That’s a headline sure to ruffle a few feathers. “Typical free-marketers, blaming everything on the working classes.”
Put simply, the concept of a minimum wage is just as futile as the concept of executive pay caps. Attempting to impose a wages policy on private companies has no positive impact on working conditions. Neither does it have a positive impact on the unemployment rate.
In fact, as we can see now, the imposition of a minimum wage increases the instances of redundancies during an economic downturn. How many of the Pacific Brands employees would have been laid off this week if there was no minimum wage and more flexible employment rules?
Of course, we can never know certain. But what we can say with certainty is that a combination of over-regulation of private enterprise, easy credit, and inflation have all combined to ensure that companies will find it of more benefit to shift work overseas rather than keep it on-shore.
This week the Australian Bureau of Statistics (ABS) revealed that the average weekly wage is now $911. That’s an increase from $650 in 2000. Yet once you take out inflation, the real figure is only an increase of about $80. But the biggest issue is not so much the increase but the false belief that this has equated to increased wealth.
The explosion in credit over that same time has made people think they are earning 30% more than they used to and can therefore afford to borrow more. It’s an illusion.
So, what does that have to do with the minimum wage? Simple, it helps to contribute to the inflation rate by making it impossible for companies to keep costs lower and therefore prices lower. In addition it artificially increases the wages of all other workers as those with more ’skills’ expect to be paid higher than those with fewer or no skills on the minimum wage.
And as we are seeing this week, the combination of the minimum wage and the inflexibility of employment laws means that companies find it cheaper to produce goods overseas and then have them shipped back on-shore.
A counter argument is that abandoning the minimum wage would lead to slave wages or ‘Wal-Mart’ style employment conditions. Again this is a fallacy. The market will dictate what a company is prepared to pay its employees. If an employee believes they can get paid better elsewhere then they will leave and get another job.
If a company continues to pay wages that are too low then the company will suffer as the staff will not be motivated to work, their productivity will fall and eventually the company will go out of business.
Senior executives over-paying themselves is equally unsustainable. However, enforcing salary caps will just create another obstacle rather than a solution to excessive pay. Let’s not forget the reason why executive pay has ballooned. It is thanks to government insistence on executive salaries being made public knowledge.
Unemployment will increase and it will do so because of government interference rather than a lack of regulation.
The Most Important Money Morning Story This Week: Market ‘experts’ continue to spin the yarn that Australian banks are much better capitalized and better run than their international counterparts. We aren’t so convinced. This week in Money Morning we took a look at the yield on the ANZ Bank and what it is telling investors about the risk.
One of the most amazing facts is the yield on the major banks is roughly equal to the yield on some of the high risk small cap shares we have tipped in the Australian Small Cap Investigator.
We also looked at the reasons why we may only be at the beginning of the problems facing Australian banks. Click here for more…
Monday: They sit in little hovels that are dimly lit. Their worldly possessions are hidden beneath the floor boards. They have hoarded copies of the Australian Financial Review for the last thirty years – piled in one corner of the room. They emerge only after the sun has gone down, sporting a graying shabby beard. They use a length of string to hold up their trousers, and shout obscenities to old ladies and children. That, readers is the life of a gold investor. Click here for more…
Tuesday: In other words, if you take inflation out of the equation, today’s Dow Jones closing price is the equivalent of it having fallen to about 5,400 points. So much for long-term buy and hold strategies. Click here for more…
Wednesday: By now Fairy Godfather Rudd’s arm must be getting very tired from all the wand waving he’s doing – creating jobs here, saving jobs there, spending money everywhere. Click here for more…
Thursday: You only have to look at the balance sheet of the Commonwealth Property Office Fund to see that similar to the infrastructure funds, it is built on sand. For the period ended December 2007, the fund booked revenue of $367 million. That’s pretty impressive. Except that nearly half of that was from a “Gain on fair value adjustments to investment properties.” In other words, property prices have gone up so we’ll book that as revenue. Click here for more…
Friday: With six and a half billion people in the world, the demand for energy has never been greater. This demand – especially from China and India – is the hidden engine behind Australia’s economy. One Perth based company is perfectly poised to capitalize on the voracious demand for energy. The “energy metal” they mine is critical for sustained renewable energy. Click here for more…