The Higher Pay Paradox

In Australia, nothing is certain except death, taxes and increases to the minimum wage.  And while understandably welcome news for workers, each wage hike tightens the noose around the necks of small business and millions of Australian job-seekers.

Minimum wage cases have become a Groundhog Day-like ritual.  Every year, the Australian Council of Trade Unions demands an unreasonably high increase, employer groups like the Australian Chamber of Commerce and Industry lob in a low-ball offer, and the Fair Work Commission orders an increase somewhere around the middle.

So it was this year, where the ACTU asked for a six per cent increase, ACCI countered with 1.8 per cent, and the FWC settled on three per cent rise, taking the minimum wage to $740.80 per week.

This represents an increase on what is already the second-highest hourly minimum wage in the developed world, second only to France.  Bear in mind also that for most workers, the statutory minimum is much higher, because of Australia's unique system of 122 industrial awards covering various occupations.  These awards cover around 2.3 million Australian workers, 92 per cent of whom receive pay in excess of the statutory minimum.

Now, the Sally McManus's of the world will tell you that this is a good thing and, if anything, Australia's wages aren't high enough.

But the reality is that Australia's industrial relations system is, for one thing, a massive handbrake on the economy.  In fact, "restrictive labour regulations" has ranked as the number one most problematic factor in doing business in Australia almost every year over the past decade or so, according to the World Economic Forum.

Small businesses are hit particularly hard.  Because they can't afford the lawyers and consultants needed to do "sweetheart deals" with unions, they don't have the ability to "bargain out" of various wage premiums.  That's why, for example, a big chain like KFC pays a relatively low rate to its staff on Sundays, while the charcoal chicken place down the road is forced to pay the full penalty rate.

Bigger businesses also have greater ability to automate.  Coles and Woolworths, for example, can simply sack workers and replace them with checkout machines.  The local grocery store does not.

And that brings us to another group hit hard by Australia's annual wage spectacle — the low-paid and unskilled, the very people who our industrial relations system is designed to protect.

The experience in the US — where various states and cities have been experimenting with steeper minimum wages for years — suggests that the costs actually outweigh the benefits.  One study estimates that thanks to wage hikes in Seattle, the average low-wage worker lost US$125 a month as businesses have cut their payrolls, put off new hiring, reduced hours and let workers go.

Elsewhere in California, there have been reports that municipalities which have recently raised their minimum wage have seen almost one in 10 restaurants shut their doors.  Obviously, that is bad news for both business owners and workers.

But the biggest losers of our industrial relations system are Australia's most disadvantaged:  The over 700,000 unemployed looking for work, the around 1.1 million underemployed looking for more work, and the countless others who do not even show up on unemployment statistics because they have simply given up looking.

For these vulnerable Australians, each minimum wage hike is a slap in the face that puts gainful employment further out of reach.  It is a devastating barrier to work that entrenches poverty.

Think of it this way:  The Newstart Allowance — the income source of many jobless Australians — currently works out to around seven dollars an hour, averaged across the Australian working week.  As of 1 July, the hourly minimum wage will be $19.40.

This means that an unemployed person cannot get a job unless they find an employer able to afford the statutory minimum.  They cannot, as a matter of law, accept a job that pays, say, $13 or $14 or $15 an hour — lower than the minimum wage but higher than the dole.

This costs unemployed Australians more than just much-needed income.  For many, it means missing out on that "foot in the door" job-wise that is often so critical.  It means going without the non-economic benefits of work that so many of us take for granted:  Creating value, building skills, enjoying earned success.

The Fair Work Commission should keep that in mind the next time it contemplates yet another wage hike, depriving millions of Australians of the dignity of work.