Productivity Commission assumptions on minimum wage lack balance

Not everyone being paid the minimum wage will move beyond these conditions. Image sourced from

To those Australians who would agree with John Howard’s statement that “it would be out of step with the Australian ethos to not have a minimum wage” and Malcolm Fraser’s observation that “There is nothing as Australian as the minimum wage”, it might come as a surprise to see the Productivity Commission declare “minimum wages have been part of the industrial relations system for more than a century, but remain a persistently controversial issue”.

This is one of the many claims the Productivity Commission makes in a recently released Issues Paper ahead of its inquiry into the Workplace Relations Framework.

The paper claims to want to “facilitate” public participation, but in my submission to the inquiry, I argue that it appears to want to steer in a particular direction. In discussing the level of the minimum wage and interaction with the tax and welfare system it notes:

…people’s decisions about whether to take a job … depend partly on the relative attractiveness of their net wages, the income they would otherwise receive through social security benefits and other considerations such as their prospect for promotion.“

There is however no discussion of these other factors. The paper ignores questions such as whether people can actually find a job, the fact that most people on benefits in this situation are also subject to work testing which requires them to take the job, or evidence that the labour supply of many groups is quite inelastic. Rather the PC is simply concerned with a focus on financial incentives.

In discussing the duration of time people spend on the minimum wage, the focus is on those who "progress to a higher wage” after a short time – usually an argument for a low minimum wage – without a balancing discussion about those who remain on low wages for extended periods. It can be argued that ensuring that the minimum wage is set at an adequate level is of particular importance to the latter group.

The positions put forward by the Productivity Commission appear to flow from a standpoint of contrasting the situation of a labour market with a minimum wage to one which operates as a perfect market. This is a very misleading approach. The evidence is that the labour market is much more complex than this – with employers often acting as price makers – not price takers - and there is clear evidence from many Fair Work Ombudsman prosecutions and recovery actions that there are employers willing to use their market power to exploit workers.

This narrow approach also permeates their history of the minimum wage. While it is reasonable to identify the 1907 Harvester decision as being the initial basis of the rate of the Federal Minimum Wage, the roots of the minimum wage are in fact earlier. They are in the earlier efforts to rein in the effects of an uncontrolled labour market.

They are in the work of the “anti-sweating” leagues of the late 19th Century and in the consequential growth of wages boards; they are in the development of the Australian Trade Union movement; and in the growth of labour politically.

Indeed, the Harvester decision was not the imposition of a minimum wage by arbitration, but rather arbitration seeking to apply the Federal Parliament’s legislation. That is, it was parliament which decided that there should be a tariff exemption to employers who paid a “fair and reasonable” wage. The Harvester decision simply sought to implement this, These antecedents are not mentioned by the Productivity Commission.

Elsewhere, in discussing options the paper claims that research “questions whether the hybrid approach [a combination of a minimum wage and in work benefits such as an earned income tax credit] helps the most disadvantaged”. It is unfortunate that they omit to mention that the work they cite explains the reason for this was that this group of the most disadvantaged were either excluded from the program or were “eligible for a trivial credit” only.

The discussion paper also reveals the abysmal lack of information on low wage employment in Australia. The Productivity Commission, for example, asks readers to answer the question “How many people receive the minimum wage (and for how long)? What is the best measure of this share and why?”.

Elsewhere they ask whether the minimum wage should be set at different levels in each state – but have to rely upon quite misleading comparisons of the minimum wage with average earnings in each state – presumably because they could not obtain median earnings – the more usual comparison, at the state level.

The question of the long term future of the minimum wage in Australia is important, and it does require policy attention. I have though deep concerns as to whether the current inquiry is the mechanism to do so.

The timing of the process, with submissions closing on Friday and a final report to be ready by November 2015 neither allows for action to address the dearth of data, nor the consultations which a policy needs to be based upon. In addition, the discussion paper issued by the Productivity Commission raises strong doubts as to whether they are approaching the issue in a coherent and balanced manner.