Flat White

The minimum wage is madness

30 May 2019

11:46 AM

30 May 2019

11:46 AM

In March this year, ACTU boss Sally McManus made headlines with her call for a six per cent increase in the minimum wage. McManus’ remarks sparked considerable debate, with then Labor leader Bill Shorten taking the promise of a minimum wage increase to the election. However, as we go through the ancient ritual of the minimum wage case yet again today, this talk of such a significant increase in the minimum wage is complete and utter madness.

For one, Australia already has the highest minimum wage in the world; a fact McManus conveniently omitted during her announcement. That is not in absolute dollar amount either, but in terms of purchasing power.

Moreover, the enforcement of such a high minimum wage is a significant cause of unemployment in Australia. This can be demonstrated by starting at the very basics of economic analysis. First, take it as fact that more of any good is demanded at a lower price, meaning that a price floor (a government-mandated lowest price for some good) decreases demand and creates a surplus for that good by artificially raising its price.

The market for labour is governed by this universal principle, and the minimum wage law, by enforcing the lowest legal price that labour can be sold at, is simply a price floor by another name. Therefore, a high minimum wage decreases the demand for labour by increasing its price, thus causing unemployment. In the same way that price floors for agricultural goods in the European Union led to large surpluses of unconsumed milk and beef, so does a high minimum wage lead to unemployment in Australia.

Unemployment is also a profound social ill. On a personal level, it leads to a multitude of negative consequences such as financial hardship, family tensions and the deterioration of work skills. On a national basis, joblessness consumes large amounts of government money that is needed to pay unemployment benefits, while simultaneously shrinking the production of taxable goods within the country.

Because of this, the government should aim to keep involuntary unemployment as low as possible, and therefore should oppose any union-led push to increase the minimum wage.

Furthermore, the unemployment caused by a high minimum wage disproportionally affects those young workers that the policy supposedly benefits. This can be shown by beginning at the very obvious premise that an employer will only hire a worker if that worker’s perceived benefit, in terms of productivity, is greater than their wage costs. The implication of this fact is that a high minimum wage forces low-productivity workers out of the labour market; because their small productive benefit to an employer is less than the wage that the employer would be forced to pay if he hired them.

The low-productivity workers who face involuntary unemployment because of a high minimum wage are individuals with few formal qualifications or those who lack experience; as it is these factors that cause their low productivity. And as young people have, because of their age, fewer formal qualifications and less experience than the general population, they constitute a disproportionally high number of low-productivity workers. This means that low-skilled young people are disproportionately negatively impacted by the unemployment caused because of an inflated minimum wage; a fact supported by numerous studies.

Put simply, a high minimum wage leaves many young people involuntarily unemployed because it prices low-productivity workers out of the labour market.

Overall, it is evident that Australia’s high minimum wage is the cause of avoidable unemployment. Therefore, in spite of the fact that many in the union movement and Labor champion an increased minimum wage, the government should ignore such economically illiterate pleas.

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