Minimum wage, minimum fuss: why a $20 increase isn’t such a big deal

Minimum wage increases are no longer big news.

Studying economics at high school at the time, I always looked forward to days when the Arbitration Commission handed down its wage judgement.

The live broadcast of the reading of the decision might not have been the most riveting viewing, but it was an important enough event that we got time off class to watch it.

And the decision itself was always front page news.

Had the Commission got it right? How would it affect inflation? Would it make unemployment worse?

When the newspapers had finished, the academic commentary started, with an endless stream of articles reviewing what had happened.

Nowadays national wage case decisions get a lot less attention – and for good reason.

By saying this I don’t want to minimise the benefit that many households will get from Friday’s $19.40 per week wage increase, or the fact that it will make life harder for some small businesses.

It’s a fact however that the wage case decisions matter a lot less for the Australian economy today than they did 25 years ago.

For one thing, the proportion of the workforce that has its wages determined in national wage cases has fallen substantially in recent years.

In the 1970s about 80% of workers in Australia – everyone whose wages were set though the “award system” regulated by the Arbitration Commission – would be affected by national wage cases.

If the Arbitration Commission said there would be a wage increase of 2.5%, then 80% of the workforce would see its weekly pay packet increase by that amount.

With the rise of enterprise bargaining, this has changed.

In 2010 it is only workers who don’t get wage increases through an enterprise agreement or via an individual contract – and estimates suggest this is only 15 to 20% of workers - whose wages are set by Fair Work Australia.

When Australia made the shift towards enterprise bargaining, this type of wage change was called a “safety net adjustment”, and that’s still a good way to think of it.

Workers who do not get wage increases through the new system, still have a process that allows them to be compensated for higher prices and to share in the benefits of economic growth.

But the safety net process is only affecting about one-quarter of the proportion of workers compared to previously.

There is another reason as well why I think national wage cases get less attention today.

Much of the debate about how much to raise wages used to concern the trade-off between the job losses that it was thought would come from making it more expensive to hire workers, versus the more equitable distribution of income when the wages of lower-paid workers were increased.

Lately, however, economists have worked out that national wage cases don’t matter as much as they used to for determining the level of employment in the Australian labour market or the distribution of income between households.

When wages increase it makes the cost of labour higher. As a result we’d expect that some businesses would try to find ways of producing that involve using less labour; and there may be businesses that aren’t able to do this, in which case the higher cost of labour simply makes it unprofitable to operate.

So higher wages are predicted to decrease employment.

The really important question though is, by how much? If the answer is a lot, obviously we’d want to worry about national wage case decisions; whereas if the answer is not much, it becomes a less important topic.

In the mid-2000s I reviewed all the available research on the effects of changes to minimum wages on employment of low-paid workers in Australia.

The strong message was that changes in minimum wages – of the magnitude being made by Fair Work Australia – are unlikely to have much impact on employment.

As one example, research by the ANU economist Andrew Leigh in the early 2000s examined minimum wage changes in Western Australia, and found that a 1.0% increase in the minimum wage would be expected to decrease employment by only between 0.15% and 0.39%.

Hence it would take a very large increase in minimum wages to decrease employment to a significant degree.

Leigh’s research was supported by other earlier studies that also predicted the effect of a 1.0% increase in minimum wages on employment to be less than 0.5%.

What about the effect of national wage case decisions on income distribution in Australia? Forty years ago, the decisions made a big difference.

In a labour market that consisted primarily of male heads of households, there was almost a one-to-one relation between wages and household income.

If you (or the male breadwinner in your family) were in a low-pay job, most likely you would be in a household at the bottom of the income distribution.

Here again things are different today. With the growth of service sector and part-time jobs, and the opening up of the labour market to females and students, workers who earn the minimum wage are predominantly not living in families that have low incomes.

Most live in families with another wage earner, and many are teenagers and students still living at home.

As a group they tend to be clustered around the middle of the household income distribution. So if the minimum wage is increased, the direct effect is to raise the incomes of households in the middle of the income distribution.

And this does not have a large effect on inequality. In another research study in the mid-2000s Andrew Leigh simulated the effect of a 10% increase in minimum wages on the distribution of income in Australia.

He found that increasing the minimum wage, if it has any effect at all, seems most likely to worsen inequality in the distribution of income between families.

So while employers and unions may still make noise about the national wage cases, don’t expect to get time off class to watch the decision – it’s just not the big event it used to be.