The Minimum Wage: Are Economic Laws Valid in Australia?
November 21, 2013 in Economics
Guest Post: The Minimum Wage and Unemployment in Australia
by Ben O’Neill
Are things really topsy-turvy down-under? Since people in Australia are already walking upside down on the bottom of the Earth, do the laws of economics operate upside-down also? Does the minimum wage in Australia lead to more employment, instead of less?
In light of recent debate over minimum wages, referring to the situation in Australia, one might be tempted to believe that the answer is yes. Some commentators have argued, contrary to prevailing economic theory, that the minimum wage can actually increase employment, owing to additional “money in the pockets” of workers flowing on to greater spending in the economy, which in turn causes greater demand for goods and services, and more employment for workers.[1] Some have attempted to bolster this argument by pointing to the high minimum wage and low unemployment rate in Australia as evidence that the policy either does not cause unemployment, or possibly even increases employment.[2] If only other countries could be more like Australia, where the beer is cold, the women run around in bikinis, and the minimum wage and employment levels are both high!
Australia and the USA: a simple comparison
A simple comparison of the reported minimum wage rates and unemployment rates in Australia and the USA show that, prima facie, Australia has a higher minimum wage and lower unemployment.[3] Even after conversion of the minimum wage into equivalent currencies, or equivalent purchasing power, the higher minimum wage in Australia still holds.[4] This simple comparison tells the story of an Australian economy with greater employment and higher minimum wages than in the US.
However, as with many superficial comparisons of this kind, there is a lot more to the story that must be understood. First of all, the rosy picture of employment in Australia ignores a great many statistical issues which take certain kinds of unemployment and underemployment out of the official figure. Second, the minimum wage in Australia is exaggerated somewhat by the above figure, since its application to low-skilled groups is tempered substantially, using a sliding scale of rates that reduces the hallmark figure for the main groups affected by the policy. Finally, there is the simple fact that basic comparisons of this kind do not get to the root of the causal effects of a policy like minimum wages — economic comparisons must …read more
Source: MISES INSTITUTE
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