News National Why the minimum wage is only half the story

Why the minimum wage is only half the story

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There has been a lot of talk in the past week about ‘equality’ and ‘equity’ in the Australian economy after the Abbott government released details of a Productivity Commission review of workplace relations – particularly its decision to put the minimum wage under the PC microscope.

It’s a good moment for political warriors to come out fighting.

The unions, which have seen membership levels – public and private sector – fall from 50 per cent to 20 per cent since 1960, recognise a recruiting opportunity when they see one.

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Thus, Transport Workers Union boss Tony Sheldon warned of the consequences if the government unleashes “its attack dog the Productivity Commission to cut the minimum wage, scrap extra pay for Sunday and bank holiday pay and attack workplace rights”.

Normally, this would have been met with some spirited comments from the Coalition about the need for workplace flexibility and wage restraint to allow the swelling ranks of young unemployed to get into the workforce and for our economy to adapt for a more competitive global environment.

Normally, that is, if Coalition MPs had not been writhing with Basil Fawlty-like embarrassment over Prime Minister Tony Abbott’s decision to knight Prince Philip.

Nonetheless, we shall hear more from both sides in the months ahead – Labor will says the review is another version of John Howard’s political suicide note, WorkChoices, and the Coalition will try to explain that Australians have been living beyond their means for too long. (It’s pretty obvious which is the easier sell.)

How to make sense of these conflicting views

The first point to make is that reducing a debate to a single number is guaranteed to miss the point.

The current federal minimum wage is $16.87 per hour, or about $33,300 a year on normal full-time hours.

How many people could survive on that, or support a family in “reasonable and frugal comfort” as the Commonwealth Conciliation and Arbitration Court suggested should be possible when it handed down Australia’s first minimum wage ruling in 1907?

Times have changed of course – female workforce participation has steadily risen since that time to be about 58 per cent, while male participation has fallen to about 71 per cent.

So if the same court were to make that ruling today, it would be suggesting that something like 1.5 times a ‘minimum wage’ should provide frugal comfort.

For the sake of argument, then, in a two-income household with one partner taking some time off to care for children, about 1.5 times the minimum wage would be around $50,000, topped up with a few thousand dollars in family tax benefit based on individual circumstance.

Is that enough for ‘frugal comfort’?

Again, the answer is not straightforward.

Early in 2014 a debate raged in the national press over whether factory workers at SPC Ardmona in Shepparton, Victoria, should be on $50,000 or $60,000 a year when the company was holding out the begging bowl for both state and federal assistance to stay afloat.

SPC Ardmona
In 2014 a debate raged over whether factory workers at SPC Ardmona in Shepparton, Victoria, should be paid more than the minimum wage, when the company was struggling to stay afloat. Photo: AAP

Some rather self-righteous voices argued that workers should take home no more than $40,000 a year (still, one must note, more than the minimum wage).

Certainly in the US, which is emerging from the global financial crisis as virtually the sole engine of global growth, it’s unlikely workers would get even that much – the minimum wage in the States totals about $US16,000 a year.

Equally certain, however, is that the US has a far larger ‘working poor’ or ‘underclass’ in per capita terms – and not even the most ideological of current Coalition MPs would wish to see such a development here.

But putting aside the US example, let’s drill down further into family life in rural Australia.

In Shepparton, in northern Victoria, a good family home costs about half the average price of similar homes in capital cities and it is conceivable that ‘frugal comfort’ could be achieved on 1.5 times the minimum wage, particularly if the family chose to rent rather than pay down a mortgage over 30 years.

That $16.87 per hour really does buy more in some areas than in others, as the chart from the Productivity Commission discussion paper below shows.

Tasmania, for instance, has among the nation’s lowest wages, and so makes $16.87 look healthier to employees than it would in Sydney’s eastern suburbs.

The problem with comparing the minimum wage with average wages, and even average property prices (the largest component of most household budgets) is that such comparisons tend to be loaded with historical assumptions about what ‘frugal comfort’ means.

And that tendency is doubly dangerous right now, as some major pillars of Australia’s economic life are crumbling.

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To be specific, the economy has just come through an extraordinary period of economic growth – 24 years since the end of Paul Keating’s “recession we had to have” – during which time it became widely accepted that most Australians should be able to own their own home, and salt away enough in superannuation to give them at least a dignified dotage.

Even 15 years ago, when Australia hosted the 2000 Olympics, both of these things looked possible.

Since then, every passing year has made these objectives look further out of reach for low-wage earners, essentially because of the same factor – a debt-fuelled housing boom that never seriously deflated as it did in many other developed nations.

While many aspects of life have become cheaper relative to wages, buying or even renting a house has become more expensive.

There are many measures of wages, general prices and house prices that can be compared, but in broad terms, since 1998 wages are 1.7 times what they were, the consumer price index has risen to 1.6 times 1998 levels, and established house prices are 3.3 times what they were in that year.

Muswellbrook Council says the town has a high concentration of social housing for the size of the area.
If you are stuck on or close to the minimum wage, you have no hope of joining the seemingly endless asset inflation of the housing market.

Importantly, the consumer price index does take account of rents, so you could argue that wages have kept pace with the costs of living.

However, rents have actually increased ahead of inflation, offset by slower inflation in other areas such as imported goods.

Furthermore, wages have not kept pace with inflation at all income levels.

In Australia, unlike in most OECD countries, the proportion of workers classified as ‘low paid’ has increased from around 14 to 19 per cent – a 37 per cent increase.

Low wage earners are falling further behind.

Put together, these figures paint a very different picture from the Australia of 15 years ago.

Now, if you are stuck on or close to the minimum wage over the long term, you have no hope of joining the seemingly endless asset inflation of the housing market.

That means those higher up the income scale, who do pay off mortgages over their working life, will retire with two large assets – their superannuation and their paid-for house, which will free them from the need to pay rent during retirement.

At the bottom of the social scale, where the minimum wage is supposed to provide frugal comfort, it is already true to say it will provide no such thing in the longer term.

It is a place from which to pull yourself up by your bootstraps. And if you can’t do that, you’re stuffed.

The housing market has done more to entrench inequality in Australia that any other single factor, and that should be front of mind as we argue about that deceptively simple figure of $16.87 an hour.

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