My personal interest in politics and government policy was kick-started several years ago after learning about how the minimum wage prices low-skilled and new entrants out of the work force. After 3 years and several hundred résumé applications, it was clear to me that there simply were not enough jobs available for all the people seeking employment. While there are a constellation of factors affecting job availability in any given location, it is fair to say the minimum wage plays a very significant role in restricting the amount of employees a business can afford and therefore chooses to hire.
Since July 2009, Australian workplaces have largely been governed not by the elected representatives but by unelected bureaucrats at the Fair Work Commission thanks to the Fair Work Act 2009. With such a positive and reassuring title – in a country where “a fair go” may as well be our national slogan, the mere suggestion that they could be partially responsible for the difficulties faced by those seeking employment in Australia would be unthinkable to most. What kind of uppity peon would dare question the efficacy of the ‘Fair Work’ Commission? What everybody needs to understand is that intentions – admirable and benevolent as they may be – do not matter. What does matter is the effects of a given policy on the people who are subjected to it.
Essentially, the minimum wage for adults is currently $16.87 ($13 US) per hour or $640.90 ($492 US) for a 38 hour week (before tax). Casual employees are entitled to an extra 25% on top of this rate, as are those under 21. However, they have incrementally lower minimums (which I’ll deal with later). It’s worth noting that just a few months earlier AUD had been at parity with USD. Over the past 6 years the minimum wage in Australia has increased between 2.5% and 4.5% annually.
Pay guides for every industry determine the minimum wage for each particular occupation. The industry awards and the classification levels within each industry are incredibly specific. The list of industry awards includes the ‘Alpine Resorts Award’, the ‘Racing Industry Ground Maintenance Award’ as well as three Education Services Awards (one for each Post-Secondary, School General Staff and Teachers) and two Higher Education Awards (Academic Staff and General Staff).
With some minor variations most of the awards follow a similar pattern for junior employees to the following Fast Food and General Retail Awards.
That these incremental adjustments based on age are included at all is a tacit acknowledgement that the minimum wage hurts young people the most and they’re trying to minimise the effect of this, at least to an extent.
That said, when compared to the cost of hiring adults over 21, young, school-aged people are incredibly lucrative to employers – at least in terms of wages. Typically when many workers get to 19 or 20 years old at these kinds of places, they experience a sudden, significant reduction in shifts (unless they become managers) to the point where they have to look elsewhere. Fortunately they have experience and the difficulty of finding work is at least somewhat cushioned. Especially when compared with those who were unable to get or did not seek work during their high school years. Because the wage rates are so much higher now they’re older, they are incredibly unlikely to get a start in retail or fast food because they’re competing with a huge supply of younger, cheaper people. These young (but not young enough) people progress into their late teens or twenties with only the slimmest chance of even getting an interview, let alone employment. Unless they’re going to university or TAFE and pursuing work in an industry that doesn’t care about previous work history (such as public sector jobs or academia), then their options are extremely limited. It’s easy to say “Well they should have just got jobs in high school”, but the point is, if it were not for this legally imposed factor working against them, they would not need to.
An objection frequently directed at those advocating lowering or abandoning minimum wages (besides insults and dismissals), is that Australia’s unemployment rate is 6.3%, which is about 0.5% higher than a year ago but otherwise not terrible. However, like most government provided unemployment calculations from other countries, the ABS fudges the data. They limit the number counted as unemployed by only classifying “a person as unemployed if, when surveyed, they have been actively looking for work in the four weeks up to the end of the reference week and if they were available for work in the reference week“. They also consider a person employed if they worked for at least one hour during the reference week for any form of payment or without pay at a family business, and they seasonally adjust data. Independent research carried out by Ray Morgan indicates Australia’s unemployment rate is closer to 11% (February 2015), as they include people looking for work no matter when and don’t cook the books to present the government in a more positive light.
As the minimum wage hurts the young disproportionately however, it’s important to consider the youth unemployment rate – 13.88% for the month of February, 2015. Unfortunately, this data comes from the ABS so it’s anybody’s guess what the actual rate is. No, Australia hasn’t gone to hell in a handbasket, but the youth are getting a pretty raw deal.
It’s important to understand that wages are essentially no different to prices for any other good. Minimum wage therefore, is an artificial price increase. You cannot raise the price of anything and maintain or increase the demand (unless there are other factors at play which shift consumer preferences towards the good or service in question despite the increased cost). When a law is passed that decrees no one may be paid less than $640.90 a week, then anyone who’s skills or productivity are not worth $640.90 a week (or the hourly equivalent for part-timers) finds themselves unemployed with considerably lower future prospects of securing employment. Minimum wage laws therefore only help those who remain employed after a wage increase, doing so at the expense of those who become unemployed altogether or, more often, will now never get hired in the first place.
To present this in numbers (which should be taken cautiously, as quantification is incredibly difficult and fraught with problems when dealing with economics), Andrew Leigh of Harvard published an article in the Australian Economic Review (2003) concerning the employment effects of minimum wages. His finding was that “for each 1 percent increase in the minimum wage we can expect… [to lose] 96,000 jobs” in Australia, as summarised by John Humphreys (using 2012 employment figures).
Another problem resulting from the minimum wage primarily effects smaller businesses and start up entrepreneurs operating on narrow profit margins. With a legal obligation to pay a minimum wage, and little room to raise prices while maintaining (let alone gaining) customers without losing a competitive advantage over another company – they will simply go out of business, and both the employees and employers will be unemployed.
Many leftists will view this positively, that if these particular businesses could only survive by not paying their workers “a living wage”, then the cessation of their existence is deserved. They pay no mind to the fact that the economy is now short the goods and services provided by each business that closes because of artificial constraints. They ignore or fail to understand that people who were previously employed (or could be employed if there was no minimum wage preventing them) are now no longer employed (or will never be sought). Why is it preferable for Qantas, PwC, Rio Tinto or Optus to lay off workers who are perfectly happy to work for 5c or even $5 less than the minimum wage? What right does anybody besides the worker (or their union if they so choose) have to demand or instruct an employer to pay an arbitrary amount that may well exceed what an employee’s skills are worth? Again, the leftist response to this is “Well they were being exploited!1!” or “But they weren’t earning enough to survive!!1”. Yet despite this, the people working for these wages do so voluntarily. To their knowledge, the wages they’re receiving are the best out of all the options available to them, otherwise they would go elsewhere. Now, thanks to the well intentioned but ultimately incompetent, they’re out of a job (or have increasingly diminished prospects for gaining employment) and now have to seek alternative routes they otherwise would not have chosen while working at the very place that was supposedly exploiting them. There are few undeniable truths which rival Hazlitt’s observation that “There is no escape from the conclusion that the minimum wage will increase unemployment”.