Australia’s adult minimum wage goes up this week by 3.3%, to AU$18.29 an hour – and chances are that you have a strong view about whether this is a good thing or a bad thing. If you do have a strong view, the next few hundred words are designed to shake your certainty.
Globally, AU$18.29 is pretty much the highest national minimum wage rate going. Nevertheless, the Fair Work Commission, which sets the rate, says this rise will cost no jobs at all. “Modest and regular [minimum] wage increases do not result in disemployment effects,” it said firmly in its decision.
— OECD (@OECD) May 6, 2015
The Commission’s certainty is a bit odd. Normally, high prices makes people buy less of something. So you might wonder why a higher minimum wage would have no effect at all on low-skilled jobs. But, hey, the world is full of scientific results that look odd at the start but become perfectly normal once we understand them better.
Then it turns out that we don’t understand the effects of the minimum wage that well at all.
Enemies of minimum wage rises need to acknowledge this starting point: if a slightly higher minimum wage destroys jobs, it’s not easy to see it in the real world. Two US economists, David Card and Alan Krueger, published a famous study in 1994 comparing fast-food-chain jobs in New Jersey and Pennsylvania when New Jersey raised its minimum wage. Weirdly, New Jersey employment rose.
Friends of a higher minimum wage should not take this as the last word on the subject, though. You wouldn’t expect the real-world effects to be obvious. You’re trying to work out how many jobs didn’t get created by a small change, over months or years, in a wage that not all many people earn, in an economy with a lot going on. And Card and Krueger were looking at just one event in one corner of the US.
Not a done deal
While Card and Krueger’s paper remains a landmark, other results and interpretations have been dribbling in, some of them suggesting that higher minimum wages do cut jobs after all. A big new study looks at the minimum wage in the US city of Seattle, which is being pushed up over several years. It estimates that the hourly minimum wage hike from US$11 to US$13 caused a huge cut in low-skilled workers’ hours – 9.4%. In case you’re wondering, Australia’s new minimum adult wage equates to around US$14.10 an hour.
There is some Australian research, though not a lot. The best comes from widely admired economist Andrew Leigh, and it was done before he left the ANU for the national parliament. He is now Labor’s deputy treasury spokesman – and thus politically locked into supporting the new minimum wage.
But some of Leigh’s work, based on Western Australian data, suggested that a 1.0% increase in the minimum wage could be expected to cut employment by between 0.15% and 0.39%. A 3% minimum wage rise, then, would cut 60,000 jobs or more. This is not a jobs catastrophe, but it’s far from trivial – especially if your job is one of those that disappears.
Leigh made another point, too: despite most people’s assumptions, the minimum wage is probably not a very good tool for reducing inequality. Card and Krueger have supported this point as well.
Time to find out
And yet Australia’s Fair Work Commission tries in its minimum wage decision to focus almost solely on UK research, notably a 2016 meta-analysis commissioned by a UK wages body. That study found modest minimum wage rises had no effect on jobs. That’s why the commission could say so firmly that there would be no “disemployment effects”.
In taking that position, though, the Commission looks very much like a bunch of people trying to dodge an uncomfortable possibility – the possibility that they might need to choose between lower minimum wages and job losses.
It would probably be more honest to say that we really don’t know for sure how many job losses a minimum wage hike causes. But as Andrew Leigh has suggested, some arm of the government ought to try harder to find out. Some organisation with less skin in the game than the Fair Work Commission.