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What future for the minimum wage?

30 May 2013

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Rob Bray came to ANU after a long career in the Australian Public Service as a policy analyst and researcher. In 2010 he was awarded the Public Service Medal in recognition of his work on poverty and hardship. His current research includes the measurement of well-being and the role of the welfare system and its interelationship with participation.

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Policymakers need to take a long view and make some tough choices about the Australian minimum wage, writes ROB BRAY.

The Fair Work Commission is currently undertaking its Annual Wage Review. Central to their concern is the setting of the Australian Minimum. Do they increase it by $30 per week as proposed by the ACTU or $5.80 as proposed by Australian Chamber of Commerce and Industry (ACCI). This, in one form or another has largely been the way the minimum wage has been set in Australia for much of its existence since 1907. This incremental approach however ignores some larger questions.

While Australia’s Federal Minimum Wage is one of the highest in the world and the wage has an iconic place in the wages system, its role has been changing. Today the wage, in real terms – taking account of price changes, is little different to what it was in 1986. However while the wage represented 99 per cent of the disposable income of a single earner couple family with two children in 1986, today it represents just 59 per cent. This is a result of government decisions to increase family payments and other income support.

Effectively this has seen the minimum wage change from a family wage to a wage for a single person. At the same time, as the minimum wage has been held at a constant value, the labour market for the low skilled has been protected from the effect of increasing real wage costs.

It is likely that this transition is coming to an end. In the light of ongoing increases in the real earnings of other workers sooner or later the gap in incomes between those on the minimum wage and others will grow too large.

Yet what policies can address this? To increase the minimum wage in line with the earnings of others requires minimum wage employees to keep raising their level of productivity – to be more skilled and produce more. If they cannot, the risk is that these are jobs which will be lost.

Any policies will also need to take account of other changes in the role of the minimum wage. The concept of a single breadwinner has been displaced by dual earner families. Indeed today just 1.1 per cent of couple families with children have a single breadwinner earning the minimum wage. Similarly the minimum wage, rather than being the mainstay of low income working households, is increasingly becoming a complement to earnings across the income distribution. While 30 per cent of adult minimum wage earners are in the poorest 20 per cent of working households, the balance are spread – with 9 per cent in the richest 20 per cent and 15 per cent in the next richest.

I would suggest there are three pathways Australia needs to consider.

The first is to seek to boost the productivity of minimum wage workers – by increasing their skills and capacity. This would allow the minimum wage to increase along with the earnings of others. Yet despite many investments in training, the effectiveness of this approach is not clear. The risk is that if the skills of the least productive cannot be enhanced, then it will be their jobs which are lost, and they will find themselves excluded from the labour market.

The second is to hold the minimum wage steady as has effectively been done. This will minimise pressure on employment, and because so many minimum wage earners are in higher income households, may not result in too much disadvantage. However for those single persons and others without children who seek to live on the minimum wage it means an increasing gap between the living standard they can achieve and the rest of the community.

The third path also involves holding the real minimum wage stable – but to complement it by policies such as earned income tax credits to boost the incomes of those households reliant upon the minimum wage. While in one way this is little more than an extension of what has already occurred for families with children, in another it is a radical departure. It implies that, for some people, the purpose of full-time work may not be to earn an income to live upon, but rather as a partial contribution towards this, with their effort being recognised and complemented by support from the rest of the community.

This is not a choice we have to make immediately, but is one which will have to be made. It is also a choice which cannot be made through incremental wage decisions, but rather a clear and long term national consensus, and if need be, putting in place the supports we need for the policy to work. It is a conversation we need to have.

Rob Bray is the acting Director of the Social Policy, Evaluation, Analysis and Research (SPEAR) Centre in the Research School of Economics in the ANU College of Business and Economics.

He launched his paper at a public lecture on Wednesday 29 May at Crawford School.

The paper “Reflections on the Evolution of the Minimum Wage in Australia: Options for the Future” was released on Wednesday 29 May 2013 by the HC Coombs Policy Forum. The Forum focuses on supporting policy-relevant exploratory work at the interface between government and academia.

Related Documents: Reflections on the Evolution of the Minimum Wage in Australia: Options for the future paper (PDF 1.55MB)

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