Reserve Bank says small minimum wage rises don't cause job losses
Minimum wage is sustaining rule that makes sure low-paid workers don’t fall below the poverty line.
Unfortunately in recent years, the cost of living has sky-rocketed and workers on minimum wage are falling further and further behind.
In a shock to big-business supporters, the Reserve Bank of Australia has found that small increases to the minimum wage does not cause job losses or a reduction in hours for workers, as they have continuously spruiked. In fact, the RBA suggests it may even boost both.
This research paper is the first study of its kind in Australia and boosts union calls for an increase in minimum wage.
The study of increases in the minimum award wages is the first of its kind in Australia and provides a boost to unions’ argument in the Fair Work Commission for a $50-a-week increase in the minimum wage.
Employer groups – who are arguing for pay rises at the inflation rate of 1.9% or lower – have argued that larger minimum wage rises increase unemployment and decrease hours, claims now put in doubt by the RBA research.
The paper by James Bishop, a research economist at the RBA, analysed minimum wage rises granted by the FWC from 1998 to 2008 using Australian Bureau of Statistics data to see if award increases were passed on to workers, whether they reduced their hours or resulted in “job destruction”.
The study found that award changes “are almost fully passed through to wages, and have no statistically significant effect on hours worked or the job destruction rate”.
The paper said there was “no evidence” that award wage changes decreased hours worked and the results suggested “that jobs with larger award wage rises had larger increases in hours worked than jobs experiencing a smaller award wage rise”.
It concluded with 95% confidence that the award wage rises did not reduce hours worked by more than half an hour.
“I also find that award wage increases do not have a statistically significant effect on the job destruction rate,” Bishop said. “Again, if anything, the point estimates suggest that the job destruction rate actually declines when the award wage is increased.”
The study adds to international studies, summarised by the FWC in the 2017 minimum wage decision, which have found that “modest and regular” wage increases do not result in an increase in unemployment.
The RBA paper noted that “the traditional competitive model of the labour market suggests that a minimum wage rise will reduce employment” but other models predict the opposite.
While the paper found that “small, incremental” increases did not harm jobs or hours, it warned “the results may not necessarily generalise to large, unanticipated changes in award wages”.
“There will always be some point at which a minimum wage adjustment will begin to reduce employment.”
The paper noted that although minimum wage rises didn’t cause existing employees to lose their jobs, “this does not rule out an adverse effect on employment”.
“For instance, the adverse consequences of higher wage floors may be borne by job seekers, rather than job holders.”
The results only measured adult employees, and did not include juniors, and changes made in the six month window after the FWC varied award wages.
Minimum wage rises in the measured period ranged from 0.76% for those earning more than $18.42 in 2007 to 3.9% for those earning less than that in 2006.
The Australian Council of Trade Unions’ claim for a $50-a-week pay rise amounts to a 7.2% increase, meaning that increases of that size were not measured by the study.
The ACTU has claimed that such a pay rise could create up to 87,000 jobs in the first two years due to workers’ increased spending.
In its reply submissions the Australian Industry Group called the ACTU claim for a $50-a-week increase “manifestly excessive and completely unrealistic”.
“Such an increase would inflict significant harm on businesses,” it said. “As a consequence, significant harm would be inflicted on low-paid workers, the unemployed and the underemployed, because their job security and employment prospects would be substantially reduced.”
The FWC concluded hearings on Wednesday before a pay rise to apply from 1 July for 2.3m workers.