Back during the height of the Occupy Wall Street movement in the United States, a lot of protesters decried the US’ minimum wage policies. Besides the usual arguments for social justice and a rising (government-mandated) tide lifting all boats, they pointed to the Australian experience with high minimum wages. In the US and elsewhere, the main argument against minimum wages is that the increased cost of labor will stifle economic growth. Wages are, after all, part of any business’ cost structure. The higher the costs a business has to clear before it can generate profits, the more discouraged other would be entrepreneurs get regarding putting up their own businesses.
Another key drawback to high minimum wages is that it discrouages businesses from training unskilled workers. The laboer market would tilt towards workers who already have skills and proven productivity. This triggers a chicken or egg dillema because new workers can’t get skills because no one would want to take a risk hiring them due to high minimum wage rates. Since they don’t have skills, they can’t get jobs which would give them more skills.
As compelling as the arguments may be, critics of the US minimum wages proudly point to the Australian experience as proof that all these anti-minimum wage arguments are false. The Australian minimum wage is $13.55 per hour-around double the US federal minimum wage. Instead of depressing hiring, Australia had low levels of unemployment and inflation was not abnormally high. It turns out, Australia’s high minimum wages were powered primarily because of the good economic times Australia was enjoying for several years. Driven by high commodity prices, Australia was riding high and could afford sky-high minimum wage rates. The good times are over as commodity prices, along with oil, have hit the skids. Now, a growing chorus in Oz are calling into question high minimum wage rates. At the very least, they are calling for slower annual rises to the minimum wage to track the economy’s overall growth rate.
Two factors are driving people to reconsider the minimum wage’s high rate of growth-youth unemployment and rising unemployment. Thanks to the erosion of mining jobs, Australia’s unemployment rate has climbed from 4% to 6.1%. Also, the rate for youth unemployment spiked to 14.5% before settling at 13.1%. Clearly, keeping minimum wage’s rate of increase at above the rate of inflation can erode overall job creation. High annual minimum wage rate increases can also act as a brake on economic growth by increasing the overall cost of Australia’s output. Another factor US fans of Australia’s wage model should bear in mind-Australia is a primarily commodity-driven economy. The value of its products are relatively high. The US economy is more diverse. This diversity can have devastating implications if the US boosts wages across all industries. For example, much of the clamor for higher minimum wages come from fastfood workers. Considering the relatively low value of their output, boosting pay to workers can lead to job losses and automation. The product value of the end product simply isn’t there to justify beefy wage hikes. In fact, another option is to automate certain portion of fastfood operations.