Graham Matthews
It's an open secret that the Howard government introduced the Orwellian-named Australian Fair Pay Commission (AFPC) in its Work Choices package as a means to cut the minimum wage. The commission will supercede the Australian Industrial Relations Commission (AIRC) which has been setting the minimum wage at an annual wage case hearing.
The AFPC won't be able to cut the nominal minimum wage (currently $467.40 per week or $12.30 per hour), but it will have the power to freeze it, or raise it at a rate that fails to keep up with inflation, thus eroding its real purchasing power over time.
The economic justification for this move is the controversial argument that lowering the minimum wage will increase employment among the low-skilled. Some economists go so far as to argue that, at 60% of the median wage, the minimum wage is pricing low skilled workers out of the work force.
But lowering the minimum wage is just the start. Melbourne University professor Mark Wooden argues in the Journal of Australian Political Economy (JAPE), that reducing the minimum wage will not be enough to boost employment among the low-skilled. Welfare payments would also have to be cut to force those on welfare back into the labour market.
In his article "Minimum wage setting and the Australian Fair Pay Commission", in JAPE #56, Wooden argues that while "ratios between minimum wage and median earnings of close to 60% are indicative of a system that prices many of the unemployed out of the labour market", lowering the minimum wage will not be enough to force many of those on welfare into the work for the minimum wage.
Wooden goes on to say that "the AFPC is likely to discover that the income replacement rates for some people out of work are such that it would not be long before the benefits from not working, which are indexed to either prices or average earnings, will exceed the benefits from working".
According to Wooden, the "benefits from not working" will impact most strongly on families with children, both single and dual parent families. The loss of benefits (including concessions), combined with the extra costs of working (not to mention the cost of child care), quickly wipe out any gain made from one or even both parents working for the minimum wage. "Holding the real wage constant while allowing benefits to increase with the Consumer Price Index (CPI) will obviously only further reduce the incentive to work", Wooden asserts.
Wooden warns that the AFPC may be forced to index the minimum wage to the CPI, just to maintain the relative incentive for those on benefits to find work. The only other alternative, he says, is to abolish the minimum wage completely, replace the range of social security benefits with a (lower) flat payment, and to use "negative income tax" — a government subsidy to the low paid — "that brings their total income up to some guaranteed social minimum".
Neoliberalism
While couched in the apparently neutral language of economics, Wooden's arguments are, in fact, not at all neutral. They reflect the thinking of most neoliberal economists, and ignore all other factors other than the cost of labour (wage levels) in determining the level of employment.
There is no consensus among economists that lowering the minimum wage will increase employment among low-skilled workers. There is no law, for instance, that forces bosses to invest any extra profits (gained from a real fall in wage levels) into increased production. They are free to use the extra wealth to pay off debts, or engage in speculation, neither of which will lead to any increase in jobs.
Alternatively, a fall in wage levels may also lead to workers having less money to spend, resulting in a drop in demand. This, in turn, may drive down demand for workers even lower!
The central tenet of Wooden's argument, that lowering the minimum wage will necessarily increase demand for low-skilled workers, is little more than a shot in the dark.
Wooden's argument, that those on benefits would refuse low-paid work, also runs foul of the Coalition government's new Welfare-to-Work requirements. Under the changes to social security legislation due to be introduced on July 1, many welfare recipients risk a possible eight-week suspension of their payments if they refuse a job — any job — regardless of its lack of penalty rates, public holidays or other conditions. This onerous provision places a big stick in the hands of the government, giving it the potential to force welfare recipients into low-waged, dead-end jobs, regardless of the loss of income they may suffer by being forced off benefits.
Hours increasing
At the other end of the scale, workers with jobs are being forced to work more overtime hours, in many cases unpaid. On February 6, the Sydney Morning Herald's Gwyn Tophan argued that average hours for full-time workers have been increasing for the past quarter of a century. She wrote: "The proportion working more than 60 hours a week has shot up by 81 per cent. And Australian full-time workers are more likely to put in more than 50 hours a week than those in any other OECD country."
According to Dick Nichols, managing editor of Seeing Red magazine, "It's not a difficult equation to show that reducing the working hours for those actually in work, with no loss in pay, will necessarily increase demand for extra workers". He told Green Left Weekly, "It's simply unacceptable for Australian workers to be faced with two equally unpalatable prospects: either you languish on benefits in dire poverty or, if you're lucky enough to find a job, you're forced to work in excess of 50 hours a week. It's the symptom of a system that cannot meet basic human needs, and no amount of lowering minimum wages or attacking benefit levels is going to change that."
One of the worries for the Australian Council of Social Services (ACOSS), a spokesperson told Green Left Weekly, is that "lowering the minimum wage will create pressures on benefits as well. So there's a rippling effect, which means that a whole range of poor people are affected by cuts to the minimum wage".
In its submission to the AIRC National Wage Case in March 2005, ACOSS argued that if the minimum wage were cut "there is a danger that work incentives will be eroded, or that social security payments will be cut to prevent this outcome — leading to a sharp increase in poverty levels as was the case in New Zealand in the early 1990s". The submission further argues that there is no evidence that increases in the minimum wage have increased unemployment.
"While it is true that government transfer payments are more precisely targeted towards low-income households at risk of poverty, decent minimum wages provide a critical 'floor' for the incomes of many low-income households", the ACOSS submission argued. "Without this floor, governments would struggle to prevent widespread poverty among wage-earning households."
From Green Left Weekly, February 15, 2006.
Visit the Green Left Weekly home page.