High Wages Down Under

Last summer, thousands of Taco Bell, Wendy’s and McDonald’s workers across the United States fought for wages higher than the federal minimum of $7.25 — a wage that many of them shouted and picketed, is not a proper “living wage.” Some argued for wages as high as $15, more than twice the current minimum. They suggested that the land of the free should not be one in which CEOs are paid over one thousand times what someone on minimum wage earns, or one in which people constantly struggle to meet the basic necessities of life. The debate still continues today, perpetuated by President Obama’s call for a $9 minimum wage in his 2013 State of the Union and push despite Republican opposition.

A key point in evaluating this debate is how this value measures up internationally. Despite the prevailing arguments for a higher federal minimum wage in the United States, the country already has one of the highest minimum wages in the world. According to The Economist’sBig Mac index” study, the United States boasts the seventh highest minimum wage on an absolute basis in the world. At $7.25, the U.S. rate is nearly half of Australia’s $16.88, the highest reported minimum, but an incredible 250 times higher than Sierra Leone’s $0.03, the lowest reported minimum.

But what would happen if the U.S. minimum wage approached Australia’s? On one hand, the economic law of demand suggests that, as the price of labor increases, the quantity demanded will fall in the long run, eventually leading to increases in unemployment. So perhaps many jump the gun when they protest for higher wages, since they ignore the potential economic side effects. On the other, many economists suggest that these effects are overblown. But what happens in reality?

In Australia’s case, the opposite of what demand theory suggests — an increase in employment, rather than a dip — has been observed. Some commentators have actually found that, because pocket money of wage earners flows into the economy more freely, there is a greater demand for goods, and thus a greater demand for employment. Australia also boasts a lower unemployment rate than the United States.

At a quick glance, it appears that Australia’s high minimum wage has not led to any of the predicted problems, but a closer look reveals a more nuanced story. The first crucial nuance is the fact that, unlike the United States, Australia’s minimum wage is graduated by age and can be withheld from disabled workers. In this manner, many of the workers who could benefit from higher wages are left out. In fact, the graduated minimum wage system is believed to be a “tacit admission” by the government of the theorized rise in unemployment brought on by increased minimum wages. And as a result, while the sliding scale means a topline $16 minimum wage has less of an impact than if everyone were paid the $16 figure, those younger or disabled workers still see many of the same reductions in employment found among lower-skilled workers in other countries.

Ben O’Neill (http://bastiat.mises.org/2013/11/the-minimum-wage-are-economic-laws-valid-in-australia/)

Ben O’Neill (http://bastiat.mises.org/2013/11/the-minimum-wage-are-economic-laws-valid-in-australia/)

Some also believe that Australia’s unemployment rate of 5.6 percent ignores underemployment, since it includes all workers regardless of the amount of hours they work per week. When this factor is accounted for, the Australian Bureau of Statistics found that the country’s unemployment rate increases further to a troubling 19.9 percent.

An analysis of Australia brings a unique perspective to the minimum wage discussion, but what lesson can it actually teach? Perhaps this look, which paints a far more detailed picture, is the kind needed to understand the potential effects — positive and negative — in the United States. In order to impose a sustainable minimum, it might be wise to consider laws that are not universally applied. It might be wise to consider those who are most affected by changes in the minimum wage — the young, the low-skilled, and the disabled — to rightfully gauge the possible ethical, economic, and social side effects. We can be sure, however, that where a sustainable minimum wage is concerned, we lie to ourselves if we maintain just superficial judgments.

Image Credit: Government of New South Wales via Wikimedia Commons

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