Last week, Labor pledged to radically change the way Australia’s lowest paid workers will be remunerated if Mr Shorten becomes Prime Minister. Their plan is to raise the basement standard to $852 a week – and while they’re at it, change the branding from a “minimum” wage to a “living” wage. Such a proposal has triggered one of two general reactions. Either:
Should Labor gets their way, some 2.2 million Australians may be about to get a serious pay rise. But before everyone jumps up and down, there first needs to be a reality check about how lucky we truly are to have a minimum wage that is both reviewed every year and reviewed generously.
If your wage was just a statistic
It may surprise you that Australia currently has the third highest minimum wage in the OECD – $36,140 if you worked full time for every week of the year before tax. As of the OECD’s most recent calculations, we’re only bettered by the Netherlands and Luxembourg and the difference is not all that much.
If you think about your wages just as a statistic, Australia is in a relatively fortunate position. Just imagine being on the minimum wage in the United States…or even Canada where its biggest province (Ontario) raised its minimum wage in 2018 by a whopping CA$2.40 an hour.
We may think that’s not so “whopping” in Australia. But CA$2.40 an hour was enough to attract this kind of story:
But what it’s in a name anyway?
It’s all in the interpretation. I find Joshua Healy and Andreas Pekarek’s interpretation to be the easiest to digest:
Essentially, while the minimum wage sets a bare minimum, the living wage aspires to be a socially acceptable minimum. Typically, this is seen as a level that keeps workers out of poverty.University of Melbourne, 2019
So if the unions get their way, this “socially acceptable minimum” that they have calculated will be 60% of the median full time wage. That 60% figure is a hefty ask, considering we have the Fair Work Commission who already review minimum wage increases every financial year. In Australia, there are laws which mandate protecting our lowly paid while recognising a business’ need to make sustainable profits. Unlike in the United States where there is no mechanism to pass along increases in a federal minimum wage (hence the old “surviving off tips” adage) and in the United Kingdom where any increases are merely recommended.
The last point which deserves mentioning is that if the ACTU’s plan becomes law, the “living” wage will become the new minimum wage. That is – it won’t compliment the law (for example, as a guide) – it will be the law. Further, a living wage only works if the poorest in our society is relying on someone else bringing in the living wage income. No two people are alike and that is certainly true for people’s budgets and wants. But a living wage alone cannot be a pure anti-poverty tool.
So that makes setting a living wage a) extremely challenging to actually pinpoint the perfect medium for all stakeholders and b) expensive no matter if people know that it’s not even a one-solution-fixes-all option. Even in the light of booming corporate profits or any other argument the Unions may provide…
Spirals and Jobs
Congratulations on making it this far. Now, we should talk about a couple of other related subjects that’ll help you make up your mind about the living wage debate: spirals and job numbers. This section is not to fear monger but it’s meant to just spark some ideas which have happened before and could happen again.
First – spirals.
No, not the pasta.
I’m talking second year economics, wage price spirals. The basic explanation for the wage price spiral is cause and effect. If you increase wages then (rational) people have more disposable income – that is more income they can spend providing people don’t increase the ratio that they’re saving. However, if all these people who have more income then spend all that much more money on goods and services then the price is bound to rise. Rising prices then lead to demands for higher wages so y’all can afford the new higher prices and so the spiral develops.
Luckily for Labor’s case, inflation has been sluggish. We haven’t seen inflation above 3 percent in this country since June 2014 and wage growth is just 0.5 percent above inflation as of writing. No wonder you’re all furious, I hear you say. But the problem is that while it’s not happening yet, there is no reason why a too large minimum wage increase can’t set off a new wage price spiral.
The other point to mention is youth unemployment. While I understand that you, the potential reader, might be just young at heart, Australia’s youngest workers will also bear the biggest brunt if this living wage idea doesn’t take off like the Unions hope it will. As one 2017 submission put it:
“Excessive increases in minimum wages are likely to reduce employment in award-reliant industries, particularly for youth, and especially when wages growth elsewhere in the economy remains moderate and inflation is low.”Government Submission to Fair Work Commission, 2017
Two years later and we’re STILL here. A minimum wage that is too high could very well only threaten to displace more people out of jobs, forcing businesses to consider automation or other cost-saving ideas to keep operating. And it’s young people who bears the brunt first.
Back as late as October 2017, we all were disappointed to see Holden move its operations overseas as a great Australian car brand decided it could no longer afford to make cars in its homeland. Ask the people of Broadmeadows. The people of Geelong. The people of Elizabeth, SA. What they would have needed (and hopefully obtained) is a job. In those situations, the need is the job not a looming wage increase.
There’s strong arguments for both sides. When wage growth has been sluggish for years and our economy’s performance has been relatively dull since the Global Financial Crisis, it’s very arguable that now is as good a time as ever to ensure that even our lowest paid workers get a strong fundamental wage. However, if the plan is to replace an already comprehensive system with one that could destroy future investment and job creation in our economy, then I simply refer you to the words of Hercule Poirot:
“If you rear your head into the mouth of a lion, you can’t complain if it bites your head off!”David Suchet as Hercule Poirot in “The Lost Mine” (1990)