Tuesday, August 01, 2006

OECD says don't increase minimum wages

The OECD argue that low income workers in Australia should not be given higher wages - at 57.6% of average earnings these are the most generous in the world - they should instead be given tax relief. With family allowances, someone with 2 children earns 85% of average incomes. This makes unskilled workers among the most expensive in the developed world - making them more expensive will damage job prospects.

While commending the WorkChoices legislation the OECD argue the Government should move more directly to abolish all industrial awards or pare them back markedly. Let wages be determined by the productivity of workers in markets and put 'social justice' issues where they belong - with Government.

Taxes for the low paid should be slashed to improve work incentives.

The Australian's editorial puts it starkly - we should not trade jobs for minimum wage hikes. Its what I have argued here repeatedly. I can scarcely credit for the view since it is so non-original. Its what every economics instructor in the country tells their first-year students.


Bring Back EP at LP said...

Hard to disagree with if you want the unskilled to be employed

Jan said...

I sure tell this to my first year macro students. Somewhat surprisingly, the majority of them disagrees (similarly to things like reducing welfare payments and unemployment benefits - I can show you some heated discussions on this on WebCT...). What exactly is it about the general public in Australia that it supports all these 'welfare' arrangements?

Steve Edney said...

I think its not suprising that students don't accept it.

Its easy to do the analysis of a say company that makes $1,000,000,000 a year, and has say $10,000 employees that they are making $100,000 profit per employee and say why can't they give them all $40 a week extra, its only $2000 a year each, and so the company only makes $980,000,000 (we will ignore tax which actually makes the difference smaller).

This is bugger all to this company and its shareholders and a lot to minimum wage workers. We see companies reporting billion (or close to) dollar profits in the media regularly.

Its seductively easy to think that higher minimum wages are a good way to help the poor by taking back some of the money from undeserving owners of capital.

derrida derider said...

There's lots of rubbish that gets taught to first-year students. This is one example.

As it happens, I believe Aust min wages remain too high, but the argument is much more complex than a simple static allocative diagram of perfect competition in the labour market would have you believe, and teaching such a diagram as an authoritative policy prescription is plain misleading.

Try reading some modern labour economics - I particularly recommend "Monopsony in Motion" by Alan Manning.

And jan has obviously never been in a position where she (? - sorry if I've got gender wrong) can't find a job. Try living on $200 a week all up. I accept that our rate of unemployment would be lower if we starved the unemployed more - but ideologues never bother to look at the evidence of how much lower (the evidence says not much lower)it would be in return for having the sight of children fossicking in dumpsters and people sleeping rough.

Seems to me that your students have a lot more sense (not to mention compassion) than you give them credit for.