Bill Shorten has declared the next federal election to be a referendum on wages and has committed to raising the minimum wage to become a “living wage”.
A living wage would be set to an amount that could cover necessary living expenses. While Labor has not indicated how this would be determined, the ACTU has called for the minimum wage to increase by 11 per cent during the next two years.
This proposal is deeply flawed.
The ACTU has said a living wage is required so that “no full-time Australian worker lives below the poverty line”.
The problem is that by “poverty” the ACTU means “relative poverty”, which is defined as 60 per cent of the median income.
This means poverty could decrease simply because the median income declined, not because of material improvements to those at the lower end of the income distribution.
It also means an individual earning $42,000 a year would be considered to be in poverty. No one can claim that $42,000 delivers a high standard of living, but describing it as the poverty line is inaccurate.
In any event, the best available evidence shows that poverty is declining.
Each year, the Melbourne Institute publishes statistical analysis based on the Household, Income and Labour Dynamics in Australia survey.
It includes two measures of poverty: an objective measure and a relative measure.
The objective measure, which estimates changes to income across time anchored to purchasing power, has declined from 13 per cent of Australians to 4 per cent over 15 years.
The relative measure, which estimates the proportion of households with income 50 per cent or lower than the median, has declined from 13 per cent to 9 per cent.
The objective measure is a more accurate depiction of the economic conditions of those on lower incomes because it tracks their progress across time.
The relative measure artificially pegs lower incomes to median earnings and so conflates changes to those on lower incomes with changes to the median income.
Unfortunately, it has become a common and dishonest tactic to redefine inequality as poverty to argue for radical redistribution and ultimately destructive wage controls.
Aside from being based on a highly misleading use of statistics, the living wage concept suffers from other drawbacks.
Not all jobs need to be able to sustain the living expenses of a family. Entry-level jobs, for example, play an important role in the economy and provide economic opportunity for young people. Then there is the issue of determining a standardised living wage. A living wage for a single person living at home with their parents would be substantially lower than it would be for someone with a mortgage and a dependent spouse and children.
Applying a standardised living wage across a multitude of circumstances is practically unworkable.
Perhaps most important, though, is that a living wage will harm those it is notionally designed to help. Artificially increasing the cost of workers will not result in higher wages but fewer jobs and fewer hours.
Even the Fair Work Commission, set up by the previous Labor government, is aware of the costs of dramatically increasing the minimum wage.
In response to a submission by the ACTU, the Fair Work Commission notes the “substantial risk of reducing the employment opportunities for low-skilled workers, including many young persons, who are looking for work” as result of a substantial increase to the minimum wage.
Rent control means people line up for rental properties; price controls mean people line up for bread; and wage controls mean people line up at Centrelink.
If Labor really believes there are no negative employment effects, then there is no reason to stop at an 11 per cent increase. Why not double the minimum wage?
While there is never a good time for such a proposal, doing so in today’s economic climate is reckless. Australia is in a per capita economic recession where GDP per capita has gone backwards for two consecutive quarters. About 614,000 young Australians are unemployed or unable to find enough work. And 1.1 million Australians are underemployed.
Still, there are legitimate concerns about stagnating real wages. Real wages in the private sector have grown by just 1 per cent during the past five years.
This is partly because of myriad entitlements and conditions included in employment contracts that raise the cost of employment for businesses and lower nominal wages. As noted by Institute of Public Affairs workplace relations director John Lloyd: “An agreement’s conditions and other legislated employer obligations such as superannuation, workers compensation and payroll tax can add 90 per cent in costs above the prescribed wage rate.”
But the single biggest hit to take-home pay is income tax. Any attempt to improve wages must include lowering taxes, which in practice means reducing government spending.
Governments cannot legislate Australia’s way to prosperity, or to higher wages. Higher minimum wages simply boost the wages of some at the expense of others who will lose their jobs or be set fewer hours. The best way to increase the take-home pay of Australians is to cut income taxes and reduce the onerous regulations on business that undermine economic opportunity and wage growth.