Guest Post: John Humphreys – Government destroys 100,000 jobs while unions cheer

Cross posted from John Humphreys: My adventures in chapter 6.

The recent announcement that the legislated minimum wage will increase by 2.9% means that we can expect there to be nearly 100,000 fewer jobs in Australia. In response, commentators and unions have cheered and asked for more.

This is a great example of Bastiat’s old rule about what is seen and what is not seen. When a business downsizes and people lose their jobs, the impact is immediate and visible – resulting in news headlines and stern-sounding politicians. But when the government subtly destroys thousands of jobs slowly and indirectly, they are given a free pass.

Of course, that is cold comfort for the unemployed.

Not only does the government get a free pass on this disastrous policy, but the opposition jumps on board too, and the chatterati clap along. Even business groups play the game by accepting a minimum wage increase, though they wanted it to be smaller. If the Australian Chamber of Commerce and Industry (ACCI) had got their way, then the government would only destroy 50,000 jobs. The Australian Council of Trade Unions (ACTU) on the other hand wanted to destroy 150,000 jobs.

This is the logic of modern politics – where good intentions and media sound-bites trump inconvenient facts.

The winning sound-bite is “we have increased the minimum wage to help poor people”. It seems so obvious, so generous, so benevolent. What could go wrong? The inconvenient fact is that increasing the minimum wage is a bad way to help the poor (since most recipients are from middle-income households) and it destroys jobs. That means more families caught in the welfare system and more children growing up in homes with no working parents.

The government, opposition and unions are hoping you are gullible enough to believe the line: “we have destroyed jobs to fight poverty”. Are you?

It is not as though the facts are in dispute. The “minimum wage elasticity of labour demand” is one of the most over-studied statistics in economics, and the empirical evidence overwhelmingly supports the very obvious notion that higher minimum wages lead to fewer jobs. No amount of poetic political polemics is going to change that.

Estimates for the link between minimum wages and employment vary, but in Australia the best estimate we have comes from Andrew Leigh, who found an elasticity of 0.29, with a sensitivity analysis range from 0.25 to 0.4.

This means that for each 1% increase in the minimum wage we can expect a 0.29% decrease in labour demand. Given that we have over 11 million people working, that means the proposed 2.9% minimum wage increase will reduce labour demand by 0.8%, which is just over 96,000 jobs.

The sad truth is that the minimum wage is bad policy. If it cannot be removed, then it should at least be frozen for several years so that it becomes functionally irrelevant. Defenders of good economics need to start speaking up against this failed example of feel-good politics, and if there are any politicians who are able to grasp these simple facts, then they need to speak up and start fighting for good policy.

If the government and their union cheerleaders actually want to help workers, then the best way forward is to increase our national productivity, which will flow through as higher wages. The government needs to revisit the Henry recommendations for corporate tax cuts and they need to find ways to lighten the regulatory burden, especially on small business. But you don’t start a productivity drive by throwing 100,000 people out of work.

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52 Responses to Guest Post: John Humphreys – Government destroys 100,000 jobs while unions cheer

  1. .

    Give that man his own timeslot.

    Well done sir.

    Get on the Bolt Report, John.

  2. Rabz

    He must die. John Humphreys must die so that this country can live.

    Good ol’ bird, turning the hyperbowl up to eleven again.

  3. JC

    Estimates for the link between minimum wages and employment vary, but in Australia the best estimate we have comes from Andrew Leigh, who found an elasticity of 0.29, with a sensitivity analysis range from 0.25 to 0.4.

    This means that for each 1% increase in the minimum wage we can expect a 0.29% decrease in labour demand. Given that we have over 11 million people working, that means the proposed 2.9% minimum wage increase will reduce labour demand by 0.8%, which is just over 96,000 jobs.

    Good bit of research by Andrew Leigh. I’m sure we’ll be hearing more about it from him. I hope he doesn’t see Shane Wand in the corridor though as he may end up with a serious bollicking.

  4. Chris M

    With a dumbed-down education system (economics not taught) and a dumbed-down media (unthinking lefties) there is no hope of change to this system – hope and change is dead. So the minimum wage, and by extension unemployed, ye have always with ye one might say.

    But one would expect the unions to cheer this – by definition they need a pool of unemployed and non-unionists to survive after all.

  5. Fisky

    I bet they’ll argue that as elasticity is less than 1, more income will go to labour if you raise wages, so spending will rise! We’ll create more jobs out of thin air.

  6. Fisky

    But you don’t start a productivity drive by throwing 100,000 people out of work.

    Actually, productivity would rise considerably if we jacked up the minimum wage! The Euros are always bragging about their superior productivity, but it’s pretty easy if you ban less productive people from working.

  7. Chris M

    There is a Christian principle that the employer negotiates a wage rate directly with individual employees with no government involvement. This is spelt out in a parable in Matthews gospel where the Lord himself is the employer, very capitalist we might say. Another reason the socialist left really hates this idea. It is also where the common saying ‘the eleventh hour’ likely originated.

    Matthew 20 “…like a householder who went out with the early morn to hire workmen for his vineyard. And having agreed with the workmen for a denarius the day, he sent them into his vineyard…. But about the eleventh hour, having gone out, he found others standing…. He says to them, Go also ye into the vineyard and whatsoever may be just ye shall receive. But when the evening was come, the lord of the vineyard says to his steward, Call the workmen and pay them their wages, beginning from the last even to the first. And when they who came to work about the eleventh hour came, they received each a denarius. And when the first came, they supposed that they would receive more, and they received also themselves each a denarius. And on receiving it they murmured against the master of the house, saying, These last have worked one hour, and thou hast made them equal to us, who have borne the burden of the day and the heat. But he answering said to one of them, My friend, I do not wrong thee. Didst thou not agree with me for a denarius? Take what is thine and go. But it is my will to give to this last even as to thee: is it not lawful for me to do what I will in my own affairs?”

  8. Chris M

    Actually, productivity would rise considerably if we jacked up the minimum wage!

    I wonder what you think of the Governments own ‘minimum wage’ which works out to about $8 per hour for a 38 hour week on the dole. Is it reasonable that the government be allowed to pay half what they demand the private sector must pay?

  9. Fisky

    I never knew the just and Christian position was free labour markets! Thanks for that Chris!

  10. C.L.

    Matthew 20 is the foundation-stone for Workchoices.

  11. Fisky

    @ChrisL – they don’t work all that time, so it’s not comparable. But $16/hr in the middle of a depression is going to see lots and lots of people lose their jobs.

  12. Dan

    It’s a bit closer to $6/ hour on the dole.

  13. Mother Hubbard's Dog

    So to reduce unemployment to the 2% of the 1960s, all we would have to do is reduce the minimum wage from the current $589.30 to $526.25. Why hasn’t this been considered?

  14. Wayneofperth

    Unions don’t represent the unemployed.

  15. Token

    Unions don’t represent the unemployed.

    …you’re right, the fees spent at the knock shop by Shaggers credit card came from 100% certified union members.

  16. Skuter

    Obviously the coalition are waving this decision through so as to avoid attracting scrutiny on IR generally, but they should be publicising Leigh’s research and arguing against it. I sense it is instances like this that are contributing to Abbott’s high disapproval numbers. However, if the Government thinks this is a positive for them, then they are deluded. Coalition supporters are disgruntled because Abbott is not right wing enough and those who disapprove of him would never approve of Turnbull nor vote Labor…

  17. Why is Humphreys applying the 2.9 per cent increase in award rates of pay to the entire labour force to generate the 100,000 jobs figure? Award dependent employees constitute around 15 per cent of the workforce and only 6 per cent of the entire wages bill. It’s embarrassing for you guys to post this garbage and then salivate over it uncritically.

    Can you tell me what’s wrong with his analysis in light of these facts or should I just go fuck myself?

  18. .

    You reckon utilities without rate of return regulation would make 48% ROE, so I think you know the answer.

  19. TerjeP

    Fair Work Australia authorised this increase in the minimum wage. An FOI request should reveal whether they did the relevant analysis to figure out how many jobs they were destroying.

    If they did no analysis at all that would be an outrage.
    If they destroyed all these jobs knowingly that would be an outrage.
    If they did the analysis and got it wrong that would be an outrage.

    Does anybody know how to do the relevant FOI request?

  20. Rabz

    Terje,

    Give it a break mate, it’s FWA, FFS. Lodge it in the next week and you’ll be lucky to get a form letter back by the time of the next election.

    FWIW, I reckon they did no analysis at all. Sinc alludes to this point above.

    2.9% is about the mid point between the increases sought by the unions and the employer bodies.

    No coincidence, in my opinion.

  21. Jarrah

    Make a request in writing to Fair Work Australia providing a reasonable description of the document. They are required to assist you to make a valid request. It costs $30 (plus $15 per hour for retrieval, then $20 per hour for deciding if it’s exempt). They can’t charge for more than two hours for each.

    However, the internal deliberations of government in policy formulation and decision-making is exempt, so it’s unlikely they’ll give you anything. Could be worth trying, though.

  22. Jarrah

    “you’ll be lucky to get a form letter back by the time of the next election.”

    They have to acknowledge receipt of request within 14 days and respond within 30.

    But I think you’re right, they did no such analysis. Much easier to split the difference between unions and employers.

  23. TerjeP

    Jarrah – So $100 max. I’m happy to put up the cash if somebody knows the ropes. To have a letter from FWA saying they did no analysis on the number of jobs destroyed by their decision would be an intriguing artefact.

  24. Alice

    Who gets the minimum wage anyway when they are only working a shift or two a week.

    This is such BS I dont know why you guys like Terje and Jarrah are salivating.

  25. Alice

    Ive heard everything now – we have Chris M up there prosetylinsing on the bible and those that dont turn up for work. Well goodness me does Chris M have a better parable for helping the poor and christian charity than to moan about those who dnt turn up for work?

    The minimum wage a week doesnt exist anyone because a lot of peopke work less than a week and if they get 2% more and the miners 2% less its overdue.

    This is a ridiculous post.

  26. TerjeP

    Alice – the minimum wage sets a minimum hourly rate of pay. It exists. It isn’t an illusion.

  27. if they get 2% more and the miners 2% less its overdue

    ::facepalm::

  28. Infidel Tiger

    This is a ridiculous post.

    It sure is. If you ask Sinclair nicely he might even delete what you wrote so you aren’t so embarrassed.

  29. Chris M

    Try reading a little slower perhaps Alice?

    Nothing there about people not turning up for work. And to your surprise the church actually doesn’t exist to help the poor or hand out ‘charity’. It’s relevant because much of our western government system and judicial system was originally based on these principles. But I agree it can be uncomfortable for lefties and God-haters to discuss.

    I suspect you have not employed low skilled people on the minimum wage or an award or you would know the direct relationship between the minimum wage rate and deciding to employ them or not and how many.

  30. m0nty

    You could probably find Biblical references for all of Abbott’s policies. Not too much reference to the Good Samaritan, though. Or chasing the money lenders out of the temple.

  31. TerjeP

    m0nty – that is a pretty blatant troll. Why don’t you find something positive to do with your time. Or else address the topic of the article.

  32. .

    Okay minty the fool where has Abbot engaged in Simony or refused to help those less fortunate than him?

    …and yes – you are simply trolling because John has written an excellent article, above your ability and you have no counter argument to defend your left wing ideology of theft.

  33. m0nty

    Chris M’s post is what I was reacting to, TerjeP. How about attacking CL for bringing up WorkChoices?

    People here seem to think that it’s off topic to do anything other than enthusiastically agree with the OP. It’s quite a peculiar attitude.

  34. dover_beach

    Not too much reference to the Good Samaritan, though.

    Quite, here, we don’t have to look at his policies so much as what he does personally as a life-saver, CFA volunteer, in indigenous communities.

    Or chasing the money lenders out of the temple.

    He appears quite good at chasing the Keynesians out of the Parliament.

  35. mundi

    This post is miss-leading. The author has forgotten to take into account the time of other rises and inflation.

    Since 2007 we have seen 13% inflation and the minimum wage has increased by 12.8%.

    Due to the non inflation adjusting tax brackets, the net take home pay for minimum wage earners has decreased, not increased in real-terms.

  36. TerjeP

    Mundi – that does not change the fact that this decision destroys jobs. Other factors (growth, inflation etc) will have other effects. If the real minimum wage was allowed to decline (as the author suggested) due to inflation jobs may in fact be created. It may not be that actual current jobs are destroyed by this decision, it may just be that jobs that would have formed now won’t. Either way it is a destructive decision.

  37. JC

    Fair is fair though New Gold Dream brings up a reasonable point in that mini wage earners don’t form the entire working age population so the assumption may cause the number to be too big. However this reasoning doesn’t take into account the potential flow on.

    Anyone have a counter? Is john’s number too big?

  38. New Gold Dream asks why I apply the elasticity to the whole of labour demand. The reason is that it is the “minimum wage elasticity of labour demand” so that is exactly what the elasticity was made for.

    If I had used the “wage elasticity” instead of the “minimum wage elasticity” then I would have over-stated the impact by inappropriately applying it to everybody. It’s a common mistake; but not one that I made here.

    As a rough guide, while the “wage elasticity” is also a contested number, it is closer to -0.8 rather than the -0.29 that I used above. If I had made that mistake, then my estimate would have been for about 250,000 lost jobs.

    It’s also worth pointing out that in economic modeling, you can be sure that all point estimates are wrong. This is just a guide to the rough magnitude of the impact… and a sensitivity analysis using a “minimum wage elasticity” of -0.2 to -0.4 gives a “lost jobs” range of 70,000 to 130,000. I didn’t mean to imply that we can calculate with precision the exact number of lost jobs.

    Finally, remember that I’m talking about “employment” here, not “unemployment” which also relies on the participation rate.

  39. Jc

    Thanks for clearing that up John.

  40. Infidel Tiger

    Can you tell me what’s wrong with his analysis in light of these facts or should I just go fuck myself?

    I guess you’ve answered this question for NGD.

  41. jtfsoon

    NGD has to fuck himself because no one else will do it for him.

  42. LOL, you shit-smeared mongoloids are hopeless. You should take your homework and get it graded by a grown up. I at least thought you guys were smart, even if you are all obsessives with borderline personalities. Now I’m not even sure about that.

  43. Infidel Tiger

    Do you kiss your girlfriend with that tongue NGD? Oh wait…

  44. JC

    NGD..

    Abuse is an art form. What you’re demonstrating isn’t abuse let alone classy abuse. It’s sounds awfully like a cry from the heart to me, or as the french say, cri de coeur over getting ribbed about this gal booting you for a six.

  45. Fisky

    I at least thought you guys were smart, even if you are all obsessives with borderline personalities.

    NGD got dumped by a libertarian chick and hasn’t stopped blaming us for it. Go away you creep, and don’t try on any Leftist Reversals on your way out.

  46. Gab

    You’re always so sensitive and empathetic, JC, even when abuse is hurled at you. A real gentleman.

  47. .

    You should take your homework and get it graded by a grown up.

    1. We’re eminently qualified.

    2. You were wrong.

    3. You have made some outrageous claims about natural monopolies.

    4. What Fisk said.

    5. Obtenir plus de votre petite amie et sont de la mer

  48. .

    LOL

    Obtenir plus de votre petite amie et un homme

  49. JC

    Why thanks Gab. Empathy has always been one of my core strengths.

    Look, even Dot is being the gentleman by speaking frog.

  50. Alice

    Chris M says

    “Nothing there about people not turning up for work. And to your surprise the church actually doesn’t exist to help the poor or hand out ‘charity’. It’s relevant because much of our western government system and judicial system was originally based on these principles. But I agree it can be uncomfortable for lefties and God-haters to discuss.”

    Hmm interesting take. The church actually “doesnt exist to help the poor or to hand out charity” according to Chris.

    That isnt what I was taught in Sunday School Chris M but maybe you go to one of those “its gods will you are rich” Churches.

    Have you given them your life savings yet?

  51. 1. We’re eminently qualified.

    How can you still have not figured this out then?

    Abuse is all you have to fall back on when you run out of arguments, that’s what you guys have in common with left-wingers.

    Thanks for clearing that up John.

    LMFAO, try again sugar.

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