Should public policy aim to boost the living standards of low-paid workers? If so, which lever of public policy should we pull to achieve that goal?
For most of the 20th century, there was a near consensus in Australia on the answer to each of those questions – we said ‘yes’; and ‘through the wages system’, respectively. Now there is a consensus about neither.
For those on the progressive side of politics, I hope there is still agreement that the living standards of the low paid matter. That leaves the question of how the state should intervene to support them. There seem to be three broad types of answer to that question.
The minimalist, social liberal position would be to ensure we have a decent education system, to enable people to acquire skills and improve their earnings potential. The fashionable, technocratic answer is that we should more or less let the market rip, but then use taxes and transfers to lift people up to an acceptable level, maybe through something like an Earned Income Tax Credit (EITC). The traditional, social democratic answer in Australia has been that we should intervene directly in the market to mandate that everyone is paid a living wage – in the language of the moment, we should care about ‘pre-distribution’.
These answers aren’t mutually exclusive. Faced with the choice of how to help the low paid, your answer could be ‘all of the above’.
As a society, we ask the independent Fair Work Commission to make a big part of the decision for us. It reviews the National Minimum Wage each year, along with minimum award wages.
The message from the Fair Work Commission in its latest review of minimum wages seems to be that it will more or less maintain the real value of the minimum wage over time, but any material improvements in the living standards of the low paid will have to come from taxes and transfers.
On the 3rd of June, the Commission announced that it would increase minimum wages by 2.6% this year. That will leave the purchasing power of the National Minimum Wage at almost exactly the same level that the Australian Industrial Relations Commission left it in 2005.
Because the minimum wage has been more or less flat in real terms while real average wages are growing, the minimum has fallen relative to the average. Back in 2000, the minimum wage was worth half of the average full-time wage; by the end of last year, that had fallen to 43.4%. The recent decision will see the ratio fall again.
The Commission expressed concern about this, saying that rising earnings inequality “may have implications… for the maintenance of social cohesion in Australia.” At the same time, it decided to increase the minimum wage more or less in line with inflation, and pointed to the tax and transfer system as a way to deliver greater gains to low-paid workers. This disappointing decision essentially amounts to the Commission pointing at the Government and saying “the ball is in your court”. This is an inadequate response to the acknowledged trend of rising earnings inequality.
The Government has done a lot to boost the living standards of the low paid through tax cuts. A single, childless, adult who earns the full-time minimum wage experienced a 5.7% rise in after-tax income between 2007 and 2012 – that’s about $30 a week in real dollars. The gains have been greater for low paid part-time workers, with the big boost in the tax-free threshold taking some of them out of the personal income tax system entirely. These changes have been hugely important – without tax cuts, workers reliant on minimum wages would have seen no real increase in their living standards over the past half-decade or more.
Even when you take taxes into account, though, the gap between full-time minimum wage workers and those on average wages has still grown. A worker on average wages experienced a 10.8% rise in real after-tax income between 2007 and 2012.
If current trends continue, the gap will continue to grow. The 2010 Intergenerational Report projects that real average wages will grow by around 1.6% a year over the long run. If real minimum wages stay flat, that will mean that a full-time minimum wage worker will only earn around a third of the average wage in 2025, down from 50% at the turn of the century.
This trend should alarm anyone who cares about inequality and the living standards of the low paid. It requires a policy response. That response should include all three arms of policy that I referred to earlier – education and training, rising real wages, and further support through the tax and transfer system. These are complements, not substitutes. As Ed Miliband has acknowledged, an era of fiscal constraint means that improving the pre-tax distribution of incomes through measures like a living wage is an important policy tool. This approach needs the Fair Work Commission to play its part in improving living standards, not just maintaining them.