Union leader claims minimum wages don’t raise unemployment
Gerard Jackson
A report by the Department of Employment and Workplace Relations has found that, surprise, surprise, minimum wages cause unemployment. Greg Combet, ACTU secretary immediately attacked the report as "fundamentally flawed".
His reasoning? "Its results are simply inconsistent with Australian Bureau of Statistics data. We have had strong employment growth, falling unemployment and record profits, which this document seeks to refute . . . .We put our faith in ABS research rather than a trumped-up survey commissioned by the Howard Government."
In fact, the ABS data does not refute the report. The first thing to note is that for a minimum wage to cause unemployment it must be set above the market clearing wage rate. Only then will it be effective. Obviously, if it’s set below the market rate there will be no unemployment. (When this happens you’ll find some idiot announcing that minimum wages don’t cause unemployment). So what matters is the effective minimum.
As an economist would say: The minimum wage only causes unemployment when it exceeds the value of the labourer’s marginal product.
Now it’s a rule in economics that when the cost of labour falls relative to the value of its product the demand for labour services will rise. This is how Keynesian policies are supposed to work. They use inflation to cut real wage rates while allowing money wage rates to remain fixed or even rise.
This is what has been going on in Australia. The Reserve’s loose monetary policy not only fuelled a housing boom it expanded general demand which is cutting labour costs and raising Profits. This is just what any pre-Keynesian economist would have predicted.
Fortunately, back in the late 1920s the British economist Professor Frederic Benham studied the connection between real wage movements in Queensland and that state’s level of unemployment. His findings conclusively demonstrated the relationship between excessive labour costs and unemployment, as demonstrated by the following table.
As Professor F. C. Benham aptly put it: "It would be hard to find a clearer proof of our thesis [that excessive wage rates cause unemployment]." Benham observated that unemployment rose as wages rose "relatively to the value produced per worker…" (This, Mr Combet, is called marginal productivity theory). Table 2 shows the correlation between wages and the annual value of output per employee. Once again the connection between the level of unemployment and excessive wages is abundantly clear.
Now it’s perfectly true that this correlation does not prove the correctness of the theory: but the theory does explain the correlation. If the theory is wrong then there would be no correlation unless some other factor had been at work. But what other factor could there have been? Once again, theory clearly states that if wage rates, meaning gross wages, exceed the value of labour's contribution to the product unemployment will rise. And this is precisely what Benham’s tables show.
Throughout the 1920s Australian unemployment, thanks to Combet’s predecessors, averaged more than 8 percent, rising from 6.5 percent in 1920 to 11.2 per cent in 1921, and then falling to 8.8 per cent in 1925. So if Combet is right about minimum wages not causing unemployment how does he explain Benham’s figures? Not that I expect him to try.
For fear of sounding repetitive, our falling unemployment is caused by the Reserve’s monetary policy forcing wage adjustments downwards. Unfortunately, this policy must eventually result in a recession. In the meantime, the likes of Combet and their media hand-puppets will blather on about the low-paid and the need to price them out of work, because that’s exactly what their economic nostrums amount to.
Regardless of what Combet thinks, natural laws are supposed to be just that — natural laws. This means they apply everywhere and in every period. Therefore the law of supply and demand applies as much to the services of labour as it does to the services of any other good, regardless of century or geography.
To argue otherwise, as Combet is doing, is to argue as S. G. Shumilin, one of Stalin's pathetic Lysenko economists, did when he declared: "Our task is not to study economics but to change it. We are bound by no laws."
Gerard Jackson is Brookes’ economics editor
BrookesNews.Com
Monday 22 March 2004
and Unemployment
Wages
per worker
1916
1917
1918
1919
1920
1921
1922
1923
1924
60 4
65 5
69 6
78 7
91 6
96 8
93 10
94 2
94 11*
287.60
325.19
316.62
305.40
362.57
338.91
339.84
370.00
424.78
5.8
7.0
9.3
11.1
13.3
15.5
10.0
7.1
6.4
Value added
less 10%
Wages
II as %of I
%.Unemployed
1911-12
1912-13
1913-14
1914-15
1915-16
1916-17
1917-18
1918-19
1919-20
1920-21
1921-22
1922-23
1923-24
1924-25
40,919
46,133
51,708
55,721
57,016
56,802
57,610
63,035
73,289
89,059
99,391
109,507
118,579
127,118
132,423
23,866
27,528
31,287
33,606
34,104
33,211
33,829
33,618
42,506
52,116
62,932
68,051
71,133
77,279
81,360
58.3
59.6
60.5
60.3
59.8
58.5
58.7
58.1
58.0
58.1
63.3
62.1
60.0
60.8
61.4
—
4.7*
5.5
5.3
8.3
9.3
5.8
7.1
5.8
6.6
6.5
11.2
9.3
7.1
8.9