Minimum wage up but households still falling behind

Taking into account inflation, the increase in Australia’s minimum wage announced yesterday is about A$4.80 per week. This is part of a pattern of small increases in the real value of the minimum wage of around 0.7% per year since the Federal Minimum Wage was re-established in April 1997.

Officially, the National Minimum Wage will increase by A$16 per week on July 1, 2015 to A$656.90. This is an increase of 43 cents per hour to A$17.29 per hour. This 2.5% increase will also be applied to minimum rates in modern awards.

However, as can be seen in the chart below, the minimum wage is not keeping up with other earnings. While the April 1997 minimum wage was equal to 48.5% of full-time adult male ordinary time earnings, by July 2014 this had fallen to 41.1%.

Minimum wage 2015 - real and as share of earningsAuthor

The ACTU estimates there are 1.9 million people who receive award only rates of pay. Other estimates suggest there are some 300,000 adults and an equal number of people aged 20 years and under being paid at or around the minimum wage. A high proportion of minimum wage earners are living in households with other people who have higher wage rates and most do not live in poor households.

How Australia compares

A recent OECD publication reports that, when converted for purchasing power, Australia has the highest net minimum wage in the OECD of US$9.54 per hour. This is over one dollar an hour more than France and Ireland, two dollars an hour more than Germany, Canada and the UK and over 3 dollars more than the US.

Out of 26 countries, Australia has the 8th highest ratio of the minimum wage to median earnings. The OECD estimates an Australian minimum wage worker with children who is a member of a couple has to work the second least number of hours of any OECD country to escape poverty, while a sole parent has to work the least. With 4.1% of adult workers on the minimum wage, Australia is around the average of the OECD, and well below the 8% recorded in France, the UK and the Netherlands.

Of course wages are only part of a household’s income. For single persons the tax bite has come down over recent years with increases in the tax-free threshold. For families low wages are supplemented by family payments, and for some by access to parenting payment. For low income working households these are very important.

Shifting government policy

In January 2015, with the then minimum wage of A$640.90, a single breadwinner family with a dependent partner and two young children who were renting privately would have had a disposable income of A$1094 per week, receiving transfers of A$500, in addition to the wage, and paying tax of A$47. But government policies over recent years have reduced the relative value of this support.

Family Tax Benefit Part A (FTB) was linked, from its introduction as part of the Hawke 1987 child poverty pledge, to the pension rate which was in turn adjusted for changes in earnings. In its 2009-10 budget the Labor government broke this link and simply adjusted the rates for changes in prices. Coalition policies have been even more draconian – proposing a total suspension of indexation of FTB, and a reduction in the rate of the annual supplements back to their 2003-04 levels.

The impact of these changes over time are large. Between 2008 and 2014, while prices have increased by 16.4%, earnings have increased by 28.3%. In approximate terms these families are, even before the freeze in rates, already some A$20 per week behind. The policy goal of seeking to ensure that children benefited from increasing community living standards is shattered.

Of course decisions about the minimum wage are a matter of balance. While small increases are likely to have limited impacts, higher increases carry with them the risk of pricing people out of jobs. We only have to look at the major supermarkets and see the self-service checkouts to recognise employers have a choice. Similarly other sectors such as hospitality are both domestically and internationally price sensitive, while human services are largely tax funded, and an increase in taxation for them results in lower consumption on other activities.

So was the decision right? To consider this I would put forward five propositions:

1. The Australian minimum wage has been increasing, but not as quickly as other earnings.

2. Australia has the highest minimum wage in the OECD and it is part of a strong anti-poverty framework.

3. Most minimum wage earners are not in poor households, although some are.

4. Increasing the minimum wage, if not matched by higher productivity of minimum wage workers, will cost jobs.

5. Successive federal governments have dropped the ball on providing adequate support to low income working families.

My view is that the last of these, and indeed also the question of support for those without families, is the most critical.

Rob Bray received funding for his initial work on the mage in 2013 from the Coombs Policy Forum.