling for a radical abandonment of Australia’s wage arbitration system, apparently so loved by the unions.
This is a deceptive method of calling for an increase in the minimum wage, which research has consistently found will not work.
Professors David Neumark and William Wascher concluded in 2007, based on a meta-analysis of more than 100 reliable studies on the minimum wage, that the minimum wage reduces jobs, particularly for low-skilled workers and young people.
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 on to inevitably lower unemployment assistance is a guaranteed strategy to increase poverty. Stuck in the welfare trap, these workers cannot build the 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.
Instead, companies invest in technology rather than people. Just walk into a McDonald’s and see those shiny new self-service check-outs: people replaced by machines because of high labour costs.
The recent introduction of a living wage in some US cities has shown its disastrous impact. Seattle is going for $US15 ($19.60) an hour, most recently increasing the minimum wage from $US11 to $US13 in just the past year.
Ekaterina Jardim and collaborators at the University of Washington, using high-quality local employment data, found this increase led to a small rise (3 per cent) in hourly income for low-wage workers. However, importantly, there was a more substantial reduction (9 per cent) in working hours. As a consequence, low-wage employees were $US125 a month worse off on average because of the minimum wage increase – a sizeable amount.
In San Francisco, which has also set a $US13 an hour minimum wage on the way to $US15, many restaurants have closed — a common source of employment for low-skilled workers. Dara Lee Luca and Michael Luca at the Harvard Business School found lower quality restaurants, which are on the margin of exit, were 14 per cent more likely to close for every $1 increase in the minimum wage. This means, in practice, fewer jobs.
It is also wrong to exclusively focus on wage income and ignore transfers, as the ACTU has done. According to the OECD, after wages, benefits and taxes, a minimum wage-earning lone parent is already receiving 68 per cent of median household income.
When the unions talk of increasing the minimum wage, they inevitably ignore those who are out of work — their job is to represent workers, after all. There are more than 700,000 people looking for work and hundreds of thousands more working-age people out of the labour force who have given up on finding employment.
Idleness is a serious moral challenge.
The opportunity to work is a blessing — it not only raises people out of poverty, it provides us with dignity and purpose. We must do all we can to get people into work, not increase the barriers to that.
We can start by resolving the failed government policies that are pushing up the cost of electricity, health and housing to which the living wage is supposedly a response. We must also cut red tape, which Institute of Public Affairs’ research has found is costing $176 billion a year and preventing businesses from creating jobs. Simplistic policy solutions such as a living wage can sound nice — but the challenges we face are far more complex and call for solutions that help people into work, not push them out.
(Originally published 06/11/17)