Opinion & Commentary
Cut the minimum wage to expand low skilled employment
The Rudd government has set up a new board, Skills Australia, to spend a billion dollars in four years creating half a million new vocational education training (VET) places. Young people are being encouraged to stay in school longer, and the government also wants to improve the skills of long-term unemployed people.
All this sounds splendid, but not everybody can benefit from more education or training. The Organisation for Economic Cooperation and Development says training schemes for unemployed people have a very mixed track record, and those aimed at unemployed school leavers rarely achieve anything. This is confirmed by a new report from the National Centre for Vocational Educational Research which admits only 10% of unqualified school leavers who sign up for VET courses complete their training and get qualified.
There are also limits to expanding schooling. The Australian Council for Educational Research finds that students who leave at year 10 to take up apprenticeships do better than those who sign on for two more years of schooling or vocational training and then try to find work. Students with low numeracy and literacy scores who stay at school to year 12 are less employable, and earn lower incomes, than those who leave at year 10 and get jobs. Forcing more kids to stay at school can be counter-productive.
Some of the 1½ million working-age people living on welfare might benefit from additional training, but many would get more from an increase in lower-skilled jobs. This will only be achieved by reducing employers’ costs, for high wages deter employers from hiring marginal workers. This means minimum wages must fall.
Brendan O’Connor, the Workforce Participation Minister, has ruled this out, but he should think again, for our high minimum wage is pricing the most disadvantaged Australians out of the labour market and depositing them on welfare.
Australia has one of the highest minimum wage levels in the world. In US dollar purchasing parities, our real hourly minimum wage in 2005 was US$7.58. In France it was $7.20; UK $6.34; New Zealand $5.51; Canada $5.14 and the USA $4.57. We could reduce our minimum wage by 20% and still be comparable with Britain and New Zealand. And a 20% reduction could generate 100,000 new jobs, most of them suitable for people with few skills.
A cut need not make low income workers worse off. Ireland’s minimum wage in 2005 was US$6.06 per hour; Belgium’s was US$6.57; the Netherlands’ was $6.76. All were significantly lower than Australia’s, yet in all three cases, their minimum wage earners took home more money than ours did. This is because these countries levy lower net taxes on low income earners than we do.
Instead of focusing on the gross minimum wage, we should be thinking about protecting people’s net disposable incomes. With a bit of ingenuity, we could cut the minimum wage and increase the supply of low-skilled jobs without making existing low-income workers any worse off. That really would be an achievement the new Rudd government could boast about.
Professor Peter Saunders’ paper ‘Expanding low-skilled employment’ is published on Wednesday by the Centre for Independent Studies (www.cis.org.au)
