8 Things to Know About the Living Wage
By Jim Stanford
There has been a lot of discussion about “living wages” in recent years — in Australia, and internationally. And now the idea has become a hot election topic. The ACTU wants the government to boost the federal minimum wage so it’s a true living wage. Opposition leader Bill Shorten has hinted he’s open to the idea. Business leaders predict economic catastrophe if the minimum wage is increased.
As the debate heats up, here’s a quick guide to 8 things you need to know about the living wage:
#1. The debate is new. But the idea is old. And it was invented in Australia!
In 1907 a conciliation and arbitration judge named H.B. Higgins decreed (in the famous “Sunshine Harvester” case) that wages should be sufficient to meet the “normal needs of an average employee, regarded as a human being in a civilized community.” He actually calculated the wage that would be required for a full-time worker (then assumed male) to adequately support himself, his wife, and three children. At the time, the living wage was 7 shillings (or around 70 cents) per day.
Of course, our idea of a standard “family” has changed a lot since then. We have fewer kids, and most women now work for pay outside of the home. But the idea of linking the minimum wage, to the actual costs associated with a minimum decent standard of living, is still valid.
#2. Working for minimum wage is a recipe for poverty.
From that humble beginning in 1907, Australia’s minimum wage evolved over time. It’s now adjusted annually by the Fair Work Commission. But the link to the concrete costs of running a household has been abandoned. These days the Commission looks at various factors (including profits, inflation, employment trends, and inequality) in setting the minimum. But it does not explicitly consider whether a minimum wage is sufficient to pay for basic living costs. And in reality, it is not.
A full-time worker on the national minimum wage today ($18.93 per hour) makes $719 per week — and that assumes they work a full 38-hour schedule. (In reality, most low-wage workers can’t get enough hours of work, on top of their low hourly rate.) That’s only about 45% of average weekly earnings for all Australian workers. And it’s certainly not enough to run a household, and pay for a decent standard of living. So Australia’s minimum wage is certainly well below a true “living wage.” Minimum wage workers, especially those with any dependents, are likely to live in poverty.
#3: How do you measure the living wage?
A common international threshold for defining low income is at 60% of the median earnings of full-time workers. (The median is the point exactly half-way between the top and the bottom of the income distribution; it differs from the average, which is unduly pulled up by a few very high-earners at the top.) Median earnings for full-time employees in Australia are presently close to $1500 per week. The minimum wage would thus have to increase to $23 per hour or more, to ensure that a full-time worker reached 60% of the median.
Another method of calculating a living wage is to gather data on the actual costs of operating a basic household for a specific family type (often assumed to be two adults and two children, but other configurations are possible). In addition to the necessities of life (food, clothing, and shelter), a living wage must also allow for other expenses associated with full and healthy participation in society: such as internet, transportation, school supplies, a minimal level of entertainment expenses, insurance, and more. There are no luxuries in this budget — just a basic, decent standard of living consistent with modern social expectations.
After adjusting for income taxes and transfers (like the family tax benefit and the child care subsidy), we then calculate the pre-tax income required to meet that basic standard of living. That in turn can be converted into an hourly living wage, by assuming a certain amount of paid work by the adults in the household (perhaps one working full-time and one working part-time).
This “bottom-up” methodology has been utilised by living wage campaigns in several countries — but not yet Australia. The research confirms that current minimum wages are not compatible with healthy families and communities. The estimated living wage benchmark can then be used to lobby for increases in the legal minimum — or even to push individual employers to voluntarily pay a living wage.
#4. For a generation, Australia’s minimum wage has lagged behind a living wage.
In 1985 Australia’s minimum wage equaled 65% of median earnings (above that 60% threshold discussed above). It declined steadily relative to overall wages over the next two decades. Successive governments were focused on reducing wages, and fostering more dog-eat-dog competition in labour markets. (Last week Finance Minister Mathias Cormann actually admitted his government was trying to keep wages low as a matter of policy.)
Over time, the minimum wage declined to a low of 52% of median wages in 2008. It bounced back slightly since then, helped along by a decent minimum wage hike (of 3.5%) last year. But the minimum wage still falls well short of any conception of a true living wage.
#5. Isn’t Australia’s minimum wage higher than in other countries?
It’s certainly higher than in America: where the minimum wage has been frozen at $7.25 for the last decade. It’s now equal to just 33% of median wages there — by far the lowest of any industrial country. No wonder many millions of full-time workers there still live in poverty. Not exactly a role model for Australia.
In dollar terms, Australia’s minimum wage is higher than many countries. Some business lobbyists even complain Australia already has one of the “highest minimum wage in the world.” But that claim is not true in any meaningful sense. Living costs are also very high in Australia compared to elsewhere. And international wage comparisons must consider deviations in exchange rates and other factors. It’s better to compare minimum wages across countries using the ratio of minimum to median wages discussed above. By that standard, Australia’s minimum wage ratio is below several other countries, including France (the highest), Israel, Portugal, New Zealand, and even Turkey.
#6: New Zealand is increasing its minimum wage — and fast.
In fact, our neighbours across the ditch are quickly putting Australia’s minimum wage to shame. The minimum wage there (presently $16.50 per hour) is already higher as a share of median wages (above 60%) than in Australia. But the new Labour-Greens-NZ First government has been increasing it substantially, as one of its first policies. The minimum wage will grow 25% over the government’s four-year term — by which time it will equal approximately 68% of median wages.
#7: Economists have changed their mind on minimum wages.
Business leaders and market-friendly economists used to argue that increasing the minimum wage will inevitably cause unemployment. After all, they believed, if something is more expensive, people will buy less of it (the “buyers,” in this case, being employers). But this simplistic logic has been thoroughly discredited by a whole new generation of economic research on the effects of minimum wages on employment. Starting with a path-breaking study of minimum wages and fast food employment in New Jersey in the 1990s (by economists David Card and Alan Krueger), economists now realise the traditional supply-and-demand story is wrong.
In fact, they have discovered several reasons why higher minimum wages do not have any significant negative impact on employment — and in some cases can actually lead to higher employment. These reasons include:
· Improving labour force participation and retention among low-wage workers.
· Reducing job turnover and the costs of searching for new jobs and new workers.
· Offsetting the uncompetitive “monopsony” power of very large employers, which otherwise restrict their own hiring in order to help suppress wages.
· Boosting consumer spending by putting more money in workers’ pockets — an effect which is especially beneficial for small business.
Hundreds of studies of minimum wages in various countries have found little impact on employment in either direction. Even Australia’s Reserve Bank confirmed that recent increases in the minimum wage had no visible negative effect on employment.
Further counter-evidence that higher minimum wages do not destroy jobs — and lower minimum wages do not create them — is provided by the experience of Australia’s recent cut in penalty rates for retail and hospitality workers on Sundays and holidays. Employers said this reduction in wages would lead to more jobs and longer hours. However, research by the Centre for Future Work showed those two sectors have been among the worst job-creators in Australia’s economy since penalty rates were cut. In fact, the retail sector eliminated 50,000 full-time jobs in the year under lower penalty rates.
#8: A living wage would reduce poverty and boost incomes.
In sum, higher minimum wages have little impact on employment one way or the other. Job-creation depends mostly on macroeconomic conditions and aggregate purchasing power. Higher minimum wages are proven to lift incomes for low-wage workers and reduce inequality. Committing to a true living wage in Australia, would ensure that people who work full-time, year-round are lifted out of poverty, and provide a badly-needed boost to Australia’s stagnant wages. It would be a powerful step in creating a fairer labour market.
Median wage data from ABS catalogue 6306.0, “Employee Earnings and Hours.” Average wage data from ABS catalogue 6302.0, “Average Weekly Earnings.” Both refer to 2018.
Dr. Jim Stanford is Economist and Director of the Centre for Future Work, based at the Australia Institute.