Minimum wage – the most anti-poor law

Imagine you are an entrepreneur. As a businessperson, would you start a venture where you were forced to pay workers $100 an hour, a rate which is well beyond what you could earn from them? No — you wouldn’t open a new enterprise if you were guaranteed a loss. Therefore, the only businesses that will thrive under such conditions are those which are sure to recover the cost of labour plus the cost of capital, and also compensate themselves for the enormous risk of opening a business in the first place. This argument, which is persuasive with a $100 per hour wage rate, can be repeated incrementally down the ladder.

Labour economists have devoted much effort to empirically estimating the effects of minimum wage legislation on the employment levels of various age, race and gender groups. It is now widely agreed that increases in minimum wages do reduce employment opportunities, especially among teenagers.

Perversely, the minimum wage ends up hurting those it is supposed to help. It is clear that the poorest and unskilled labourers are the ones who are crowded out of organised job markets when minimum wages are imposed. One textbook example comes from 1980 in Zimbabwe, where a government decision to set a minimum wage of $45 a month backfired dramatically, causing the dismissal of more than 5,000 workers.

Studies on the subject of poverty have found that minimum wage legislation has only a minor effect on the distribution of income. This finding is not surprising, because not all low-wage workers are members of poor families. Many workers on the minimum wage, especially teenagers, are second earners in middle or upper class families. As Des Moore notes in The Age (5 September 2006), ‘It is plain wrong to characterize the minimum wage as a safety net when more than half the recipients are in the top half of household incomes’.

Even the fiercest minimum wage advocates usually concede there is a point when minimum wages would cost jobs. What most advocates of the minimum wage do not grasp is that there’s no known theoretically established rate which can be rationally fixed as a minimum wage. In other words, there’s no person in the world who has a Ph.D. in market interference, and who knows exactly when and where to interfere with the market. Economists make models, but a model is a simplified version of reality and is not the truth. Predictions of positive economics involve the influence of one variable on another, holding all other variables constant. But real-life labour market experiments are difficult to conduct, and economists generally use proxies to draw conclusions.

So does the minimum wage help anybody at all? In fact, minimum wages do help certain people. In particular they help the members of trade unions, many of whom are already earning wages above the minimum wage. By making it illegal for employers to hire at market rates (the rate that is deemed mutually suitable to both employer and employee) they minimise competition for the jobs of organised labour and keep their salaries higher than would otherwise be the case in an open and free labour market. They also help lawyers, who are kept busy with reams of industrial relations legislation.

This might seem heartless. Surely employees have less bargaining power than employers? Sometimes, they do. Most of the time however, there is competition for labour amongst employers themselves, who use good working conditions and pay as a means of attracting employees. Usually, employees who enter a job at a very low wage rate gain experience that enables them to earn more later. Social interaction with colleagues can prevent depression and provide other personal benefits. With a legally mandated minimum wage however, these options are closed to many looking for work.

The fallacy arises when policymakers conflate issues of social welfare with labour market efficiency (which leads to lower prices for the consumer). Increased unemployment is the visible consequence. Concern for the ‘working poor’ might call for a different solution: better targeted welfare. But it does not call for government interference in voluntary wage contracts entered into by employer and employee.

The minimum wage would not be such an issue if it weren’t for politicians who have capitalised on the general public’s perception that wage controls protect the poor from exploitation. But if the poor are in trouble, what is required is to upgrade their skills, and to shift their supply to sectors where market demand is growing. This is not an instantaneous process, and it is important that a social welfare system offer temporary relief in the interim. But it is wrong to penalise small businesses by placing on them the burden of making unskilled workers wealthier than the market will support. Why kill the hen (entrepreneur) that lays the golden egg (of jobs)?

58 thoughts on “Minimum wage – the most anti-poor law

  1. This is one of the most basic things I advocate. Economic issues often go right over my head (I’m not exactly much of a mathematician), but the minimum wage dilemma is so basic that even my dog, Buster, understands it.

    If someone is forced to pay 14 dollars an hour when the only job they have going is going to earn them 10 dollars an hour, they don’t hire anyone. I don’t understand how ANYONE can advocate a minimum wage, particularly in areas that are hit with high levels of unemployment. It hurts the potential workers (ie. the unemployed folks), it hurts businesses’ ability to expand, it hurts consumers, and of course it hurts society, because taxpayers are the ones who have to prop up these people who have been FORCED into unemployment. It’s a very sad state of affairs.

  2. I know. Minimum wage laws inhibit our ability to exploit the poor! It’s very inconvenient. It’s a constant source of amazement to me that people we’re paying a pittance whilst profiteering from their labour aren’t more grateful to us. After all, the economic system we’ve devised works best the more we get to exploit them – our very own “experts” in the system keep proving it!

    Why can’t they just suck it up and be grateful we pay them anything?

  3. MrLefty, I think low income earners should get more, but it isn’t up to the business to pay up when the only other option is not employing anyone at all. It should be up to the government to produce better targeted welfare for low income workers.

  4. The minimum wage in some Australian industries is close to $20 and hour.

    A wage over $750 per week isn’t fantastic. It however is well above a meaningful, absolute level of poverty.

    Seems the smart thing to do would be to end wage regulation and taxes on low income earners. More people are employed. Employees have a higher real take home wage. Everyone wins.

    To the argument that the minimum wage prevents amss exploitation: this is bunkum, otherwise we would all be on the minimum wage. But we are not.

  5. I have some serious concerns about this issue as my daughter has a part time job after school and on weekends as a checkout chick at one of the local supermarkets. It is good for her as it gives her pride to be working and earning, as well as teaching responsibility, and gives her an idea of what her future is if she doesn’t work her arse off at school.

    The pay is low but the benefits personally are high, and the employer is quite responsible towards young staff.

    If the minimum wage was to be lifted to a level where this type of employment was cut, she would probably be out of a job. This would not cause financial stress, however my most serious concern is that at the moment she is establishing a work history which will be a big advantage down the track, it counts.

    Minimum wage jobs tend to play an important part in the entry level to the workforce.

  6. A worker on $14 per hour in a full time job earns well above the tax free threshold and their financial position could be readily enhanced by a tax cut. And yet trade unions seem to spend a very much larger amount of time lobbying government for a higher minimum wage than they ever spend lobbying government for a higher tax free threshold. A higher tax free threshold would improve the financial position of low income workers whilst have no negative effect on their employment prospects.

    Following the recent IR reforms the Australian minimum wage is set by the Australian Fair Pay Commission. In one regard it is an improvement over the previous system because the Fair Pay Commission must specifically consider the impact on the unemployed. However it seems that it is bound to do this at a national aggregate level and will not give consideration to the special circumstances of certain regions (remote communities) or certain minority groups (eg the young). So whilst a $1 increase in the minimum wage may have what some regard to be a tolerably small impact on the headline unemployment rate it may also have a very significant disproportionate impact on some specific groups.

    And of course if a minimum wage of $14 per hour ensures that many people are unemployed, then it is rather moot if a minimum wage increase to $15 per hour causes only a negligibly higher level of unemployment.

  7. Imagine you’re an employee. Your boss offers you $500 a week, a rate which is well below the costs of your rent, food, and other bills. Fortunately, the government gives you handouts unders various names such as “rent assistance” and “parenting allowance” so that you can live without going into debt. This is a subsidy, for employers to hire employees below the general cost of employment.

    Labour economists agree that there is a point at which a minimum wage deters employment, but there is ablosutely no agreement at where that level is. This is because the level is fluid, and is based on general costs of production, local costs of living, and the government’s willingness to subsidise employment costs.

    Studies on countries with lower wealth dispersal compared to higher wealth dispersal have been unable to find a correlation with total employment, or wealth generation.

    Even the fiercest free market advocates acknowledge that a person will need a minimum amount to live on. Amazingly, what they almost never acknowledge is that, one way or another, this minimum has to be paid for by production in the economy – private or public sector. Their preference is almost always for the government to collect taxes, and use those taxes to subsidise the cost of living for uneconomic employment. They would rather have this than a minimum wage, which is administratively more efficient by an order of magnitude, because of ideology. True free market acolytes will acknowlege that ultimately people should starve as a true base point of reference for a truly free labour market.

    So does a minimum wage help anyone? Yes. It helps hundreds of thousands of Australians as a guaranteed base, and millions more as a point of reference. It helps hundreds of thousands of employers who simply want a base rate to pay or reference for their employees.

    The notion that there is competition among employers for low or no skilled employees, however, is only theoretical. The main motivator is whether employing a low skilled person will increase profits. The specific person is largely irrelevant, as long as there is someone else available at a government subsidised rate.

    A minimum wage doesn’t help unions. A minimum wage is by definition universal. While unions might use a minimum wage to justify their value to members, it never benefits members to the extent of their contributions.

    The minimum wage is not an issue for most people. For those who do have an issue, there are two simple responses. First, accept that it is an economically efficient means of meeting a socially acceptible minimun rate of pay – whether it is set at the right rate is another argument. Second, acknowledge that,in treating human capital the same as other capital, some people should starve as excess to economic needs.

  8. Mrlefty, the profiteer deserves a high rate of return, he thought up the idea, he organised the operation / company, he took the risks. Without him there wouldnt be an idea, without one worker there would be another!!!

  9. > This argument, which is persuasive with a $100 per hour wage rate, can be repeated incrementally down the ladder.

    Yep, until we reach slavery which sets the floor price for labour. Unfortunately slaves have to be fed, clothed and housed; minimally it is true, but the cost is more than zero. At that point, all business has a common cost structure for labour and can no longer compete on price.

    Only then will they have to worry about secondary attributes like quality.

    > Even the fiercest minimum wage advocates usually concede there is a point when minimum wages would cost jobs.

    Yep. At the point where the average business no longer has a viable number of consumers able to afford their goods or services, but is stuck with a bunch of working poor no-hopers living hand to mouth. At that point, there is no demand and they go out of business. Supply ain’t enough you know.

    Both these effects have long been recognized.

    Henry Ford paid his workers enough for them to buy his cars, and Keynes (I’ll just put on my helmet now) rescued capitalism and got us out of the depression by pointing out the role of demand in the economy. Namely that equilibrium of supply and demand can be reached at any point, and that point may not be optimal.

    Join the 21st century please.

  10. Some examples of countries with no legislated minimum wage:-

    Norway, Sweden, Finland, Denmark, Switzerland, Germany, Austria, Italy, and Cyprus.

    Loads of slavery in those places.

  11. I think that if a person is starving as a result of low wages, Baz, then they should probably return to subsistence because that’d be far more productive than whatever work they are engaged in. Wages are ideally set by productivity and while there is some definite disparities, if someone isn’t able to produce a week’s worth of food for themselves then they should re-evaluate their skill-set. A free society requires an informed populace with a desire to be free. Selling oneself to wage-slavery because it’s “secure employment” is selling oneself short.

    I think that as society progresses towards liberty and freedom skill level required by human labour will increase. There’s already a lot machines can do, and yes that costs jobs in the short term, but in the long term it ensures that humans become skilled labourers and machines do the mundane work.

    I’m sure not many people like being a garbage man- which is why a lot of the process is automated and more people are able to move into the ever-growing entertainment, tourism and technology industries. People should be performing challenging enough labour that they can feed themselves and their families with what they output. That would be the ideal, in my opinion.

    The more we can do with less, the better. The only hurdle humanity is going to come up against is that we’re in a world of “finite” resources. Which doesn’t actually mean they are finite, it just means science is going to need to find better ways of recycling waste. There’s still the same amount of “stuff” on earth as there ever was, most of it just isn’t as precious to us once it’s in the dump as it was when it was in the ground or on a tree.

  12. While Australia has a much higher minimum wage than the USA it’s economy doesn’t seemed to be suffering from it. This just doesn’t appear to be an important issue.

    Terje, those countries you mention which do not have a minimum wage all have very strong social safety nets of other sorts (except maybe Cyprus, I don’t much about that country).

  13. Trinifar,

    A social safety net makes more sense than wage regulation. And like those countries Australia also has a social safety net.

    However that is rather beside the point. JM was inferring that a minimum wage of zero would lead essentially to slavery. Clearly this is not the case in the countries that I cited. Clearly JM was attempting to use a dire narrative to paint a picture that bears no resemblance to reality.


  14. Baz says:

    “Imagine your boss offers you $500 a week which is less than your cost of living.”

    Your boss could be offering you more. You take it.

    Your boss could be offering the same. What a waste of $200 to get a lawyer to draw up an AWA.

    This begs the question why you would keep the same job previously if you couldn’t live on it. Then again, maybe you should rent somewhere cheaper.

    Finally, you are offered less than now. You may quit.

    Baz is trying to argue that welfare, assistance and wage subsidies (to employees) are a subsidy to low wage paying employers. Maybe they are. Then the best policy would be to cut welfare. But there are millions of workers and hundreds of thousands of employers, with the subsidies going to employees. No such subsidy to employers exists.

    Maybe we should just cut benefits and taxation of low income earners?

    Baz thinks that economists have no idea with the impacts of minimum wgaes and that getting rid of welfare and just increasing the minimum wage is a good idea. Three poblems Baz.

    1. We do know the effects of wage regulation on employment. The elasticity of the demand for labour is estimated regularly by labour economists.

    Aggregate Wage Studies
    Australian aggregate wage studies estimate that employment will fall by between 0.4% and 0.8% in response to a 1% across-the-board increase in real wages (other things being equal).

    In a study by Lewis42, which used a disequilibrium model of the Australian aggregate labour market, the labour elasticity was estimated to be –0.6.
    Lewis and Kirby43 redeveloped the earlier Lewis model and estimated labour elasticity at –0.8.
    In 1987, Pissarides44 estimated labour elasticity at –0.8.
    Russell and Tease45 estimated labour elasticity at -0.6 in 1991.
    Major macroeconomic models of the Australian economy including the Commonwealth Treasury’s TRYM, the Access Economics model and the Murphy model, each estimating labour elasticity at -0.7 to –0.8.
    In 1998, Lewis46 used more sophisticated techniques to revisit the findings of earlier studies. He concluded that the aggregate wage elasticity of demand for labour was -0.7.
    Debelle and Vickery47 estimated the long run real wage elasticity of employment in Australia at –0.4, using quarterly data for the period 1978 to 1997. Over a longer time period, 1969 to 1997, they estimated a significantly higher elasticity of –0.7.

    The figure changes over time and there is variation between the long and short run as elasticities change over time. Short term unemployment can however lead to long term unemployment as workers are deskilled and may never be more productive than the minimum.

    2. How does your plan work if you are unemployed? With higher labour costs, why will people give to charity?

    3. The minimum wage puts people out of work. We know this from elasticity estimates. Again, “Australian aggregate wage studies estimate that employment will fall by between 0.4% and 0.8% in response to a 1% across-the-board increase in real wages (other things being equal).”

    So to Trinifar it is obvious that Australians suffer from any kind of wage regulation.

  15. I totally agree that welfare or charity are more logical than a minimum wage.

    The risk some people see is that when there’s no minimum wage- and unemployment is high people will be taking jobs that pay chickenfeed because a minimum wage job is better than no job. But if the proper social safety nets are there it shouldn’t be a problem. And in a freer economy unemployment should be less of a problem.

    I was talking to an “average voter” last night about libertarian economics. She seemed to agree with most of what I said, but basically raised the concern, “If we have free trade what’ll we do with all the farmers and low-skilled people that lose their jobs to cheaper overseas products?”
    And if we lower the minimum wage and workers here have to accept 50c/ hour to compete with China but the cost of living remains the same, then low-skilled workers are going to be in a bad way. Especially if we have freer borders so that skilled immigrants can accept the jobs that open up.

    Obviously a social net can protect against these effects, but then we run into needing higher taxes to support all the unemployed. As someone without an economic background the only real argument I could must was, “well, the tourism, entertainment and technology industries are growing, so people would be able to find work there” and “with less regulation and tax businesses would be wanting to start up here which would keep economic and job growth high”. I do think its a legitimate concern that people in the community will have, though.

    In Japan unemployment was kept low for so long because the government ensured 2 people were employed for jobs where only 1 person was needed. The government created a bunch of artificial jobs that weren’t needed just to keep unemployment under control. I’m sure economically it wasn’t a smart move, but on the other hand what’s the actual risk that a freer market will hurt Australians? Is there any?

  16. We farm goods we can produce cheaper than anyone else. Cotton farmers can become graziers or grain farmers if they are no longer subsidised. Free trade won’t put people out of work. It costs jobs to keep people employed in portected sectors. Getting rid of these sectors will see more people employed. Farms are not one of these. It has one of the lowest rates of protectionism globally. Workers in protected sectors will not be made redundant, they will be paid more as management becomes more innovative. This happened in the auto manufacturing sector after the tariffs were dropped in the 1980s. It happened in the NZ ag, sector too when it was liberalised.

    However, try cramming that in a soundbyte.

  17. First, a job at 50 cents is highly unlikely to happen — do you know anyone who would work for this much? Employers want motivated employees, and will pay them accordingly. This is also why a voluntary army is better than conscription.

    People who say ‘economic rationalist’ arguments lead to the conclusion that slavery would be more efficient have not understood that we are dealing with individuals crying out for incentives. Employers, like the government, need to give their employees an incentive to work productively — the greedy capitalist scum’s self-interested end of making a profit is not served by having employees who couldn’t care less how they performed, because their pay is so shit.

    Second, question the assumption that farmers & low-skilled workers will necessarily lose their jobs. Remember, without reform many workers may lose their jobs anyway as companies relocate overseas. Life goes on, as people learn new skills and go into other specialised fields. Your friend fears highly visible job losses without understanding the hidden job losses of the present system. They need to be weighed against each other.

  18. Fears about 50 cent per hour jobs stem from a lack of faith in markets. It is like suggesting that farmers might threaten all the people in the cities with starvation and extort massive amounts of money for food. The reality does not fit such a narrative. Inventing scary scenerios should not be a substitute for properly reasoning through the situation.

    Having said that I would guess that in remote Australian communities where unemployment sometimes hits 70% it is likely that the free market (ie zero unemployment) rate for low skill labour would be in the region of $3 per hour. I think that full employment at $3 per hour is more respectable than 70% unemployment at $14 per hour.

  19. Yeah, it’s sort of what I thought myself, but how do you convince someone that doesn’t use rationality and research that there’s nothing to be scared of? I like your example about farmers, Terje, it’s definitely one to try.

    But we’re in a society where certain groups of people LIKE the rest of us to be scared. If we’re scared of not being able to get a different job- then our current job is able to get more labour out of us for less. If we’re scared of terrorists we’ll surrender our freedom to be “protected”. If we’re scared of our children being corrupted we’ll let the government pass harsh in order to protect them from the evils of gays, drugs and guns.

    The government is the biggest perpetrator of fear-tactics but the media and other groups (including those on the left) are experts at manipulating the “fight or flight” response.

    Libertarianism is a rational argument, but most people respond more to fear than rationality. Just look at the word “protectionism”, what is it exactly people are looking to be protected from?

  20. I’m not scared. But I can’t speak for the majority of people.

    And yes I do hold myself to a higher standard than them before you ask. I am being condescending. I know they have the potential to stop giving in to their fears, but until they do they will never know freedom. Rationality and logic is my salvation from fear. But each person needs to find their own.

  21. Rational argument to non-libertarians can only get them so far. You can demonstrate the job losses caused by minimum wage, but you can’t demonstrate that events that they fear won’t happen. People need to make the logical leap from irrationality to rationality themselves.

    As for minimum wage, a comparison with the Australian auto industry may be in order. Dropping of tariffs did result in some parts of the industry having to decrease production to compete. It has also forced manufacturers to innovate. Australian cars are of higher quality today than they were 30 years ago when they were hiding behind tariffs. Did the sky fall down? What happened to all those auto-workers? Why is unemployment at 6% when xxx auto-workers lost their jobs through plant closures and redundancies?

    One of my first experiences of the benefit of deregulation was meeting contractors on a mine construction site. These guys had been working steadily in the previously protected steel industry, labouring away, waiting for retirement. Steel tariffs ended and BHP made them redundant. After the initial shock and displacement, somewhat eased by their payouts, they found that they had a set of skills that simply needed to be tweaked to enter another industry, construction, that paid better, had more flexible conditions, and was more interesting and challenging to them. They had woken up to a new world of possibilities.

    My co-workers were lucky to a certain extent that they were thrust out onto a world with a skillset that they gained while protected by the state. Not everyone is so lucky, but as many whizkids in IT, an industry that has never been protected by tariffs, have shown, traditional skills and qualifications are not neccessary to take advantage of more flexible working arrangements. IT guys get paid to do work that is their hobby and is largely self-taught. People are very capable at working out what is best for them, even if shocked into the new paradigm like redundant steelworkers, or don’t know any different like IT workers.

    Have faith in people’s ability to discover what is best for them, especially when faced with real decisions like how to house, feed and clothe themselves and their families. People are resilient, and nannying them blunts their ability to look after themselves and grow as human beings.

    Libertarianism is about the freedom of individuals to pursue their own desires and enjoy the entire fruits of their acheivenments themselves. There has never been a better formula for a good society than people pursuing their own self-interest.

  22. Shem – at least you are honest. I think your points are logical, though I disagree with the basic values.

    Mark Hill.

    Your first statement about employee options is based on an adequate safety net, and then you suggest cutting that safety net, or an altenative job, which is never guaranteed.

    You then state that there are no similar subsidies for employers. There are. Tax rates for business income (read profits) are lower than for employees. The cost of employment is subsidised by Government welfare payments. Businesses do not have to directly pay for the education of their workforce, or policing of a safe community or business environment, or effective and reliable infrastructure, etc,etc. All western societies subsidise business this way.

    The best policy in this context is to cut both the subsidies and taxes for lower income earners, at the same time that you cut the subsidies to business. When so called free market advocates start to seriously argue the latter as part of the solution to the former I’ll be encouraged that they are at least arguing the whole issue rather than spouting ideology.

    As to your set of three points.

    1. Elasticity is based on a range of underpinning assumptions. Without having the details of each of the studies, I can confidently predict that they do not include the impact of the aforementioned subsidies, the potential for a minimum under which potential employees start to remove their labour, and a range of other factors. I can also confidently predict that they make a number of assumptions regarding labour “market” behaviour and employment behaviour which are contestable. All that can be said is that they make a best guess at the impact on the CURRENT labour and economic markets, without making a general judgement on the impact of a minimum wage per se.

    2. How does your plan work out if there is not genuine 100% employment? Give me one example, anywhere in history, of such an economy. Otherwise at least admit that the “exit” for the lowest rungs of the labour market is starvation. As for your second point, I prefer a Government welfare system to relying on private sector charity, for many of the same reasons.

    3. You are essentially rehashing your first point.

    Seeing as you went to so much trouble the first time, I’d ask that you also consider whether or not a minimum wage is an economically efficient way of regulating the bottom end of the market, rather than chewing up so much money in recycling taxes as welfare for working people and having millions of employers and employees wasting millions of hours on debates about often miniscule pay differences. You don’t have to consider whether the current minimum wage is appropriate in this context – that’s another debate entirely.

  23. The tax rate for employers is not lower than for employees. The company tax rate is merely a withholding tax. At the end of the day the profits belong to shareholders and when they receive their dividends they are required to pay the balance between the company tax rate and their personal tax rate. The profit is fully taxed.

    If not for issues of compliance it would be much more sane to have a company tax rate of 0%. The shareholders would then pay the full amount of tax personally at dividend time instead of the current half/half payment arrangement.

  24. There is one benefit of a minimum wage and that it is less of a headache for employers to determine wage levels in low-paying jobs. Having run a restaurant in the Gold Coast myself, i was appalled at how high the min wage was but glad to be relieved of the problem of individually negotiating wage rates with 15-odd staff.

    However, for this to work the rate needs to be set low (as in the US) so that workers are not priced out of the job market.

    That said, i cant think of another benefit of the min wage. It’s schoolboy economics for woolly thinkers.

  25. Pommy, you’re forgetting that every other restaurant on the Gold Coast faces the same problem. A labour market would give you wage rate (price) guidance without the need for a bunch of suits to meet up for a jolly on the government tit!

  26. Baz, your point was moot. No one will continually work for less than what they can survive on. But you think quitting for another job is unreasonable. It isn’t, it happens. This is what fractionally unemployed people do. They make up roughly a third of all officially unemployed workers.

    Like Terje said, company taxes are withholding taxes. Individuals evade taxes through business structures, businesses do not evade taxes by being taxed like individuals. Simply taxing consumption only or treating all income equally and taxing it in the same manner at the same rate would end any legal evasion. You repeat the myth that unemployment benefits are a subsidy to employers. If this were true, all we need to do would be to abolish unemployment benefits and wage rates would immediately rise, even though workers would have a stronger incentive to find work. Unemployment benefits actually artificially hold up wage rates as the reservation wage of workers become higher.

    Training and infrastructure should be privatised simply because they are better and cheaper this way. Labelling services as subsidies gets terribly subjective – but I would agree about subsidising transport and training even if the subsidies are not direct. Firms would be better off as they could pay less tax for something better. I don’t think police protection of property, businesses or people is a subsidy to anyone. The economic arguments for police are based on a network or common insurance idea.

    The only common assumptions about elasticity is that people are price responsive and this responsiveness alters over time and inputs can be substituted. These are non-refutable assumptions. Your assumptions about subsidies are wrong so they are discounted. In fact, they work contrary to what you are trying to prove. Current labour demand elasticity is in fact more inelastic – (i.e the demand for workers falls more with mandated wage increases) than the older estimates suggest.

    A negative income tax doesn’t “rely” on 100% employment, it allows those previously caught up in welfare traps or with a low incentive to find work to find work. It allows market rates of labour to be paid. Furthermore, your own plan is very sketchy without 100% employment – it assumes there will be 100% employment no matter how high the wage rate is set, despite theoretical and empirical evidence. But you prefer a welfare system over charity, even though you call welfare a subsidy to employers? The evidence in early Australia and America shows that with lower tax rates, philanthropy rates were much higher per capita than now. It should also be noted that per capita charity donations increase with increases in real income. So it may be feasible that charity can deal with the amelioration of poverty altogether.

    A negative income tax removes much of the churn, as would removing all other welfare. It is not efficient to price labour out of the market, whether you consider it relevant or not. It isn’t efficient determining wage rates for everyone else as well. You have fallen into making the mistake that central planners can efficiently deal with all of the information an economy presents. They cannot. You are not doing a favour for everyone by determining a egregiously high minimum wage. This is allocatively inefficient and workers pay doesn’t entirely consist of cash in hand wages.

  27. The evidence in early Australia and America shows that with lower tax rates, philanthropy rates were much higher per capita than now. It should also be noted that per capita charity donations increase with increases in real income. So it may be feasible that charity can deal with the amelioration of poverty altogether.

    The two questions I always have about these statements are:
    “Would the poor be better off under private charity? Would a person losing $100 of their welfare because of tax cuts get $100 extra from private charity?”
    “Would people still donate as much if charities were no longer tax-deductible?”

  28. Trinifar- I heard on the Radio this very morning that Australia’s unemployment rate was 4.3%. Why were you praising France with 8% unemployment?
    Shem- (1) with no minimum wages, people would not stay unemployed for long, as wages would decrease in some cases to their natural level. Also, in a no-tax society, prices would be lower overall.
    (2) with no taxes, and no fancy tax-minimising schemes needed to hang on to money, the rich would have more money for when they felt charitable. The down-side is there would be a lot more unemployed lawyers and accountants who had been fired because their skills at fending off the ATO were no longer needed, but I think I’ll be able to live with that.

  29. 1. Perhaps we’d see a real unemployment insurance market.

    2. Think about what charities do. They work with people. Centrelink does not.

    But really, we’d need some figures. My source material will take some time to track down, but I am sure the figure is around five times what it is now. That doesn’t factor in economic growth, but I am unsure how strong that correlation is. I can’t remember how much GDP has grown in real terms.

    So the effect would be: benefits of taxes (reduction in unemployment and increases in real wages); number of workers/retired people able to give = change in deadweightloss x change in GDP x five x rate of change of giving to GDP.

  30. Perhaps too we are not even mentioning the greatest benefits of having low skilled workers working at market rates – they have jobs now. This is one of the greatest predictors for future employment and increased future wages.

    It is the best way to ensure your human capital gets developed and skilled up.

  31. If elasticity of demand for labour is around -0.7, and real wages have grown by around 20% over the past 11 years, this implies a fall in employment of around 14% over the same period.

    Yet clearly this has not occurred. What have I missed?

  32. Most wages are not the minimum wage and they will rise in line with productivity. Productivity can come from increasing skill levels or it can come from the application of capital. It can also come from structural change. It is all of these things that have improved Australias productivity and lifted wages.

  33. E.D – the demand for labour has increased – which is another way of saying what Terje has said because labour demand is a function of productivity.

  34. Sorry, but you will have to spell it out more clearly for me (I’m not trained in economics).

    Precisely how are employment (demand for labour), wages and productivity related?

  35. Productivity is the rate of production for a given unit of labour. If productivity increases then there is more production (of goods and services). In a competitive market this means one of three thing. Either the price of goods and services will decline (production based deflation) or the price of labour will rise, or the return on capital (ie profits) will increase. The less competitive the market the more the added output will flow to profits (increasing the yield on capital). However this will create demand for new capital (because capital returns are high) and the move back to equilibrium will again tend to push the benefits through to wage earners.

    In practice there only needs to be the smallest amount of competition for the benefits to begin flowing through to wages.

    In China we are seeing huge increases in productivity (less so in the rural sector). Real wages across China are increasing at 10% per annum.

  36. So rising productivity contributes to higher wages (and presumably a higher standard of living). But how do these factors relate to demand for labour / employmment growth?

  37. Trinifar- I heard on the Radio this very morning that Australia’s unemployment rate was 4.3%. Why were you praising France with 8% unemployment?

    I’m just pointing to France as an economy that leans toward socialism and saying “Hey, things are not so bad there.” It’s not praise. In the USA where the miniumum wage is something like half that of Australia’s the unemployment stitutation is not about the same as Australia’s.

    I don’t see the case for the minimum wage — as it is actually realized in today’s economies — being a significant force. Sweden, a very socialist country, doesn’t have one at all and does well. As you point out Australia, even with a relatively high minimum wage (at least compared to the USA) also does well. So does the USA. All this assuming GDP per capita is a decent measure of “doing well.”

    Seems to me the minimum wage is not a significant factor in the economy. What am I missing? That is, in real terms what am I missing? I do get the abstract arguments but they don’t seem to play out as advertized in the real world.

  38. Wish I could edit my comment above. I meant that Australia’s and the USA’s unemployment rate is about the same even though Australia’s minimum wage is much higher.

  39. Id suggest any anaysis of the bottom end of the US labour market has to take account of millions of migrants, legal and illegal, putting a general downward pressure on things. Without this, US wages, employment levels and labour productivity would all be measured at higher levels. I’d guess.

  40. Another issue to consider is additional mandated employment costs such as superannuation, payroll tax, workers compensation insurance, health care insurance, etc.

  41. Actually, I hadn’t forgot about income tax (or welfare) but chose to not mention it.

    Another important consideration is that the US experienced a recession in 2001-02(?), and may be headed for another one soon, whereas Australia has had virtually 16 years of uninterrupted economic growth. That must surely count for something!

  42. Response to the first comment.

    Dear Danny boy: Where is that place that forces $14.oo dollar an hour pay? I sure would like to go there and put in for a job. Now these places that pay .15,.20,.25 cents an hour, even Buster knows not to go there right?

    Gary Long

  43. Can someone explain why the unemployment rate in the 1950s and 1960s was at or below 2-3% yet there was greater unionisation and workplace regulation than today?

  44. ED,

    Monetary inflation had not pushed people up the tax scales. The spending policies inspired by Whitlam but ultimately kept in one form or another by those that followed had not yet bloated the public sector. And the nature of work was more heavily dominated by enterprises (eg manufactoring) that where more able to accomodate rigid codification of work practices.

    So short of rolling back technological changes we can hope to return to full employment by cutting the public sector back toward the pre 1970 levels, introducing labour market flexibility and ideally restoring hard money.


  45. Also, ED, they’d just come out of a major war. People were probably more willing to work together, and they hadn’t encountered the dark side of Keynesian policies- the stagflation of the 70s.

  46. Poor old Keynes. In the 1950s and the 1960s we lived under the Brenton Woods gold standard. A system that delivered low inflation and much certainy. A system that Keynes was instrumental in creating. The policies of the 1970s were done in his name and are what we call Keynesian. But poor old Keynes.

  47. I know there was less inflation in the 50s and 60s, but I don’t see the connection between that and low unemployment.

    I thought the main free market argument was that unemployment is caused by unions pushing wage rates too high. Were the unions better behaved back then?

  48. Two glib explanations:

    1. After the war, there was plenty of reconstruction to be done. There was also a lot of people killed off. Like how wages rose after the black plague (although virtually all of the time the relationship between labour and capital isn’t that direct – generally this is only a measure of labour’s share of income).

    2. It was done on borrowed time. The stagflation of the 1970s was how it (Keynesian policy) ended – in an ugly mess.

  49. I get the first point, but not the second. Can you elaborate? Again, I don’t see the connection between low unemployment and low inflation of that era. Is low inflation necessary for low unemployment?

    If Keynesian economics was responsible for almost 3 decades of low inflation and low unemployment, what went wrong?

  50. ED,

    The problem was not so much inflation as it was inflation combined with progressive income tax. The problem from the 1970s onwards was compounded because it was global in nature. And it was global in nature because of how Brenton Woods was setup (ie dependent on the US dollar).

    There were several groups incorrectly blamed for the inflation of the 1970s. They include:-

    1. Banks.
    2. Foreigners.
    3. Businesses.
    4. Unions.

    None of these is correct. The wage price spiral did include unions demanding higher pay but this was symptomatic of inflation and not causal. The real culprit was monetary policy as administered by central banks.

    When inflation pushes an increasing percentage of the workforce into higher tax brackets the result is contractionary.


  51. Terje, mate, you are going to have to stop calling it the Brenton Woods system, it was the Bretton Woods system. Sorry for being pedantic!

  52. In today’s SMH (p.8) article “Asbestos victim scorns Hockey”

    “Bill Mitchell, a labour market economist at the University of Newcastle, said the latest OECD figures showed that countries with high levels of union membership – such as Sweden with 78 per cent membership, Finland with 74 per cent membership and Denmark with 80 per cent membership – had stronger levels of economic performance than Australia.”

  53. Unions have been demonised in Australia by the Liberal Party and media both (perhaps with good reason? I’m too young to remember). I think unions have a vital role to play in levelling the negotiating power disparity of employer and employee- especially in the case of low-skilled employees. I think that with high union membership AWAs would be less of an issue because employees would be able to use their unions to negotiate collective agreements where an individual AWA tried to be exploitive.

  54. Pingback: The ACTU: selfish then, still selfish now « Thoughts on Freedom

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