A data point on minimum wages

by John Quiggin on April 28, 2016

I’m currently working on a section of my Economics in Two Lessons book dealing with minimum wages in the context of predistribution policies, so I thought I would compare Australia with the US, where the idea of a $15/hour minimum wage is currently a hot topic. In Australia there are two kinds of minimum wage. The PPP exchange rate is estimated at $A$1.30 = $US, which is fairly close to the market exchange rate at present, so I’ll give both $A and estimated $US equivalents

The standard minimum wage for workers aged 21 or over is $A17.29 hour ($US13.30) applying to employees under standard award conditions. These include four weeks annual leave, sick leave, employer contributions to pension plans and so on.

More comparable to the situation of US minimum wage workers are “casual” workers, employed on an hourly basis. Casual workers get a loading of at least 25 per cent, bringing the wage up to at least $A21.60 an hour ($US16.60), to compensate for the absence of leave entitlements. In addition, they have entitlements including:

  • “Penalty” rates for weekend and night work (usually a 50 per cent loading, 100 per cent on Sundays)
  • For workers employed on a regular basis, protection against unfair dismissal.

The policy question is: what impact have these high minimum wages had on employment and unemployment. That’s too big a question to answer comprehensively, but we can look at the obvious data points: the official unemployment rates (5.7 for Oz, 5.5 per cent US) and the 15-64 employment population ratios (72 per cent for Oz, 67 per cent US). So, it certainly doesn’t look as if the Australian labor market has been crippled by minimum wages.

Note: I’ll respond in advance to the widespread misconception that Australia is a special case due to mineral resources. Mining accounts for about 2 per cent of employment in Australia, and (because most mines are owned by multinationals) its contribution to Australian national income is also so, probably around 5 per cent.

  • Workers aged 18 get about 70 per cent of the adult minimum, equivalent to around $US11.50 for casuals. But the great majority of US minimum wage workers (about 80 per cent) are 20+.

{ 29 comments }

1

SamChevre 04.28.16 at 11:57 pm

Do you have–because I think it’s likely to be the key problem with higher minimum wages–the estimated proportion of young disadvantaged people who are in the paid labor force? I’d be much more convinced if the rate of employment for Aborigines 18-25 was no lower than for African-Americans in the same age group, than knowing that overall employment is the same.

2

SamChevre 04.28.16 at 11:59 pm

Also–are there any exclusions to minimum wage? For example, for a long time in the US, agricultural work wasn’t covered. In many EU countries, people under a certain age have a lower minimum wage.

3

John Quiggin 04.29.16 at 12:26 am

@1 A good point. Indigenous Australians are much more disadvantaged than either African Americans or Native Americans – they have suffered all the oppression of both groups. Unemployment rate is 18 per cent, E/P ratio 48 per cent. But there’s a lot more than minimum wages going on here

@2 Minimum wage is for workers aged 21+. But even at age 18, it’s still around $A16/hour. Below that age, nearly all employment is part-time jobs for students. Farm hands typically get above minimum $A20-$25/hour according to this site, which is consistent with my direct observation
http://www.payscale.com/research/AU/Industry=Agriculture/Hourly_Rate

4

SamChevre 04.29.16 at 12:40 am

Thank you! It’s not agriculture particularly that I was interested in, but just “big areas of employment excluded”. It sounds like that isn’t the case.

And the figures for Aborigines are not that much worse than for African-Americans; adjusted for an estimated 5% incarceration rate (NAACP estimate 1 million imprisoned vs the 19 million in the civilian non-institutional population).

Overall unemployment about 14%, employment/population 55%, adjusting BLS figures.

This makes a higher minimum wage seem less likely to do harm than I would have guessed.

5

christian_h 04.29.16 at 12:47 am

Thanks John, extremely interesting information for this recent Australia arrival.

6

John Quiggin 04.29.16 at 1:26 am

@4 Sadly, our incarceration rate is also high. About 2.5 per cent of the Aboriginal population, compared to 0.15 for the general population. But still, the two groups look comparable, bearing in mind that lots of Aborigines live on (the equivalent of) reservations in outback areas where there are virtually no jobs.

It’s also true that Aboriginal employment suffered a big hit around 1970 when they were suddenly moved into the wage system – before that, many had worked on stations for rations and small amounts of cash and these jobs disappeared. So, wages can make a difference.

7

Witt 04.29.16 at 1:43 am

I’m curious about the pace of wage increases in Australia. Has the minimum wage always been close(r) to what we would regard as a living wage? Or did it start off more like a US-style minimum wage and then make a significant jump at some point?

8

Matt 04.29.16 at 1:53 am

What’s the justification for the “penalties”? Is it actually necessary to get people to work at these times? If not, I’m skeptical that it’s justified. Lots of people would rather work at these times – I know that, other things equal, I’d rather work on the “weekend” and have, say, Monday and Tuesday or Thursday and Friday off, so that I could avoid crowds and the like. My guess is that, at the margin, this leads to shops having shorter hours in a way that’s not justified. I have nothing at all against significant minimum wage rules, but find the “penalty” wages dubious. (The higher penalty for Sunday is especially dubious, unless it’s somehow mixed up with a questionable church and state mixing, I’d think.)

9

ZM 04.29.16 at 2:14 am

Sam Chevre,

“Also–are there any exclusions to minimum wage? For example, for a long time in the US, agricultural work wasn’t covered. In many EU countries, people under a certain age have a lower minimum wage.”

There are lower rates of pay for trainees and apprentices. Eg. trainee retail assistant or apprentice who left school in year 10 is under 21 and works full time at an entry level position has an hourly wage of $8.55.

So businesses can employ people at entry level positions paying wages lower than the minimum wage if training is provided.

10

Mark 04.29.16 at 2:54 am

Surely this has to do with people’s childcare requirements, no? If you work a fairly standard daytime, weekday shift, your working hours will substantially overlap with school hours, leaving a (relatively) small amount of time to arrange for childcare. If you’re working nights or weekends, it’s much more difficult (and more expensive) to find childcare.

11

derrida derider 04.29.16 at 3:35 am

Witt@7 –
No, minimum wages have always been higher in Australia than the US – in fact from 1909 to the 1960s they were explicitly set by labour courts (yes, we had such things) at a rate “that would allow a man with a wife and three children to live in frugal comfort”. They have gradually fallen, relative to average wages, since the their peak in the 1980s to now be (again, relative to other wages) a little above the OECD average, rather than the highest or near-highest as they once were. Still higher than US ones, though.

12

John Quiggin 04.29.16 at 4:24 am

Following on from DD@10, the wage setting system that prevailed until the 1980s took the basic (minimum) wage as its starting point, with margins being added for skill, dangerous work and so on. Employers spent a lot of time resisting increases in margins for their own businesses, much less in trying to hold down the basic wage paid by all. Unsurprisingly this led to a very high minimum relative to other wages.

13

otto 04.29.16 at 8:46 am

Interesting. is there any research on at-the-margin changes in rates/patterns or unemployment / employment in Australia associated with at-the-margin changes of the minimum wages – yearly hikes, once-off larger changes, higher (effective) rates in some areas etc?

14

Tim Worstall 04.29.16 at 8:48 am

Characteristics of US minimum wage earners:

http://www.bls.gov/opub/reports/minimum-wage/archive/characteristics-of-minimum-wage-workers-2014.pdf

I’ve always thought it was rather more complex than many realise:

The industry with the highest percentage of
workers earning hourly wages at or below the federal
minimum wage was leisure and hospitality (18 percent).
Over half of all workers paid at or below the federal
minimum wage were employed in this industry, the vast
majority in restaurants and other food services. For many
of these workers, tips may supplement the hourly wages
received.

I believe tipping just doesn’t happen in Oz. And it is of course ubiqitous in the US. A very large percentage of those perceived to be making that US minimum wage simply aren’t. Making cross country comparisons more difficult I would think.

15

Metatone 04.29.16 at 8:54 am

Worth noting that many of the people in the USA who are claimed (in this case by Tim Worstall) not to be making minimum wage because of tipping are in fact making minimum wage or less.

16

J-D 04.29.16 at 9:31 am

Tipping happens in Australia.

17

Collin Street 04.29.16 at 11:46 am

> If not, I’m skeptical that it’s justified.

If I can ask a question: what, exactly, do you expect us to do with this knowledge?

18

Faustusnotes 04.29.16 at 3:42 pm

A small point in reply to John at 6: Aboriginal people never suffered the oppression of black Americans and native Americans. Slavery was a special American institution, though at the time genocide was fairly ubiquitous.

In Japan there is a shortage of workers due to aging but all the power remains on the side of the hirer, not the person seeking work. Institutional and cultural factors are really important in labour markets. “Econ 101” dismally fails to explain Japanese labour market practices and “it’s supply and demand innit ” arguments about minimum wages are equally shallow.

19

Bloix 04.29.16 at 5:27 pm

Here’s a question based on my five-minute googling expertise: What about the differences in immigration?
In the US, 13% of the population is foreign born. A third of this is made up of undocumented immigrants, and 2/3ds of legal immigrants qualify because of family ties. Most of the rest were granted legal status on “humanitarian” grounds (e.g., asylum).
In Australia, more than 25% of the population is foreign born, but the nature of the immigrant population is very different. There are no undocumented immigrants to speak of, and the great majority of legal immigrants are chosen on the basis of having employment skills, English language ability, and good health.
These differences imply that the US may have many more low-skilled immigrants of limited English proficiency.
What implications (if any) does the different immigration profile have for your comparison?

20

eric titus 04.29.16 at 7:39 pm

The Australia case is a great example of the positives of consistently raising the minimum wage, and of discouraging “non-standard” jobs. The minimum wage may be part of the reason why Australia has sustained a “lift all boats” type of economy. It certainly is an indicator that the minimum wage can be part of a successful economic strategy–although I am sure there are a number of reasons for the resilience of the Australian economy. The high minimum wage is after all as much a result of economic strength as a cause of it…

Tim@10 The BLS stats on “who is making the national minimum wage” in the US are fairly useless. For one, over half the population is covered by higher state minimum wages. And most of those making below the minimum wage are “tip-credit” workers who are legally permitted to be paid lower–but may be making at or above the minimum once tips are taken into account.

The research in the US has been fairly definitive that there are not strong negative employment effects from raising the minimum wage. But I am concerned that there may be areas of the US (i.e. the South) where a $15/hr minimum would be a dramatic shift and difficult for labor-intensive businesses to adjust to. Restaurants and other labor-intensive businesses will increase prices, and it is a matter of determining whether the economic base is big enough to support them. While a rapid increase to $10/hr, or even $12 would be a positive nationally, going above that should be a more extended process. Other changes in low-income work (subcontracting, last-minute scheduling, etc) are just as big of an issue.

21

John Quiggin 05.01.16 at 6:58 am

Bloix @19 I don’t think migration can be a big factor. A couple of observations

(a) The unemployment rate for US whites is 4.5 per cent, and has been significantly higher. Participation rates are very similar to those for the population as a whole, and therefore below Australia

(b) There are quite high unemployment rates among Australian immigrants of some Non-English Speaking Backgrounds, particularly those where entry is largely under family reunion or refugee status.

22

Timothy Scriven 05.01.16 at 8:18 am

Faustusnotes:

“Aboriginal people never suffered the oppression of black Americans and native Americans. Slavery was a special American institution, though at the time genocide was fairly ubiquitous.”

If by this you mean that they never suffered oppression which was of a similar magnitude I can’t agree at all. Is this a topic you know a lot about?

23

Witt 05.02.16 at 12:04 am

Thanks for answering my question.

24

Brett Dunbar 05.02.16 at 2:37 am

What I’m not clear with those workers who can have basic pay below minimum wage if pay+tips comes to less than the minimum is the employer required to make up the difference or can they include a notional assumed amount regardless of what the actual tips are?

When the UK minimum wage was introduced tips could be included in the calculations the employer was required to make up the difference if the wage+tips came up short. This provoked protest from restaurant staff and the rules were changed so that basic pay must meet minimum wage.

25

Collin Street 05.02.16 at 2:52 am

Last night I went out for dinner and I gave the waitress an extra dollar and she handed it back. Tipping really isn’t a thing in australia.

26

Kaleberg 05.03.16 at 1:03 am

Tipping isn’t a big thing in Australia, but we tipped a bit anyway. We had a wonderful concierge at our hotel and just had to leave her a tip after all her good advice and arrangements.

Australians are a lot more egalitarian than Americans in their attitudes and less likely to believe that the working man or woman has to put up with the kind of garbage American workers endure. The museum in Ballarat was an eye opener. Maybe it comes from the years as a penal colony or having a relative shortage of labor in a big country.

27

J-D 05.03.16 at 1:14 am

Brett Dunbar @24

What I have read is that under US law, workers in ‘tipped’ occupations can be paid a lower minimum wage, but the employer is legally required to top up their pay to the standard minimum wage if their tips fail to do so — but the law is in practice often disregarded, being difficult or impossible to enforce.

28

J-D 05.03.16 at 1:16 am

Collin Street @25

That’s a notable story, but I don’t know that it’s typical. I have never seen a proffered tip declined at a restaurant in Australia.

I wonder whether it’s different in different parts of Australia?

29

Rob Bray 05.04.16 at 2:29 pm

John

I missed your original post on this. I cover a number of the issues you raise in a working paper I did a couple of years ago (link at the bottom).

I would note a couple of points:

1. Do not neglect the issue of the association between minimum wages and part-time work – Australia in common with a number of other high minimum wage countries has a high proportion of employment as part time, and in Australia at least much of the minimum wage employment is part-time – and this is not just students. (And it could be suggested that this is to be expected)

2. Historically the Australian minimum wage is currently at a relatively low level. This makes single snapshot comparisons such as your unemployment rate one less reliable – if you assume that certain industrial structures have evolved to cope with a high minimum wage. (And I will not bring in the issue of tariff policy and the ‘Australian settlement’- or otherwise.)

3. DD is not strictly correct re the ‘living wage’ . Firstly since the 1930s there has been an economy wide capacity to pay element to the wage setting (although this can be considered as a proxy for the relative lving standard at which the living wage was set) and indeed for much of the pre ww2 period the primary objective was to maintain the standard set in 1907. Secondly the question of children was increasingly overtaken by the introduction of child endowment from 1941 on.

https://coombs-forum.crawford.anu.edu.au/sites/default/files/publication/coombs_forum_crawford_anu_edu_au/2013-08/minimum_wage_j_rob_bray_8_may_2013.pdf

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