PC concludes there are some adverse employment impacts from minimum wage increases

The President of the Queensland Council of Unions is reported in the Brisbane Times this morning as noting “There is no empirical evidence that cutting wages creates more jobs” (Qld unions to make penalty rates election battlefield). In my view, this is too strong a statement given the evidence that does exist on the relationship between wages and employment. While the evidence base is not large, there is some evidence that minimum wages have an adverse impact on employment, particularly of young people.

The Productivity Commission identifies a number of Australian studies showing the demand for labour has a negative relationship with the wage rate, so the quantity of labour demanded falls as the wage rate increases, all else being held equal. While the findings of the studies are typically explained in terms of the negative impact on employment if the minimum wage increases, the logic works the other way, so that, if the minimum wage had not have increased, employment would not have fallen, or, if it had decreased, employment would have increased. The Productivity Commission notes on p. 854 of its draft report on the Workplace Relations Framework that:

Notwithstanding possible concerns with individual studies, when viewed collectively these employment elasticities suggest that:
• minimum-wage changes in Australia, if anything, tend to have a small and negative effect on the total employment (that is, taking into account the impact on both minimum-wage and above minimum-wage workers);
• the impacts may be stronger for certain subsections of the labour market, particularly younger workers (Leigh found statistically significant effects for females aged 15 to 24 and males aged 15 to 34. Mangan and Johnston found statistically significant effects for young people in Queensland and in Australia, but of a smaller magnitude than those reported by Leigh).

The Productivity Commission notes that many of the Australian studies it reviewed were from a time when the minimum wage was higher relative to the median wage than it is now, and the impact of minimum wages may not be as great in today’s economy. The Commission therefore draws a heavily qualified conclusion on p. 302:

Taken together, the Productivity Commission’s reading of the Australian empirical studies is that increases in Australia’s minimum wages are likely to have caused some disemployment, but that the effects have not been major relative to other influences.

So minimum wages may not have had a major impact, but it is undeniable they have cost some jobs.

Overall, the Commission makes many sensible recommendations on reforming workplace relations in Australia. Undoubtedly some people would be worse off in the short-term, but the recommendations would be good for the economy and jobs overall. Alas, given the political considerations, I expect the Government will quickly put the report on a shelf and let it gather dust, at least until after the next election.

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2 Responses to PC concludes there are some adverse employment impacts from minimum wage increases

  1. Katrina Drake says:

    Young people in Australia are getting a very poor deal when it comes to employment. Minimum wages are not keeping them out of jobs. What is robbing our youngsters of jobs is the rorting and rackets in student visa, ‘unskilled’ 457 visa, and training schemes. For every young Australian looking for a job at the present time, we are importing a student visa working more than their allocated 20 hours per week, and a 457 visa with questionable skills, and a 2 year holiday visa to compete with them. What is more, racketeers are becoming very wealthy rorting the student visa, and visa schemes, and probably claiming government subsides to add further insult.

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