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Time to scrap the minimum wage?

Alexander Philipatos | Business Spectator | 28 February 2013
As the saying goes, you reap what you sow. For the government, this applies to yet another well-intentioned but poorly thought out policy.

In an effort to wean the long-term unemployed back into work, the government introduced subsidies to entice businesses to hire workers who have been unemployed for more than two years and have little to no recent work experience.

The government set aside $85 million from the 2011-12 Budget to pay for the program over four years. Unfortunately, the program has been so overwhelmed with businesses looking to cash in that the government was forced to put it on hold until July 1. Meanwhile, the long-term unemployed are deprived of valuable job prospects.

The wage subsidy program, dubbed Wage Connect, subsidises employers to the tune of $5,900 per employee over six months to assist with the cost of training. This averages to roughly $230 per week, roughly equivalent to Newstart Allowance.

The original program provided subsidies for 35,000 job seekers over four years. However, according to National Welfare Rights Network president, Maree O'Halloran, ‘By August 2012 the number of very long-term unemployed had grown [since May 2011] by 23,000 to 253,000.’ The program simply has not been able to cope with the rising level of long-term unemployed.

The wage subsidy program has laudable objectives. It works for both employers and employees. The long-term unemployed find increased employment opportunities, and the employers’ costs are reduced.

But the taxpayer rather than the job seeker is footing the cost of training. Moreover, it was entirely foreseeable that a program like this would burn a hole through its budget.

There is a better way to get the long-term unemployed back into work and with no impact on the government’s budget. Instead of offering subsidies, the government could allow businesses a six-month exemption from the minimum award wage.

It increases the job prospects of the long-term unemployed and would give businesses the incentive to hire long-term unemployed, and reduce the cost of training so that job seekers finally obtain work and training.

The program could be designed along the same lines as Wage Connect. Job seekers must be unemployed and on income support payments for two or more years; be registered with an Australian Government employment services provider; and have little to no recent work experience.

After six months, the employee’s wage would go up to the minimum wage or an agreed-upon market rate. It is important that employees are not sacked after six months while the employer fills the position with another worker. This could be monitored by the employment services provider that the job seekers are already paired with.

In any case, such unscrupulous behaviour is costly and counterproductive. If employers were to go through employees every six months, they would face massive training costs, not to mention gaining a poor reputation.

A minimum wage exemption has two advantages over wage subsidies.

First, the program adds not one cent to government spending. On the contrary, it should reduce spending, since job seekers employed under the program come off welfare.

Second, there are equity advantages. The current wage subsidy program offers 35,000 places over four years – 8,750 per year. Great for those lucky enough to be recruited, tough luck for everyone else. A minimum wage exemption on the other hand does not require a budget; hence, the number of recruits is unlimited. So long as employers are willing, job seekers will be hired.

Critics might argue that a minimum wage exemption might incentivise business to hire the long-term unemployed, but reduce the incentive for the unemployed to accept the job. Is this a legitimate criticism?

A full-time minimum wage job pays $606.40 a week. Allowing employers to hire for less than the minimum wage would mean that employers would be offering a weekly wage lower than $606.40, perhaps only $400.

The prospect of a job paying $400 per week is clearly less enticing than one paying $600, but it is still far better than the $246.30 a week Newstart Allowance – with the added prospect of earning higher wages in a few months. Furthermore, Newstart payments will not cut off completely. Payments taper off as the job seeker begins working, so they will still be drawing a smaller proportion of their payment until their income rises to a sufficient level.

The reduced incentive argument holds little water because it still pays for the job seeker to be employed. The options for the long-term unemployed are few; the trick is to give incentives to prospective employers.

A minimum wage exemption is a fiscally responsible and fair alternative to wage subsidies – a no-brainer for a government struggling to produce a budget surplus before an election.

Alexander Philipatos is a policy analyst at The Centre for Independent Studies.