Poor people can’t eat good intentions

Apparently, politics is simple. Either you are good and care for people, or you don’t. 

This simple ‘cult of good intentions’ played out once again last week when the Fair Pay Commission chose to freeze the minimum wage. There was an immediate public outcry that this was a mean-spirited assault on the poor. 

The minimum wage is one of the best examples of the difference between good intentions and good outcomes. At first glance it seems obvious that increasing the minimum wage will help poor people. But the truth is that the main cause of poverty is unemployment and a major cause of unemployment is the minimum wage. 

If people want to help the poor, they need to get past mouthing pro-poor slogans and consider which policies encourage employment and productivity growth. 

Last year, the Fair Pay Commission awarded a minimum wage increase of 4.1%. If they had frozen wages then, it is estimated that more than 100,000 more jobs would have been created (or not lost). The main consequence of their decision this year to freeze the minimum wage is that thousands of low-skilled workers are going to keep their jobs. This decision should be applauded by anybody who actually cares about the poor. 

It is also worth remembering that Australia already has one of the highest minimum wages in the world. At $28,276 per year, the Australian minimum wage is about the same as the GDP/person in developed countries like Portugal and South Korea. 

Further, the minimum wage is a uniquely bad instrument for helping the poor. Much of the minimum wage is lost in higher tax and lower welfare benefits. And the minimum wage is not targeted at poor families, with 25% of minimum wage earners coming from families in the top 30% of disposable incomes. 

For a government wanting to help low-income earners, the best solution is to reduce their tax, perhaps by increasing the tax-free threshold. Not only would this increase their disposable income but also improve work incentives. 

But first politicians need to decide whether they want to help poor people or just look like they’re helping poor people. Because good intentions without good policy is pointless. 

Details of these figures used in this article can be found in an opinion piece in the Canberra Times. 

John Humphreys is a Research Fellow with the Economics Program at the Centre for Independent Studies.