The new Australian federal minimum wage is $511.86/week or $13.47/hour

The Australian Fair Pay Commission has handed down its first decision.

The Australian Fair Pay Commission has announced its Federal Minimum Wage decision for October 2006.

The Commission announced an increase of $27.36 per week for minimum wage rates up to $700 and $22.04 per week for minimum wage rates $700 and above.
 

So my prediction was too low. Given that the ACTU asked for $30/week, anyone walking along Swanston Street can probably hear the corks popping (did the AIRC ever give the unions 91% of what they asked for?). At least until the next decision, it’s going to be very hard for the union movement now to argue that the AFPC gives lower minimum wage increases than the AIRC.

The whole decision is worth reading. In sections 2 and 3 (pp.66ff), the commission quickly demonstrates why economists are better job than lawyers in synthesising economic research. And Appendix F (pp. 176ff) neatly summarises the research that’s been done, and is forecast for the future. My only quibble is that the commission misquoted my estimated elasticity of labor demand (it’s -0.3, not -0.15), but that’s mostly my fault, since the corrected number was published in a subsequent erratum to the paper.

The decision comes into force on 1 December 2006, except if the High Court overturns the industrial relations laws, in which case the minimum wage will be back to $484/week. Our morning tea hypothetical: suppose an employer raises their workers’ pay from $484 to $511 for the first week of December, at which point the High Court scraps the IR laws. Could an uber-stingy employer then ask each of their workers to pay back $27?

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18 Responses to The new Australian federal minimum wage is $511.86/week or $13.47/hour

  1. Fred Argy says:

    When I reviewed the pluses and minuses of Workchoices in my recent Australia Institute paper, I was critical of the assault on collective bargaining and trade unions, the stripping of the unfair dismissals protection and the big increase in managerial autonomy and industrial power relative to low-paid workers. Ironically however I thought one of the “positives” of the reform was that it might allow a gradual reduction in the ratio of minimum wages to median earnings over time. I argued that this “would facilitate recruitment at lower skill levels”, while the social impact could be neutralised by further increases in the low-pay ‘tax offset’.

    Obviously, I completely misjudged what the FPC was going to do. Politically, I agree that it deflates one of the ALP/Union concerns – but not the others.

  2. Matt Cowgill says:

    Couldn’t that additional $27/week come to form a part of their employment contract, such that an employer may potentially not be entitled to reduce their wage even if the minimum wage was reduced? Surely that would be a csae of denial of contractual benefit

  3. derrida derider says:

    IMO calling this rise a ‘generous one’ is a classic example of an anchoring effect – we only think it generous because it is near what the unions asked for.

    But the ACTU claim was excessively modest – it is now 18 months since the last rise, so the finding roughly restores real FMW to where it was at the last AIRC judgement. As a pecentage of median wages it is almost certainly lower than after the last AIRC judgement (we can’t know for sure because the ABS only does median wages once a year).

  4. slim says:

    Slim said:

    From the outset I’ve thought that the AFPC minimum wage decision will be relatively generous in the run up to the Federal election.

    “So slim wins the tipping comp.”

  5. cba says:

    “IMO calling this rise a ‘generous one’ is a classic example of an anchoring effect – we only think it generous because it is near what the unions asked for.”

    its funny that the best application of behavioural economics is deriding the statements other economists. 😉

  6. Fred Argy says:

    Derrida, you are of course right. On a closer look, the minimum wage (MW) increase awarded by the AFPC will fall well behind the increase in median earnings. The ratio of MW to median was falling even under the AIRC so this trend will continue and perhaps slightly accelerate.

    One wonders what the Government has achieved – a big overhaul to deliver a pup. If indexation is what the AFPC have in mind, why do we need an independent body to police this? Why can’t the Government simply announce that the MW will be maintained in real term iunless there are exceptional circumstances? Is the old Constitutional constraint still there? Does anyone know?

  7. derrida derider says:

    Fred I think the government is playing a much longer game with the AFPC, and industrial relations generally, than you give them credit for – Howard won’t be displeased with this result at all, on the grounds slim gave.

    In any case I don’t think Howard has a terribly strong ideological views on wages policy (as distinct from workplace relations – that is, power relations) policy. In fact unlike much of the rest of his Cabinet his social conservatism makes him look rather kindly on ‘male breadwinner’ models of wage fixing, welfare and tax policy.

    And we know that unless he has a strong ideological take on an issue then the man will just concentrate on his strengths – devious tactics for reelection and gratuitous hypocrisy.

  8. Geoff R says:

    A triumph for public choice theory I think, statutory authorities want to bend with the political wind to survive, I am sure Judith Sloan deon’t want a Labor victory. I explain context on my blog.

  9. Sir Humphrey says:

    Fred, agreed it does counter union/ALP concerns, but it will be interesting to see how it plays out within the coalition’s support base. The BCA, ACCI and others can’t be too happy that they were sold this reform with the tacit (probably explicit behind closed doors) acknowledgement that it would keep wages down. Fat lot of good that did them.

  10. TB says:

    Andrew,

    It looks like they did mention your revised elasticity estimate of -0.3 in the middle of p. 72? Or were you suggesting that they should have put only that figure in, instead of the -0.15 quoted in an earlier paragraph?

  11. Michael Moriarty says:

    Well you have to wonder how generous this really is when you consider that interest rates will rise before the pay rise comes into force.

  12. Matt Cowgill says:

    Mr Argy,
    You have to bear in mind that the effective federal minimum wage has fallen for many workers as a result of the removal of the no-disadvantage test on AWAs. Additionally there are several classes of employee covered by the Federal system that are untouched by this increase. They include employees that have signed AWA’s prior to midnight on 26 March 2007, employees on federal certified agreements registered prior to 26 March 2007, employees covered by frozen stage agreements (as opposed to NAPSAs) and employees working for non constitutional corporations covered by a 5 year transitional federal award.

    As far as the constitutional constraint goes, I’m sure you’re aware that (subject to the failure of the High Court challenge), the Commonwealth now regulates wages under the Consitutions power rather than the old Conciliation and Arbitration power.

  13. Fred Argy says:

    Thanks Mark for reminding us that there are many ways to skin a cat and that the decisions of the FPC are only half the story.

  14. Bill Dobell says:

    Australia’s disabled war veterans get compensation far below the minimum wage, it currently resides at 83.3 percent of the latest minimum. Until recently the compensation was paid at a rate close to the average weekly earnings.

    Is it any wonder that our Armed Forces are struggling to find and keep members.

  15. Andrew Elder says:

    This should be the tax-free threshhold. Below this amount, it’s counterproductive for the ATO to collect revenue.

  16. Grumpy old economist says:

    Andrew,

    They do get your elasticity correect, going on to say (on p.72)

    ACCI consider that Leigh successfully
    defended his fi ndings in a 2004 correction to his 2003 paper, in which he also revised the
    estimated elasticity to -0.29.18

  17. mark says:

    i receive $10.88 per hour working in a factory as a 19 year old,am I being underpaid?

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