Home > Economics > Government destroys 100,000 jobs while unions cheer

Government destroys 100,000 jobs while unions cheer

June 2, 2012

The recent announcement that the legislated minimum wage will increase by 2.9% means that we can expect there to be nearly 100,000 fewer jobs in Australia. In response, commentators and unions have cheered and asked for more.

This is a great example of Bastiat’s old rule about what is seen and what is not seen. When a business downsizes and people lose their jobs, the impact is immediate and visible – resulting in news headlines and stern-sounding politicians. But when the government subtly destroys thousands of jobs slowly and indirectly, they are given a free pass.

Of course, that is cold comfort for the unemployed.

Not only does the government get a free pass on this disastrous policy, but the opposition jumps on board too, and the chatterati clap along. Even business groups play the game by accepting a minimum wage increase, though they wanted it to be smaller. If the Australian Chamber of Commerce and Industry (ACCI) had got their way, then the government would only destroy 50,000 jobs. The Australian Council of Trade Unions (ACTU) on the other hand wanted to destroy 150,000 jobs.

This is the logic of modern politics – where good intentions and media sound-bites trump inconvenient facts.

The winning sound-bite is “we have increased the minimum wage to help poor people”. It seems so obvious, so generous, so benevolent. What could go wrong? The inconvenient fact is that increasing the minimum wage is a bad way to help the poor (since most recipients are from middle-income households) and it destroys jobs. That means more families caught in the welfare system and more children growing up in homes with no working parents.

The government, opposition and unions are hoping you are gullible enough to believe the line: “we have destroyed jobs to fight poverty”. Are you?

It is not as though the facts are in dispute. The “minimum wage elasticity of labour demand” is one of the most over-studied statistics in economics, and the empirical evidence overwhelmingly supports the very obvious notion that higher minimum wages lead to fewer jobs. No amount of poetic political polemics is going to change that.

Estimates for the link between minimum wages and employment vary, but in Australia the best estimate we have comes from Andrew Leigh, who found an elasticity of -0.29, with a sensitivity analysis range from -0.25 to -0.4.

This means that for each 1% increase in the minimum wage we can expect a 0.29% decrease in labour demand. Given that we have over 11 million people working, that means the proposed 2.9% minimum wage increase will reduce labour demand by 0.8%, which is just over 96,000 jobs.

The sad truth is that the minimum wage is bad policy. If it cannot be removed, then it should at least be frozen for several years so that it becomes functionally irrelevant. Defenders of good economics need to start speaking up against this failed example of feel-good politics, and if there are any politicians who are able to grasp these simple facts, then they need to speak up and start fighting for good policy.

If the government and their union cheerleaders actually want to help workers, then the best way forward is to increase our national productivity, which will flow through as higher wages. The government needs to revisit the Henry recommendations for corporate tax cuts and they need to find ways to lighten the regulatory burden, especially on small business.  But you don’t start a productivity drive by throwing 100,000 people out of work.

  1. Anthony Andreazza
    June 3, 2012 at 3:38 pm

    I’d just like to point out that one of your feel good politicians would be the Federal Member for Fraser, Andrew Leigh. The irony is that the only source of evidence you use in this article is his own research …

    Yes, economics does support the removal of minimum wage for efficiency reasons. But it also advocates that zero taxes creates the least distortions to markets. But the belief that markets solve all problems is one that economics doesn’t support (note: externalities, public goods, information asymmetry just to name a few).

    So what do we do? We try and find the most inefficient taxes (i.e. those with the highest inelasticities. And with the funds raised we provide welfare system, health care, education, a justice system and so many other government provided goods and services. If the Government has sought to use some of their influence to reduce the monopoly power on setting wages well below actual cost of labour all for their benefit (for the sake of ballooning out their profit margins).

    And by having the minimum wage independently set this reduces the risk of inflation-wage spiral as well.

    Get back to me in 12 months time with the proof that 100,000 jobs were lost from this. Otherwise, you are just adding to the sensationalist journalism/media already crud-ding up our airways.

    • June 5, 2012 at 8:44 am

      Anthony: consider the incidence of the minimum wage and the goal you’re trying to achieve. Whatever you want to do to improve outcomes for lower income workers is better done through wage subsidies funded by the general income tax system than through minimum wages. Recall that poorer people disproportionately also consume the products and services of minimum wage workers; most minimum wage increases get passed through into consumer prices. Is it really better that the folks who ultimately pay for minimum wage hikes are mostly other lower wage workers as compared to the general tax system?

  2. June 3, 2012 at 4:00 pm

    Better than that Anthony, I also referenced Leigh regarding the fact that most minimum wage recipients are from middle-income families. 🙂

    The “belief that markets solve all problems” is a total straw man, which makes it hard for me to take you seriously. And asking me to prove a counter-factual makes me think you’re not entirely serious yourself. Most of the rest of what you’ve written is gibberish or pointless or just plain wrong.

    It seems like you’ve done high-school economics or something similar, and that’s given you an over-inflated sense of your understanding. Before you mention optimal tax principles you should probably get informed about the public choice approach to tax… before you try to invoke monopoly arguments you should learn the difference between monopoly and monopsony… before you try to invoke “information asymmetry” as a reason for government you should learn evolutionary theories of knowledge generation and theories of efficient information… before invoking externalities, you should learn about Coase & North… before you make embarrassing comments about inflation you should learn some basic monetary economics. The list goes on.

    If you want to become a bit more informed about economics, you could start with the Bastiat link that I gave above.

  1. June 3, 2012 at 8:50 am
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