Recently I wrote “the minimum wage could make things worse.” The argument being that a minimum wage artificially raises wages at the lower end of the market without any regard to productivity, skill or profitability.
This in turn artificially raises the wages further up the labour force as those employees that are more productive, more skilful and/or more profitable demand a premium over those less so.
Many people will argue that minimum wage policies served the country well during the boom times and that therefore that is proof of it not harming the economy. Yet, it is not proof at all.
A similar argument could be made that executives paid themselves well during that period and that didn’t harm the economy either. It is only now that as the economy moves into recession that more attention is being paid to executive salaries.
The reality is that any kind of government enforced incomes policy only serves to distort the markets. And ultimately it is the consumer who is worse off thanks to the need for businesses to keep raising prices to cover costs. An incomes policy is, in a word, inflationary.
Before we look more closely at minimum wage provisions, let’s take a basic example from your own experiences. When you buy something from a shop do you phone the government and ask them what you should pay for a packet of biscuits?
Is the shop keeper mandated to sell biscuits for a minimum price for fear of being prosecuted if they do not? Actually, the ACCC does have the right to prosecute businesses for selling products too cheaply, but that’s another subject.
Generally, a shopkeeper will sell the biscuits for a price that will leave him/her with a profit.
So in a free market, shouldn’t an employer have the flexibility to pay someone a wage according to business conditions rather than by what is mandated by the bureaucrats? Here the argument is that absent a minimum wage, employers would continually push wages down in order to increase profits.
Of course, that is not correct. Just as employers are free to negotiate salaries for staff on anything above the minimum wage, the same would apply at the low end. Obviously no-one is going to work if they are not getting what they feel is a reasonable wage, so employers would have to offer competitive rates otherwise they could not attract staff and could not remain in business.
Even aside from that, how can a government agency possibly be able to keep track of, and set minimum wage standards across the whole economy? How can a bureaucrat in Canberra claim to have a better understanding of a retailer in Geelong than the retailer in Geelong?
Why should a low margin retailer have to offer the same minimum pay as a retailer with slightly higher margins?
But, apparently bureaucrats do have a better knowledge of running businesses. Which is a shame, because their talents are clearly being wasted in the public service.
For an example of how government quickly becomes oversized and attempts to micromanage the economy, take a look at the Workplace Authority website and the list of pay scales.
We counted 449 separate employment pay scales. Although to be honest, we did start to lose count somewhere around 352. They range from the Wine Industry Award to the Meat Retailing Award to the Greenkeepers Award and the Airport Retail Concessions Award.
It seems that for almost any type of employment, government has decreed that it knows best. And don’t forget, you are being told that ‘extreme capitalism’ has run roughshod over the country for the last twenty years.
But would ‘extreme capitalism’ really have given birth to a Sugar Field Sector Award?
Now, don’t get us wrong, we’re not batting in favour of businesses against workers. Rather, we’re batting for the right for individuals to make their own choices without interference from the ‘nanny state.’
Because as soon as government gets involved in anything, it is incapable of removing itself. And that just leads to more bureaucracy and more costs and inevitably higher taxes.
That’s why at a time when the economy is moving into recession and businesses will need to cut jobs, it is the very worst time for those in industry, and indeed some individuals, to be clamouring for the government to take a bigger role in ‘helping’ the nation.
The best help it can give is to keep out of the way and let the economic cycle run its course.
Other Stuff on the Markets
A third straight day of gains on the US markets. We won’t get too excited yet. There have been more ’suckers rallies’ than we can count for the last eighteen months.