Liberal Party labour market reforms, union lies and minimum wages

Gerard Jackson
BrookesNews.Com
Monday 17 April 2006

Economic modelling for the Government has shown that over 500,000 jobs would have been created during the last ten years if the labour regulations had been loosened. Moreover, a study commissioned by The Department of Employment and Workplace Relations commission found that if the ACTU’s wage claims had been successful employment would have dropped by 3.8 per cent. Naturally ACTU secretary Greg Combet challenged the findings.

I am in no position to testify to accuracy of these findings. However, what needs to be understood is that we are dealing with fundamental economic laws, laws that we defy at our peril. One such law is that if we raise the cost of labour (its gross wage) above the value of its marginal product unemployment will emerge. The greater the gap between the two the higher and more persistent will be the unemployment.

If it were otherwise unions or politicians could dictate any wage rate, no matter how high, without damaging output or raising unemployment. Whether he knows it or not, this is precisely what Combet is arguing. Now he stated that “no research had shown a conclusive relationship between reasonable increases in the minimum wage and employment”. This is pure rubbish.

Before I go on let me make it clear that when economists speak of minimum wages causing unemployment they mean “effective minimum wages”, meaning a wage rate that exceeds the market clearing level. Obviously, if the minimum is set below the market rate there will be no effect on the demand for labour. When this happens someone like Combet is bound to scream: “See, I told you minimum wage rates don’t cause unemployment!” It follows that any study of the effects of minimum wages that ignores the market rate is in grave danger of being highly compromised.

This is why Combet’s statement that “experience shows over time that increases awarded by the IRC have been accompanied by hundreds of thousands of extra jobs in minimum wage industries” is completely worthless. What he overlooked is that monetary policy has been used to lower real minimum wage rates with respect to the value of the worker’s marginal product and hence raise the demand for labour. (Grant Belchamber, the ACTU’s chief research officer, made the same mistake in Impact of Safety Net Adjustments on Wages and Jobs, December 2004 )

In a desperate attempt to deny reality Combet resurrected the Card and Krueger study, arguing that it proved that rises in the minimum wage do not cost jobs. It’s a pity he neglected to mention that their study had been thoroughly discredited. The Nobel-Prize-winning economist George Stigler sarcastically observed that by

using these methods you could prove that no soldier was killed in WW II—a comfortable conclusion but one whose validity is open to considerable doubt”. (Thomas Sowell, Basic Economics: Citizen’s Guide to the Economy, Basic Books, 2000, p. 155).

Combet also conveniently forgot to mention that Card and Krueger were actually quite cautious about their findings. Nowhere did they actually state that raising wage rates above the market level will not cause unemployment. Moreover, Benjamin Zycher, vice president for research at the Milken Institute for Job and Capital Formation in Santa Monica, pointed out that their study had a very deep flaw “The survey data upon which it depends are lousy”. This was confirmed by the Employment Policies Institute and David Neumark of Michigan State and William Wascher of the Federal Reserve. There were many more effective critics.

If, as Combet asserts, there are no statistics showing a link between rises in minimum wages and rises in unemployment how does he account for a 1998 OECD study that found that an effective increase in the minimum wages reduced teenage employment? Furthermore, A 1999 study by Baker et al. also found that lifting the effective minimum wage raised youth unemployment. Neumark and Wascher (2004) found the same thing in 17 OECD countries.

Combet and his mates are screaming that labour market deregulation will lead to wages cuts. Yet these are the same people that support wage-fixing policies that increases unemployment — which in reality amounts to 100 per cent wage cut for those who lose their jobs. What a bunch of callous hypocrites.

The Society of St Vincent de Paul’s Marxist claptrap and its attack on the free market

Gerard Jackson is Brookes’ economics editor