Abstract The Australian Federal Minimum Wage has long historical roots going back to the 1907 Harvester Decision which established a ‘fair and reasonable’ wage to meet the needs of a working man and his family. In recent decades there have been significant changes in the role of the wage, many of which build upon earlier development. Effectively these have seen the minimum wage held constant in real terms with the role of support of the family being taken up by strong increases in government transfers for families with children and eclipse of the single breadwinner family. In essence this has transformed the minimum wage to a wage for a single person with the state taking on the support for children. This change has meant that there has been little pressure from the minimum wage on the labour market. This process is now coming to an end. In addition, in line with other research, it is clear that the minimum wage is a relatively ineffective ‘anti‐poverty’ tool. The paper canvasses the options for future minimum wage policy including the use of EITC approaches. Keywords: minimum wage, Australia JEL Classification: J31, J38, N37 i REFLECTIONS ON THE EVOLUTION OF THE MINIMUM WAGE IN AUSTRALIA: OPTIONS FOR THE FUTURE J ROB BRAY RESEARCH SCHOOL OF ECONOMICS COLLEGE OF BUSINESS AND ECONOMICS THE AUSTRALIAN NATIONAL UNIVERSITY MAY 2013 this paper was commissioned the HC Coombs Policy Forum of the Australian National University’s Crawford School of Public Policy as part of the visioning Australia’s future initiative which aims to informing policy making and public debate on the major challenges facing Australia over the coming years. ii EXECUTIVE SUMMARY This paper is concerned with the future of the minimum wage in Australia. While the minimum wage, from the time of the 1907 Harvester decision, has been a core element of the Australian wages system, its nature and role has varied. Established as a ‘family’ wage it has moved to be a wage for a single person, with the role of family support being taken up by government and by changing patterns of workforce participation. Despite the minimum wage remaining relatively stable in real terms over recent decades, this transition has seen rising living standards for low waged families. This has occurred without strongly exacerbating inequality and without the potential adverse consequences of a growing minimum wage outstripping the productivity of many low paid workers. Notwithstanding the central role of government policies and programs in this, there is little to suggest that this is the consequence of a deliberate and coherent policy strategy implemented by different governments over time. It is however a transition which is coming to an end. After an introduction in Chapter 1, Chapter 2 looks at the history of the federal minimum wage in Australia. While the paper notes that for much of the period State minimum wages, and award minimums, may have played much more direct roles, the focus on the federal minimum wage reflects both the current role of the wage and the influence it has had over time. Over this period the well- being of workers on the minimum wage has also been impacted on by other changes, including in relation to working hours and superannuation. In weekly terms the minimum wage has increased by almost 120 per cent since the Harvester decision, but taking account of these other factors suggests a real hourly increase of some 220 per cent. The minimum wage has though declined relative to other earnings. In part a consequence of the family wage structure of the Harvester decision and its underlying male breadwinner model, it was not until 1975 that the minimum wage was extended to women. The current role of the minimum wage is discussed in Chapter 3. In the absence of direct data on the payment of the minimum wage the paper draws estimates from a range of different surveys. These suggest that between 4 and 10 per cent of adults are currently paid at or around the minimum wage. Minimum wage employment is higher among small firms and in occupations such as food preparation, process workers, sales, hospitality and in agriculture and related occupations. Part-time workers are more likely to be employed on the minimum wage as are those employed on a casual basis. Although there is contradictory data, on balance it appears women are more likely to be employed on the minimum wage than men. Minimum wage employment is more frequent amongst younger workers, but picks up again for older age groups. It is also much more common amongst those with low levels of education. In stark contrast to the original conception of the Harvester minimum wage as a family wage, the archetype of a single breadwinner supporting a partner and children while working on the minimum wage has virtually disappeared. Indeed it is estimated that just 1.1 per cent of couple families with dependent children currently fit the Harvester model. Rather the income of minimum wage employees tends to supplement that of higher earners in households. Amongst couples receipt of the minimum wage is most frequently by one member of a couple, working either full or part-time for the minimum wage, while their partner works full-time at a higher earnings rate. In many other households the minimum wage employee is an adult child still living at home. A consequence of this is that while minimum wage workers are more likely to be in lower income households, they are represented in households across the income distribution. While 30 per cent of minimum wage workers are in the ‘poorest’ 20 per cent of working households, almost a quarter are in the ‘richest’ 40 per cent. Using i relative income measures minimum wage employees were only marginally more likely to be in a household ‘in poverty’ than other employees, with this result holding also for measures of financial stress and ‘consistent poverty’. Where these measures identified disadvantage, this was associated with either a lack of employment, or part-time employment. A consequence of this is that today the minimum wage is a relatively inefficient and ineffective means of boosting the incomes of low income households. Internationally Australia has a high minimum wage, and along with France, which also has a high minimum wage and New Zealand, it has a relatively high incidence of minimum wage employment. In contrast the UK and Netherlands, while also having a relative high minimum wage, have a much lower rate of minimum wage employment. Canada and the United States have comparatively lower minimum wages and rates of incidence somewhat between these other two groupings. Chapter 4 looks at more recent trends in the minimum wage, relative to other earnings and its interaction with the tax and transfer system. Compared to other earnings, the value of the minimum wage in Australia has declined over recent decades. This reflects higher rates of growth in these earnings rather than a fall in the minimum wage. The most significant trends however are those arising from the interaction of wages with the tax and transfer systems. Between January 1986 and January 2012 the paper estimates that, while the real value of minimum wage increased by just 1.3 per cent, the disposable income of a single person earning this wage increased by $53 per week mainly due to lower taxation. For a couple with a single wage earner on the minimum wage with two young children, as a consequence of policies directed at providing support to low income families with children, disposable incomes are estimated to have increased by $410 per week – a 70 per cent increase. There are many theories about the economic role of the minimum wage. These and the evidence from empirical research about the impact of changes in minimum wages are discussed in Chapter 5. The paper argues that, while these theories are most frequently portrayed as conflicting – and the results of analysis interpreted as proving or refuting a generalised case about the impact of minimum wage policies – much of this debate is misplaced. Rather it needs to be recognised that the labour market is complex, has many distortions and that labour supply is not homogeneous. A consequence of this is that the impact of minimum wage changes, especially at the margin, is very sensitive to specific circumstances and may be quite different depending upon these. In the longer run however, sustained increases in real wages require higher productivity. The final chapter addresses future policy options. It recognises that Australia has adopted national policies of boosting participation and productivity and it places the question of the minimum wage in this context. Three options are considered. The first is maintaining the minimum wage at around its current real value, as has been done over recent decades. While minimising pressure on employment this comes at the cost of greater wages inequality and potential poor outcomes for single people depending on this income. The second is to allow the minimum wage to increase in line with overall productivity growth and other wages. This strategy, unless accompanied by increased productivity of minimum wage employees is likely to have adverse employment outcomes – with this being borne by those with the lowest skills. The third is to hold the minimum wage steady, as with the first option, but with the government intervening in a targeted way to boost the incomes of the low paid through policies such as an earned income tax credit. In identifying these options the paper emphasises that while this relatively benign transition in the role of the minimum wage is coming to an end, what is required is not a short term fix, but rather a clear strategy.