Australia’s New Minimum Wage and its Effects Essay
- As from 1st July, the new national minimum wage will be increased by 59c per hour meaning $ 694 a week or $ 18.29 per hour.
- The national minimum wage rates in modern awards will increase by 3.3% a year and $ 22.20 per week.
- The increase is higher than last year’s increment of $ 15.80 a week. However, it is less than the Union’s demand of a $45 increase.
- 2.3 million Australians will be directly affected by the minimum wage increase.
- Over the past five years, the real value of minimum wage has increased by 4.3% which is less than half the actual growth of labour productivity.
- This decision follows a decision in February by the FWC to reduce Sunday and holiday penalty rates by between 25 and 50 percentages for employees in the pharmacy, fast food, retail, and hospitality industries.
The minimum wage is the minimum rate of payment for hours worked by any employee who has not been covered by an agreement or a modern award while minimum wage laws are a set of labour laws and regulations that provide a framework on worker’s wages. In 1895 in Victoria Australia, an amendment to the Factories Act created a wage board which was made permanent in1904. After 1907’s Harvester ruling, basic wages were introduced to enable households to live in frugal comfort. The Australian Fair Pay Commission (AFPC) was formed under the Workplace Relations Amendment (Work Choice) Act 2005 to replace the Australian Industrial Relations Commission that took submissions and recommendations from various stakeholders to set the standard federal minimum wages. In 2010, the AFPC was replaced by Fair Work Commission to undertake the responsibility of setting the national minimum wage.
A national minimum wage order by the Fair Work Commission (FWC) normally applies from the first full pay period after 1 July each year. It further outlines the minimum wage for awards and agreements. It will include a minimum wage for adults, apprentices, trainees, and junior employees. The minimum wage also covers employees with disability, those with training arrangements as well as casual loading workers. The current wage was set at $18.29 per hour or $694.90 per 38 hour week before tax. However, the casual employees that are covered by the national minimum wage will receive at least a 25% of the casual loading (OECD, 2017).
Australia’s official inflation rate has been hovering between 1 and 2 percent a year for the past few years with the current rate being at 2.1%. The low figure has been trotted out as evidence of low inflation which also explains why wage growth has been slow. However, that figure has little relationship with any Australian’s actual budgeting experience. Australia’s CPI has increased by 28% over the past 10 past years but electricity has shot up by 114%, gas prices and water bills about 90% while medical care by 84%. Housing and rent prices have also increased by 75% and 46% respectively. The entry of India and China into the global economy has decreased the cost of goods that are traded which cost of services provided by highly regulated employees has increased in Australia. Such increases in the cost of living necessitate the FWC to increase the minimum wage annually.
This section will focus on the key parties that will be affected by a new minimum wage increase
An increase in the labour costs negatively affects the firm’s profits. This may result in the increase of prices for goods and services by the firms. With the higher prices of products, the consumer surplus will decline with consumption of the firm’s products hence the firm generating less revenue. For instance, fast food restaurants will accommodate the higher wages for the minimum waged employees by raising prices on fries and burgers. The consumers will respond by consuming less fries and burgers thus less revenue. Unlike large firms that withstand shocks such as wage increases due to their economies of scale, the smaller and medium firms will be forced to exit the market due to the increased costs and less revenue.
Generally, firms maximize profits over the short-run by hiring until labour’s marginal product (MPL) is equal to the real wage (W/P). Therefore, as long as the firm by increasing labour will gain more in output than the losses in the costs, it will continue hiring new employees. However, an increase in minimum wage increases the cost of production since the marginal cost of added labour will be more than the MPL. This will result in the firm not hiring new employees and reduce its production level to maximize its profits. If the costs are more than the revenues, the firm will make less revenue.
An increase in the minimum wage increases the disposable income of employees. However, such increases are riddled with drawbacks for the labour force especially the low-skilled employees. In a generally competitive labor market, firms bid for the most productive employees and the resulting wage distribution will reflect the productivity of those employees. If the government imposes a minimum wage on the labour market, those employees whose productivity falls below the minimum wage will find few or no job opportunities. The basic theory of competitive labour markets normally predicts that an increase in the minimum wage above the market wage rate will decrease employment. Moreover, an increase in the minimum wage creates a bidding price floor in the labour market whenever the low-skilled labour wages are below the minimum level.
Labour-leisure trade-off: Unlike high-wage people who react to a higher wage by working fewer hours leading to a backward-bending labour supply curve, low-waged workers work for longer hours whenever their wages are increased. These low-waged workers do not trade off leisure for labour as their wages rise, so their labour supply curve is inelastic. Therefore, these employees tend to be more flexible in their hours and more ready to increase hours worked when wages are high.
The minimum wage advocates argue that such increases are beneficial to the low-skilled employees. But if there is an increase in the minimum wage for the low-skilled and wages for the semi-skilled are slightly higher or similar, the employers will simply substitute the low-skilled employees with semi-skilled employees (Ehrenberg & Smith, 2012). This may limit training costs incurred in training the low-skilled employees by the firm. But, it will negatively affect the youth especially teenagers who are low-skilled and lack the relevant work experience. In the diagram below, Y represents low-skilled labour while X represents experienced or semi-skilled labour. An increase of experienced or semi-skilled labour from X1 to X2 decreases the low-skilled labour from Y1 to Y2.
Once the increased minimum wages come into effect, the firms will raise the prices of goods and services thus shifting the pressure of increased labour costs to the consumers. With increased prices, the demand for a firm’s product decrease. As a result, the firm will reduce the level of production hence reducing its labour demand.
At a lower minimum wage, firms will be willing to hire more employees. However, an increase in the minimum wage with other factors of production held constant, the firms will be forced to increase the prices of products throughout the economy hence increasing the level of inflation in the country. The firms will try to adjust to remain profitable by decreasing the level of production. This will result in an increase in labour supply hence increasing the levels of unemployment.
Tax revenue is the main source of any government’s income. With an increased minimum wage, the cost of production will also increase for firms in the country. If this situation persists, a number of firms will exit the market hence resulting in the government losing tax revenue. Also, as the firms exit the market, many people are left unemployed. The government will have to increase its social benefits expenditure such as unemployed benefits to cater for the newly unemployed people. This will increase the government’s budget deficit.
With firms exiting the market or firms replacing low-skilled individuals with semi-skilled especially the youths, the government will have to cope with increased crime rates. Considering the high cost of education and lack of a proper social support system such as training of unemployed persons, many unemployed youths may engage in criminal activities as a means of survival.
This section will analyze possible ways in which the government will intervene through the policies at their disposal.
Provision of subsidies or incentives such as tax reliefs; the national minimum wage is designed to provide incentives for people capable of working to seek employment thus boosting the labour supply in the economy. However, it increases the cost of doing business for many small businesses. The government can provide tax reliefs to businesses that hire and implement the minimum wage policy. By giving a tax relief to businesses, they won’t pass on the higher prices to consumers. In the short-run, the government may experience a budget deficit, but it will be negated by increased public spending hence tax income to the government.
Restricting labour substitution in particular markets or sectors; it may be considered radical by many economists, but it can be helpful in the long-run. The government can collaborate with unions in implementing such a policy. For instance, coming up with a policy or legislation that prohibits firms from laying off a large number of low-skilled employees for semi-skilled or highly-skilled employees. Punitive measures should be formulated for employers who don’t uphold such policies.
Reduction of weekend penalty rate; penalty rate cut especially in the retail sector has been a major reason behind the massive job opportunities in that sector. By implementing such a policy, firms will offer more hours to the existing labour hence increasing labour demand when the cost of labour reduces.
Investing in infrastructure; the government should spend more on infrastructure and improve the existing infrastructure. This will reduce the cost of doing business for firms hence creating jobs directly and indirectly. Furthermore, it stimulates the domestic demand by increasing the government spending due to money circulation between the transactions hence more value created. However, if people prefer to save more, no value will be created.
Initiating retraining programs; it is important for the government to retrain low-skilled people who have lost their jobs due to the increased minimum wage or other factors. By training the lowly skilled individuals especially the youth, they are able to get other employment opportunities that require the newly acquired skills. Thus reducing the unemployment level over the long-run. Furthermore, such investment in human capital through training generates a certain stock of productive capital.
After considering the potential effects of the new minimum wages and the outcomes of the discussed possible solutions or policies, it would be reasonable to choose a mixed policy that boosts the economy and at the same time mitigates the negative effects of the new minimum wages. The government should provide subsidies and tax reliefs to small and medium firms that are essential in the growth of the economy while contemporaneously investing heavily in the country’s infrastructure. With any increase in the cost of production, in our case the minimum wage; businesses will pass on the additional expense to their consumers whose household expenditure is already higher than their counterparts in the US, Canada, Belgium and its neighbor New Zealand. Subsidies and tax reliefs will enable the firms to withstand the effects of the newly increased minimum wages without increasing the prices of their goods and services. It will also enable the firms to maintain their work-force over the long-run. These incentives may attract foreign investors and entry into the local market by local firms thus reducing unemployment in the country. Secondly, investing heavily in infrastructure boosts the economy as a whole. A proper road and rail network greatly reduces the cost of doing business in Australia. The ease of movement for both people and goods cannot be overemphasized as it is a key element of economic growth and development for any country.
Ehrenberg, R. G., & Smith, R. S. (2012). Modern Labour Economics Theory and Public Policy 11th Edition. New York: Pearson.
OECD. (2017, June 15). How does Australia compare? Employment Outlook 2017. Retrieved September 27, 2017, from OECD website: www.oecd.com/how-does-Australia-compare-employment-outlook-2017