A fair and health relationship between work and wages and social security system is critical for the welfare of Australian families, says Grant Belchamber, in this address to the ACOSS National Congress 1999.
ACOSS National Congress 1999
I am honoured and pleased to be invited to address you today on work, wages and welfare.
ACOSS’s leadership role in the community sector, advocating on behalf of the poor and disadvantaged in our community is widely and rightly recognized.
The views of the ACTU and ACOSSS are not always and everywhere identical – indeed over recent years our positions have diverged on some important issues. On wages, we have had much in common, and ACOSS has made important submissions to the Living Wage hearings before the Australian Industrial Relations Commission [AIRC] broadly supporting the ACTU claims.
We have shared little common ground on the GST, but have expressed similar concerns with the proposed CGT changes now before the Parliament as a result of the Ralph review of business taxation.
We agree, I think, that the central problems are clear and demand rectification – the PAYE tax base is shrinking and in the future Governments are going to find it difficult to raise the revenue to fund the sort of programs that we all believe Governments have a responsibility to run.
The widespread move away from the PAYE system in the construction industry illustrates the problem. The core issue, in the jargon, is the alienation of personal income, and it is a favourite route for many in the tax minimization game.
Here your have a situation where, either through coercion or through choice, employees are being rebranded as independent contractors. They finish work on Friday as an employee and come back on Monday as an independent contractor.
The way they work does not change. They are still directed in what to do in the same way that employees are. However, their employment status is altered as is their treatment within the tax system.
A 1998 report from ACIRRT commissioned by one of our affiliates found that these independent contractors paid roughly half the amount of taxes that employees paid. So we have the farcical and unjust situation where two people can be doing the same work for the same builder, yet the system allows for different rates of tax to be paid. The report concludes that this loophole could be costing the Federal Government up to $2.2 billion per annum in revenue. And this is only for the construction industry.
Some of the recommendations on the alienation of personal income contained in the Ralph Review will improve the situation. It is important that the Governments adopts these recommendations and takes the other steps necessary to ensure that this and other loopholes currently being utilized by sharp operators to avoid legitimate tax obligations are closed.
So there is substantial overlap in the interests of our respective broad constituencies on a wide range of policy matters, and it is important for them that we maintain open dialogue on issues of the day.
At the heart of our shared interests is an abiding concern with work, wages and welfare and how the interact. There are two major items on the ACTU’s current action list that will impact directly on the wages of low-paid workers and on their welfare.
Next week unions will be lodging claims for the next Living Wages increase.
The claims will seek an increase of $24 a week to most award rates of pay. The increase if granted would raise the Federal Minimum Wage [FMW] to $409.40 a week ($21, 300 a year). Because of the failure to adjust the income tax scales for bracket creep since 1993, this will take a full-time FMW earner above the lowest income tax bracket for the first time.
Second, we have embarked on a longer term campaign on the theme ‘Work, Time, Life’ , targeting excessive and insufficient working hours, un-paid overtime, job insecurity, casualisation and contracting our, and work-place stress.
Both campaigns seek to improve minimum standards in our labour markets, thereby to raise family incomes and community welfare. It is our strong belief that better and more secure incomes from work helps to quell the flames of need and the fires of disadvantage in our community.
The two campaigns are two faces of the same coin: one seeks to raise minimum wages, the other to raise minimum standards at work through more effective regulation of the terms and conditions of employment, thereby to deliver greater job and income security.
Our direction is opposite to that of the ‘low pay movement’ , which believes lower minimum wages and reduced labour market regulation will raise community welfare through creation of more jobs.
The crux of the issue in contention here, between the ‘low pay movement’ and us, is the proposition that minimum wage laws cost jobs – that the intended beneficiaries of fair minimum wage laws are actually harmed by them. That employment would be higher and unemployment lower if minimum wages were cut and labour market regulation repealed yet further.
Minimum Wages and Employment Growth
There are three strands to this debate, one political, the other two economic.[1]
The political debate generates much heat but little light. It is characterized by florid rhetoric and exaggerated claims.[2]
The economic theoretical debate is inconclusive.[3]
Economics students in Australia are taught that a minimum wage increase interferes with market signals and thus necessarily leads to less employment and slower growth than we would otherwise have.
Though there exist robust theoretical models under which increases in minimum wages lead to higher employment or are neutral for employment, for many/most economists this proposition is akin to belief that water flows uphill, and it is one they simply cannot abide.[4]
Ultimately, theoretical argument alone and in abstraction cannot resolve the issue. Theoretical propositions must be tested against the evidence, and the relationship between minimum wages and employment is one of the most tilled patches of turf in all of applied economics.
The empirical analysis, the third strand of the debate, is by far the most interesting.
The concern here is to explore the real relationship – to isolate and quantify the linkage between minimum wages and employment. The analysis typically proceeds from the theoretical proposition that there is a relationship, and seeks to measure it.
The researchers are trying to estimate the sensitivity – in technical terms, the elasticity – of employment with respect to minimum wages, to answer two key questions:
(i) do increases in minimum wages cost jobs? And
(ii) if so, how many jobs are lost for a given increase in minimum wages?
Hard evidence in support of the cental proposition – that minimum wages cost jobs – is yet to be found.[5]
There is a rich and healthy debate underway in the northern hemisphere on all of this. To quote one prominent analyst:
“Summarising the state of the current empirical research … the best econometric models find that the disemployment effects of recent increases in the US [FMW] hover about zero…
“There are enough reliable findings slightly below zero (in the negative 1-3% range for a minimum wage increase of 10%) to assuage those who cannot abide other results, but there are equally careful studies which find no systematic disemployment.
“All told, a dispassionate observer would probably come away from this literature concluding that water usually does flow downhill, but, at least in the low-wage sector, very slowly.
“And if the same observer examined the impact of the most recent US minimum wage increase, she would be forced to revise even this tepid hypothesis. Our analysis of the last increase applied four separate tests and found no evidence of significant disemployment effets.”[6]
The emerging international consensus is that Minimum Wage elasticities hover around zero. If there is any relationship at all, it is utterly swamped by prevailing macroeconomic conditions.
Some commentators argue that the international literature is not relevant in the Australian context because we have an award system, not a single minimum wage. That argument is bluff. It does not withstand critical scrutiny. The generic result holds good here too.
Our historical record shows that regular, moderate increases in minimum award wages are fully compatible with sustained strong rats of job growth. And the apparent absence of any employment downside is not because the wage increases fail to flow through into take-home pay. Most of the water gets to the fire. Low paid workers benefit from Living Wage increases.
Minimum Wages and Income Distribution
Minimum wage laws affect the distribution of income. Effective minimum wage regimes compress the earnings distribution at the bottom, raising the incomes of low paid workers. The US evidence is absolutely clear on this.
It is sometimes argued that minimum wage laws raise the incomes of dependent children and the spouses of professionals. That is, the beneficiaries are not low-income families but high-income families, because the poorest families have no income from work at all, and many/most minimum wage earners are secondary income earners who live in high income households.
However, as Ian Watson and John Buchanan have shown, amongst all married households (including de facto couples):
- 48% of spouses are not currently employed;
- employed spouses are most commonly engaged in clerical work, not a calling noted for hight altitude salaries;
- at the top and the bottom of the earnings distribution, ‘birds of a feather flock together’ – the employed spouses of professionals and labourers are, most frequently, also professionals and labourers respectively;
- most low-wage spouses have low or middle income partners
The evidence shows that, between the well and the fire, some of the water does slop out of the bucket. The minimum wage alone is not a panacea for poverty or disadvantage. It is an imperfect redistributional tool; but it is effective nonetheless. Most of the water gets to where it is most needed. Most of the benefits of minimum wage increases here and overseas go to low-income workers in low-income families.
Dynamics
The key point in this discussion of work, wages and welfare is that we are dealing with processes through time.
Cutting minimum wages cuts take-home pay. Deregulating the labour market:
- Increases casual employment at the expense of secure employment
- Increases unpaid overtime hours
- Reduces minimum periods of daily engagement for regular part-time workers
- Fragments and reduces the time available for family and community activities
This alleged ‘flexibility’ simply shifts the risk from employers onto workers, and it is not good for workers’ wages or their families’ welfare.
If we are to have minimum wages and minimum standards in our labour markets, it is necessary to maintain and update them in a changing world.
This is the challenge presently confronting the Low Pay Commission in the UK. Having rolled back Mrs Thatcher and instituted a National Minimum Wage last year, the present challenge for them is to find a way to keep it relevant without causing large and unanticipated shocks in the labour market.
We have a workable system here, through the Living Wage process, where an institution at arms length from government makes the adjustment.
The AIRC in these cases must weigh the economic implications of any adjustment it proposes to make [7] , with the needs of the low paid and with generally prevailing living standards in the Australian community – a three-way balancing act.
This is what the AIRC did, last year and the year before and the year before that, in awarding three increases totaling $36 per week, in the process maintaining a significant gap between minimum wage incomes and unemployment benefits.
Work should provide a higher income than benefits or allowances, to maintain not only the incentive to work but also the dignity of work.
It is to be expected that families with one or more employed will be found at higher levels in the distribution of family income that families without any employed members, and this what the data shows. [8] In ball-park terms:
- The bottom 30% of families consists mostly of unemployed and retired households with few employed members;
- The middle third of families, from the 3rd to the 6-7th decline, represent the bottom half of the distribution of employed households, and the effect of Living Wage increases is concentrated here:
Some 1.7 million low paid workers are estimated to rely on Living Wage increases. This includes large numbers of part-time and casual workers, and significant numbers of low-paid full-time employees too
- The top 30% of all households, and the top half of all employed households, do not benefit greatly from Living Wage increases.
Australia’s award system has inhibited the development of a class of working poor in this country, through it prescription of effective minimum wage levels and specification of fair entitlements for causal and part-time workers. Mr Reith’s second wave legislation threatens to undermine this system.
If we are genuinely concerned for community welfare, the challenge for policy is to ‘snug’ the minimum wage, to keep it within cooee of the market when market wage outcomes reflect decentralized bargaining processes.
If we fail to make regular, moderate, (more or less) predictable adjustments to our minimum wage standards, the wages distribution will stretch at the bottom end and the gap between minimum wage workers and the labour market pack will steadily widen, and with it the distribution of household incomes.
This is the intent of the proposition floated by the ‘gang of five’ economists, who believe lower minimum wages will be effective in creating more low-paid jobs.
They propose to make good some of the lost income by paying a tax credit on earned income to some low paid workers.
Over time, unless the policy were to confound t he available evidence and lead to a huge surege in employment, the effect would be to stress fiscal policy and inexorably raise pressure to cut expenditure by cutting benefits.
That is, the effect of this wages policy proposal is to make more tenuous the sustainability of present welfare policy arrangements.
Minimum wages are, for all practical purposes in today’s Australia, the only policy tool available that works on the primary distribution of income. This is where the market failure is, and where direct measures to remedy is should be targeted.
The tax-transfer policies of our welfare system shape the secondary distribution and are important, but give the lack of evidence that fair minimum wages harm employment, the case for hands-off approach to the labour market carries no convention.
Tax credits have been implemented in the US and in the UK , to raise the return from work for needy families. In those countries, earned income tax credits are seen to complement minimum wage policies, each reinforcing the effectiveness and sustainability of the other through time in quelling the fires of need in the community.
Minimum wages and tax credits and family payments are best conceived not as substitutes, one for the other, but as complementary policies in fighting low pay and low income.
The ACTU supports effective provisions designed to offset poverty and disadvantage. There is ample scope and some need to improve the interaction of our income tax and socials security systems, to reduce work-traps and poverty traps, and other bumps on the road from welfare to work. It is a matter of design detail whether a system of tax credits ought to reduce or eliminate these problems.
On one view, the great appeal of tax credits lies in their offering an effective mechanism to target an income tax cut to low paid workers – and they need one now, because the GST income tax cuts fail to compensate workers earning under $580pw for bracket creep since 1993, and leave nothing over to compensate for the price effects of the GST.
Conclusion
A fair and health relationship between work and wages and social security system is critical for the welfare of Australian families, whether or not they have household members presently in work.
An active welfare system with an effective suite of labour market programs can help people into work, and supports for minimum ages.
A Living Wage that keeps workers out of poverty reduces the load on the welfare system and helps to maintain it.
To reduce poverty and disadvantage we must fight the good fight on both fronts.
Address by Grant Belchamber, Senior Research Officer and Advocate, ACTU, 11 November 1999
[1] This section, and much of this paper, draws heavily on Bernstein [1999].
[2] For example, in its submissions to the past three Living Wage hearings the federal Government has told the AIRC that granting a wage increase of more than $8 a week to more than a handful of workers would harm employment growth. The Commission has, an average, awarded %50 more than the Commonwealth’s amount, and to three times as many low paid workers as the Commonwealth proposed, but the sky has not fallen in on employment growth.
[3] The principle charge made by the political opponents of Living Wages increases is that higher minimum wages mean fewer job opportunities, thus penalizing the very groups of low-paid and vulnerable workers who are the intended beneficiaries. Somewhat curiously, given the economic rationalist assertion that human actions are best explained by self-interest:
• low-paid and unemployed workers support Living Wage increases;
• the union movement presses the case though most union members do not benefit from it (because they are covered by collective agreements that provide substantially higher wages): and
• church and community groups including ACOSS have supported the concept and practice of Living Wage cases in ensuring fair and adequate wages from work.
Just how a self-interest model of human behaviour explains this is not clear to me, but I leave analysis of the political debate to another day.
[4] One has visions of the prelates confronting Galileo.
[5] Sure, like the thylacine, there have been periodic sightings claimed, samples of droppings collected and footprints found in mud, but on close inspection, the photos invariably found to have been doctored or are indistinct, and the dung and footprints left by dogs.
[6] Bernstein [1999]
[7] Generally, and for inflation, employment and productivity in particular.
[8] For a contemporary discussion and outline of the data, see Richardson [1999], especially pages 151-153
