The Fair Work Commission yesterday announced plans to increase Australia’s national minimum wage by 2.5% on July 1 of this year. In a time of ongoing economic recovery, this measure has shown lack of pecuniary sense as lower-skilled workers now face job cuts and financial uncertainty due to higher labour costs for businesses.
Despite the unemployment rate falling to 5.5% which is nearing the pre-covid level of 5%, the social and economic costs associated with the closed national borders and reduced international trade paths mean that we are not out of the woods just yet.
It comes as no surprise, economically speaking, that raising the minimum wage merely results in higher unemployment levels overall. As the price of employing workers rises, companies will inevitably demand less labour supply. This appears to be a feel-good strategy aimed at the vulnerable low-income earners but may work to harm them more than support them. This minimum wage increase forces the low and high skilled workers in the same industry into competition for the available jobs, where the higher-skilled workers will end up on top. This directly prices lower-skilled workers out of the market, increasing unemployment as businesses are now unable to afford to employ them, leaving those who are currently struggling into further financial adversity.
With the international borders not due to reopen until well into 2022, now is far from the right time to be experimenting with drastic minimum wage adjustments, the focus needs to be on keeping as many people employed as possible.
This increase is set to take the minimum wage from $19.84 per hour to $20.33 per hour adding to the already large disparity between other developed nations where the UK’s current minimum wage is $16.36 per hour and in the US, it is set at just AU$9.52 per hour.
As an alternative policy, incentivising small businesses to hire and keep more workers would instinctively act to push wages up for these lower-skilled roles, resulting in both higher wages and increased employment opportunities. This would not only benefit the original and new employees in these jobs but would greatly assist those businesses who have been knocked down repeatedly by this ruthless pandemic.
Although this approach to increase the minimum wage appears to be helping workers in lower-skilled industries such as hospitality and retail by raising their weekly salaries, taking a deeper look shows quite the opposite effect.
Sarah Ray is a Research Associate with the Australian Taxpayers’ Alliance.
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