Minimum wage destroys jobs

Published in The Drum ABC Online on 11 June 2012 under the title “Unseen damage of raising the minimum wage”.

The announcement that the legislated minimum wage will increase by 2.9 per cent 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 an 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 “wage elasticity of labour demand” is one of the most overstudied statistics in economics, and the empirical evidence overwhelmingly supports the very obvious notion that higher 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 a “minimum wage elasticity of labour demand” of 0.29, with a sensitivity analysis range from 0.25 to 0.4.

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

The scary truth that some politicians know but all avoid 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.

If the government and their union cheerleaders actually want to help workers, then the best way forward is to increase our national productivity. 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.

Author: John Humphreys

Chief Economist at The Australian Taxpayers Alliance, Sessional Lecturer at the University of Queensland, and National President of the Liberal Democrats.

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