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Minimum Wage Increases, Unemployment and Inflation

It is almost extraordinary to think that, in the context of the Australian election where cost-of-living pressures are causing such pain towards so many, that there's now a debate over the minimum wage. To give a brief summary, the Fair Work Commission is engaging in an annual review of the national minimum wage. On one side, employers represented by the Australian Industry Group is proposing an increase of 41c per hour (to $20.74) and the Australian Chamber of Commerce and Industry suggests slightly more, whereas the Australian Council of Trade Unions is arguing that the minimum wage should be raised by an additional 61c per hour (to $21.35). The Labor Party leader, Anthony Albanese, has said that the increase should be at least the rate of inflation, that is 5.1%. The ACTU is pointing out that wage workers have received pay increases under the rate of inflation for successive years, an effective wage cut.

For his own part the LNP Prime Minister, Scott Morrison, attempted to claim that Albanese's claim was an "unprecedented" intervention (which simply is not true) and responded on whether workers should be paid in the minimum wage in very couched terms ("it depends", he responded, referring to those workers in the unprotected casual "gig economy"). For what it's worth, the Prime Minister is one of the highest-earning politicians in the world, at $549,229.

The fact that the Australian election has come down to arguing about an additional 38c per hour for the country's lowest-paid workers in the most insecure employment is an extraordinary failure of empathic understanding of how other people live by our supposed national leader. These are the people who were deemed "essential workers" during the harshest period of the pandemic and who are overwhelming the workers who are most likely to be exposed to SAR-CoV-2 and least likely to have access to health care facilities. Whilst donning a hi-viz vest for a photo opportunity is the sort of marketing trick that fools some people once, it does not generate loyalty.

One matter that must be discussed is the claim, endlessly paraded by conservative politicians, well-paid advocates for employer groups, and those with a grade-school knowledge of labour economics, is that increasing the minimum wage will generate unemployment. This argument is predicated on the assumption of a perfectly competitive market economy, where a floor price does indeed generate a loss of trades at that price. However, a modicum of thinking about what labour markets are really like leads to the realisation that in nearly all cases labour markets are where there are many sellers of labour and few buyers of labour; the result is that wage workers are usually underpaid. As the Reserve Bank states: "There is no evidence that modest, incremental increases in award wages had an adverse effect on hours worked or the job destruction rate."

The result of such markets (which Joan Robinson coined the ugly word "monopsony" in 1933) means that, in comparison to a perfectly competitive market where there is equality between buyers and sellers, wealth is distributed away from the employee to the employer but this gain to the employer is less than the loss to the employee, resulting in an aggregate loss overall. There is, overall, lower wages, lower productivity, and lower employment. Whilst minimum wages can generate unemployment in a specific industry it does generate an overall increase in employment and production. That is why low-skill service jobs are replaced by technologies and technical employment as low-skill wages increase.

If the unemployment argument fails an even more bizarre attempt is to suggest that a minimum wage increase will generate higher inflation. Such "cost-push" inflation can happen where wages and the cost of raw materials increase, and even more so when there is high consumer demand or "demand-pull" inflation. However, the extremely modest contribution that a small increase to the minimum wage to real inflation rates has been correctly described as "alarmism". It is far more appropriate to identify problems in the supply chain as the primary cause and, it must be mentioned as another contributing factor, the tax cuts being implemented for the very wealthy. Tax, as monetary theory correctly identifies, is not used to fund governments who control their own money supply, but rather it is used to remove excess money from an economy or to influence consumer expenditure in specific ways.

Such governments must spend before they can tax, and their real restriction is not the amount of tax revenue they receive but rather the improvements to production from such expenditure. There must always be some increase in the money supply because real goods depreciate and money is simply the representative value of those goods. However, if there is an additional increase to the money supply that must match the productivity and utility gains that come with that expenditure. This is why spending money on war is ultimately a loss, whereas building hospitals and schools is an investment. It is also why JobKeeper, the biggest single expenditure in Australia's public history, was one of the biggest causes of contemporary inflation and a disturbing waste of money. Public expenditure without productivity gains means too much money chasing too few goods; that's real inflation. The opportunity for large-scale public works was largely overlooked in favour of large-scale handouts and longer-run costs.

Ultimately the minimum wage question is whether we want a low-tech, low-skill, low-wage economy or the opposite, and the public expenditure question is whether we want to provide more public funds to the already well-off or for public infrastructure. Phrased in such a manner you would think that the answer is obvious. But in the murky world of political marketing and class nepotism, it requires a bit of a look behind the curtain to find out what is really going on. It is no coincidence that the very people who have been described as heroes of the pandemic age are also the same people who are being told that there is no more money to pay them extra for cost-of-living increases and that there is no more money for the health centres that they need. But apparently there is money for employers, for high-end tax cuts, for business subsidies, and for government contracts if you have the right connections. That's how our economy works for the few and against the many.