Australian economy: Employers’ groups cave in on the minimum wage
Gerard Jackson
I get emails from readers asking why business organisations never seem to “put up a convincing argument against minimum wages”. The reason is simple: these organisations never rely on economic theory, economic history or the history of economic thought to support their case. This is why they are always outmanoeuvred by union researchers who at least do understand the power of economic theory — that’s why they try to discredit it — and the usefulness of economic history.
Australian Chamber of Commerce and Industry chief executive Peter Hendy is a perfect example of why employers’ groups keep getting it wrong. According to Mr Hendy the ACCI has decided to abandon “ideological” conflicts and support a maximum rise of $10 a week. He is apparently unaware that he had conceded to the union argument that the economic theory of wage rate determination has been discredited. This means that his organisation has no economic case against the Australian Council of Trade Unions’ claim for a $30 a week increase in the minimum wage.
The Australian Industry Group has placed itself in the same position. Its spokesman claimed that $14 was a “fair and responsible” rise for low-income earners. But how in heavens name did they arrive at $14? (Come to think of it, how did the ACCI arrive at a rise of $10?) It wouldn’t, I wonder, have anything to do with the little fact that the CPI was coming in at 4 per cent, would it? Could it be that some economist advised them that such a rise would be quickly wiped out by inflation?
Whatever the case, it was an incredibly inept ploy. Do these organisations honestly believe that the ACTU is not aware of the effects of inflation on real wages? No wonder ACTU secretary Greg Combet is laughing at them.
It needs to be incessantly stressed that economic laws do exist and that they apply to the services of labour in the very same way that they apply to the services of any other factor of production — more so given the non-specific character of labour services. Economics explains that there is a tendency in the market for every factor of production to be paid the full value of its product in accordance with the tenets of marginal productivity theory, irrespective of what union activists think*. (Unions can argue for indeterminacy but that view has also been disposed of).
The incompetence of the employers’ is terrible. Several days before they surrendered the economic case against the minimum wage Phil Lewis, an economist at the University of Canberra, revealed his findings that if the minimum wage had been held at the 1996 rate 650,000 more jobs would have been created. Obviously taking into account productivity increases he also said that even if the minimum had only kept pace with inflation 290,000 jobs would have been generated.
Now Andrew Leigh wrote in Online Opinion, 6 February 2004, that
The employment costs of raising the minimum wage appear relatively small, while the chance to provide a boost to the incomes of the working poor is real.
The word for this is nonsense. If I were to suggest to Mr Leigh that the minimum wage could be raised to $1,000 a week without any impact on the demand for labour he would vigorously disagree — rightly so. Professor Frank Knight explained 55 years ago why we cannot calculate the elasticity of demand for labour. In his own words:
Serious embarrassment arises from the fact that there is no conceivable way of determining the elasticity of either demand or supply with reference to any particular time period. . . . The conditions underlying either curve will never remain constant. . . . As to the chance of making any estimate or calculation of elasticity for any real period, the possibilities in the abstract are limited enough on the supply side, but are virtually zero on that of demand. (The Economic Organisation, Augustus M. Kelley, 1951)
What we can usually do, however, is measure the consequences of a rise in an effective minimum wage. We call it unemployment. Defenders of the minimum wage used to cite Clinton’s 1996 legislation that raised the minimum wage as proof that such legislation does not cause unemployment. Yet a study by the Employment Policies Institute (Job Loss in a Booming Economy, 2nd Edition, April 1998) found that the Clinton increase of 50 cents per hour eliminated some 645,000 entry-level jobs.
Readers should note that I stressed “effective”. This is because if a minimum wage is set below or at the market clearing rate there will be no resulting unemployment. When this happens proponents of the minimum wage assert that it does not destroy jobs. But once the minimum is set above the market rate unemployment emerges. This is why it should be called the effective rate — or even the job-loss rate.
In addition, a general increase in the demand for labour can mask unemployment created by the minimum wage because only marginal workers are affected. By ignoring this fact proponents of the minimum can argue that raising it does not increase the level of unemployment. Under certain circumstances this is true. It is also grossly misleading because it overlooks the fact that though the minimum did not lift the unemployment rate it nevertheless kept it higher than it would have been in the absence of a wage increase.
What our employers’ representatives have not grasped is that the minimum wage can be used as an “excluding rate”, as the late Professor William H. Hutt put it. A Supreme Court case made this abundantly clear. The majority in the Adkins v Children’s Hospital, 261 US 525 (1923) struck down as unconstitutional the Minimum Wage Act of 1918 that applied only to women.
The case concerned a female elevator operator at the Congress Hotel, Washington DC, who was on $35 a month plus two meals a day. The law raised the minimum to $71.50 per month. The woman was quickly replaced by a man who was paid the old rate. (It still is not known how many women lost their jobs through this law). Justice Sutherland, speaking for the majority, observed that the Act
...is not for the protection of persons under legal disability or for the prevention of fraud. It is simply and exclusively a price-fixing law, confined to adult women…who are legally as capable of contracting for themselves as men….surely the good of society as a whole cannot be better served than by the preservation against arbitrary restraint of the liberties of its constituent members.
If only our employers’ groups had even a small portion of Justice Sutherland’s forensic skills.
Note: It should go without having to be said that when we speak of a wage rate we mean the total cost of hiring labour. This includes pensions and any other additonals costs that must be incurred. For example, if the minium wage rate is $400 and oncosts are $100 then the gross wage is $500. This means that a $16 rise would be an increase of 3.2 per cent and not 4 per cent.
*Liberal Party stuffs up its workplace reform arguments against the unions
BrookesNews.Com
Monday 8 August 2006