Minimum wages and rising employment: is this the new economic orthodoxy?

This is part three in a series on wages. Find part one here and part two here.

Apart from curbing access to cheap foreign labour, another issue on which UK Prime Minister Boris Johnson is expected to go against traditional conservative policy is the expectation he will support an increase in the UK minimum wage of over 5%, to £9.42 an hour.

Johnson has also backed previous large increases in the minimum wage.

In Australia, minimum wage rises are anathema to business, business organs like The Australian Financial Review and the right more generally; the reflexive response is that they cost jobs. There is little evidence that that’s the case, and Australia’s experience of cutting penalty rates showed that reducing low wages certainly doesn’t create jobs. The Productivity Commission struggled to find conclusive evidence that minimum wage rises cost jobs in its 2015 industrial relations report.

The issue is timely give this week’s Nobel prize in economics. It was shared by Canadian-born economist David Card (who received half the prize), Joshua Angrist, an American, and Guido Imbens, from the Netherlands, who received one quarter each. They were cited for their work on natural experiments, which is said to have revolutionised empirical research.

Card’s research on the labour market effects of raising minimum wages back in the early 1990s is still bitterly opposed or ignored by neoliberal economists and both the Coalition and business here. (Ross Gittins is one of the few high-profile economists in this country to understand the importance of the research of Nobel winners — he has often pointed out how economic models used by the RBA, Treasury and others to plot a course of action or a new policy are wrong because they are theoretical and don’t look at what consumers especially often do.)

Card made his name with a controversial paper that studied whether an increase in New Jersey’s minimum wage from US$4.25 to US$5.25 an hour in 1992 cost jobs in the fast-food industry compared with Pennsylvania next door. Contrary to previous research and economic orthodoxy, he and his fellow economist Alan Krueger (who died in 2019) found that employment in New Jersey restaurants increased after the minimum wage was raised.

It’s taken decades but Card and Krueger are slowly being vindicated in the United States, with the push to raise minimum wages accelerating in recent years — some states will see double-digit rises in minimum wage rates this year. After years of pressure, companies like Walmart, Amazon, Target and others have also lifted wages to US$15 an hour to more than US$20 an hour with added benefits.

The most recent jobs data in the US shows both wages rising and employment rising (everywhere bar government education due to seasonal adjustment factors): year-over-year wages rose to 4.6%, the employment-to-population level rose and underemployment fell. The monthly Job Openings and Labor Turnover Survey (JOLTS) report for August showed 10.4 million vacancies and 4.3 million people quitting their jobs — a record after rising from the previous month and a sign of job market confidence. 

The contrast between the UK and the US with Australia is remarkable, and not just because of ongoing lockdowns — even when Australia was a world leader in COVID-zero and reopened in 2020, a rapid rise in employment didn’t translate into wages growth, which continues to languish below 2%, far below inflation. That reflects both a business community hostile to reversing the recent shift from incomes to profits, and a government that opposes minimum wage rises, suppresses public sector wages growth and demonises unions.

Card’s other major work was to find that a sharp increase in migration from Cuba to Miami in 1980 — via the Mariel Boatlift — had little impact on wages and employment. Over four months, 125,000 Cubans arrived in Miami, raising the size of the workforce in and around the Florida city by 7%, but Card’s comparison with four other US cities found no negative effects on jobs or wages of low-paid workers.

Since that time, structural factors have moved against workers in the US and other Western economies: unionisation levels in the US have fallen by nearly half, employment precarity has increased, automation has removed both low-paid and, increasingly, middle-income jobs. Some more recent studies have sought to contest Card’s result, though in the view of academics, so far unsuccessfully.

But crucially, inflation expectations have also radically changed since 1980 — the US had inflation over 13% in 1980; now the Federal Reserve’s target is 2%, a level it has struggled to reach most years since 2012.

It’s been a similar experience in the UK, and of course here in Australia where the entire goal of monetary policy is to see wages growth push inflation up.

Whether the current inflationary spike due to Brexit, workforce and logistics disruptions is temporary or longer-term will be a key outcome from the UK’s bold experiment in rejecting neoliberalism and what Australia can learn from it — if it has a government and business community smart enough to learn.