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Rights and Wrongs
The discussion of post July industrial relations changes has included debate over the setting of minimum wages (safety net wages) in Australia. This is not surprising given the Coalition's antipathy towards the Commission and the fact that its minimum wage decisions do not accept the recommendations of the federal government.
The Federal government is rumored to be considering adapting a UK style low pay commission to review safety net wage claims. Such a commission would comprise of "experts" who would preside over safety net wage cases and make recommendations for wage increases to the government. The implication of such a move is that the Federal Industrial Relations Commission is either ill equipped to handle such claims or that it is not making the "correct" decisions.
This is surprising, since the government is responsible for the appointments to the Commission and in its decisions the Commission has to consider a number of criteria, including the needs of the low paid and the impact of the decision on the economy. A recent letter to the editor of the Australian Financial Review from former members of the tribunal stated that "in safety net wage cases, the levels of productivity and inflation and the employment effects of minimum wages are discussed at length". (letter to the editor, Government Misleads Public on Wages: Judges, Australian Financial review, April 8th, p.85).).
So, would a UK style Low Pay Commission make different decisions? Or even, "more responsible" decisions? This would depend upon who were appointed to such a commission and what criteria it had to consider in making its decisions. There would always be doubts regarding independence (especially if the government appointed members) and its decisions would always be contested, just like those of the Industrial Relations Commission in safety net wage cases. It is not clear how yet another institution, this time a Low Pay Commission, would improve the situation. In the UK the government does not have to accept the Commissions recommendations, and perhaps this is the aspect that appeals to the government. If this is the case, and the government wants to make the decision, then why have a commission at all?
One of the perennial issues of debate and discussion surrounding safety net adjustments is the consequences of the safety net wage adjustment for employment, or more specifically for unemployment rates. There is no simple formula for establishing such consequences, but in general the employment effects of a safety net wage adjustment will depend on:
a. how large the wage adjustment is
b. the relativity between minimum wages and other wages
c. how many workers are affected by the decision
d. the state of the economy
The standard argument presented by employers and the coalition government is that wage increases lead to unemployment? How? Some employers will reduce employment in response to higher labour costs, while more persons will be attracted into job searching due to higher wages, the result is an increase in unemployment. This argument assumes that employment and labour supply are both wage elastic. That is, they are both responsive to wage changes. Many of the submissions to the commission are centred on the estimates of these elasticities or responses of labour supply and demand to wage changes. The debate centres around whose set of "facts" has the most credibility before the Commission.
Such analysis is very problematic as it is usually based on estimates of what happened somewhere else, at a different time, for a different wage adjustment and under a different set of conditions. The Commission has to make judgements on what will happen now with a given wage adjustment in Australia.
Invariably, the evidence is also based on comparative statistics, that is, what happens if there is a wage increase, given that everything else is constant. The problem is that everything else is not constant. Two important variables are prices and productivity. If prices are higher, then the purchasing power of wages falls and the cost of employing labour declines. If productivity increases then the costs of employing labour also declines since workers are producing more but costing the same. Both prices and productivity are generally increasing - so costs of labour adjusted for prices and productivity do not necessarily have to increase if money wages increase. Since safety net wage adjustments consider retrospective evidence, that is, what happened since the last adjustment, there has always been some inflation and some productivity growth since the last decision.
What about the argument of labour substitution? If wage costs increase, then businesses will replace minimum waged labour. The first problem with this argument is, with whom? These are minimum wage workers, there are unlikely to be workers earning below these rates. Youth workers are a possibility, but such substitution only affects the composition of employment, not total employment. A second possibility is replacement by machines. That is, substituting capital for labour. This is an ongoing process that is always present, and it is a process that is important in lifting productivity. Increasing productive investment is an important process in lifting productivity and living standards across the economy. The substitution process is not confined to minimum waged labour. What about offshoring the jobs? Well, some processes can be located offshore if there is a large wage cost differential between countries and the process is labour intensive. But, this argument can be applied to all labour. See the offshoring of call centres and airline services, both involve skilled labour, not minimum wage labour. Also, not all production can be relocated offshore, you are unlikely to go to New Zealand for a haircut, buy a burger in Malaysia or consult a lawyer in Vietnam because wages and costs are lower.
Are there other ways that labour may be displaced? There could be substitution between labour. That is, using higher paid labour in place of minimum wage labour. This may occur if the higher paid (and more skilled) labour is much more productive. In this case fewer workers are required for the job. This is why the relationship between minimum wages and other wages (wage relativities) is important. In the case of Australia the wage distribution has been expanding, not narrowing, minimum wages are around 55% of average wages.
Other forms of substitution could take place including part-time for full-time workers, and casual workers for permanent workers. Note, this will not result in job loss, but the ability to exercise greater short-term control over labour use and labour costs. Again, it impacts on the composition of employment, not total employment.
The demand for labour is largely determined by the demand for goods and services that are produced by labour. The Industrial Relations Commission has to be conscious of the implications of its decisions, and what is important is the state of the economy. If the demand for labour is expanding then modest wage increases for minimum paid workers are not likely to impact on the unemployment rate. The Commission has to be also mindful of other important aspects of the safety net adjustment. It remains an important source for improving the living standards of the low paid and it remains an important instrument for distributing productivity gains across the workforce.
Finally, why not leave such decisions to the market? The market is far from free or flexible, there are a range of failures and imperfections that can make market outcomes far from suitable. Through institutionally establishing a minimum, the result is a floor wage that all organisations can use for the setting of wages (this saves transactional and information costs). Many productivity gains are produced through collective action (eg teamwork) and through improvements outside of the workplace (such as better roads, information and communication technology). Minimum wage adjustment allows those low paid workers to receive some of these collectively generated benefits.
John Burgess, Employment Studies Centre, University of Newcastle.
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