Regionalise the Minimum Wage

One of the positive things about the labour market reforms brought in by the Howard government is that considerations regarding the minimum wage will now give regard to the economic situation not just for workers but also for the unemployed. The new Australian Fair Pay Commission states on it’s website that:-

In fulfilling its wage-setting function, the Commission must have regard to:

  • The capacity for the unemployed and low paid to obtain and remain in employment;
  • Employment and competitiveness across the economy;
  • Providing a safety net for the low paid; and
  • Providing minimum wages for junior employees, and employees to whom training arrangements apply and employees with disabilities that ensure those employees are competitive in the labour market.

Whilst I believe that the correct rate for the minimum wage is zero, I still regard this new policy as a meaningful improvement. The fact that it now gives consideration to employment across the economy is a good thing. The next logical reform to this setup would be to make a provision where by the Australian Fair Pay Commission could apon request make a determination about the appropriate minimum wage for some smaller subregion within the the Australian economy. For instance is the minimum wage appropriate to the employment and economic conditions in Queensland also appropriate to the employment and economic conditions in Tasmania. And what about economic and employment conditions in Melbourne compared to Alice Springs.

In other places a similar effect is achieved by decentralising decisions about the minimum wage. For instance in Canada there is no minimum wage set within the central government sphere and it is instead set by regional governments. Likewise within the EU minimum wages are set at the national level not the EU level. And in the two tier US system they set minimum wages at the state level with a catch-all minimum set at the Federal level which is generally lower than most states.

In light of recent events this issue should be topical given the extremely high rates of unemployment in many remote aboriginal communities. Clearly a minimum wage set according to the overall national unemployment rate will be quite inappropriate in an economically remote region with a high rate of unemployment.

13 thoughts on “Regionalise the Minimum Wage

  1. I’m not sure whether this could be done under the Constitution:

    99. The Commonwealth shall not, by any law or regulation of trade, commerce, or revenue, give preference to one State or any part thereof over another State or any part thereof.

  2. Yes I thought that might come up. Are the territories exempt from this clause?

    If Tasmania is given a lower minimum wage than Victoria then which state is being given the preference?

    Of course we could have no federal minimum wage and let the states set the minimum. Or set a federal one that was so low that it was universally harmless. Or better still we could have no federal minimum wage and let the market place set one dynamically.

  3. Whether it happens to be a good idea or not, I’m not sure a comparision with either the US or the EU is worthwhile — there are more people in many EU countries and some US states than there are in Australia.

    Also, on a different note, do you have any data to show what difference the differences make in a place like Canada?

  4. Pingback: Club Troppo » Missing Link 3 July, 2007

  5. Terje;
    You really stuffed up this time; Putting two really good posts on so close together. When Little Children starts to go off the interest horizon you will have to remind us of this one, as in it’s own way it is just as important.

    I wont comment here at the moment, but when things settle down a bit, I’ll be back.

  6. Sorry for the stuff up Jim. 🙂

    The Little Children discussion passed 250 comments and it did seem to dominate discussion for a while.

    What was the comment you wanted to make?

  7. I’ll get back to you on this. I just wanted to remind people that it was here, and at the time I didn’t want to distract attention from ‘Little Children’ as I felt that it could do a great deal to help us come up with positive ideas.

    Regards, Jim.

  8. It’s a great idea, although hard to implement if done from a central perspective. A central authority would find it difficult to keep in tough with the economic situation in the remoter regions, although it may be able to glean enough information from census data.

    One thought that came to mind is the possibility of seconding the authority to local government, however many of them would be economically out of touch enough to feel that they can gain kudos from having a higher minimum wage than those around them. The same might apply to the states.

    Having a lower minimum wage in depressed areas would have the effect of making local industries more competitive, and attracting others, while causing workers to move to areas of higher employment, and hence higher wages.

    I will leave the ‘how to’ to you economic types, but if we can do it , then I am all for it.

  9. Andrew is probably right that the constitution would be a barrier. However lets ignore that for a moment.

    One way to achieve it would be to start by having a national minimum wage determined as it currently is by the The Fair Pay Commission. The criteria they currently use is:-

    In fulfilling its wage-setting function, the Commission must have regard to:

    * The capacity for the unemployed and low paid to obtain and remain in employment;

    * Employment and competitiveness across the economy;

    * Providing a safety net for the low paid; and

    * Providing minimum wages for junior employees, and employees to whom training arrangements apply and employees with disabilities that ensure those employees are competitive in the labour market.

    SOURCE: http://www.fairpay.gov.au/fairpay/About/

    You would then provide some scope for the Fair Pay Commission to re-examine this decision for some smaller geographic subset of the Australia economy as requested by any of the following:-

    a) The relevant federal minister.
    b) A relevant local government authority

    Other requests might be accepted at the discretion of the commision based on their merits.

    For example a review of a remote aboriginal community with unemployment of 60% may warrant a revised minimum wage because of “The capacity for the unemployed and low paid to obtain and remain in employment” as applicable to the region.

    Of course my preference would still be for no legislated minimum wage but at least a regionalised minium wage would provide a greater degree of flexibility that accomodated the economic differences between regions.

    Regards,
    Terje.

  10. Thanks Jim.

    The weakness with the argument put in the article you reference is that if unskilled illegal Mexican workers can demand US$14 per hour due to supply and demand then it is easy to mount an argument that a minimum wage of US$8 per hour is harmless. I would not particularily bother much to oppose minimum wage laws if they were harmless.

    However the reality is that minimum wage laws assume that economic conditions are essentially consistent across the domain to which they apply. This is generally untrue. Whilst a minimum wage might be below the market clearing rate in some geographic areas and some economic sectors it will typically be above the market clearing rate in other areas or other sectors. In the former case the minimum wage is ineffective and in the second case the minimum wage is harmful.

  11. Certainly Terje;
    The article does indicate that in an area of high employment that the minimum ‘Illegal Immigrant Indicator rate’ or whatever you economic types use, as a technical term to describe the free market rate will be higher than the rate that would be expected in other less competitive areas.

    It also points out that the IIIR for other less competitive illegals is lower, and also that better quality illegals are preferred even at the higher rate.

    Perhaps we should put a submission to the Fair Pay Commission to adopt the IIIR to set regional minimum rates (if we need them at all)

  12. I think that a submission to the Fair Pay Commission based on the need for regional variation would be a good idea. It may not success but it may at least generate some debate about how to interprete the needs of the unemployed.

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