Submission 167 Australian Council of Trade Unions Workplace Relations Framework Public inquiry

Learning from others’ mistakes

There is no one clear criterion by which the relative living standards of the low-paid can be deemed adequate or inadequate. Informed judgement is required. Historical comparisons are clearly relevant – such comparisons tell us that the relative living standards of low-paid Australian workers have deteriorated over time. Historical comparisons also show that measures of inequality and the prevalence of low pay have risen as the relative value of minimum wages have fallen.

International comparisons are also useful. These can provide some information about the consequences for Australia of choosing a particular level of relative living standards for low-paid workers. They shed a light on what the possible consequences may be for Australia if our minimum wage bite continues to fall.

There is a precedent for an advanced economy with a minimum wage worth over half the median that allowed this ratio to fall to a dangerously low level: the United States. In 1968, the US minimum was equivalent to 55% of the US median wage. It is now worth just 37.8% of the median. The purchasing power of the US minimum wage was greater in 1968, in inflation-adjusted terms ($US10.40) than the Australian minimum wage in 2013 ($US10.20, converted at PPP).¹⁹⁸

The US allowed its minimum wage to fall sharply in real terms in the 1980s. Since then, the minimum has remained more or less constant in real terms (with declines between adjustments followed by relatively sharp rises). The US minimum wage has been worth an average of 35% of the median full-time wage for the past twenty five years or so.

Unlike the US, Australia’s minimum wage has increased modestly in real terms in recent decades. However, the decline in the value of the Australian minimum wage relative to the median has been steep, as discussed earlier in this chapter.

Figure : Minimum wage in inflation-adjusted 2012 US dollars, at purchasing power parity

Figure : Minimum wage as a percentage of median wage of full-time workers

Source: OECD Stat.

Australia’s safety net used to be distinctively robust. Only two decades ago (in 1992), Australia’s minimum wage (the C14 award rate) was 55.7% of the average full-time wage, clearly the highest ratio in the OECD. By 2003, Australia’s minimum wage bite had fallen significantly (to around 50% of the average wage), yet remained the highest in the OECD. But as Australia’s bite has continued to fall over the past decade, those of many OECD countries have risen. Australia’s bite is no longer distinctively high and we are rapidly converging with the middle of the pack. Figure shows this clearly.

Figure : The distribution of minimum wage bites in OECD countries over time

Source: OECD Stat and ACTU calculations. The minimum wage bite here refers to the minimum wage as a proportion of the average wage.
Over the decade to 2013 (the most recent year for which OECD Stat contains minimum wage information), Australia’s minimum wage bite fell by the largest amount of any OECD country,. The minimum wage bite increased in 15 of the 23 OECD countries that had a minimum wage in both 2003 and 2013.

Figure : Minimum wage bite in OECD countries (2013)

Figure : Change in minimum wage bite: 2003 to 2013

Source: OECD Stat and ACTU calculations. The minimum wage bite here refers to the minimum wage as a proportion of the average wage.
Australia’s minimum wage bite is rapidly converging with those of Canada and the UK. The grey shaded area in the figure below shows the range of minimum wage bites in all OECD countries other than the US, UK, Canada, and Australia.
Figure : Minimum wage as a percentage of average wage, including projected Australian bite
Source: OECD Stat and ACTU calculations. The projection assumes a 0.67 percentage point decline per year, the average since 1990. The average between 2002 and 2012 was 0.68 percentage points.

If these trends continue, in around 2018 our bite will be the same as Canada’s current bite and in around 2019 it will be the same as the UK’s current bite. In just two decades, if the trend continues, Australia’s minimum wage will be worth less than 30% of the average full-time wage, in the vicinity of the present level in the United States.

Countries with smaller minimum wage bites unsurprisingly tend to experience greater earnings inequality, as measured by the 50:10 ratio (see Figure ). Countries with smaller bites also tend to have a greater prevalence of low-paid work, measured as the share of workers who are paid less than two-thirds of the median (Figure ).

In the US, research has suggested that the rise in earnings inequality in the 1980s and 1990s is largely explained by policy-related changes, such as the fall in the real value of the minimum wage. ¹⁹⁹ Lee found that the falling real US minimum wage in the 1980s could explain nearly all the growth in inequality in that decade.²⁰⁰ A more recent study by Chernozhukov, Frenandex-Val and Melly found that changes in the US minimum wage can explain nearly all the increase in the US 50/10 ratio since 1979.²⁰¹

There is a correlation between a falling minimum wage bite and rising earnings inequality and rising low-paid incidence for Australia over time (see Figure ) and across countries at a point in time (Figure and Figure ). Based on this, we submit that further reductions in the minimum wage bite are likely to result in a higher incidence of low pay and higher earnings inequality.

Figure : Earnings inequality and the minimum wage bite in OECD countries (2010)

Figure : The incidence of low pay and the minimum wage bite in OECD countries (2010)

Source: OECD Stat. The 50:10 ratio measures the earnings of the median full-time employee as a multiple of the earnings of the full-time employee at the 10^th percentile. Low pay incidence refers to the share of full-time workers earning less than two-thirds of gross median full-time earnings. The charts include all OECD countries for which data was available for 2010.

The rise in earnings inequality (the 50:10 ratio) and the incidence of low pay has been large in Australia over the past decade, relative to other OECD countries, just as the fall in our minimum wage bite has been relatively large. We believe, though it is difficult to prove, there is a causal relation between the fall in the minimum wage bite and the rise in earnings inequality and the incidence of low pay.

If the minimum wage bite continues to fall, then earnings inequality and the prevalence of low pay are likely to continue to rise.

Figure : Incidence of low pay in OECD countries (% of full-time workers with earnings below two-thirds of the median)

Figure : 50:10 ratio among full-time workers in OECD countries

Source: OECD Stat.