Friday, October 27, 2006

Why the Fair Pay Commission made a Fair Decision

Why so much money from an organisation that was expected to deliver so little? According to the Chamber of Commerce and Industry, the Fair Pay Commission has been “conned”, it has “swallowed a line”.

A better explanation is that it has realised that the relation ship between wages and employment isn’t as simple as some of the lobbyists would have it believe.

The Commission has no problem with the proposition that when minimum wages climb too high the number of those jobs on offer begins to shrink.

Indeed, it says that proposition is “generally accepted” in all of the research that it has read.

And it points out that Australia’s minimum wages are indeed high, compared to those overseas...

The UK Low Pay Commission has concluded that as a proportion of the typical full-time wage Australia’s minimum wage is the highest of any OECD country.

In Australia the minimum wage is around 58 per cent of the typical full-time wage. In the US it is 32 per cent.

But that’s only half of the story. Cutting that wage, or letting it slide in real terms, most probably would make employers more willing to hire. But it might also make potential workers less willing to be hired.

In economists’ language: cutting the minimum wage might increase the demand for low paid workers, while restricting their supply.

In Australia there are financially realistic alternatives to accepting a low-paying job, among them unemployment benefits, pensions and family allowances. And they can add up to almost as much income as would a minimum-wage job.

The Commission says that the financial gain from accepting a low paying job is typically between $170 and $210 a week, and that’s before the costs of childcare and getting to work are taken into account. Parents with children who accept low wage jobs can find themselves out of pocket.

On balance the Commission finds that at the moment there is an adequate incentive for most people to look for or take up low-wage jobs.

But its problem is that the financial rewards for not working keep rising – pensions, family allowances and unemployment benefits are indexed to inflation.

Unless the Commission keeps the increasing the minimum wage to keep pace the rewards for working will fall behind.

In the words of Melbourne University’s Professor Mark Wooden, who is himself no fan of high minimum wages: “…it would not be long before the benefits from not working, which are indexed to either prices or average earnings, will exceed the benefits form working.”

The Commission has been placed in a straitjacket. Without the power the cut benefits, it has little choice but to keep increasing minimum wages in order to keep work attractive, just as did the Industrial Relations Commission before it.