No Difference Between Pay Equalisation and Minimum Wage Legislation

More enlightenment from Kris Sayce, editor of Money Morning Australia.

Perhaps even if you still don’t agree with our arguments about minimum wages and pay equalisation, maybe you can agree that artificial interference in the market by governments only tends to create another problem while claiming to solve one problem.

We’ll bang on about it for one last time today.

To our way of thinking, there’s no difference between pay equalisation and minimum wage legislation. Both create artificial wage markets which aren’t sustainable over time.

So today we’ll take another bash at the ultimate job killer, the minimum wage. The argument always put forward is that without a minimum wage, wages would be pushed to zero and workers would work in slave-like conditions.

This argument is false and is made without any evidence. Because there is no evidence.

Providing you have a free society where people are not compelled to work against their will then it’s not possible for wages to fall to zero.

Contrary to conventional wisdom, it’s actually only in economies where there is an interfering and coercive government (by nature all governments are coercive of course) that real wages are forced lower and slave-like conditions exist.

And unlike the claims made by the zero-wagists, there is plenty of evidence to support our argument. Just look at any tin-pot dictatorship, or even at any western democracy for that fact.

Government’s favourite way of doing this is through inflation. We won’t get sidetracked, but take this revelation from the Herald Sun:

    “Australians have to work almost three times harder to pay off the average family home than they did 50 years ago… homebuyers on the average income now have to work for 19,374 hours to buy the average Australian house with the average mortgage… In 1960, it took homebuyers just 7500 hours to pay off the average mortgage.”

Take into account other increases in the cost of living and the devaluation of your money, it’s no wonder the quality of life hasn’t improved.

Anyway, it’s important to remember that wages is just another term for the price of labour. You sell your labour to an employer for a price (wage) that you’re willing to accept. And the employer will pay for your labour (a wage) at a price which he or she believes is acceptable and profitable.

As we’ve mentioned before, the impost of a minimum wage distorts this pricing action and leads to employers finding alternative ways of employing people.

Either they will look for new technology that can replace the work of individuals, or they will send work offshore where the price of labour may be cheaper. Or they may even use legal or illegal imported labour where different working conditions may apply.

The point to remember on the use of cheaper imported or exported labour is that the claim about cheap labour from overseas ’stealing’ the jobs of Australians isn’t true. In reality it’s market manipulation by governments, bureaucrats and trade unions which is responsible for unemployment.

In most cases jobs aren’t actually being taken from Australians at all. Because either the job in Australia doesn’t exist at the price the employer is willing to pay and the employee is able to accept, or it’s no longer profitable for the work to be done here due – in part – to minimum wages and other labour restrictions. Therefore the job would disappear anyway.

If it wasn’t profitable for the employer to offer the job at the minimum wage level, and the job couldn’t be sourced from overseas labour then the employer wouldn’t create the job anywhere – it wouldn’t exist.

Even in the case where an employee loses a job in Australia, and a new job is created overseas to carry out the same tasks, the job isn’t being ’stolen’, but rather it’s due to the inability of the employer to source the job locally at a profitable price of labour.

If it wasn’t profitable for the company to keep employing an Australian at the higher rate, and they couldn’t source the work cheaper overseas then eventually the Australian would lose their job anyway.

Businesses go bust all the time for that very reason.

Let me illustrate it to show you what I mean…

Let’s say a job is only profitable for an employer if he or she can pay someone $8 an hour. However, the minimum wage law insists that the minimum pay is $10 an hour.

Therefore the employer will not create a job to pay someone $10 an hour when he or she knows they will make a loss. In this case no job can be created and therefore there is no job for an Australian at a rate of $10 an hour.

But then let’s assume that the employer finds a job market overseas that will allow him or her to pay workers $7.50 an hour. And assume it costs 50 cents an hour for the completed work to be imported back to Australia, the employer is able to make a profit on the production of the product.

Therefore, due to the lower rate of pay in the overseas employment market, a job has been created at a total cost of $8 an hour.

But remember, this isn’t a job that has been ’stolen’ from an Australian worker, because at $8 an hour the job doesn’t exist in Australia.

And as we note, even if it’s an existing industry, if the minimum wage rate was unprofitable for the employer, the job would have disappeared in Australia anyway even if it wasn’t replaced by an overseas worker.

In other words, it’s the artificial setting of wage rates that causes job losses not overseas workers who are prepared to accept a lower wage.

But let’s put it another way. Let’s forget about minimum wage levels. Let’s look at higher pay scales where you’ll see that the same principle applies…

If we consider there’s someone applying for a job as a hat salesperson that pays $100,000 a year. But this person has no qualifications or experience as a hat salesperson. However, the employer takes a shine to them.

The employer likes the fact that the applicant has previous sales experience and believes that the ins and outs of the millinery trade can be easily taught.

However, the $100,000 wage was aimed at someone with hat sales experience, so the employer offers to pay the unqualified applicant a wage of $80,000.

What does the applicant do? They would prefer a wage of $100,000, but in the opinion of the employer the applicant is not worth that amount. The applicant is only worth around $80,000.

The applicant has two choices, he or she can either decline the job offer and hold out for a higher paying job elsewhere, or they can accept the lower pay. In this instance the applicant accepts the lower pay and a job is created.

But now consider what would happen if the government imposed a minimum wage level of $100,000 for all hat salespeople. Naturally, those in the industry would be delighted, “It’s a bumper pay day” they would yell.

As we pointed out yesterday, it would be a bumper pay day for some, but not for all. In the instance of our applicant above, it would not be a bumper pay day. Because as much as the employer may like the applicant, he or she would only employ them if they could pay the applicant $80,000.

But under the law they could not. And worse still, even if the applicant is prepared to accept a lower wage the law decrees they cannot accept it.

In this instance no job is created.

Now, I’m sure you’d agree that an artificial minimum wage for a middle class job would be terrible for many in the middle class. It would make their job prospects much tougher and would either force then into trying to apply for higher paid jobs for which they may not be qualified, or it could force them to take work in a lower paid job which they did not really want or were not suited for.

Or it may mean they are left without a job.

If you accept the logic that an artificial minimum wage would be terrible for the middle classes, then logically you have to accept that current minimum wage laws are equally bad for those on low pay.

If we return to our point above about wages being another term for the price of labour, then you’ll see that wages would not go to zero if there wasn’t a minimum wage. To claim it would happen is brazen misinformation.

In fact, if you accept the arguments above, then a minimum wage may not have any impact on the wage rates of existing jobs at all. In the case where jobs are not currently in existence due to minimum wage laws, new jobs would be created onshore rather than overseas, and it would be up to employees to decide whether they accept the wages offered.

If the wages offered are too low then employers will not attract a workforce. Especially if there are competitors in the new industry as competing firms would increase wages to a level that would attract workers.

Naturally, if workers are still not prepared to work at a level which the employer deems to be profitable then there will be no job creation. The point is that the market and individuals will have decided that, not an arbitrary decision from a jumped-up bureaucrat.

However, in some instances the abolition of the minimum wage could lead to lower wages. Yet, it should be remembered that those higher wages were only available to those lucky enough to benefit from an artificially set wage – this is how trade unions work.

For instance, if an employer has a total wage budget of $500,000 per year and the minimum wage is $100,000 each, then he or she can only employ five people.

Yet, if there is no minimum wage the employer can either maintain the current staff on their wages, or if he or she believes there would be an increase in productivity and profits with six employees then there would be an incentive for the employer to drop salaries to $83,333 each.

Or offer varying salaries above or below the old minimum wage based on performance.

In that case the employees would need to decide whether they are willing to accept this or not. And if not, find alternative employment.

The point is, the example above is merely the opposite to what happens when you have trade unions and governments manipulating wages policies.

Increases in wages that are determined by governments will necessarily lead to losses in jobs. There’s no avoiding it. It applies whether you’re looking at manipulating the high end of the job market, the middle, or the low end.

The reverse is that the abolition of artificial wage levels such as the minimum wage creates jobs. That’s real jobs, not the type of job the government creates by paying people to install insulation and then paying a bunch of other people to rip it out again!

Cheers.
Kris.