Poor people can’t eat good intentions

If you haven’t yet, go and subscribe to the regular CIS e-mails, which includes the weekly “ideas @ the centre” e-mail with three mini-articles by CIS researchers. This week included the following mini-article by me about the minimum wage…

Poor people can’t eat good intentions

Apparently, politics is simple. Either you are good and care for people, or you don’t.

This simple ‘cult of good intentions’ played out once again last week when the Fair Pay Commission chose to freeze the minimum wage. There was an immediate public outcry that this was a mean-spirited assault on the poor.

The minimum wage is one of the best examples of the difference between good intentions and good outcomes. At first glance it seems obvious that increasing the minimum wage will help poor people. But the truth is that the main cause of poverty is unemployment and a major cause of unemployment is the minimum wage.

If people want to help the poor, they need to get past mouthing pro-poor slogans and consider which policies encourage employment and productivity growth.

Last year, the Fair Pay Commission awarded a minimum wage increase of 4.1%. If they had frozen wages then, it is estimated that more than 100,000 more jobs would have been created (or not lost). The main consequence of their decision this year to freeze the minimum wage is that thousands of low-skilled workers are going to keep their jobs. This decision should be applauded by anybody who actually cares about the poor.

It is also worth remembering that Australia already has one of the highest minimum wages in the world. At $28,276 per year, the Australian minimum wage is about the same as the GDP/person in developed countries like Portugal and South Korea.

Further, the minimum wage is a uniquely bad instrument for helping the poor. Much of the minimum wage is lost in higher tax and lower welfare benefits. And the minimum wage is not targeted at poor families, with 25% of minimum wage earners coming from families in the top 30% of disposable incomes.

For a government wanting to help low-income earners, the best solution is to reduce their tax, perhaps by increasing the tax-free threshold. Not only would this increase their disposable income but also improve work incentives.

But first politicians need to decide whether they want to help poor people or just look like they’re helping poor people. Because good intentions without good policy is pointless.

(Details of these figures used in this article can be found in an opinion piece in the Canberra Times.)

18 thoughts on “Poor people can’t eat good intentions

  1. an immediate public outcry

    Wasn’t it just an outcry from certain elite groups. I don’t recall people marching in the streets?

  2. I am not entirely opposed to a minimum wage nor minimum wage rises but I think the Fair Pay commission made the right decision this year.

  3. If the government wanted to help ‘poor’ people, it would eliminate the minimum wage to create more job opportunities.

    $28,700 per year is not ‘poor’. Anyone who thinks so should take a look at the rest of the world. If you can’t live on minimum wage ($500 per week), there is something seriously wrong with you, considering the world poverty line is $17 a week. Yet people will say ‘ive got kids’, yeah and you’ve also got parenting payments and tax rebates, not to mention that you choose to have kids, so take some responsibility.

    gah, our welfare state gets me all worked up.

  4. DaveM – you might want to consider purchasing power parity before assuming Australians ought to be able to live on $17 per week.

    John – The question wasn’t rhetorical, I simply don’t know how big the outcry really was. Perhaps it was just a noisey minority.

  5. Good article. It always surprises me how many so-called free marketers seem to think that price floors in labour markets are somehow acceptable.

  6. DaveM, TerjeP, also, precisely because those countries are developing countries, they generally have some non-cash subsistence resources still around. Poor people there aren’t living “on” $17 per week but with it, as a top up for their other resources.

  7. While $17/week would be tough in Australia, it is quite easy to live under the poverty line quite comfortably. I have been officially in poverty for more than half of my adult life, and it was a hellova lot of fun.

    From my experience in developing countries, many people in low incomes own their own homes with a vege garden, and so have accomodation and basic food covered.

    While I believe in giving everybody (including the rural poor) secure property rights… by personal advice to them is not to sell their land yet. It makes for a good form of insurance against unemployment.

  8. “From my experience in developing countries, many people in low incomes own their own homes with a vege garden, and so have accomodation and basic food covered”.

    That’s pretty much what I was getting at.

    It may be worth mentioning, this mixed cash and subsistence economy used to interact through extended families in our own history, with young people usually “going into service” not as a career but as a stage in life (with “upper servants” coming from the few who did adopt it as a career – but even those often retired early enough to become landlords/ladies doing similar things on their own account, as with the visible Mrs. Hudson and invisible Mr. Hudson behind the scenes taking in and providing services, meals, etc. for gentlemen like Sherlock Holmes and Dr. Watson). These young people would take money back to their families on visits while receiving board and lodging at work, then receive family support in kind when they married and settled down. I’m sure today’s developing countries often have a similar generational/life stage/extended family pattern, only with cash crop or factory work in place of domestic service.

  9. I can’t say I’m an expert at economics but wouldn’t the dole set its own minimum wage? Say if I was on the dole and was looking for work, I would only apply for work which offered greater pay then I was already receiving in welfare correct?

    I say this because I see something similar with uni students and youth allowance. Many students way up working (with the resulting reduction in youth allowance) compared to not working and receiving benefits, with many choosing the latter.

    I guess there are other factors such as social stigma, dealing with centrelink and opportunities for promotion which make employment (even at dole wages) favorable but I still don’t see how this doesn’t set its own minimum for employers to compete with.

  10. JC, by sheer chance I have some other priorities on my plate just now, things I should have caught up with last week but which were delayed by a medical condition. I have committed to write up a survey of special cases in which comparative advantage does not work well enough to justify free trade. At least one is quite common, when taxes take a material proportion of profits but don’t follow economic activity from one country to another, i.e. the tax base switches from one country to another.

  11. “I have committed to write up a survey of special cases in which comparative advantage does not work well enough to justify free trade. At least one is quite common, when taxes take a material proportion of profits but don’t follow economic activity from one country to another, i.e. the tax base switches from one country to another.”

    Do you expect to get an increase or the presence of foreign direct investment instead as trade shifts from trade in commodities to “trade” in endowments as *arms length trade* (i.e normal trade) cannot occur in endowments?

  12. But what if your caring for the poor meant you wanted Governments to get off them, by repealing minimum wages, etc. Isn’t that caring?
    Wow!This word-play is fun! Let’s call ourselves socialists, who think that societies can do without any of that nasty government intervention stuff! We care for societies, NOT governments!

  13. JC, it was a flare up of a continuing problem. Either that or more likely the late night medication is leaving me zonked until mid-afternoon, after which I’m ordinary tired enough not to be able to get at things for a full stint. The irony is that a strong cup of coffee can often kick me out of it, but how do I make that under those circumstances?

    Mark Hill, I’m not aiming at projections of future trade patterns for the economy but at isolating the factors that can disrupt the ideal working of comparative advantage to see the situations in which particular free trade policies are not optimal after all. The Rocky Road to Paradise: Why Economic Liberalization [sic] is Interrupted does something of the same sort of thing in other areas, and I will probably draw on it.

Comments are closed.