The evolution and future of the minimum wage in Australia

Rob Bray Research School of Economics ANU

2

Minimum wage – key numbers

• Currently $606.40 per week – Lower for some youth – Many obtain casual loading

• Second highest in OECD • Paid to some 4-10% of employees

– More common for part-time employees – Employees of small business

3

Theory

• Perfect market – price up, demand down • Monopsony – distorted market • Efficiency wage – pay to get people to work • Bargaining – profit share with employer • Bargaining – relative wages – for different

workers • Education and training – up or down?

Harvester decision

“the normal needs of the average employee regarded as a human being living in a civilised community” “himself and his family” - “necessary average weekly expenditure for a labourer’s home of about five persons”. “to insure the workman, food, shelter, clothing, frugal comfort, provision for evil days, &c”.

Higgins 1907 4

• Determining a fair and reasonable wage

The minimum wage since 1907

5

0

100

200

300

400

500

600

700

1907

1917

1927

1937

1947

1957

1967

1977

1987

1997

2007

$201

2 pw

Harvester/Basic wage (1907-22) Basic wage (1923-64)Minimum Wage (1964-78) Divergence - NWC only (1978-95)Divergence - Metal workers (1978-95) FMW (1977-current)

Effective value of the minimum wage

6

0

50

100

150

200

250

300

350

1907

1917

1927

1937

1947

1957

1967

1977

1987

1997

2007

Inde

x nu

mbe

r 19

07=1

00

FMW Adj Hours & Super

Relative to other earnings

0

10

20

30

40

50

60

70

80

90

100

0

200

400

600

800

1000

1200

1400

1914 1929 1950 1970 1990 2010

Min

imum

as

% o

f ave

rage

Wag

es $

2010

Min Wage Av earnings FMW as % av earnings (RHS)

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The minimum wage today – type of employment (EEH 2010)

Full-time non-casual

39.4

Full-time casual

6.2

Part-time casual 34.3

Part-time non-casual

20.1

8

Casual 40.4%

Part-time 54.6%

Occupations of FMW employees (EEH 2010) Sales 13%

Factory 12%

Food prep 9%

Base clerical

8% Hospitality 7%

Cleaners 5%

Carers/ Aides 5%

Other labourer

4%

Farm 3%

Other 34%

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Who gets the minimum wage (HILDA 2011)

• Adults – Couples with children 25.8% – Couples without children 26.0% – Non-student adult child 19.5 % – Adult student child 4.0% – Lone parent 8.2% – Other 16.5%

• Couples – 10.4 % have a minimum wage earner – Mainly supplementary (27.8% only minimum wage)

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Household distribution of adult FMW income (HILDA 2011)

0

5

10

15

20

25

30

Bottom 2 3 4 Top

Per

Cen

t

Income quintiles of households with some income from wages and salaries

Share oftotal FMWearnings(%)

FMWshare ofHHearnings(%)

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Minimum wage, taxes and transfers

8090

100110120130140150160170180

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

Inde

x N

umbe

r 198

6=10

0

1 Jan

Minimum Wage Single Person Couple + children12

Single breadwinner couple family (Kids 3 & 8 years)

13

-100

100

300

500

700

900

1100

-100

100

300

500

700

900

1100

1986

1989

1992

1995

1998

2001

2004

2007

2010

$Dec

201

1 p

w

Minimum Wage Income support RA FTB(A)FTB(B) Tax Disposable Income

Taking stock • Minimum wage fallen relative to other

earnings • Paid to 4-10%, over half part-time • While more concentrated in low income

households only part contribution to income • While real rate effectively flat

– Single - mainly tax +11% – Couple with children – mainly transfers +70%

• ‘Harvester family’ largely disappeared

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The low lying fruit has been picked

• Transition from family wage to single wage is now complete

• Essentially has involved 25 years of minimal pressure from minimum wage

• … and has occurred without too much impact on income inequality

• Scope for this is coming to an end

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Options

• Get rid of the minimum wage • Allow the minimum wage to grow in step

with other earnings • Continue to hold the minimum wage flat in

real terms • Continue to hold the minimum wage flat in

real terms – but intervene to increase income of low income households

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Get rid of the minimum wage

• Risk of downward wages spiral

• Employers will rent seek on support for

families

• Has a role in underpinning other wages

• Has a role with regard to transfers

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Allow the minimum wage to increase

• Will require productivity of minimum wage workers to grow at same rate as overall – If not will have employment consequences for

least skilled

• Is there a training path? – Are we confident about the ability to assist the

most disadvantaged?

18

Hold the minimum wage flat

• Minimises adverse employment effect • Will increase earnings inequality – and

have significant effects for some households

• Will put pressure on income support payment rates

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Hold flat but complement

• Introduce an Earned Income Tax Credit • Can target it at those on low earnings and

in low income households • But signals a real change

– Full time work may not be sufficient to earn enough – but is recognised as a contribution/ obligation

– We have done this for families

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What now?

• Important but not urgent? • Path choice is essential

– Current annual mechanisms limit options – and indeed risks poor outcomes

– Other paths require the development of new institutions

• Challenge is how we decide – … and recognise the need to do something

before we run into problems 21

The End

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