Minimum Wage, Maximum Pain

wage chartGrowing employment and high and rising real wages fall out of high and rising productivity. This requires profitable and potentially profitable businesses having the ability and willingness to invest and employ technically advanced processes.  Nothing much else matters. Governments need to minimise obstacles; that’s their primary role.

Trade unions will always impede increasing prosperity. That can’t be helped. It is the nature of the beast. They inevitably press for higher monetary wages than can be afforded. Higher monetary wages now means lower employment and lower real wages in future. Unions are a plague but they have to be suffered in a free society – except in negotiating wages in the public sector, which should be outlawed as the price for being paid out of taxpayer dollars.

Once a business closes down there will be speculation as to the causes. But there is no doubt that union-inspired remuneration outcomes over decades played a part in the demise of the Australian car industry. The workers themselves were just sheep. Have a look at Toyota workers being interviewed. They have no idea what happened or what to do. Managers of various component manufacturers mostly express their depressive and unimaginative view about the future. Union bosses have gone to ground.

Quadrant Online: What Toyota Asked Of Its Unions

It should remind us that we stand on the shoulders of entrepreneurs without whom the future would indeed be bleak. Factory floor workers, administrative timeservers, union apparatchiks, government ministers don’t create jobs. Entrepreneurs do. Governments need to get out of their way and not prop up uncompetitive industries while unions extract a cut of taxpayer largesse.

Ideally, all wages should be set by individual businesses, taking account of their own positions and their need to acquire labour. Taking the job at the going rate, or not, would be up to the worker. All wage-fixing outside of that model is damaging. Minimum wages provide a singular example that has general application.

President Obama has recently made an executive decision to increase the minimum wage for federal government contractor jobs. He would like the whole country to follow suit. He feels good about this. The moral position is unarguable, apparently. People who work deserve a liveable wage.

A similar campaign to lift minimum wages is on foot in the UK, and our Fair Work Commission decided to lift adult minimum wages in Australia by 2.6% in June, 2013. In general, progressively lifting minimum wages is the moral imperative of those on the left who are in the self-aggrandisement, high-moral-ground business of being seen to help the disadvantaged.

Think, if you like, of low-paid workers being corralled into line, marching for wage justice with Obama, Miliband and Shorten at their head, red flag a-flying. With all of that righteous compassion on show it is a pity about unintended consequences. Minimum wages put people out of work.

Most workers earn more than whatever is set as the minimum wage, therefore it has no effect on their position. The only workers affected are those that in the normal course would be earning less than the minimum wage. Unless we accept the socialist script that people are victims unable to look after themselves, those worth more than the minimum wage will seek employment where they are better appreciated and rewarded.

On the whole those who would be earning less than the minimum wage are adding only that equivalent value to their employer. This is not a loaded proposition. Often the workers concerned are young and inexperienced who harbour ambitions to do better for themselves in future. Sometimes they might be older workers whose skills and productivity are limited for one reason or another.

All of these willing workers deserve the opportunity of a job. No one has the right to take it away from them by insisting that employers pay them more than they add to the business. Yet that must be the result of hiking the minimum wage. In other words, businesses suffer and dependence and misery is heaped on those thrown out of work.

All the while the likes of Obama, Miliband and Shorten, protected by the difficulty of isolating cause and effect in a complex labour market and by their woeful economic ignorance, feel (sickeningly) good about themselves.

What does market economics tell us? It tells us that wages geared to the needs of the businesses concerned — often lower monetary wages than fixed by governments, tribunals or by union strong arm tactics — eventually result in more employment and in higher real wages as businesses grow and develop in a competitive marketplace.

Media questions about what plans the government has to ameliorate the situation facing workers in a failed car company or in any failed company should be met with a stock response. ‘We will not prop up particular failing businesses with taxpayers’ money. This would be akin to affirmative action and would be an affront to competitive free market forces which have made our society rich. Moreover money we gifted would be leached away into unwarranted wage rises. Think about it. You work for a business that is failing and get a pay rise. How does that work exactly?

We intend to lower regulations and taxes as much as we can to free the private sector to grow jobs and we have no idea where those jobs will be created. We are as prosperous as we are because of initiatives of the private sector not because of government intervention. No we don’t have plans. And by the way workers are made redundant every day. No particular set of workers deserve special treatment.’

Is this politically palatable? Well it may have to be rephrased a little but I think it would be. It relies on people having common sense and the fact that lots of people have lost jobs and have had to get on with it without the government rushing in to help them. It is time the narrative was changed to accord with economic reality and to improve economic outcomes and create jobs and higher real wages.

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

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