The case for labour market reform is obvious enough. If people have a marginal productivity of labour below the minimum wage, then they will not get a job. The only way to fix that is to (1) increase their productivity; or (2) lower the minimum wage. Increasing productivity is a slow long-run project, so the only short-term option to increase employment is to lower the effective minimum wage (including all the costs of employing somebody, not just the wage).
Equally obvious is the political reality that prevents real reform. One of the reasons that the Liberals lost the last election was the unpopularity of Workchoices — the overly complex and bureaucratic attempt to marginally increase labour market flexibility. The consequence has been that labour market reform has stalled and gone slightly backwards.
In this context, what can be done? I have one minor suggestion…
Every year the government wages watchdog considers the case for an increase in the minimum wage. There needs to be a subtle (but important) change of focus. Instead of aiming at a set minimum wage, the wages watchdog should aim for a set level of disposable income.
After all, the whole idea is to help low-income people by making sure they have more money. So the important point is how much money they have, not the level of the minimum wage.
The benefit of this is that after the wages watchdog picks their preferred increase in disposable income, then there can be a separate debate about how this should be achieved — through wage increases, lower taxes or a handout (wage subsidy).
The ensuing debate will highlight a number of points — such as how 60%, 70% or even 80% of a wage increase can be lost to the tax/transfer system… how the minimum wage is not well targeted, with 25% of minimum wage earners coming from families in the top 30% of disposable incomes… how lower taxes on workers will not only increase their disposable income but also improve the efficiency of the economy… and how higher minimum wages will reduce employment while using the tax/transfer system will increase employment opportunities.
The downside of using the tax/transfer system is that it will impact on the government budget (through lower taxes or higher welfare spending). This may encourage the government to still use wages policy sometimes… but I don’t think it would cost the budget too much in any one year and so especially in times when unemployment is a political issue we may see the government pursue tax/transfer instead of wages policy to address disposable income targets.