Wage inequality

In a discussion of minimum wages, Anthony says:

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.

This relates to one of the points that David Card made on Wednesday night - that we might care about wage inequality in and of itself (separately from inequality across households).

If that’s the focus, then minimum wages are a pretty effective instrument, since all sides of the debate agree that a higher minimum wage reduces the number of low-paid workers: either because they get wage rises or termination notices.

When thinking about inequality, my general feeling is that we should care most about the distribution of resources across households – but I can see reasons why you might also be concerned about widening inequality in hourly wages. For example, maybe wage inequality makes workplaces seem more unfair (on the other hand, maybe it creates stronger incentives to work hard). Other thoughts?

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9 Responses to Wage inequality

  1. Kevin Cox says:

    Now I am starting to agree with you Andrew – or perhaps I misunderstand what you are saying:)

    I interpret David George (Preference Pollution, University of Michigan Press) saying that we have two classes of incentives and preferences. First order ones that appeal to childish impulses and second order ones that are more reflective and appeal to the moral, fair and right thing to do.

    Classic marketing techniques and incentive techniques in regular goods markets appeal to the first and work well but we often feel bad about them.

    I think the same thing applies to relative wages and salaries. Most people in their hearts know that within reason a “flatter” wage structure is better for society and leads to more overall well-being but we all know that if we are offered more we will take it and as they say “feel bad all the way to the bank”.

    The people in control of organisations almost feel obligated to increase their own salaries and bonuses because they can do it, they are judged by what they get, and it is expected that they should do so because we have allowed the cult and excuse of increasing money to someone to mean that they will work harder and be more incentivised.

    We all know that there is more than money as to the reason why many work hard.

    What we can do is set up institutional structures that allow our second order preferences to play a greater part in incentive mechanisms. Perhaps by giving some monetary score to them or perhaps in other ways such as employee of the month awards.

    For example, I suspect (perhaps you can prove) that setting limits on chief executives salaries and flattening overall salary structures would not have a detrimental effect on the quality and work ethic of chief executives but would have a greater effect on overall wage growth than reducing minimum wages.

    Even if both had an equal effect if we judged things by the “fair” or the “right” thing to do then we would probably agree that limiting chief executives remuneration is fairer than reducing or restricting minimum wages.

  2. derrida derider says:

    I think this is sort of what Ian Walker at the LSE has been saying for years – in his vibrant phrase “you’ve got to pay kitchenhands a decent wage to stop them spitting in the customers’ soup”. It’s about class relations in the workplace.

    That certainly seems to me a better set of arguments for regulated wages than the purely economic ones.

  3. Corin says:

    Andrew, the big question you have raised before – how likely is the termination notice or less new jobs created for the unemployed through higher FMW rises. Is it a false logic that people in work feel more equal, if there is a rump of jobless who have less community integration. I mean it is ultimate insider/outsider scenario – is it not?

    Thoughts? My concern with the views on FMW’s and EITC’s goes to the politics of it. People like us will keep getting kicked, while the dominant logic of the insider prevails. Especially in the obvious forums for poverty alleviation like unions and the ALP.

    I mean frankly i’d be a pariah. What a stupid outcome.

  4. Patrick says:

    People like us will keep getting kicked, while the dominant logic of the insider prevails. Especially in the obvious forums for poverty alleviation like unions and the ALP.‘ Sadly yes, that is basically Andrew’s point I believe. Applies equally well to protecting Australian (or UK) manufacture at the expense of ‘unfairly’ cheap foreign manufacture, or protecting Australian (or UK or any) jobs from guest-workers, etc.

    The history of capitalism is rising prosperity steadily expanding the circle of ‘insiders’ to the benefit of both the incumbents and the recently admitted – but we are apparently far from rich enough yet to include everyone in our street let alone the world.

  5. Kevin Cox says:

    I have been going through the exercise of trying to determine the price of a new product and the same process seems to apply when determining how much we pay people. What we do is an iterative process and the actual cost of production or the value of labour is only a small factor.

    You set prices according to what you think people will pay but that varies considerably and particularly if it is a new product you have no idea until you try to sell it and even then the prices you charge different customers varies a lot. When we are employing someone we try to get them to work for what we consider to be a fair wage then we adjust all the other variables to try to make a profit. Thus if you have minimum wages then that is just another parameter you consider. Lowering minimum wages will have little effect on the decision to employ as that is determined by the market for goods and services whose price will be adjusted to cover costs and costs can be adjusted in many different ways.

    What I am trying to say is that finding the price of something is not a simple calculation of determining costs plus margins. It works within a whole lot of other adjustable factors and putting a floor under the price of some component – like labour – is just another thing you live with and is unlikely (within reason) to affect your decision to employ. As these things are complicated interactions of many variables thinking that there is not a better tradeoff than the relationship of lowering minimum wages to increase employment shows a distinct lack of imagination.

    It is my gut feeling that increasing minimum wages will in fact cause the economy as a whole to become more efficient and at the macro economic level increase demand – because people who have more money can spend more and that then leads to more employment.

    As an observation I have found it is easy to find people to advise on marketing on production and on administration – but try finding someone who can advise on pricing?

  6. Anthony says:

    My original point was not even about the flatness or otherwise of the overall wage structure, just about equalities between workers doing similar work. Most of us probably have a sense of ‘a fair day’s pay for a fair day’s work’ and that judgement is going to be to a large extent based on looking at what other workers are getting paid for doing work of similar skill, effort and responsibility etc. Despite being called a ‘Fair’ Pay Commission, the FPC didn’t devote much of its published reasons for last month’s wage rise to any explicit discussion of fairness, and none to fairness in the sense I have just described.

  7. Michael Moriarty says:

    Andrew L says:

    “since all sides of the debate agree that a higher minimum wage reduces the number of low-paid workers”

    Isnt the bottom 5% of wage earner still the bottom 5%, regardless of what the minimum wage is (with in reason)? They are still the low paid workers.

    It just moves the goal posts a little.

  8. Matt Cowgill says:

    “My original point was not even about the flatness or otherwise of the overall wage structure, just about equalities between workers doing similar work.”

    For me, that’s one of the weakest aspects of the award-based state industrial relations systems (operating under the ‘common rule’). There is great potential for similar (or even identical) jobs at different firms to be subject to drastically different minimum rates and conditions.

  9. Bruce Bradbury says:

    In work I did a few years ago, we found a very strong cross-national correlation between (relative) child poverty rates and wage inequality (stronger than the correlation with social expenditure). This is the case even though many low wage people are not in low income families and many poor families are not receiving wages.

    We speculated that this relationship was due to feedback between income support and low wages. Lower wages imply that, in order to maintain incentives, benefits must be low also. High benefits might also act as a floor under wages. Potentially, in-work benefits have the potential to break this link.

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