Sometimes in public policy a poor decision is made. Other times you conclude a very bad decision has been made. Then there are times when you witness one of the worst decisions that could be made. Today’s Australian Fair Pay (Not) Commission decision falls into this latter category. It was a decision made by highly-paid officials in secure employment which will impacts disastrously on the lowest paid workers and their families. in the context of a demand-deficient (that is, spending failure) downturn, the FPC has denied the low-paid workers a pay rise. The decision consolidates the triple whammy attack against the poor which is the Government is largely turning a blind eye too while it swans around preaching social inclusion.
The triple whammy is:
- The response by firms to falling revenue is to scrap full-time work and generally ration hours of work and increase casualisation – all adjustments impact disproportionately badly on low income workers. They amount to a real wage cut of significant proportions for these workers even if they keep their jobs.
- TheThe largest proportion of jobs that are being scrapped at present are those held by low-skill workers.
- And now, the FPC has decided to further cut the real living standards of the lowest-paid segment of our labour force by failing to pass on a nominal wage increase sufficient to protext these workers against inflation.
So much for the social inclusion aspirations of the Government which are in tatters today. One of the problems I believe is the Government’s stated intention to avoid the so-called night of the long knives when they came to power. Instead they retained the neo-liberal stooges that Howard had put into to do his dirty work. The one labour economist on the FPC, has consistently argued over her career for wholesale deregulation of the labour market – claiming that “unemployment is primarily a consequence of labour market regulation and adverse welfare incentives” in a speech she gave in 2002 for example. I won’t give any references to her work but you can find them if you bother (to waste your time) and search.
So at the bottom of today’s disaster is the Government’s failure to put in place a realistically independent process for determining minimum wages. The previous safety net rulings via the Australian Industrial Relations Commission were more protective of evidence-based analysis than the sham that the conservatives replaced it with.
It is clear that the issue of minimum wage adjustments always invokes a lot of debate. We always get the usual (boring) reactions from employer groups and conservative economists who say that you cannot have a minimum wage rise because it will cause unemployment among the low-skill ranks of the workforce. If you believed their logic, then there never would be a minimum wage rise. The reality is that there is no evidence available to support these notions and lots of evidence to refute it.
The new problem is that the current Federal government is now aligning with the conservatives and using the same defective logic to oppose any reasonable rise in the minimum wage. This what they said in their Australian Government submission to the 2009 minimum wage hearing:
5.25 The majority of empirical research, as previously recognised by the Commission suggests that there is a negative relationship between minimum wage increases and employment. While this relationship has been relatively weak in recent years given that rises in the minimum wage have co-existed with strong employment outcomes for the low paid, the Government cautions the Commission that expected negative impacts on employment of minimum wage increases could be stronger in a slowing economy.
In other words, they were aligning with comments made by the Chair of the AFPC who had taken the extraordinary step of prejudging the decision by briefing various journalists some months ago along the lines that he believed there is a negative relationship between employment and minimum wages. In my view this should have disqualified him from overseeing the process – there is certainly no evidence to support that generalisation. You might care to read my blog – Minimum Wages 101 – on this issue.
In reaction to the Australian Government’s claims the following points are relevant.
First, the majority of (reasonable) studies do not find a negative relationship between the minimum wage increases and employment. The most careful studies actually find no relationship.
Second, the Government seems to acknowledge that this relationship has been non-existent in “recent years” (they use “relatively weak” because they cannot bring themselves to admit that there has been no negative effect at all) because employment growth in the low-paid segment has been strong but they expect the relationship to turn negative again in the weaker labour market. What?
Did you spot the flaw in logic? The relationship between minimum wage changes and employment is “positive” when employment growth is positive but, allegedly, “negative” when employment growth is negative. They fail to note that employment growth is always driven by aggregate demand. So if you measure the correlation between wage rises and employment growth when aggregate demand is strong and believe that correlation equals causation then you will conclude that wage rises cause stronger employment growth. Then, if you correlate measured wage rises with employment growth when aggregate demand is weak you will conclude the opposite. Both conclusions are flawed.
The impact of today’s decision will induce the correlation between static nominal minimum wages and hours and employment losses. What theory are they going to pull out to explain that one?
Third, the neo-classical theory they rely on doesn’t consider a relationship between nominal wage increases and employment levels. The theory is always expressed in real terms such that real wage rises would cause employment losses. The fact is that depending on the inflation rate assumption you make there was clearly scope to deliver a real wage neutral decision but still award low-pay workers some nominal wage growth.
I computed previously that if inflation was running at 2 per cent per annum then a real wage neutral increase in the minimum wage to $554.76 would be required (a rise of $10.98 per week). If inflation is running at 2.5 per cent a rise of $13.77 would have been required and $16.56 for an annualised inflation rate of 3 per cent. But this would only take workers up to October 2009 (a year after the last decision became active).
Of-course, there is no clear relationship of the neo-classical variety that has been found in the empirical literature. I note that the Australian Government Submission (page 26) cites only one article – a US survey that concluded the majority of studies found such a relationship. Of-course, if you read that survey and then investigate the articles they analyse you soon realise that the comparison is biased towards finding the neo-classical result given the flawed methodologies used by the studies on the “for case”.
The fact is that the wage rises in recent years have not damaged low-paid employment. Low-paid employment will definitely fall in the coming months but not because of cost factors. Firms will not keep workers employed if there is nothing for them to do no matter how much they “cost”.
So what is the impact of the decision?
The following graph shows the evolution of the Consumer Price Index (blue line) and the nominal Federal Minimum Wage (red line) since the AFPC was inflicted upon low-wage workers. For the first few decisions, the lowest-paid received inflation adjustment at the time of the decision but then as you can see suffer real wage erosion (the gap between the two lines). It is another story but the next highest paid rung of workers actually suffered real wage cuts throughout this period as a result of the AFPC squeezing the relativity between the bottom and their wage contour.
You can also clearly see that the latest decision will just extend the erosion into the foreseeable future.
To see how this translates into real wage movements (here real wage units are just the nominal Federal Minimum Wage divided by the CPI index number – so they don’t actually give you an easy interpretation in $s but show direction), consider the following graph. You can see that the final decision of this body will deliver substantial real wage cuts for an extended period into 2010 for the low-paid workers. The gap between each decision also resulted in sharp real wage cuts which means that every day (between decisions) the nominal minimum wage is being eroded by rising prices and the standard of living for low income workers is being squeezed.
The FPC thinks this will prevent these workers losing their jobs. It won’t have any impact at all on the ability of these workers to hold their jobs as the demand collapse tsunami gathers pace. The decision will just make it harder for those who keep their jobs.
The FPC claimed they took into account the impact of fiscal policy transfers in making the decision. They said (Decision) that they recognise:
… that consumer prices continue to increase, putting some pressure on household disposable income. However, the Australian Government’s changes to the tax/transfer system and its recent fiscal stimulus packages have provided real increases to disposable income for most households and have thus enabled the safety net to be maintained without the risk of increasing unemployment.
First, this amounts to more corporate welfare in that the fiscal stimulus is going to underwrite higher profits by cutting wage costs. I thought the fiscal stimulus was about adding new spending rather than replacing existing spending. Aggregate demand policy should not become a hidden wage subsidy.
Second, the impact of the tax changes largely benefit the higher income earners anyway. So why are they able to enjoy real wage protection (or growth) as a result of Government largesse and the lowest paid workers get their nominal wages cut because the government is taking up some of the slack?
Overall, I could write chapter and verse about the type of research the FPC cites to justify its decision. Probably most of it would be libellous.
The bottom line is that this will not protect any jobs. It will just make life more difficult than it already is for the poorest workers in our communities. It is a pathetic decision.
I note that the Employment Minister has been reported as saying that:
… although the Government believed minimum wages should be set by an independent umpire, this time the commission had failed to strike the right balance.
In two submissions to the commission, the Government asked it to award a considered pay rise to low income workers
Well in reality the Government might be disappointed now but in their Submission they went along chapter and verse with the neo-liberal nonsense that wage rises would cause higher unemployment. They failed to show leadership in this matter and it is rather wan to now say they are disappointed.
Digression: Opposition Environmental Policy Announced
I noted today that we finally have an environmental policy launch from the Federal Opposition. The wording is something like this:
Get a big truck and put a huge trailer behind it with some pictures on it of a time bomb which indicates the environmental problems that will arise if we drive the said truck hither the thither across the highways of Australia. Especially if you put big Joe Hockey in it which will use up more fuel and rubber.
Here is the said truck!
Other news of note (not!)
Barry Halls quits South – he won’t punch anyone on the field for the rest of this season!
Tonight I am off to play in my blues band and will stay calm as a consequence!