I disagree with the government on the issue of minimum wage. Which means I disagree with most economists as well. But I think there's very simple and obvious proof for why they are all wrong.
Australia currently has 1.6 million people on the minimum wage. Which is a good chunk of our working population, which is around 10 million I believe. The theory is that many of those 1.6 million are overpaid. If there was no minimum wage, then their wage would fall to the "correct" price. However, no one seems to notice that these 1.6 million people currently have jobs, so presumably they are making their employers at least minimum wage in profit. Economic theory suggests that people will be paid approximately the same amount as the revenue they generate for the company they work for. However, it seems highly unlikely that 1.6 million people are generating exactly the same amount of revenue. You'd expect it to be spread out a lot. And we know that it isn't less than the minimum wage, because if it was they'd get fired. So it must be higher. So there are 1.6 million people currently generating different amounts of profit for their employers, who are being told their wages are too high.
The theory would predict a smooth spread of wages down to minimum wage, and then a whole bunch of people beneath it who aren't productive enough. The clustering around minimum wage also tells you that people aren't able to negotiate their wages. It tells you that the labour supply curve assumptions are wrong. People worth more than minimum wage are negotiated down to it by employers who have more power than them. They must have more power, or it would be impossible for them to do it. And this is now, when we have unions, and unfair dismissal laws and a vaguely reasonable minimum wage. I think the evidence clearly suggests that minimum is far lower than it could be. One way of finding out would be to gradually increase the power of unions and workers until that clustering was flattened out. Then you'd have a labour market that satisfied the assumptions of the theory, and you could bring in your models. If you can eliminate the clustering then you actually have a good argument for removing minimum wage in favour of some other safety net. But by that point business-owners won't care anyway, because the level of minimum wage will be irrelevant since no one will be working for it.
Basically, if economic theory on labour markets was even remotely close to reality (which I've talked about previously), you wouldn't have 16% of the workforce clustered at minimum wage. Non-economic forces, like bargaining power, have to be at work for something like that to happen. And those forces, surprisingly, will continue operate even after you remove further power from workers.
95% of all workers are worth more than the current minimum wage. After the IR deregulation 16% of workers will be paid significantly less than the current minimum wage.
There’s a bit I don’t get.
“Economic theory suggests that people will be paid approximately the same amount as the revenue they generate for the company they work for…And we know that it isn’t less than the minimum wage, because if it was they’d get fired.”
How does this work for Bob Snuffles the cleaner? Bob doesn’t (officially) generate any revenue for the Day Care Centre he cleans. He performs a service which therefore allows his employer to generate revenue, but I imagine it would be quite difficult to put a dollar figure on his value in terms of bottom-line financial benefit to the company. I mean, in that argument, if he didn’t clean, the Day Care Centre would be shut down by Docs. Therefore his worth (on those terms) is the entire profit of the Centre.
Because his value cannot (that I can see, anyway) be accurately determined in that way, and thus justify his wage, shouldn’t his wage be determined by the job market itself? If someone else will provide the same service at a cheaper rate then surely a business has the right to take them up on that offer. Isn’t that how our economy functions?
The exception to that would be when it crosses an ethical line (sweat shops etc) and therefore some kind of government watchdog needs to be in place.
I would argue that Bob Snuffles can’t in fact be fired even if there was a way to work out that he was of less value than the minimum wage because, as long as his employer has no alternative then he must be paid that minimum wage.
Yes, that model gives more power to the employer, but the employer should have more power than the employee because they are providing the job and they are spending the money. I think Individaul Workplace Agreements promote one-on-one negotiation which should in theory push wages to an equilibrium due to supply and demand. Yes, workers need jobs, but employers also need cleaners. Individual Workplace Agreements encourage competition and thus increase productivity and innovation. Isn’t that what our economy is built on?
matt / 1:33pm / 10 November 2005
and don’t forget the current minimum wages are protected!
Ie minimum wages cannot go below what they are now!
read the policy
Anonymous / 3:43pm / 10 November 2005
They are basically lying with that one. They say that the nominal minimum wage won’t go down. But if it stays the same that means that real minimum will go down about 3% per year. The US hasn’t raised it’s minimum wage for 8 years, as a way of effectively lowering it. The Liberal party has said that minimum wages are $70 too high, so it’s a reasonable bet they won’t raise them until inflation has knocked off that $70.
Ryan / 10:57pm / 10 November 2005
I would say that if no one is willing to fire Bob Snuffles then he must be worth whatever he is getting paid. If he’s the only one stopping the company from being closed down, he seems to be very valuable indeed. If his wage was too high, then the company would go bankrupt and the government would probably think about relaxing the regulations. It’s not Bob Snuffles’ fault the government has decided his job is so useful.
Ryan / 11:03pm / 10 November 2005
This page (http://en.wikipedia.org/wiki/Monopsony) gives a good, although long, explanation of one reason why minimum wage might be a good idea. Although they’re talking about market failure, and was only talking about what happens when you have flaky labour supply curves to begin with. If there’s market failure then you can assume the supply curves are the way people draw them – if you want to.
Ryan / 3:10pm / 18 November 2005
Matt, you also mentioned productivity and innovation. The empirical evidence for a link between microeconomic reform and productivity improvements isn’t that great. It’s nearly all theoretical. US growth can be mostly attributed to longer working hours, not productivity growth. Australia has had one of the most regulated labour markets in the world for the last two decades, but over the same period we’ve had the fastest growth in the OECD.
Even if there was evidence, I guess I don’t think that the economy should come first. Our society is built on a lot of ideas that make most economists squirm – income redistribution, a fair wage, equal access to fundamental services. Ultimately, I’d rather Australia looked like Europe than like the US. In fact, if we start to look like the US I think I’ll move. :)
Ryan / 3:18pm / 18 November 2005
[…] Matt’s Comment Matt made a good point. It’s often difficult to work out someone’s value to a business. However, the theory is that if someone is working for less their the value of their labour another business will come along and offer them more. It never works like this, because there are so many cleaners and not enough cleaning jobs. And people can’t shift out of industries into other industries that easily. […]
Fat Vegan › Matt’s Comment / 5:16pm / 20 September 2006