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June 07th 2014 print

Peter Smith

Minimum Wage, Maximum Pain

Every well-meaning but grossly misguided bid to raise the floor price of labour ignores the fundamental principle known and understood by anyone running a successful business: a worker is worth only what he or she adds to the bottom line

wageThe Fair Work Commission split the difference between what the unions and employers had asked for in setting an increase of $18.70 to the adult weekly minimum wage. No science to that, just tawdry compromise. The Australian minimum will now be $16.87 an hour. This is far higher than the US federal minimum of US$7.25 and the UK’s £6.31 — but don’t feel too complacent, you lefties out there in Aussieland. The feel-good race to keep low-skilled unemployed people out of work and dependent is far from over.

There is pressure everywhere among the progressive political class to increase minimum wages. President Obama would dearly like to do so, as would Ed Miliband. And progressives are doing it on their own, as the song sort of goes. In Democrat-controlled Washington State, for example, the minimum wage has been raised to US$9.32 and Seattle (its largest city), with a socialist on the council, has announced its intention to progressively increase the minimum wage to US$15.

An unconscious and wretched alliance is afoot to replace Adam Smith’s economics with alchemical economics. Utopian dreamers you might call them. Unfortunately their dreams turn into nightmares for those who can’t find work.

First, of course, and the most explicable in the alliance, are those from Planet Left. Perfecting society is their goal and they are never going to be deterred from pursuing this noble endeavour, whatever the evidence of unfortunate consequences and past failures. They simply can’t be fathomed by those of us from Planet Right. Moreover, it is best not to try too hard lest madness ensues.

Deserving a mention are the well-meaning fools who deal in simplistic superficialities. ‘People deserve a living wage,’ is their catch cry, which substitutes for brainpower. Well, as cinematic gunslinger William Munny perceptively said to the wounded and defenceless Little Bill Daggett, the sheriff of Big Whisky, before he finished him off, “ ‘Deserve’ has got nothing to do with it”. It doesn’t matter what politicians say and do, employers will not advertently pay  workers more than they add to the business, however ‘deserving’.

But the most insidious parties to the alliance are employer groups that front wage-setting bodies and argue for mitigation. As soon as they argue that minimum wages should increase by only-so-many dollars they give the game away. The give respectability and succour to alchemical economics and effectively join the alliance of utopian dreamers and know-nothings. There is no question about where they stand. It is simply a question of haggling about the price.

Minimum wages keep people out of work who might otherwise gain the fulfillment that comes from working and also the potential of advancement into better paid jobs. This is not a matter of opinion it is a matter of economics and, by the way, common sense. Ask any employer whether they would be more or less likely to hire people if wage rates were lower and, alternatively, if they were higher.

You don’t need a university degree do you to answer that question. It is not complicated.

 

Peter Smith, a frequent Quadrant Online contributor, is the author of Bad Economics