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Do we really need a minimum wage?

We look at the case for and against.

Your Money contributor

Minimum wage (iStock.com/ Sergey Tinyakov)
Minimum wage (iStock.com/ Sergey Tinyakov)

The main purpose of a minimum wage is to provide unskilled workers with a safety net, says Professor Lisa Cameron, Development Economist at the University of Melbourne.

“Minimum wages are justified on the basis of fairness – that workers receive fair pay for a fair day’s work.”

“They also serve as a guard against exploitation by employers of vulnerable workers who might seek to divide the surplus produced by capital and labour unfairly in their favour.”

More political than practical?

That said, some economists argue that a minimum wage only has a limited effect on bringing incomes together and that the real impact may be more social and political than economic.

“Minimum wages aren’t an especially effective tool for combatting income inequality as minimum wage earners are spread across the distribution of income e.g. domestic partners and/or children of high income earners may be minimum wage earners,” Cameron says.

“A higher minimum wage, however, in my view, does combat some of the political angst about income inequality and leads to people feeling like they live in a more inclusive society.”

Jo Masters, Chief Economist at Ernst & Young, says that this political angst can have far-reaching repercussions. 

“When you look at societies where wages diverge too far, there is disenfranchisement and discontent and this can begin to have political implications.”

“There is an argument that the election of Trump and Brexit are both examples of where this has happened.”

Masters also says a minimum wage also won’t go much way towards lifting wages generally – an issue Australia is struggling with at the moment.

How Australia uses its minimum wage

Australia was an early adopter of the concept of a minimum wage. While it has its origins in the famous Harvester decision by Justice Higgins of the Arbitration Court in 1907, Australia derives its current minimum wage from the 10 National Employment Standards enshrined in the Fair Work Act 2009.

Each year, the Fair Work Commission reviews and revises the level of the wage based on submissions from its ‘expert panel’.  At the moment this panel consists of members of the Fair Work Commission itself, as well as outside economists.

Traditionally, the Fair Work Commission has a record of setting a relatively high minimum wage by international standards.

In fact, Australia’s minimum wage for workers over 21 is currently $18.93 an hour, or $719.20 a week, based on a 38-hour week. Casual workers receive a 25 per cent loading on top of that.

This makes ours one of the highest – if not the highest – in the world, both in real terms and purchasing power.

To put this in perspective, the United States has a federal minimum wage of just US$7.25 an hour, approximately A$10.10. In the United Kingdom, it is  £8.21, around A$15.

“While it’s true that most low paid workers in Australia are Award covered, the minimum wage really sets a floor for these,” Masters says.

“About 20 per cent of Awards are influenced and another 20 per cent of contracts influenced by the minimum wage.”

Can a minimum wage hold back the economy?

If the arguments for a minimum wage are largely social and political, many opponents to the minimum wage attempt to use economics to support their position.

In particular, Professor Cameron says that there is an argument that it could lead to unemployment if the minimum wage is set above the intersection of supply and demand.

Professor Cameron also points out that “classical economic theory (and so some extent common sense)” suggests a high minimum wage could lead to fewer people being hired.

“If the cost of something rises, people purchase less of it,” she says. “Hence increasing the minimum wage could lead people to lose their jobs.”

“However, research examining what has happened in the past in all manner of countries when minimum wages have been increased does not produce an overwhelming endorsement of this argument.”

“In fact, it is surprisingly hard to convincingly show that minimum wages decrease employment. It may be that the classical economic model, does not explain the labour market very well,” argues Professor Cameron.

“Economic models, which allow for employers to have significant market power, think Amazon, show that minimum wage increases need not lead to job losses.”

Masters agrees, describing the empirical evidence linking between higher minimum wage and unemployment as “mixed, at best”.

But she does note that there can be some flow-on effects of setting a minimum wage too high, which can include businesses choosing to cut down on vocational training or employing people part-time over full-time.

“Higher wages tend to have a particular impact on small businesses because they tend to have less flexibility and run on tighter margins,” Masters explains.

Minimum wages in the age of Uber

Increasingly many low-paid workers are finding they have no right to a base level of pay at all because they’re not employees but “contractors”. This model has gained widespread popularity in the food delivering and ride-sharing sectors, as apps like Uber and Deliveroo increase in popularity.

But Professor Cameron believes that it is this very fact that makes a minimum wage more important than ever.  

“Companies like Uber argue they are not ‘employers’ so they are not subject to the minimum wage. Governments around the world are grappling with this.”

“In my view, these companies are trying to sidestep minimum wage legislation for their own gain.”

“This makes it more important to establish fair minimum wages and to seek to apply these measures, that are designed to protect workers, across all forms of employment.”

So maybe the debate isn’t just about increasing the minimum wage, but about keeping it there as a safety net for those who need it in a changing world.

Minimum wages around the world by the numbers (per hour)

Australia $18.83
New Zealand $16.74 (NZ$17.73)
United States $10.10 (US$7.25)
United Kingdom $14.98 (GBP8.31)
France $15.81 (EUR10.03)
Germany $14.49 (EUR9.19)
China (Shanghai) $4.36 (RMB21)