Increased Minimum Wage – Good or Bad?

Australia's new higher minimum wage took effect this month.

The 3.5% increase follows a trend. From Europe to Australia, governments are gambling that they can force up the wages of those at bottom and do more good than harm. Germany, for example, just increased their minimum wage by 4%.

The Australian national minimum wage is now A$ 18.29 an hour; the third highest of any country. There are about 250,000 workers directly affected. The figure rises to about 2.5 million when account is taken of those who have awards that are linked.

The increase in the minimum wage is well above the rate of inflation of around 1.9%.

Recent academic studies show that higher minimum wages do not harm economic growth but small business owners in Australia have reservations.

For example, the Chief Executive of the Australian Chamber of Commerce and Industry, James Pearson, said ‘the minimum wage increase is bad news for Australia's 700,000 unemployed and 1.1 million underemployed. The simple reality is that the more expensive it is to employ, the less viable a small business becomes and the less viable a business becomes, the less likely they are to employ.’

There are two sides to the argument.

Some say that increased wages lead to higher spending and increased business revenue. Others argue that the burden on the taxpayer is reduced; as lower paid workers have a higher propensity to be supported by benefit payments.

From a social mobility point of view also, it’s clearly a bad outcome when there are working families living in poverty conditions with no hope of advancement.

The key issue is how sensitive is employment to changes in minimum wages. If it’s not very responsive, then it may be possible to raise the minimum wage with little downside. Given that Australia has a high minimum wage and record economic growth, there is undoubtedly truth here.

But the degree of responsiveness is unlikely to be the same for all businesses in every industry and in every part of Australia. Moreover, the state of the economy will affect how businesses react to higher minimum wages.

The bottom line though is that minimum wages can be a blunt and potentially dangerous way of improving the living standards of workers. It’s a fine line between granting pay rises and workers losing hours and jobs, and new entrants finding it harder to secure employment.

We shouldn’t forget that low pay isn’t the only issue for those at the bottom of the work ladder.

Increases in minimum wages do little to help those on unpredictable shifts, poor benefits or who have sub-standard working conditions.

While these things are still happening, the economy will always seem broken to the lower paid.