Academic journal article The Economic and Labour Relations Review : ELRR

Minimum Wages, Equity and Unemployment

Academic journal article The Economic and Labour Relations Review : ELRR

Minimum Wages, Equity and Unemployment

Article excerpt

1. Introduction

Pursuit of equity or fairness is a policy goal in most industrial democracies. Without government intervention, the distribution of opportunities and incomes across the community would be decidedly more unequal (EPAC 1996, p. 95).

The above quotation makes an uncontroversial statement of fact. Equally uncontroversial is the statement that policy to promote equity or fairness is mainly concerned with maintaining or increasing the incomes of those at the bottom end of the distribution. It is true that in Australia, as in many other countries, we attempt to tax those with high incomes more heavily than the bulk of the population, though not nearly so much as was the case a decade or two ago. Nevertheless, the main thrust of policy to change income distribution is to ensure that those at the bottom end have as adequate an income as possible, given political and economic constraints, and that the income of those at the bottom of the distribution rises at least as fast as incomes in the rest of the community.

Wages play a key role in the pattern of income distribution because they are the dominant form of income in our society, and especially the dominant form of market income or income before personal income tax is paid and social security benefits are received. From the point of view of equity what is happening to the wage rates paid to low income workers is one of the major features of our economy. Moreover, it has immediate and important implications for the social security system.

Hence, if one is concerned about the income of those towards the bottom end of the income distribution, the possibility of increasing minimum wage rates must be seriously considered. However, there is a possible downside. Some argue that raising minimum wage rates will increase unemployment. This too raises equity questions. The effects on employment of raising minimum wage rates is discussed in sections 3 and 4 below, with section 3 considering theoretical issues and section 4 reviewing empirical studies. But first the following section sets out in detail why the issue of raising minimum wage rates is so important.

2. Why Minimum Wage Rates are Important

Two policy instruments are widely used to reduce income inequality. One is regulation, particularly the setting of minimum wage rates. The other is the tax-transfer system, whereby the government provides both cash benefits and benefits in kind (eg. subsidised education or health services) and finances them by taxation. Australia has a long history of using both these policy instruments. Today, market pressures towards increasing inequality are growing and are likely to continue to do so in the future. This suggests that the continued use of both instruments will be necessary if Australia is to keep any claim to be a 'fair' society.

Over the last 20 years income distribution in Australia has become noticeably more unequal. This is overwhelmingly due to a dramatic increase in inequality in market income. It is convenient to focus on the period from 1981-82 to 1989-90 since there is a wealth of detail about income distribution in these two years. Also, by happy coincidence, they are at roughly the same stage of the cycle of boom and slump. However, we know that the trends in income distribution that occurred in the 1980s started in the second half of the 1970s (Nevile, 1991) and continued into the 1990s (Australian Bureau of Statistics, 1996).

If one looks at the distribution of market income over all income units, adjusted for size, the Gini coefficient increased by 12 per cent between 1981-82 and 1989-90 (Nevile, 1996, p. 313). Moreover, the share of total income going to the bottom 20 per cent of income units fell by a startling 35 per cent. One possible explanation of this sharp rise in inequality is demographic change. Perhaps there was a sharp increase in the number of people at that stage of the life cycle in which low incomes are common. …

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