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THE ECONOMICS OF THE LIVING WAGE
ARTICLE FOR THE
AUSTRALIAN ECONOMIC REVIEW
June 1997 issue
Tim Harcourt1
Research Officer
ACTU
1
This paper is based on the economic submissions of the ACTU to the 1996-97 Living Wage Case in the
Australian Industrial Relations Commission (AIRC).
At the time of writing, the Commission had not brought down a decision on the Living Wage Case.
A longer version of this paper was presented to the Australian Labour Market Research Workshop in
Fremantle, WA in February 1997. The author would like to thank the participants of that workshop for
input into the paper - particularly P.N. (Raja) Junankar of the Australian National University who was
the discussant. The author would also like to thank John King, Ray Petrides, Roy Green, Joe Isaac and
colleagues from the Australian Union Movement for written comments and suggestions
1.
INTRODUCTION
The ACTU has made an application for the new 'Living Wage' which is being heard by the
Australian Industrial Relations Commission (AIRC). The Living Wage Case is the first major
national wage proceeding since the election of the Howard Government.
This paper discusses the key issues focussing on the economic case for fair and equitable
wages including the employment, productivity, and equity arguments. The paper is based on
the economic submissions made by the ACTU in December 1996.
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2.
WHAT IS THE 'LIVING WAGE CLAIM'?
The Living Wage claim reflects the view that the fixing of fair and reasonable award rates of
pay should be based on a standard which is sufficient for a worker to belong to and participate
in the Australian community. The claim is based on the premise that all workers should be
entitled to a decent standard of living in a civilised society as enunciated by Justice Higgins in
the famous 'Harvester Judgement' in 1907 - a landmark in Australian wage-fixing history. It is
also based on the notion of an equitable distribution of economic growth as enunciated by
Adam Smith in the 'Wealth of Nations' : ".......that they who food, clothe, and lodge the
whole body of the people, should have such a share of the produce of their own labour as to be
themselves tolerably well fed, clothed, and lodged." [Smith (1776, 183).]
It is perhaps ironic that Adam Smith has been championed by those who call for 'deregulation'
of the labour market whilst Justice Higgins has been so maligned. Both Smith, the economist
and Higgins, the lawyer, expressed the need for fair and equitable wages for both economic
and social reasons.
The Living Wage claim sets a minimum award rate (to be reached in three stages), based on
established AIRC Award skill relativities, which meet the 'needs' basis of workers and is set on
fair 'market' rates. Justice Higgins, in the Harvester Judgement, was also concerned with both
the 'needs' of workers and their families, and what the 'market' was paying.
The objective of the Living Wage claim is to establish (in three stages) a minimum of $12 per
hour for work within ordinary hours, and $456 per standard 38 hour week. The $12 per hour
rate would be the minimum for the C14 classification in the Metal Industry Award. The stages
of the claim are to provide $10 per hour in the first stage, $11 in the second, and $12 in the
final stage. The claim comprises a schedule of minimum rates of pay, consistent with previous
AIRC decisions on relativities. The claim also seeks to achieve three annual 'safety net
adjustments' of $20 per week for those employees who have not received enterprise bargaining
increases.
The Living Wage claim is based on a broad range of economic, social and industrial criteria.
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These include: fair market rates; consistent skill based classification structures; the adequacy
of minimum award rates to Australian living standards and the needs of Australian households;
benchmarks of income inadequacy; labour market changes; work and family responsibilities;
equal pay; the equitable distribution of economic growth; the dispersion of earnings; the
disparity between award rates of pay and average weekly earnings; the decline in real award
rates of pay; executive salaries and community movements; enforcement of award rates; and
key economic criteria. The ACTU believes that there are both efficiency and equity grounds
for granting the first stage of the claim in the current economic context. It is the efficiency and
equity grounds to which we now turn.
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3.
EFFICIENCY AND EQUITY IN WAGE FIXING - MICROECONOMIC ISSUES
3.1
Introduction
The Living Wage Claim is based on the premise that a wages system must produce
efficient outcomes necessary for a productive economy and fairness and equity
sufficient for social stability. A key to Australia's success as a nation is that it has been
able to achieve steady rates of economic growth simultaneously with a relatively
equitable and cohesive social structure. Australia's wage fixing system has played an
important part in achieving that balance between efficiency and equity. The ACTU
believes the Living Wage Claim should be granted in order to maintain that balance.
The granting of the claim is necessary to avoid what Green (1996a) has called the "low
pay ghetto" in a two-tiered labour market.
The claim enables Australia to meet these social justice and equity objectives. This
can be done together with the economic dynamism needed for Australia to be a
competitive player in the global economy. History shows that Australia's wages system
has been: adaptable in the face of macro-economic changes (eg. external 'shocks' such
as the terms of trade crisis in 1985-86), flexible in terms of workplace reform; efficient
in responding to industrial disputes and; socially progressive in providing equal pay for
women, indigenous and migrant workers.
3.2
Economic Efficiency and Flexibility Issues
Some commentators portray the Australian IR system as anachronistic and a hindrance
to economic efficiency. According to Isaac (1993), this view does not withstand a
rigorous assessment of the historical development of the Australian IR system. This is
also demonstrated in terms of international comparisons which show the Australian
systems' flexibility and efficiency relative to IR systems in comparative economies.
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This is shown in studies by Coelli, Fahrer and Lindsay (1994); Withers, Pitman and
Whittingham (1986); Brown, Hayles, Hughes and Rowe (1978); OECD (1986); NLCC
(1987); and the Hancock Committee of Review (1985). The studies show that the
Australian IR systems have at the least the same (if not more) flexibility and efficiency
than corresponding IR systems of similar economies. Furthermore, claims that
deregulation of the labour market will reduce unemployment by allowing more relative
wage flexibility are ill-informed . The labour economics literature referred to shows
that Australia's system has not been inflexible in terms of relative wage movements
compared to countries that are comparable but have different IR systems. Furthermore,
even if relative wages were made more flexible, there is debate about their role in
improving employment opportunities.
3.3
Minimum Wage and Employment Issues
The Living Wage Claim has been criticised for its alleged adverse employment effects.
Those who criticise the claim, typically view the labour market in a simple way,
claiming that any interventions, such as those by trade unions and arbitral tribunals
prevent the labour market from finding equilibrium leaving adverse employment
effects. The criticisms of statutory minimum wage increases (such as the Living Wage
Claim) are based on the simple neo-classical economic theory of the labour market.
This simple theory not only has deficiencies as a theory, but also has problems when
tested empirically in the real world of labour markets both in Australia and overseas.
The simple model says that any statutory minimum price set above the equilibrium"
price will cause supply to exceed demand. Applied to the labour market, with the
wage as the price of labour, the result must be unemployment, if the statutory
minimum wage ("price") is set above its equilibrium. The proponents of the model say
that any policy measures aimed at raising legally binding minimum wages by definition
will cause unemployment.
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However, there are some problems with the simple model from a theory perspective.
For instance: the theory treats the wages like any price and labour like any other
commodity; it ignores the social or human dimension of selling and buying "labour";
the theory is 'comparative static' but not 'dynamic'; there may be monopsonistic (one
buyer of labour) or monopolistic (one seller of labour) elements; there may be
imperfect or asymmetric information about 'the market'; and there are other ways in
which the labour market operates not related to wages (prices) eg quantity adjustments.
In fact, a whole literature has developed in labour economics because the simple
model cannot adequately explain labour market phenomena. The literature on why the
labour market is different from other markets include explanations such as Quantity Constrained models, Human Capital Theory, Search Theory, Bargaining Theory,
Insider/Outsider Models, Segmented labour markets, Internal labour markets, and
Efficiency wages. These reasons have been discussed by Solow (1990) and Nevile
(1996).
In essence, the market for labour is a market for a very different commodity - where
social notions of fairness and equity come into play. The simple theory has also been
damaged by empirical evidence in labour economics. The evidence is widespread and
comprehensive. The studies include Groshen (1991); Katz and Krueger (1992); Card
(1992a); Card (1992b); Card and Krueger (1995); Brosnan and Wilkinson (1988);
Bazen and Martin (1991); Kitson Michie and Sutherland (1996) and; the OECD
(1996). For example, in Australia, Gregory and Duncan (1981) test the employment
effects of the equal pay cases of 1969, 1972 and 1995.
Measured female
unemployment appeared to have been remarkably unresponsive to the equal pay
decisions. Despite the predictions that women would "price themselves out of jobs", a
boom in female employment followed the equal pay decision. All these studies
contradict the simple theory's prediction that raising minimum wages reduces
employment.
3.4
Equity Issues
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Equity and fairness in the wages system is not only important in terms of social
cohesion in the Australian community but there are also clear benefits to the economy
in terms of positive effects on productivity. This was recognised by Adam Smith and
Justice Higgins. Labour Economists and such as Isaac (1993) and Gregory (1996)
have also understood this phenomenon. Australia has benefited from having a wage
system that has delivered equitable outcomes relative to other industrialised countries
such as the USA. Despite these outcomes, critics of the system still call for
'deregulation' and 'genuine' labour market reform.
The critics call for a set of institutions similar to the US system to minimise or even
eliminate the role of unions and industrial tribunals [see Wood (1996) cited in
Gregory 1996, 5].
Gregory (1996) has examined the equity implications if Australia changed its IR
system to a US style 'deregulated' model. He examines several aspects of the
Australian and US labour market to illustrate Australia's relatively egalitarian wage
structure. He notes the egalitarian wage outcomes in Australia for women, workers of
non-English speaking background (NESB) and part-timers relative to their US
counterparts.
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Gregory notes:
"The comparison of Australian and US experience relates to the current
emphasis on changing labour market institutions. It suggests that the most
likely effects of institutional changes will be to impact adversely on income
distribution rather than generate employment growth at low wages. A
comparison of recent job growth in the United States suggests that a greater
dispersion of relative wages did not lead to the creation of proportionately
larger number of low paid jobs, relative to Australia. The restoration of full
employment will lie in a direction other than reducing the wages of the low
paid".
[emphasis added]
Gregory (1996) at p.100
The ACTU submissions concurs with the Gregory's view that sacrificing the equity
elements of the Australian system would bring no economic or employment benefits to
workers, employers or the Australian community. Furthermore it would be a needless
sacrifice as it would threaten Australia's social cohesion.
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4.
THE ECONOMIC CONTEXT OF THE CLAIM: MACROECONOMIC ISSUES
4.1
Introduction
Consistent with previous ACTU national wage applications, the Australian economic
context is a key factor in the framing of the claim. The ACTU claims have been shown
to be economically responsible time and time again, despite the warnings from
employer groups about the dire economic consequences of each and every ACTU
wage application. The latest employer rhetorical flourish is that the claims would
"...kill the economy stone dead if granted ..." [Reg Hamilton, ACCI 1/10/96, Living
Wage Case Transcript]. However, the Living Wage claim is both economically
responsible and sustainable. The claim is consistent with the efforts of workers and
the trade unions that enabled Australia to experience lower inflation and strong
employment growth over the past decade. These efforts have assisted Australia's
economic performance historically and by international standards.
The examination of the economic data in the case support the ACTU submission that
the current macroeconomic environment supports the grounds of the Living Wage
claim. The data is presented below.
4.2
Economic Growth
[Insert Table 1 - Chart 1.1]
The ACTU has consistently been committed to an economic strategy based on growth.
The Living Wage claim is being made in the context of economic recovery bringing
three consecutive financial years and 21 consecutive quarters of positive economic
growth. This is shown in Table 1 and Chart 1.1.
[Insert Table 2]
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The claim is also made in the context of Australia being one of the fastest growing
industrialised economies [See Table 2].
4.3
Employment and the Labour Market
[Insert Table 3 and 4 and Chart 3.1]
Australia has experienced a recovery in employment too since the recession [see Table
3, Chart 3.1]. This comes in the context of Australia experiencing one of the fastest
employment and labour force participation rates in the OECD in the 1983-93 period
[Table 4]. Despite the employment recovering unemployment still remains stubbornly
high.
4.4
Inflation
[Insert Table 5, Chart 5.1]
In contrast to recent decades, Australia is a low inflation economy in the 1990s. (This
is shown in Table 5 and Chart 5.1). This reduction in inflation is a major contributor to
Australia's improving international competitiveness and workers were instrumental in
its achievement.
[Insert Table 6 and 7 and Chart 6.1 and 7.1]
Australia now has an inflation comparable to its Major Trading Partners (MTP) and the
OECD Average. This is shown in Tables 6 and 7 and Charts 6.1 and 7.1.
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4.5
Wages and Incomes
[Insert Table 8 and 9 and Chart 8.1, 8.2, 8.3 and 9.1]
The data on wages show a period of moderate wage outcomes in nominal terms from
1983 - 1989. From 1989 there has been moderate growth in real wages associated with
the benefits of restructuring and productivity gains.
This is shown in Table 8 and 9 and Charts 8.1, 8.2, 8.3, and 9.1. However, the data
highlights, particularly in the 1990s, a disparity between the incomes of workers on
average earnings and those on award rates of pay and a disparity between those on
executive salaries and those on ordinary wages and salaries.
In particular, Chart 8.3 produced from Reserve Bank data shows the problem presented
to AIRC of a 'gap' between growth in award rates and average weekly earnings. The
claim is directed at reducing the 'gap'.
4.6
Productivity
[Insert Table 10 and Chart 10.1]
The Living Wage application is made in the context of strong growth in productivity.
The data in Table 10 and Chart 10.1 on productivity growth (Market Sector Gross
Product per hour worked) show the benefits in the 1990s of the restructuring of the
1980s. The granting of the Living Wage Case enables the equitable distribution of this
strong labour productivity growth to low paid workers.
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4.7
Company Profits
[Insert Table 11 and Chart 11.1]
The 1980s saw an improvement in company profits and an increase in the profit share
of national income. The data show that 1990s company balance sheets have also
recovered healthily since the recession. Businesses has benefited from the restraint and
restructuring of the 1980s. In terms of record profitability and the corporate sector's
capacity to pay there is no better time to grant a wage increase for the low paid.
4.8
Profit and Wages Shares
[Insert Table 12 and Chart 12.1]
The record company profits experienced in the corporate sector are reflected also in the
share of national product going to profits. Table 12 and Chart 12.1, show the profit
and wages share of national income. The claim is being made in the context of a
historically high profit share.
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4.9
Real Unit Labour Costs and International Competitiveness
[Insert Table 13 and Chart 13.1, Table 14 and Chart 14.1]
Table 13 and Charts 13.1 show the movements in RULC over the past two decades.
Since 1983 RULCs have been falling steadily. The index has been below 100
consistently from 1986 - 1987.
Table 14 and Chart 14.1 show how the RULC decline has contributed to the
improvement in Australia's competitiveness. The evidence shows a sustained decline in
the index over the period which represents, in turn, a steady improvement in our
competitiveness.
4.10
Terms of Trade
[Insert Table 15 and Chart 15.1]
In contrast to the mid-1980s deterioration Australia has experienced an improvement in
its terms of trade. An influential article by Isaac (1987) shows how a reduction in the
terms of trade reduces national income. The ACTU argued in the case that the
conditions shown by Isaac to exist in 1986-87 have been reversed in 1996-97
illustrating an increased capacity in the economy to grant a wage increase.
4.11
Summary
The economic data presented show that the Living Wage claim is consistent with the
current macroeconomic environment. The economy has recovered from recession and
Australia is experiencing low inflation, moderate wage growth, strong productivity
growth, record company profits, high profit/GDP shares, falling real unit labour costs
and associated improvements in competitiveness.
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The external accounts have improved though there is still some need for caution.
Unemployment still remains stubbornly high, but as Gregory (1996) shows, reducing
protections for the low paid will not create the necessary employment growth to
eliminate unemployment.
The improvement in the economic fundamentals in the 1990s in terms of low inflation,
the strong exchange rate, improved terms of trade, high profit shares, high productivity,
and public sector efficiencies also strengthens the economic case for the Living Wage.
Furthermore, there needs to be some return to low paid workers for the sacrifices made
over the decade in terms of restraint and restructuring. This Living Wage application is
the vehicle by which they can fairly receive their return from their contribution to the
improvements in the Australian economy.
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5.
SUMMARY
In conclusion, this paper has outlined how the 'Living Wage' claim is applied in terms of
effective minimum award rates and safety net adjustments; the efficiency and equity grounds
of the claim, and; how the claim is consistent with the current macroeconomic environment.
It has been designed to ensure that the award system meets the needs of working families and
remains relevant in the changing labour market of the 1990s. The claim provides the means for
an equitable share of economic growth and productivity for low paid workers whilst meeting
the overall economic requirements of sustainable low inflationary growth and
an
internationally competitive economy.
Finally the claim will assist the nation's need for economic growth and social cohesion. The
need for a community to meet both social equity and economic considerations was understood
by both Adam Smith and Justice Higgins. The 'Living Wage' claim reflects and respects both
those economic and social considerations in the contemporary Australian context of 1996/97.
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