Audit Commission proposals to reform the minimum wage will not resolve the problems of a system which hurts the poor and harms the productive potential of the Australian economy.
One of the surprises contained within the 1200‑odd page Commission of Audit report was the discussion about amending the Australian minimum wage regulatory system, presently mandating that a worker must receive at least $622.20 each week.
But why did the minimum wage, of all things, enter the reform frame for the commissioners, when the commission terms of reference primarily relate to government scope and spending efficiency?
It did so because, as stated on page 146 of the Phase One report, an "important dimension to government programmes designed to get people back to work is the relationship between the rate of income support and the minimum wage".
The commissioners then observed that "if the minimum wage is too high relative to income support then many unemployed people ‑ particularly the low skilled and inexperienced ‑ will be priced out of the labour market and struggle to find employment".
Under the present minimum wage arrangements, it is illegal for an employer to hire somebody for less than $16.37 per hour, consigning people who cannot create additional economic value, that covers their wage cost, onto the dole queue. The resulting employment restrictions expose the government to a great fiscal burden, all else being equal, through an increasing uptake in the Newstart unemployment allowance.
To put no finer point on the devastating impact of welfare dependency for working‑age people on their living standards, 62 per cent of Newstart recipients (currently over 340,000 people) are in receipt of the payment for longer than a year, whereas the median duration of payment is 88 weeks.
A point missed in much of the debate over the minimum wage, and most certainly by union and employer organisations in their submissions to the Fair Work Commission annual wage review, is that the higher the minimum wage the more employment is restricted.
Drawing upon empirical evidence, most notably a study by former academic and now senior Labor federal parliamentarian Andrew Leigh, it is possible to indicatively estimate by how much labour demand by employers would fall in response to a minimum wage increase.
Based on Leighʼs "wage elasticity of labour demand" estimate, and official data on employment in Australia, last yearʼs minimum wage increase of 2.6 per cent would have reduced overall labour demand by about 0.75 per cent, the equivalent of close to 88,000 jobs. In other words, the minimum wage only serves to put upwards pressure on an unemployment rate which has remained naggingly higher than those rates recorded prior the 2008‑09 global financial crisis.
And compounding the employment disincentive effects of the minimum wage is its interaction with the aforementioned welfare system, which forms an artificial zone of effective wage rates in which employment prohibition applies.
As mentioned previously, the current minimum wage stands at $622.20 per week, and this compares with the Newstart Allowance rate for singles (without children) at $255.10 per week.
This means an employer is discouraged from pulling an individual away from the indignities of welfare dependence by paying them anywhere between $255.11 and $622.19 per week.
The Commission of Audit report raised another important issue for discussion, and that is that the federal minimum wage covers just about every worker, with the main exception of state government employees, irrespective of their location. The centralisation of minimum wage determination for private sector workers is a significant problem within our federal system, since "having a uniform national minimum wage ignores substantial differences in local job markets".
According to the commission report, the prevailing arrangement also "disadvantages workers attempting to gain a job in states like Tasmania and South Australia where wages and the cost of living are generally lower than in other states".
Whilst the audit commissioners adroitly conveyed the difficulties created by existing minimum wage regulations, they presented a confusing and overly complex solution to resolve the pressing set of problems posed.
To help reduce the gap between Newstart and the minimum wage, it was suggested in the report that the minimum wage be eventually set at 44 per cent of national average weekly earnings (compared with 56 per cent today). Getting there would require applying a rule to restrain minimum wage growth, and so the audit report suggested an "indexation factor" of the consumer price index less one percentage point be used, over the period of a decade.
This would ensure the minimum wage would keep growing in nominal terms, but at a slower rate than at present, and after10 years the minimum wage would be indexed in line with national average weekly earnings growth. In addition, the states would be empowered to apply different minimum wages reflecting their circumstances.
The specific recommendation is that the minimum wage in each jurisdiction could move towards a benchmark of 44 per cent of national average weekly earnings, or 44 per cent of state average weekly earnings, whichever is lower. But the complex minimum wage proposals canvassed by the commission raise some obvious questions.
If the minimum wage is so problematic for people with lower skills, harming their economic prospects, then why keep it?
Furthermore, why keep the minimum wage but replace the Fair Work Commission adjudication process, as admittedly costly and time‑consuming as it is, with a complex administrative system giving federal Department of Employment staffers greater effective control over minimum wage determination?
There simply needs to be a better way to economically emancipate vulnerable Australians, across all parts of the country, from experiencing the minimum wage poverty trap, and the optimal solution would be to scrap it altogether.
Abolishing the minimum wage would enable more of the poor to build their human capital base, by acquiring economically desirable aptitudes and skills in the workplace, and earning much‑needed experience to find a better paying career into the future.
The audit commission has rebooted a conversation about an important feature of IR reform, and this, in itself, is most welcome in an environment where our most vulnerable need more opportunities to work. But, in the end, the commissionʼs reform proposals would, at best, only modestly ease some of the minimum wage pain upon the poor.
Letʼs do even better by fixing this longstanding policy problem: end the anti‑jobs, anti‑social justice minimum wage for a fair go and a stronger economy.
Dr Julie Novak is Senior Fellow, Institute of Public Affairs. The IPA submission to the annual wage review can be found at www.ipa.org.au