Don’t make mistakes, higher minimum wages have unintended consequences



The Australian Fair Labor Relations Commission (FWC)’s recent decision to raise the federal minimum wage by 5.2% and the award minimum wage by 4.6% was higher than expected.

The FWC typically acts to balance the demands of unions and employer groups. But this year, there is no doubt that the Commission has endorsed the union and the New Labor Party administration.

Australians may be allowed to assume that higher minimum wages will prevent real wage cuts in the light of rising inflation.

But this is not a way to raise wages. Instead, unintended consequences can accelerate inflation and increase unemployment.

First, the employment effect of the minimum wage is one of the most studied topics in economics. In the Australian context, you can see an empirical study of Labor Party Minister Andrew Lee.

Despite its clear relevance, there is a clear reason why Labor does not mention the work of their own ministers. That goes against their argument for a significant increase in the minimum wage.

Higher minimum wage cost

Lee, a PhD from Harvard University and a former professor at the Australian National University, found employment elasticity with respect to the minimum wage -0.29. In other words, for the Australian labor force as a whole, a 1% increase in the minimum wage will reduce labor demand by 0.29%, resulting in higher employment costs.

In the context of Australia’s 13 million workforce, a 5.2% increase in the minimum wage means that more than 200,000 jobs will be lost.

The result is even more severe for young people. Lee discovered that for every 1% increase in the minimum wage, youth employment could decrease by 1%.

Youth unemployment is twice that of other working populations. There is nothing natural about this cool statistic. When the government directs wage floors that exceed market value, this removes the first rung of youth employment ladders seeking to enter the workforce. This often puts them in catch 22 — if they can’t get a job, they can’t master the skills that would make them hired. Therefore, a cycle of permanent unemployment begins.

Epoch Times Photo
On January 3, 2021, a waitress can be seen delivering cutlery at Mosman’s cafe in Sydney, Australia. (Jennie Evans / Getty Images)

There is no doubt about the trade-off between minimum wage and employment. It makes sense on the basis of economic principles, and solid evidence supports it.

People on the left, especially trade unions, often advertise the famous 1990s paper by David Card and Alan Krueger as evidence that raising the minimum wage does not cost employment ().pdf).

What they do not mention is that if you use more reliable salary data instead of the survey data that was originally used, result In fact, higher minimum wages show a significant reduction in employment.

Inflamed inflation

The impact of minimum wages on employment is always questioned, but the current economic situation makes the impact of inflation a more serious concern.

Andrew McKellar, CEO of the Australian Chamber of Commerce, said the new wage increase will add $ 7.9 billion ($ 5.5 billion) in additional costs to businesses, impacting profits or consumers. Pointed out that it will be passed on to. Feed inflation.

The inevitable pain that the Reserve Bank of Australia raises interest rates to curb inflation from historically low levels will only be amplified by higher minimum wages.

My hometown of Western Australia (WA) has two separate labor-management relations systems. Country and state system. The WA Labor Relations Commission has raised the state’s minimum wage to 5.25%, further widening the gap between state and federal minimum wages.

Why is this a particular concern?

The reason is that WA’s minimum wage applies only to certain businesses, that is, the only trader or partnership business. Therefore, as Aaron Morey, WA Chief Economist of the Chamber of Commerce, properly points out, “This is an outdated WA labor relations system compared to the majority of companies covered by the national system. It is even more disadvantageous to WA’s smallest enterprises governed by. ”A lot to support our small and medium-sized enterprises.

Do Workers Care About Unemployment?

Defenders of the higher minimum wage have succeeded. The Labor government got what it wanted from the Fair Labor Relations Commission. And undoubtedly, they are happy with their early political victories. But none of the workers seem to care about the work that would be lost as a result. Or seriously accelerating inflation concerns.

Artificially determining wages is not a substitute for productivity reforms. This is the best, and frankly, only effective way to help workers.

Even in the words of liberal economist Paul Krugman, “Productivity is not everything, but almost everything in the long run. The country’s ability to improve living standards over time is production per worker. It depends almost entirely on the ability to increase the amount. “

It lowers corporate tax rates, encourages business investment, reforms other parts of the archaic labor relations system, reduces bureaucracy and reduces regulatory burdens, especially for SMEs and start-ups. It means promoting innovation.

The views expressed in this article are those of the author and do not necessarily reflect the views of The Epoch Times.

Sebastian Tofutsu


Sebastian Tofuts is a research assistant at Curtin University in Australia.