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Minimum wage hike is no boon for many

4 June 2018

5:35 PM

4 June 2018

5:35 PM

Late last week the Fair Work Commission recently increased Australia’s minimum wage to $18.93 an hour. Minimum weekly wages are estimated to increase by some $24.30 as a result of this 3.5 per cent rise, which came in far beyond the current inflation rate of 1.9 per cent.

The decision is a compromise in the face of lobbying from the ACTU for a $50 rise in weekly pay and opposition from business groups asking for an increase limited to $13.20. The strongest opposition to the hike came from the restaurant and catering sector who sought to avoid a minimum wage hike entirely. Restaurants and caterers have notoriously tight margins compared to other sectors. Small retailers and eateries already find it difficult to operate under current minimum wage rates and are more likely to find ways to underpay their staff.

Restaurants and retail stores account for a majority of minimum wage jobs and increasing the minimum wage won’t stop many from underpaying staff cash-in-hand as they currently do. The honest businesses ultimately bear the costs and are forced to adjust their prices and labour.

As Australians, we enjoy a great selection of cafes and restaurants. Raising minimum wages not only directly increases prices for the consumer, but diminishes the competition that keeps prices down. This is especially troubling at a time when other soaring costs such as electricity are driving many businesses out of business or out of Australia where costs are lower, while the costs of living for Australians in major cities continues to be a concern.

To offset the increased cost, an employing business can either increase the selling price of its goods and services or reduce the number of workers it employs or the working hours of these workers. Being ‘priced out of work’ is a real phenomenon observed recently in the wake of Seattle, USA’s hike of its minimum wage to $15 an hour, resulting in increased unemployment and underemployment with many entry-level jobs replaced by automation. For this reason, a ‘minimum wage’ hike is more properly viewed as an increase in the price floor for work.

Australia’s 2.1 million strong small businesses are responsible for the bulk of employment nationally. Business growth facilitates higher employment and wages in the long run. Rising wage floors only make it harder for businesses to reinvest retained earnings into capital for future growth and act as a barrier to entry for future enterprises. Diminished investment ultimately leads to a decrease in labour demand and slower growth.

It is true that our unemployment is at an all-time low, but this is due to our competitive wages and steady GDP growth, both of which could be stifled by a higher minimum wage. The International Monetary Fund recently noted that strong worldwide economic growth in recent months has been buoyed by conditions which are highly unlikely to last.

Notably, there are also vast differences in unemployment and underemployment statistics across the country, whereby the minimum wage hike will only exacerbate problems of youth underemployment in places such as South Australia.

For students, the restaurant and retail sectors are often the entry point into the workforce. These opportunities become more restricted when the labour supply increases with the prospect of higher wages whilst the demand for labour decreases. As a result, people who are willing to work, especially the youth, become involuntarily unemployed as the mandated wage locks them of the labour market. Ironically, many workers will see a reduction in their pay as businesses compensate for the hourly wage hike by allocating fewer hours.

While emotive arguments for a minimum wage hike can sound compelling at face value, the debate must be kept in perspective. Australia’s minimum wage is already the second highest in the world, just behind France. France’s highly inflexible labour market is a product of its high wage floor and a myriad of other employment regulations. Nearly one in every 10 Frenchmen and women willing to work are out of a job and the figure for French youth is nearly as high as one in every four. The high price floor on labour, combined with other stringent regulations on work, are driving factors behind the high unemployment figures for France and Italy in comparison to their EU peers. Australia’s prosperity is incumbent on us avoiding the example of these nations.

Wages, like other production costs, should be determined by the value provided to the consumer whereby artificial wage floors only turn businesses into welfare agents at the cost of shareholders, consumers and in the long run, workers themselves.

When businesses don’t have the ability to adjust wages based on the supply and demand of labour, as was the case in the centrally planned nations of South America, the Soviet Union, and pre-crisis Greece, we see the decline and even collapse of nations and economies. Grievances about low wage growth should not be curtailed by short-term solutions that might seem innocuous but can have devastating impacts on employment and growth in the long run.

Conan Feng is a Research Associate with the Australian Taxpayers’ Alliance.

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