Burdens of Low Pay

The new Australian Fair Pay Commission is due soon to release its first minimum wage decision — possibly as early as this week.

The decision will set the national minimum wage for all people covered by the Commonwealth's Workplace Relations Act. Following recent changes to the Act by the Howard Government's controversial Work Choices legislation this could be close to 80 per cent of the workforce.

The new laws require the commission to set the national minimum wage by taking into account the following: "the capacity for the unemployed and low paid to obtain and remain in employment; employment and competitiveness across the economy; providing a safety net for the low paid; and providing minimum wages for junior employees, and employees to whom training arrangements apply and employees with disabilities to ensure those employees are competitive in the labour market".

The commission held 18 public consultation sessions in July and August and received about 180 submissions from government, charitable, business and union organisations and individuals.

Many of the submissions to the commission argued recent changes to the way the federal minimum wage was set would lead to significantly lower wages and increased poverty and therefore the commission should maintain and increase the level of the wage.

There is one big problem with statutory minimum wages: they put people out of work. The higher the minimum wage the higher the unemployment rate, and the greater the likelihood that more people will be living in poverty. Not only do they put people out of work but the people who tend to suffer as the result of the imposition of a minimum wage tend to be the most vulnerable workers — the unskilled, women and especially younger workers.

And the higher the minimum wage, the more people who will be negatively affected.

Arguments made by union leaders and the Labor Party that the creation of the commission will result in a "race to the bottom" in wages are simply nonsense. And it is ironic this claim is being made at the same time the Federal Government is being criticised for a "skills shortage" in Australia.

Take a typical example illustrating the effect of a minimum wage. Imagine a small local business — say a bakery, owned and managed by its owners. Most such businesses are not particularly profitable and as often as not the owner-managers will earn less in an average week than some of their employees.

When it comes to hiring staff, the bakery will have a limited budget to spend on wages. If the business is forced to pay a federal minimum wage it may only be able to afford to employ, say, six workers, whereas without a federal minimum wage it could pay a little less to some workers and perhaps employ seven.

The bakery will want to hire those with the most skills and experience, and therefore the seventh worker who missed out and will remain unemployed will be the least skilled and least experienced. This not only means the absence of a pay packet but also the absence of an opportunity to gain valuable skills and experience.

With 100 (or more) such bakeries operating in a city like Brisbane (and a skills shortage) there will be upwards pressure on wages. Those bakery workers with more skills can be choosier about where they are willing to work, and employers will pay a premium for them — in all likelihood, paying a wage well above whatever minimum wage might have been set.

However, in this scenario, at least, although some people would be working at wages below what the minimum wage would otherwise be — at least they would be working.

Clearly, if one of the main aims of the commission is to ensure the low skilled and currently unemployed are given the opportunities to work, the level of the minimum wage is crucial — and the higher it is set, the more vulnerable people will be without jobs.

The other thing about a minimum wage is that it is effectively a tax on struggling employers — usually small and medium businesses. These businesses will find it harder to find the money to pay for an increase and the money to do so will usually come from the owner-manager's pay packet (either that, or they will be forced to lay off workers).

On the other hand, increases in the federal minimum wage affect the top end of the labour market very little: An increase is not going to affect Macquarie Bank's labour force at all because they are likely to have few employees on the minimum wage, and an easy capacity to absorb any increases.

If there is an argument that employers should be responsible for sustaining workers' incomes through some sort of imposed regulation, it is fair that the burden should be spread among all employers — not just imposed on those who can perhaps least afford it.

Joel Butler is a postgraduate fellow in the law faculty at Bond University