5 Jun 2013

Big Business Loves Dead End Jobs

By Ian McAuley

If employers have to pay a minimum wage, then they've got an incentive to invest in staff skills and productivity. That's what the business lobby will never understand, writes Ian McAuley

The reaction to Monday’s decision by Fair Work Australia to grant a 2.6 per cent boost to the minimum wage was so predictable that The Australian didn’t bother to report it on their front page. It was reserved for the message that NBN, and therefore “Labor”, is to blame for a decision by Telstra's predecessor, the Postmaster-General, to use asbestos in the 1950s and 1960s.

The Australian Chamber of Commerce and Industry (ACCI) called the wage increase a “body blow” to small business “employers”. Its submission to Fair Work Australia had called for a pay rise of only $5.80 on the minimum weekly wage of $606.40.

The Australian Council of Trade Unions (ACTU) called it a “kick in the guts” for low-paid workers. It had argued for a $30 rise, largely on the basis of the need to redress widening income inequality.

It was left to Judith Sloan to make the most contentious comment, suggesting that the minimum wage be frozen – that is, to be allowed to fall in real terms. Hers is an oft-repeated argument: because high wages discourage employers from hiring staff we should let wages fall to the point that there is no more unemployment.

She went on to draw attention to the commission’s observation (pdf) that not only minimum wages, but also the “tax-transfer system plays a significant role in alleviating the impact of earnings inequality and supporting the living standards of low-paid workers”.

Her arguments have superficial appeal. Surely it is cruel to lock people out of the opportunity for work by setting too high a minimum wage. We should let the minimum wage fall and should support living standards through social security payments.

That logic may suffice for a pass mark (but no higher) in a first year economics exam, but it ignores important aspects of the economic role of minimum wages, particularly in the Australian context.

To put it simply, if a business has to pay a reasonable minimum wage, there is an incentive to ensure that people are employed productively. Any Australian visiting the USA, where federal minimum wages are $US7.25 an hour compared with our $A16.37, cannot help noticing how many people are employed in jobs such as parking attendants, domestic servants and supermarket bag packers – “dead-end jobs,” to use John Howard’s term.

In other words, a high minimum wage is a spur to productivity. It carries a financial incentive for efficient work practices, and encourages the use of labour-saving technology. In fact our high exchange rate, while obviously hurting in terms of price competitiveness, should provide an excellent opportunity for businesses to import labour-saving machinery.

In the static world of basic economics textbooks, high wages and substitution of capital for labour may result in some loss of employment opportunities, but in the more complex world of dynamic systems higher productivity means higher incomes and more employment all around — and that’s just what’s been happening in the Australian economy.

Over the last 15 years the number of people employed in high-skill occupations (ABS classifications “managers” “professionals”. “technical and trade workers” and “community and personal service workers”) has grown by 2.3 million or 52 per cent, while the number of people in lesser-skill occupations (“clerical and administrative workers”, sales workers”, “machinery operators and drivers” and “labourers”) has risen by only 0.8 million or 20 per cent. The workforce is changing, a point clearly acknowledged by the commission, when it observed that the proportion of workers described as “award reliant” has fallen from 23 per cent to 16 per cent since 2000, and that non-award incomes were running well ahead of award incomes.

The minimum wage and the associated awards which link to it are becoming more a backstop than a prime determinant of people’s pay and conditions. That doesn’t confine the minimum wage to irrelevance, however. It will always have a function in protecting people who lack the capacity to bargain for their full worth and who may sell themselves short, including those with poor English, those who lack information on comparative wage levels, those whose work situations are isolated and those who lack confidence and negotiating skills.

The minimum wage also serves a stronger function, in that it helps ensure at least a basic income and something more dignified than a low-productivity job. In pure financial terms there is a case for letting the minimum wage fall and supplementing it with social security payments, but that amounts to a subsidy to business to provide dead-end jobs, and it sustains welfare dependence. The message in such an arrangement is “you’re not productive enough to look after yourself”.

Howard regretted the passing of dead-end jobs, and it seems that such thinking is still alive in the Federal Coalition with its opposition to the Gillard Government’s education reforms. The more expansive vision is of a workforce in which everyone is able to make full use of their capabilities. If a high minimum wage restricts opportunities for those without qualifications that’s not necessarily a bad thing, for it provides some incentive for young people to stay on at school and to gain post-secondary qualifications.

It also plays a small part in reducing inequality in the workplace. It provides some protection against the emergence of an “underclass” of working poor resentful of the unfairness of the economic system. It helps ensure that all workers have a stake in productivity and more broadly in sustaining the capitalist system. But the ACCI just doesn’t get this point, for in its submission to the Commission it wrote:

“ACCI anticipates that some parties, particularly unions, will provide submissions which compares the minimum wages with remuneration of company executives of top ASX 200 companies or salaries more generally in the community, including high skilled employees ... It is unclear how any of this type of information actually assists the Panel in understanding how determinations of the Panel impacts [sic] on an award reliant small business retailer and their staff?”

The ACCI seems to be locked into an early nineteenth-century model of class struggle, which divides between “bosses” and “workers” with antagonistic interests, where the division of rewards is a zero-sum conflict. Although it describes itself as “the authentic voice of Australian enterprise & industry” it’s more about representing those who see themselves paternalistically as “employers”.

That’s a long way from a more liberal and contemporary economic model in which people – some with financial capital, some with technical skills and qualifications, some with organisational ability, and some with energy and creativity – come together to create value and to share the rewards from their contributions.

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aaron
Posted Wednesday, June 5, 2013 - 14:49

A lot of low paid jobs can't be replaced by machinery such as retail staff, waiters and in most cases cleaners, in these cases high minimum wages simply mean more of these businesses go bust. Rather then encouraging innovation a high minimum wage crushes small business and creates structural unemployment. Yes manufacturing can save labour costs through machinery, though most probably already do this. I doubt the premise that manufactures do nothing to reduce costs until the government forces up minimum wages. Business people are not stupid they are always trying to reduce costs, usually the only time they won't is when government intervention/protection creates protected or monopolistic industries. The most likely outcome of a high minimum wage is that manufactures go to Asia where there is cheaper and in many cases higher skilled labour.

I think the falseness of this whole argument is demonstrated by Europe where many countries have high minimum wages which results in high structural unemployment.

 

jackal012
Posted Wednesday, June 5, 2013 - 18:54

aaron

Business people are not stupid they are always trying to reduce costs.

 

Yeah, by running equipment into the ground and cheating workers out of their entitlements, like super. Most casual do not chase their super when only employed for short periods.

On top of that where do you thing consumers come from or who are they.

 

The CONSUMER needs to earn money, good money, so that he can spend it. 

Most coffee's are bought and payed for with disposable income, most Hobbies are financed by disposable income. If you earn nothing you spend nothing.

Most small business's go broke after 3 years, have a look at the figures, Why, there stupid businesses that were never going to take off. Run by idiots who believed economists, who are nothing but cash for comment cows.

 

Judith Sloan is a Liberal Party Monkey, same as Peter Reith, found on The Drum.

 

jackal012
Posted Wednesday, June 5, 2013 - 19:26

What is it that you people don't get.

Depressions are caused by the top end of town. Allan Greenspan the Jesus Christ of the Financial world, THE MAN, got it wrong and so are the rest of the brain boxes.

The Land of Big everyrthing is 13 Trillion in debt, the place is a Joke. It killed 100 million to get on top, they had it all and blew it and they are still blowing it, take away the weapons industry and the dump would fall over.

So what makes you the Allan Greesnspan of the Business world or why would you be smarter then him, or why would Judith Sloan know something Greenspan apparently didn't.

Who do you Dills think gave us the depressions, the working classes and their high wages.

The working classes and their productivity fed the war in England, Russia and the Pacific while the Russian Hords fought 65% of the German Army at huge losses. The Yanks only took 90 divisions to Europe. Economics 101 somebody. 

America's Civilian economy grew by 16% after 11 long years of Depression and 17% unemployment, it was the only Country and the only Country to ever  achieve such a gain, during a war.

Yet they can't run a good ship in peace time, why is that, their going broke.

We are talking Fantacy land here. The 1st Empire England got rich by raping Pillaging and Plundering and so did the second one, America. No Inteligence required to steal and shoot if the victims don't give. This Economics stuff is just bull to hide the reality, stealing is the only way to make money. Stealing to the working classes means one thing but the rich Thieves, well, they have Corporate law and other rubbish to hide behind.

Business and Economics is the Joke they tell us to make the working classes think that they know what their talking about and hide the fact that their thieves.

 

Kevin Charles H...
Posted Wednesday, June 5, 2013 - 20:01

jackal012:

agree 100% with the thrust of your post.

Here's a post by  Jeffrey St Clair Counterpunch May 2013 about the US demise which also captures the spirit of your post.

Our politics has gone sociopathic and liberals in America have been pliant to every abuse, marinated in the toxic silt of Obama’s mordant rhetoric. They eagerly swallow every placebo policy Obama serves them, dutifully defending every incursion against fundamental rights. And each betrayal only serves to make his adoring retinue crave his smile; his occasional glance and nod all the more urgently. Still others on the dogmatic Left circle endlessly, like characters consigned to their eternal roles by Dante, in the ideological cul-de-sac of identity politics.

How much will we stomach before rising up? A fabricated war, a looted economy, a scalded atmosphere, a despoiled gulf, the loss of habeas corpus, the assassination of American citizens…

One looks in vain across this vast landscape of despair for even the dimmest flickers of real rebellion and popular mutiny, as if surveying a nation of somnambulists.

We remain strangely impassive in the face of our own extinction."

Finally, I wonder how many of the pro business posters above realise that the US Federal Rerserve is a private banking organisation over which the US Congress has no effective power?

The Fed is the world's most powerful body.......by a mile.

Check out the Ypou Tube posts of Ron Paul & Alan Grayson as they question the Fed's boss, Ben Bernanke...jawdropping stuff.

GraemeF
Posted Wednesday, June 5, 2013 - 20:38

Call me ignorant but I can't understand how a tax deductible expense such as labour can ruin a business. It just has to impinge on cash flow, not the profits. It just means a bigger expense to write off like your power bill.

 

Please explain.

aaron
Posted Wednesday, June 5, 2013 - 23:39

GraemeF you are ignorant, have you not heard of payroll tax?

thomasee73
Posted Thursday, June 6, 2013 - 06:54

@aaron, first post.

Economics isn't straightforward. You didn't follow the hypothetical in your case study far enough. If retail staff, waiters and cleaners can't be replaced by machinery, and retailing businesses, restaurants and cleaning companies with high labour inputs go bust, then how will retailing, restauranting and cleaning be done instead? By your own premise, certainly not by machines.

If labour really is irreplaceable, then increasing the minimum wage forces costs to go up for the entire industry. Customers still want those services, so the businesses don't go bust, they just raise their prices. And the increased prices are paid by customers who are relatively wealthier than those who are still at the bottom of the pyramid on the minimum wage. 

You can't argue economics from an armchair and come to a definitive conclusion. For every argument that says an increase in prices will benefit suppliers through increased revenue there is an equal and opposite argument that says that customers will buy less and revenue will fall overall. With sufficient sleight of hand it is easy to conflate revenue and profit, price and value, spending and happiness, interest and rent, wages and wellbeing, or normal and supernormal profic, or to assume that some markets are perfectly competitive and balanced, but that others are not, as necessary to suit the conclusion. It's then straightforward to construct a plausible sounding line of logical "argument" that you can use to prove anything you want as preferred to support your particular political solution. And you definitely can't use "common sense".

For example, the time that employees spend goofing off during working hours to play on facebook and check up on the latest results on reality TV can be argued to add a lot of value to the economy. The businesses that those employees are working for are not going bankrupt (if they did, the staff wouldn't be on line at work, right?) so the productivity of those staff is a fair contribution to the business in return for their wages (The labour market is competitive). If the employees didn't shirk in the office, their productivity would be higher (businesses must operate at maximum efficiency otherwise they would not be competitive and would not exist) and they could therefore bargain for higher wages (the labour market is competitive). Therefore, employees are expressing a preference to play on the internet rather than increase their income. In effect, they are "spending" foregone income on leisure - income that doesn't appear on the national GNP accounts. How much is this worth to the economy? Easy - mutliply the number of hours spent on-line by wages.

Spot the flaw in the above argument. You'll only find one if you look hard enough and you'll only look hard enough if your politics are so offended by the conclusion that you are sure there must be a mistake somewhere. 

There is an equal and opposite argument that concludes that people goofing off at work costs the economy a lot of productivity. That argument also has assumptions in it that are no more justifiable than those supporting the conclusions above. However, because the conclusions are intuitively plausible (and also because they happen to support the relatively more powerful business lobby rather than the relatively less recognised class of low-paid staff whose jobs are so meaningless and unrewarding that reality TV is more interesting) the unjustifiable assumptions that are required to make the more plausible argument unassailable are rarely held up to scrutiny. ...Until they support an inconvenient conclusion in some particular situation. And then there will always be an economist for sale who will be glad to unearth a "market failure" and to tweak the argument to make the assumptions more "realistic" in just the right way.

Yep. Economics is difficult. Its difficult to argue from an armchair and come to a unique, water-tight conclusion. On the other hand, economics is easy. Given almost any desired conclusion, it is possible to construct a plausible sounding, logically connected, "argument" that supports that conclusion, and befuddles a good 90% plus of the population. 

Why? The standard assumptions of economics are so unrealistic that you just choose which assumptions to make more in accordance with the reality of the particular case in hand, just making sure that you make the realistic changes that support your argument and ignore the option to make any realistic changes that undermine it.

Why not simply get rid of all the unrealistic assumptions? Well, that would make any definitive conclusions from the armchair impossible. And it also makes the proper detailed analysis too complicated - effectively impossible. The situation has to be simplified. The thing is, there are many alternative ways of simplifying and which ones you choose will have radical impacts on the conclusions. 

imcauley
Posted Thursday, June 6, 2013 - 10:47

Thank you Aaaron and Thomasee73.

You have taken the thread into two important distinctions -- between "trade-exposed" and "trade-sheltered" industries, and between those industries which can substitute capital for labour and those that cannot.

Trade-exposed industries which are intrinsically labour intensive, such as clothing manufacture, cannot survive in Australia in a global competitive environment. Even China, with hourly labour costs for low skill workers a fraction of ours, is shifting such activities offshore to other countries with even lower wages.

Trade-sheltered industries which are intrinsically labour-intensive, such as restaurants, should, in armchair theory, be able to pass on their costs to customers. But I know many restauranters are doing it tough, and I know that labour costs are one issue.

It's an industry with unique problems.  One is penalty rates -- an issue which should be separate from minimum wage determinations, but which has become linked in awards. Penalty rates which were designed as fair compensation for 10 pm to 6 am factory shifts are not necessarily appropriate for restaurants and bars. Another is competition from enhtusiastic and competent people running family businesses (here in Canberra many businesses are run by retired public servants on good pensions who don't worry if their hourly takings are a pittance). Another is the power of retail landlords -- avaracious rent-seekers in every sense of the term. And then there is competion from licensed clubs who cross-subsidize food and liquor from gambling: if they were international competitors they would be found to be breaking the WTO dumping rules. (It surprises me that the restaurant industry didn't throw their weight behind  Wilkie's gambling proposals.) 

What perhaps I should have said in my article is that we suffer a degree of hypocrisy, in that we like the idea of a high minimum wage, but are all too willing to grizzle when we find we have to pay so much more for our meals that we would in USA, Thailand or a host of other countries. A healthy economy is about people trading with one another, with no-one feeling exploited.

I, for one, whenever I'm in the USA, find the practice of waiters begging fir tips puts me off eating out. I want my economic transactions to be on the basis of mutual respect, not on the basis of charity.

aaron
Posted Thursday, June 6, 2013 - 12:00

imcauley your right we don't want to see people working on Asian wage levels in Australia. But I still think the minimum wage should not be set at a level which creates structual unmployment and hurts business. I guess maybe the biggest issue here is cost of living in Australia. If the whole cost structure of the economy was reduced eg. rent, housing, electricity food then such a high minimum wage would not be required.

And yes your point about penalty wages is legitimate, and yes there are other ways to help increase business competitiveness, eg. reducting regulation.

I guess setting the minimum wage is increadily subjective but competitiveness internationally should be a key factor considered when setting it.

Evan
Posted Thursday, June 6, 2013 - 13:22

Hi aaron,

 

Perhaps the minimum wage doesn't create structural unemployment.  This was Ian's point about theory and the complex real world.

 

The restaurant industry got reduced penalty rates.  Now they want lower wages.  That path seems doomed.

jimmy_o
Posted Thursday, June 6, 2013 - 13:57

I'm not sure why new matilda gives a voice to this rubbish.

The vast majority of goods and (especially) services produced in Australia are consumed in Australia. High minimum wages put a floor under consumer purchasing power which supports employment levels. Look at how vacancy rates move with the business cycle to see very clearly that unemployment is the result of a lack of consumer demand. You can not possibly argue that the upturn in unemployment seen since 2008 is related to minimum wages because real wages have stagnated or fallen. It is absurd.

Arguing that the pitiful wages of the poorest Australians explains why Australia is an expensive place is many magnitudes worse. Vile, disgraceful rubbish.

 

 

 

This user is a New Matilda supporter. Marga
Posted Thursday, June 6, 2013 - 16:20

The way Ian Mcauley explains it, it makes sense. 

However, what if the minimum wage is not a trigger to higher productivity, better training etc, but businesses shift operations overseas where they can (e.g. call centres = trade-exposed industries) or they import cheap labour for trade-sheltered industries, as they do no with the 457 visas, which - we are being told - are rorted because they have loopholes like a Swiss cheese.

If, on the other hand, by any miracle we could return - within a couple of generations -  to a global population of 200 years ago (roughly one billion or so), with every single person not only demanding a high standard of living but being highly skilled, educated and cultured, thus not willing to do menial and manual labour, then we would have to invent a 'homo robotica' which can take over the mundane tasks.  Although this sounds highly utopian, that is what we should aim for.  From a humanitarian viewpoint, why should people (and animals) have to do demeaning work below their optimum potential.  I don't  want anyone to cook and clean for me, unless that person has a high ambition to be a cook or cleaner. 

Then again, even now some jobs can be cut back.  For example: restaurants could reduce waiting-on-tables staff through self-service, or a surcharge if one wants to be waited on.   Supermarkets use increasingly self-serve checkouts (I use it exclusively now).  Maybe one day there will be a surcharge for the use of checkout staff, as some supermarkets now charge for the use of plastic bags.  Hospitals may be able to cut back on some staff where patients stay in hospital more for observation than because they are sick, for example, elective surgery cases.  The list of productivity efficiencies are almost endless.

Ian then highlights penalty rates.  I have never believed in them (although I support either extra payment or shorter working hours for night shifts), and they are a killer to many businesses - where businesses are not run as hobby or retirement businesses.