Now let us look at the full quote from p 31:

. . .there is general agreement that a statutory minimum wage is likely to reduce employment if set above a certain, usually unspecified, level. While sometimes conflicting, the weight of evidence suggests that young workers may be most vulnerable to job losses at a high level of the minimum wage. There is less evidence available on the employment effects, if any, for other groups such as women and part-time workers, who represent a large and growing proportion of the workforce.

In other words, effective minimum wages — which must include the total cost of hiring labor — cause unemployment. By effective, I mean those set above market clearing levels. I’ll leave it to readers to decide why Mr Murray selectively quoted from an OECD publication in away to give the impression that OECD findings were in full agreement with his own views.

In addition, an OECD study paper made it clear that effective minimum wages do destroy jobs:

. . increased dispersion tends to create opportunities for low productivity workers. Thus, employment prospects for young people and the lower-educated are in influenced to a significant extent by their relative wages . . . and relative-wage inflexibility is likely to have significantly contributed to the concentration of unemployment among certain groups.

What a pity he overlooked that particular quote. He followed up with a quote from the Reserve Bank of Australia Bulletin, July 1992:

The recent deterioration of the youth labour market does not seem to be due to any change in relative wage levels, which have been declining steadily since the mid 1970s.

Relative wage levels cannot be used to support the case for minimum wages unless it can be shown that there are fixed ratios between them. The idea that such ratios exist is so absurd that it is a waste of time to even consider it. Moreover, I doubt whether those who speak of youth unemployment and relativities grasp what they are really saying.

Not having read this Reserve Bank’s report I cannot comment on its contents. However, given Mr Murray’s apparent penchant for selectively quoting I am inclined to question his obvious insinuation that the Bank is also in agreement with his views on labour costs and youth unemployment. My caution on the matter was given added weight by another Reserve Bank’s report that basically claimed that minimum wages were causing unemployment and the main reason people remained unemployed is that “there is a lack of job offers”. But this can only mean that above market labour costs have destroyed jobs.

Murray then another quote. (I guess quoting beats thinking):

It is often argued that a similar (to the US) shift away form unskilled labour has happened here (in Australia), but instead of the labour market responding with wage falls for the unskilled, it has responded with unemployment. But, there is not much evidence supporting this view…..wage rigidity is probably not the major source of our difficulties. (Professor Bob Gregory, Australian National University.)

I consider this to be nonsense, and especially disgraceful nonsense coming from a professor of economics. I should point out that Gregory’s claim at the time that real US wages had fallen, and thus consumption, had been completely discredited. In fairness to Gregory, he was not the only one to have made this a claim.

This was followed by:

With current labour market institutions, the easiest way to reduce average real wages is to work on the bottom end of the wage distribution. Casual, and especially casual part-time, employees are almost certainly a bigger proportion of workers at the lower end of workers ranked by wages. If this is the case, much of any increase in the hours workers may be in the form of casual workers working more hours per week, or more weeks per year (for less annual pay) but with a relatively small increase in the actual number of people employed. (Professor John Nevile, University of New South Wales.)

Two points: 1. The problem has never been the average wage but those particular wage rates that exceed market clearing rates. Treating wages as an average leads to the absurd Keynesian view that en bloc wage cuts are needed instead of particular wage rate adjustments. Once the adjustments have been made withheld capacity is released and income flows are restored through the process of coordination. We should therefore expect to see payrolls rise once the appropriate wage rate adjustments have taken place.

2. As I have explained on a number of occasions, the effect of pricing labour out of work is to direct some of the unemployed into part-time and casual employment. This is why part-time and casual work now account for 25 per cent of the labour force compared with America's 13 per cent.

The reader was also treated to the following — and yes, it’s another quote. This one is from Professor John Freebairn, University of Melbourne:

Unfortunately not a lot is known about the magnitude of elasticities of substitution between labour categorised by gender, age and skill level. For Australia there have been….natural experiments which also suggest a low elasticity of demand for particular types of labour. The 20 per cent increase in relative wages for females in the early 1970s had no discernible effect on the gender composition of employment and unemployment.. .Credential creep in the face of overall unemployment helps concentrate unemployment among those with low skills, including the young, migrants, older retrenched people with limited formal education and the longer term unemployed

What makes this a gem is that a fuller reading of Freebairn clearly shows that he believes lower labour costs would increase employment. For example:

. . .international evidence suggests that the elasticity of demand for low skilled labour tends to be higher than for unskilled labour (Towards Full Employment, Freebairn and Dawkins, Australian Economic Review, Vol. 40, No. 4)

Incidentally, Freebairn and Dawkins strongly argued at the time that if the minimum wage was held constant for four years, that could in due course increase employment by 400,000-500,000. Most of these jobs would be largely for the low-skilled. Therefore it is abundantly clear that Freebairn believes that lower labour costs would increase employment and that the young would benefit considerably, despite Murray’s implied suggestion to the contrary

I think a comment on elasticity of demand is now called for. Although it is a useful concept it is also a deceptive one in that a formulae can be applied to it that yields precise but spurious results. The formulae claims to measure the response of demand to a change in price, which implies the existence of a constant. But elasticity is not a constant, not only will it vary over the range of any demand schedule the schedule itself also changes, which in turn changes the elasticities. For elasticity to be constant consumer preferences would have to be frozen. In short, elasticity of demand cannot be measured! Professor Frank Knight probably expressed it best when he wrote:

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.

All that Murray really did was to select quotes that supported his anti-market stand. But this kind of arguing is fallacious, what logicians call the fallacy of arguing from authority. It does not prove the case. What critics of free labour markets have to do is refute marginal productivity theory and demonstrate that not only are wage rates, or at least youth rates, completely indeterminate but why the demand for labour would not expand to take advantage of the profit-making opportunities this would offer labour intensive firms.

Finally, as a lover of political irony, I should like to finish with this quote: “The present [wage-fixing] system is really offensive — it's just unacceptable. We have to find a better mechanism”. And who said that? Why, Senator Murray.

Gerard Jackson is Brookes’ economics editor

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