Minimum Wages #3

Over at ControveryEcon CoreEcon, Joshua Gans thinks that the Australian Fair Pay Commission has been too generous. He points out that if they really only wanted to maintain the real incomes of minimum wage workers, they should’ve adjusted by less than the CPI, since workers save part of their wage, and savings are adjusted for inflation.

Tangentially, this reminds me of something I’ve been meaning to mention. The ACTU asked for an increase of $30 per week. The AFPC granted an increase of $27.36 per week, which they claimed was equivalent to CPI. So the real puzzle is not why the decision was so high, but why was the ACTU claim so low? Why did the ACTU ask for an increase that was lower than the rate at which average wages had been rising?

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12 Responses to Minimum Wages #3

  1. Leo says:

    I thought average wages were rising at an annual rate of 4%, which, over 18 months is about 6%, which is what the ACTU asked for… 😉

    No doubt they stuffed up badly though. They asked for nearly $27 after just 12 months last time at the IRC.

  2. Kevin Cox says:

    Surely when discussing fairness we should look at the income being received by those who are in a position to influence their own pay scales and the pay scales of workers. How about the following.

    Minimum wages including super component adjusted for inflation
    In any company or organisation minimum wages adjusted up so that the minimum wage is a mandated percentage of the chief executives salary and bonuses.

    Don’t worry that it is difficult to calculate as we only have to do it for one person in each organisation.

    This way we might get a better approximation to a Fair Wage.

  3. Andrew Leigh says:

    Sinclair, I guess it’s quite possible that the ACTU simply made a mistake. (You use stronger language than that, but I don’t think it adds anything to the argument.)

    On the other hand, you might imagine that the ACTU’s payoff function is inversely related to the absolute gap between their claim and the result. This gives you the same result.

  4. Though I don’t think minimum wage cases are about the long-term financial position of low-paid workers, since many of them are only low-wage earners temporarily. It is about immediate needs, so what matters is their cash-in-hand, not what their employer is saving for them.

    Also, if you take into account the fact that many low-wage workers are likely to have debts (credit cards, HECS etc) increased by inflation but not included in CPI this counter-balances the superannuation effect.

  5. Sinclair Davidson says:

    To be generous, the ACTU may have made a mistake. This is abad mistake to make and suggests technical incompetance rather than ideological blindness.

  6. derrida derider says:

    Not so much a mistake as a misjudgement. The AFPC took an extraordinarily long time to get going. When preparing their submissions, everyone – including government and employers – thought it would hand down its decision about 6 months earlier than it did. The claims from all parties were about what you’d expect for a 12-month lag.

    I’m not sure whether the delay was just bureaucratic inertia or a very canny move by the AFPC.

  7. DD – I’ve seen people say what you are saying, but it makes no sense. The Commission would have had to make a decision almost immediately after its establishment to have decided 6 months ago. It did not even call for submissions until 1 May. Back in mid-February, when Ian Harper was still the designate Chairmain, he gave a speech in which he said:

    “The AFPC is required to deliver its first determination by Spring 2006. Between now and then, we need to develop an agreed approach to public and stakeholder consultation and decide on priorities for commissioned research.”

    That makes September the earliest possible time, meaning that the decision was not much later than anyone could reasonably have expected.

  8. tb says:

    Something that gets lost in discussion of minimum wage increases is that the calcuations of percentage increases applies ONLY to people on the Federal Minimum Wage, and not on all the people who are on awards higher than the FMW. Since these people get the same dollar-per-week increase, their percentage increase is lower. Overall, then, you’ll find that all the reporting about a minimum wage increase of 3.75-4% annualised has substantially overstated the increase that all minimum wage workers get.

  9. Andrew Leigh says:

    DD, I think Andrew Norton is right on this one. I re-checked the timeline. The AFPC was only granted wage-setting powers on 27 March 2006. The ACTU submission was due by 28 July 2006. The decision came down on 26 October 2006.

    The AFPC’s 3-month gap between submissions closing and the decision being handed down sounds to me very similar to the schedule on which the AIRC used to operate. For example, in the 2005 AIRC decision, first submissions were taken in February (with follow-ups in March and April), and the final decision was handed down in June.

  10. derrida derider says:

    Andrew, how dare you sully a blog controversy with facts! That sort of thing just inhibits the pontificating that we bloggers all love.

    Yep – it looks like I was wrong. Strange – that’s never happened to me before :-).

  11. Andrew Leigh says:

    DD, you’re so rarely wrong about a factual matter that I confess I double-checked my comment before posting it!

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