unions wage stagnation
(Image: AAP)

There’s good news for anyone making $18.29 an hour, Australia’s minimum wage.

The next decision on minimum wages is due out soon, and the Fair Work Commission will hopefully consider a new study published by the Reserve Bank of Australia. It provides strong evidence that lifting minimum wages is all upside. Last year, the Fair Work Commission (FWC) lifted minimum wages by a generous 3.3%. There was the predictable chorus of dissent. But as the commission considers its next decision, partisan rhetoric will hopefully be drowned out by actual evidence.

On the very last day that the FWC was doing consultation for its next wage decision, the RBA published a study showing that rising minimum wages don’t hurt employment.

Australia’s minimum wage for an adult is $18.29 an hour, and award wages can go much higher. Source: RBA

OurCollectiveDestiny.xls

Sometimes the history of the world is written in spreadsheets. For example, the pointy heads at Treasury who calculated that company tax cuts would benefit the economy, ever so slightly, have fuelled an enormous debate that could yield an $80 billion upside to the corporate sector.

This time, however, the spreadsheets seem to be on the side of the little guy. The new RBA study represents a significant interruption to normal economic programming. It finds that if you raise minimum wages, companies don’t cut staff. Classic economic theory tells us that if the price goes up, the quantity demanded should fall. But the study, completed by RBA wonk James Bishop while on secondment to the Australian Bureau of Statistics, finds no such effect.

“I find that adjustments to awards are almost fully passed on to wages in award-reliant jobs. I find no evidence that these small, incremental increases in award wages have an adverse effect on hours worked or the job destruction rate,” writes Bishop.

Importantly, Bishop uses a range of sophisticated statistical techniques to try to isolate causation rather than just correlation.

Not so fast

Of course the minimum wage paper comes with caveats. You wouldn’t expect anything else, and it is important we recognise them.

  • The paper studies adult workers only. Lots of young people are on minimum wages, and they may be the exact sort of low-productivity workers that get cut when minimum wages go up;
  • The study covers a period of incremental minimum wage price increases, and “may not necessarily generalise to large, unanticipated changes in award wages”. We probably can’t just bump everyone up to $50 an hour and expect no unintended consequences;
  • The study covers outcomes in a six-month window after the wage rise. If firms are slower than that to respond, it won’t show up; and
  • While there is no evidence of job destruction, and workers are better off, the unemployed might bear the brunt if job creation is lower.

Makes the economy go round

Not only could this be fortuitous news for anyone on minimum wage, it could be handy for the whole economy. Australian wage growth in recent times has been on the deathly-pale side of anaemic. Just yesterday, the Bureau of Statistics showed wages growth running at the second-weakest rate in the last 20 years: 2.1%.

Average Australian wages growth would be even lower without the lift in pay provided by that 3.3% lift in minimum wages. The RBA’s deputy governor Guy Debelle gave a shout-out to the minimum wage decision in a speech on Tuesday, acknowledging that it was shaping expectations about wages. A rising minimum wage is to some extent putting a floor under average wage growth that prevents the destructive cycle of falling wage growth and falling wage growth expectations from accelerating.

Anything that can put a bit of spark into our meandering economy will be quite useful at this stage. These findings could be good for everybody, not just those on minimum wage.