Does raising the minimum wage help the poor?

I gave a little presentation at Melbourne University last night, on the question “Does Raising the Minimum Wage Help the Poor?”, and thought some people might be interested in glancing at it. Here it is in Powerpoint and PDF. Basic conclusions:

  • we should learn more about how minimum wage rises affect hourly wages, and a useful first step towards this would be to ask about wages in the ABS Labour Force Survey;
  • if your main focus is alleviating poverty/inequality, the minimum wage is a blunt instrument.

Comments welcome, of course.

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5 Responses to Does raising the minimum wage help the poor?

  1. Michael Moriarty says:

    Australians’ Federally mandated minimum wage acts as a disincentive to climb out of poverty. The wage level as it stands is too high and in the long run achieves very little.

    We need to diminish the supply of unskilled (I use the word for want of a better) labour. In doing this the market forces will take care of the wages.

    The current level of MW is a disincentive to education yet education is that silver bullet which can kill the poverty trap.

    It is our obligation to find a way to make the participants in the labour market more attractive to employers. In an increasingly large global market we run the risk of exporting these jobs. The MW people in Australia will have to compete with those from over seas. The level of MW is already uncompetitive against global markets.

    Lets focus on curing the disease rather than treating the symptoms. Does raising the minimum wage help the poor…NO!

  2. Rajat Sood says:

    Andrew, I attended your presentation and found it interesting as well as confirming what I understood about the ‘beneficiaries’ of minimum wage increases. I have a question that is a bit off-topic. I recall you saying that you thought the FPC’s decision indicated that it will tend to award future nominal minimum wage increases in line with inflation. If that’s the case, where does that leave the rationale for having an inflation ‘target’ of 2-3% over the cycle? My understanding of the original rationale for having a target that high was partly that it would allow real price (and wage) adjustments to occur over time without nominal reductions to get around ‘stickiness’ problems. If the wages of the least productive workers rise in line with prices, there seems to be a much weaker case for tolerating higher levels of inflation than would otherwise be considered optimal. Any thoughts?

  3. Anthony says:

    The minimum wage may not be the best tool for alleviating poverty, but surely it’s a good tool for preventing poverty. Although the majority of minimum wage workers do not live in poor households, minimum wage workers are still more likely than other workers to do so. That is, minimum wage workers seem to have a higher risk of poverty. What protects many of them is that they share households with higher wage earners: it’s a good strategy, but only as long as it lasts. The woman who is today’s low paid ‘secondary’ earner in a prosperous household has a one-in-three chance of being tomorrow’s low paid single mum in a very poor household.

    Alleviating poverty is important, so we need a good safety net (which is primarily a question of adequacy, rather than whether we add to our current system of transfers and family benefits with some new fangled tax credit). But prevention is also important: ensuring adequacy of individual wages and minimising low pay or stopping its increase surely has a role to play here, given the risks of poverty associated with low pay. Unlike sharing living arrangements, it might be a better strategy in that it increases the likelihood people will avoid poverty in the future. When it comes to anti-poverty strategies, shouldn’t the focus be on both ‘getting out’ and/or ‘staying out’?

  4. Patrick says:

    When it comes to anti-poverty strategies, shouldn’t the focus be on both ‘getting out’ and/or ‘staying out’?

    Yes, why not, but nearly everything on this site in the last couple of days has been to the point that the minimum wage is probably more counter-productive than positive in relation to both goals. So why not delete all references to it in your comment and start from there?

  5. Anthony says:

    Settle down, Pat. Andrew says ‘if your main focus is alleviating poverty’ we shouldn’t place too much store on the minimum wage. My point was that the main focus of minimum wage adjustments should not be, and has not been, limited to alleviating household poverty. One other purpose I pointed to was that adjustments to the minimum wage might decrease the vulnerability of already existing low wage worekrs to poverty.

    Minimum wage adjustments in Australia also serve another purpose: when the AIRC and now the Fair Pay Commission adjusts minimum wages it does not simply raise the level of a single minimum wage but adjusts the entire wage structure for all award wage dependent workers who haven’t concluded an enterprise bargain. That is, absent minimum wage adjustments, the difference in pay between two workers doing exactly the same work with similar levels of skill but one of whom happens to have strong bargaining power under our enterprise agreement-making system would widen. Allowing award dependent workers to someway keep pace with the market rate for work of their skill level is, I’d hazard, another reason for supporting increases in the ‘minimum wage’ in the Australian context.

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