It is a tricky area but letting politicians and judges fix wages, as used to happen in the 1970s, is not the best answer.
A minimum wage rise can alleviate poverty for workers with little bargaining power and ensure they capture their fair share of productivity increases. On the other hand, it can also raise wages so high that no one can afford to hire these workers, especially in struggling sectors of the economy.
Economists have rethought how this balance works since the global financial crisis because the relationship between wages and employment has gone haywire. Even as unemployment has fallen to levels that would previously have given workers the confidence to push for pay rises, pay cheques have barely grown. It is a shift in the labour market caused by changes in union membership, technology and globalisation.
Yet lifting wages by administrative decree is a tool that should still be used with caution. The economy handled the large real increases in the minimum wage of 3.3 and 3.5 per cent handed down in 2017 and 2018 because demand for workers was growing strongly. More recently, however, the economy is slowing and employment growth is weak. An excessive increase in the minimum wage yesterday might have given a short-term boost but it could have caused businesses to discard workers.
While this year’s minimum wage increase is a little smaller, it is still fairly generous. Australia has one of the highest minimum wages in the world, and in recent years it has grown much faster than inflation and the average wage for the workforce as a whole.
Instead of focusing too much on the minimum wage, policymakers should look at the other tools that can be used to stimulate the economy and maintain living standards, starting with the tax cuts announced in the federal budget of up to $1080 for low- and middle-income workers. It would be unfortunate if those cuts were delayed in Parliament because the Coalition insists on linking them to the tax cuts planned for higher income earners in the never-never land of 2024.
The Reserve Bank can also help by cutting interest rates, which would put some cash in the pockets of home buyers. State and federal governments can also help low-paid workers by investing wisely in infrastructure and doing all the detailed, evidence-based reforms needed to make the economy work better.
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