If you want to raise the minimum wage you need to raise productivity first

The video comes at an opportune time since this is a large part of where our next election will be fought: Business faces world’s highest minimum wage under Bill Shorten. I will also mention that the Card and Krueger study mentioned in the vid for many years played a large part in our own wage cases where I had to spend an inordinate amount of time demonstrating how inane the notion is that higher minimum wages do not cost jobs. They do. Unless productivity goes up, the only possible outcome of raising minimum wages is a fall in employment. The vid makes the case, while also establishing how out to lunch the economic establishment is in yet one more area. Thinking you can create jobs by raising the minimum wage is as stupid as believing you can increase employment through unproductive public spending. Modern economics has almost entirely lost its way, but if that’s the advice people want, there will be plenty of advisors to provide it.

The chart below is from that same article, showing the drop in the minimum wage as a proportion of the median wage which coincided with the GFC and may even have preceded it. A very old sequence, a downturn that decimates industry changes the employment pattern along with the underlying wage structure. Using averages as a measurable reality that can be adjusted by some kind of administrative policy will never ever work. If you want to raise the real wage or the minimum wage you can only do it by raising the level of real value added per employed person. That’s called leaving things to the market, a very old idea that has always worked when it has been applied, but another one of those notions economists in general have long ignored and is now all but forgotten.

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45 Responses to If you want to raise the minimum wage you need to raise productivity first

  1. Arky

    Why would raising productivity raise wages instead of lowering prices?
    Or does lowering prices effectively raise real wages?
    If so why don’t you just point out increased productivity lowers prices and therefore raises real wages?

  2. Arky

    Why would raising productivity raise wages instead of lowering prices?
    Or does lowering prices effectively raise real wages?
    If so why don’t you just point out increased productivity lowers prices and therefore raises real wages?

  3. Bruce of Newcastle

    Venezuela has increased its minimum wage. Yay!

    Venezuela: Maduro Raises Minimum Wage by 40 Percent to $2 a Month (3 Jan)

    I’m sure that Shorten can learn from Maduro’s hard earned experience.

  4. hzhousewife

    lol

    The Maduro regime is currently moving forward with plans to launch its own national cryptocurrency known as the ‘Petro,’ backed by the nation’s considerable reserves of oil, gold, and diamonds.

  5. H B Bear

    Venenezuela’s cryptocurrency should be called the flamingo and be exchangeable for the real thing around dinner time when people get hungry again.

  6. Mitchell Porter

    While we’re talking economics, does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

  7. egg_

    does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Da Union bruvvas?

  8. struth

    While we’re talking economics, does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Could you expand your theory here please?

  9. Snoopy

    does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Bill Shorten’s done pretty well for the son of a ‘waterside worker’.

  10. RobK

    I get that capital needs a return on investment.
    I get that government needs revenue.
    I get that labour needs a return on effort.
    I get that markets are price sensitive.
    It all seems quite simple really. I find it perplexing that they cant all find a happy medium that works. Such is life.

  11. Bruce of Newcastle

    While we’re talking economics, does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Yes. I do.

    Extreme Poverty In Rapid Decline Worldwide (3 Feb)

    Our world is certainly a long way from being perfect, and much more needs to be done to tackle poverty. Yet the incidence of extreme poverty has fallen sharply in the last few decades, despite the huge increase in global population.

    In 1970, 60% of the world’s population was living in extreme poverty. This had reduced to 10% in 2015.

    Now look at the graph in the story.

    I’d wager that quite a few of the remaining extremely poor people are in Venezuela.

  12. Botswana O'Hooligan

    The only fly in the ointment of – more productivity is needed to increase wages – is probably best demonstrated by asking the question of should undertakers bury more bodies, should the medical profession kill more than the 17% that die from misadventure in hospitals at present. On the other hand, why should a builders labourer on a CMFEU controlled worksite have a base salary of 155K or something near to it. There is no solution for as long as humans are around and to prove it, go to any BBQ or function and watch people, see them jockeying to be the first at the trough and get the best steak, crayfish, or whatever, and that is why communism failed miserably, because of people.

  13. Entropy

    Mitchell Porter
    #2627743, posted on February 4, 2018 at 2:38 pm
    While we’re talking economics, does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Not that that has anything to do with actual property, but what do you expect when markets are corrupted by the cosy Triumpherate of Big Government, Big Union and Big Business?
    The little guys get screwed by rules set up by Big Government to favour the redundancy and large HR departments of a Big Business, further sweetened by exclusive deals with Big Union, none of the leaders of which have ever seen a shop floor and have more in common with (and sleep with) the Big Business and Big Government types that those grubby workers.

  14. Entropy

    Formproperty read poverty in the first line above.q

  15. Confused Old Misfit

    most of the economic gains have been going to people who already have the lion’s share of the wealth?

    Some would call it a normal distribution. There is nothing wrong about it. It has been going on since humanoids became vaguely sentient, probably even before that.
    Those people are the ones who work at using economic opportunity to increase their wealth. They have been practicing this for generations. Some of them (and for my sins I am not one of them) have become very, very good at it.

  16. mareeS

    Our son works casual on mining shuts all 0ver the West and the Top End, PNG and Indo, goes home to his wife one week in four. He has many mates doing this in mining and offshore and because they and their wives have businesses. and the boys get to surf in the good seasons.

    People might not think this is a way to live, but we gave them $50k last year for a block of land at the beach at Canggu, they are building a 4br house for $50k at present with help from our daughter-in-law’s architect c0usin, due to be completed at end of march.

    Meanwhile, we are spending considerably more for a 1br apartment for our daughter above our garage, on land we already own, which may be approved by mid year.

  17. Linden

    its something you never hear about, how much and all the kick backs the unions heavies get, I betcha they don’t live on the ‘ordinary’ mans suburb or send their kids to the ‘ordinary’ mans school, etc If any can do a good and proper job of completely stuffing this country, no doubt it is dear comrade Bill

  18. Squirrel

    “If you want to raise the minimum wage you need to raise productivity first” – a quite logical position for anyone who wants increased employee remuneration to be sustainable – but in the pursuit of necessary productivity gains we would do well to look across the economy at those sectors which have, for various reasons, been deliberately shielded (partially or fully) from genuine market forces. Likewise, we would be wise to look, in some cases afresh, at sectors which are ostensibly subject to market forces, but which, in truth, are little more than rackets and rorts dressed up as markets.

    In the wondrous event that these things were done, there may well be scope to improve employee remuneration, but there should also be an easing of the hidden and unacknowledged cost of living pressures which are driving the demands for improved remuneration.

  19. egg_

    does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    State Gummint shiny arses like Gargooglery?
    Aren’t they talking about raising the level of the GST, to keep their fat arses in a manner to which they’re accustomed?
    Palacechook promised them a swag in the last Election in exchange for votes (WTF = they’d vote Labor anyway?)?

  20. Botswana O'Hooligan

    Squirrel, you are describing socialism mate for that is what Marxist Leninist countries did and do, and that is what our various governments have been doing by stealth for years now, shield some industries, solar and wind are good examples, costs of living via the dole, transport subsidisation for the dole recipients, and goodness knows what until a few workers who do pay tax and the well off who pay lots of tax, support the rest of the community, and that is pure socialism. One wonders what a visitor from another planet would think if he/she was told that the few who pays heaps of tax to support others who don’t work eventually retire and they are not eligible for a pension or any support for their years of toil, but the non workers continue to get a pension, and so do those bastards who are supposed to represent us in the Parliament, but don’t. Imagine my chagrin coming back to Australia after being chased out by Hawke/Abeles to discover that a married couple with a few kids got more benefits in the way of dole and allowances than I earned at the only job I could find, an instructor on jet aeroplanes. People shake their heads in wonderment about dole bludgers not working, our aboriginal people not working, and the people from the religion of peace not working, but why would you work if the taxpayer paid you to live more or less comfortably.

  21. NB

    Minimum wage.
    What do we want? Robots. When do we want them? Now.

  22. Arky

    the pursuit of necessary productivity gains we would do well to look across the economy at those sectors which have, for various reasons, been deliberately shielded (partially or fully) from genuine market forces.

    ..
    Yeah.
    Unlike those really productive sectors of out economy like textiles and footwear.

  23. Flyingduk

    So…..this new study…..bafflingly……shows that if something costs more (labour), people (employers) can afford less of it? We need a new study to explain this loco result!! (Sarc)

  24. Mitchell Porter

    struth
    #2627746, posted on February 4, 2018 at 2:47 pm
    Could you expand your theory here please?

    I was thinking, first of all, of the claim from Oxfam that “Four out of every five dollars of wealth generated in 2017 ended up in the pockets of the richest one percent, while the poorest half of humanity got nothing”. Though it turns out that if we focus just on Australia, we have our own extremes: “Top 1% of Australians own more wealth than bottom 70% combined”.

    And in fact the differences become more pronounced, the higher you look. The very richest people in the world, with fortunes of around $100 billion, must exist on a completely different plane than the one on which these macroeconomic debates apply. They may be, for example, oligarchs with near-monopolies, much of whose personal fortune is locked up in volatile assets like stocks.

    I don’t claim to understand how their world works, but if, as I said, most of the economic growth is going to people like them, then something is going on which has little to do with classic tradeoffs like unemployment vs inflation, or minimum wage vs productivity. Our western economies are politically dominated by the financial sector, it seems to me, and I am skeptical that the “growth” which is further enriching the ultimate rich, has much to do with any increase in concrete value, and has more to do with a kind of shifting financial power balance.

    But I am really just guessing. Another thing I find striking is that the population of Earth increases by one BILLION people every decade. So it could be that the number of customers who buy “things that everyone has” is increasing numerically, and this is increasing the fortunes of those who sell those items…

  25. nerblnob

    Let’s go to Glasgow, where politicians who courted the public with promises of *wage equality” for council employees – the old “vote yourself a pay rise!” speil – now find the city can’t afford it.
    Jobs will have to go.

    https://www.thetimes.co.uk/article/equal-pay-cost-of-equal-pay-is-500m-jobs-services-and-glasgow-s-crown-jewels-says-council-g2j3fc2b

  26. kc

    Mitchell, if you “don’t understand how their world (as in a capilalist free market economy) works” maybe you are on the wrong blog and might be better entertained at the gaurdian or fairfax.

  27. Gavin R Putland

    Employers can pay higher wages without reducing employment provided that they can pay less rent and/or less payroll tax and/or less compulsory super on top of wages. But any of those options would represent some sort of attack on privilege, so the only thing left to do is to screw the workers.

  28. 2dogs

    does anyone have anything to say about the fact that most of the economic gains have been going to people who already have the lion’s share of the wealth?

    I do. Consider the extent that this is the result of home ownership.

    Then consider our land use regulations.

  29. Mitchell Porter

    kc, let’s look at the Australia implied by the headline I quoted earlier. Think of it in terms of the old “village of 100 people” analogy. There’s one man, richest in the village; there are 70 others, the village poor, whose wealth together equals that of our single rich man; and then there’s a village middle class of 29 people, less than half the number of the village poor.

    Then add to this, that 4 out of 5 extra dollars earned in the village this year, go to the single richest man. That all sounds like feudalism, not capitalism.

    Now, I have combined a national statistic with a world statistic here. Maybe it’s not 4 out of 5 new dollars that’s going to our Australian 1%. But whatever the details, isn’t it obvious that something is going on here, that isn’t exactly the capitalism of economics textbooks?

  30. harry buttle

    We already have a minimum wage setting, the dole – offer someone less than that and, without serious incentives, they won’t take the job.
    Minimum wage jobs are not meant to be careers, they are there to let you establish a work history and most of those jobs are looking down the barrel o looming automation, this just makes it cost effective sooner.

  31. EvilElvis

    How about we gut all public services, that would be productive. Then we could lower the tax burden on everyone, that would increase take home pay.

    Why is it always the private sector having to be more productive, efficient and providing more than its fair share?

  32. EvilElvis

    Mitchell Porter, your problem from the view on your progressive high horse is that everyone looks ‘equal’. Now, the top 1% of said village on closer inspection may have an advantage either naturally or learned that the bottom 70% don’t have, they may even be disadvantaged either physically or like yourself, mentally. No two people are equal in a society, why would the outcomes of such a society be so then?

  33. BorisG

    I broadly speaking agree with Steve on this one.

  34. Tel

    Does the calculation of “Median Earnings” include people without a job?

    Does it include people on various welfare payments?

    My point is that if a recession causes the lowest paid workers (typically the least skilled) to be laid off and no longer working, and if you only count people who do have a job… then apparently the “Median Earnings” goes up, even when no one got a pay rise. However, if you count everyone then the median will reflect the fall in overall earnings as people are put out of work.

  35. Tel

    Thinking you can create jobs by raising the minimum wage is as stupid as believing you can increase employment through unproductive public spending. Modern economics has almost entirely lost its way, but if that’s the advice people want, there will be plenty of advisors to provide it.

    IMHO unproductive public spending can create employment, even if it reduces overall productivity. Point is that as productivity increases, presuming people are satisfied with a certain standard of living, they tend to work less because usually leisure is preferable to work. Thus, by creating obstacles to productivity (even better, spend government money employing people to BE an obstacle) you create ways to keep people busy, without ever getting to the point where they can step off the treadmill.

    Minimum wage is more insidious than that, because it creates an underclass of people unable to become productive at all, thus requiring all the other workers to increase productivity in order to make up for the growing percentage of people who cannot work.

  36. Mitchell Porter

    EvilElvis, I know natural inequality exists. But I think something dodgy is going on at the high end of the economy. Maybe it’s debt. The central bank lends to the big banks, the big banks lend to big business, big business announces plans for expansion and ambitious projected revenues, money flows into stocks. Isn’t that what already happened in the years leading up to 2008?

  37. EvilElvis

    So natural inequality exists but you’d prefer fake equality?

    There’s enough info in the comments above but the big government, big union, big business cabal is predominantly not made up of the 1%ers, they are actually part of the 70%, they have no fucking ideas or drive to produce anything, they’re a product of the ‘equal’ world you yearn for, dumbarses who have control of a few levers and have influence far beyond there means or intellects. You’re living in the world you want, Mitchell. The 1%ers are just chugging away doing what they do. They are smart enough to play the game by the rules society has set and still win.

  38. bollux

    Mitchell, stop whining and aspire to be one of the 1%. Both you and Australia will be better off. Life isn’t fair, get used to it. Ask Steve Jobs if being one of the 1% would be a fair swap for a healthy 29 percenter. Stop trying to be equal, try and be better.

  39. egg_

    So natural inequality exists but you’d prefer fake equality?

    Socialism in a nutshell.
    Ribbons for 11th place.

  40. Diogenes

    I was thinking, first of all, of the claim from Oxfam that “Four out of every five dollars of wealth generated in 2017 ended up in the pockets of the richest one percent, while the poorest half of humanity got nothing”. Though it turns out that if we focus just on Australia, we have our own extremes: “Top 1% of Australians own more wealth than bottom 70% combined”.

    Mitchell,
    you live in Australia – YOU are part of the 1% when taken over the entire global population

  41. Tel

    Slightly off topic but I searched around for the same “Economics Detective” show.

    https://detective.liberty.me/migration-and-fertility-with-lyman-stone/

    This is kind of interesting… I think there’s a lot of dodgy points there but worth a listen. They carefully do not discuss things like illegal immigrants working below the minimum wage (illegally) nor do they talk about the systematic wealth transfer out of the native born middle class because of the welfare state. Plenty of open-borders virtue signalling and tiptoeing around difficult issues… but at least they do approach the issue a bit.

  42. Mitchell Porter

    I’ve brooded a little on the revelation that I am a whining progressive who already belongs to the global 1%. Actually I’m a post-alt-right economic nationalist who thinks our country is being run by a corporate elite whose first priority is self-enrichment. But apparently that’s the best we can hope for?

  43. EvilElvis

    We can hope for a lot more, Mitchell. Until someone has the stomach for a slash and burn though it’s all we’ve got.

  44. Paul Farmer

    Mitchell…………in terms of your village analogy, the part you are missing is what is the standard of living of the 70 village poor ? The 70 village poor are far better off in a modern market system with a modern welfare state that is paid for via the gains of capitalism than they would be in any other system so far imagined . The productive many who are employed in our society contribute more than those that don’t, hence we can afford a welfare state, so before you start making throw away remarks that are really off topic that the system is broken you need to consider the absolute relativity of the bottom 70 who are supposedly poor in relative terms.

    Versus a socialist system or some other utopian model , our system might not be perfect but it works pretty well in what could be described as utilitarian terms ( the most benefits applying to the most people most of the time ) and in the process we havent had to sacrifice our freedom of thought, speech and association and economic liberty, which I know is trite to many lefties but it assuredly goes out the window when people start adopting other models less inclined to the importance of freedom.

    If you don’t believe this analogy is relevant, look at Britain or the US or Australia circa 1750/1800 at the start of the industrial revolution and look at it today. A lot of people made extremely wealthy in that time although interesting to note not many of the list that was tehre in the 19th century are still on that list of wealthy elites. In short Capitalism = incentive to innovate and new develop new technology and work hard and over decades this is why it wins, not slightly , not maybe but by miles and those wins haven’t been limited to a select few . If that means a few super rich people so be it……..I am more interested in how that system delivers to the 90 % who are not super rich and the working class has done pretty damn well over the last 220 years as anyone would know who has read any of Dickens.

  45. Bruce of Newcastle:
    Loved the link you provided ref: Extreme Poverty in Decline.
    The graph is heartwarming.
    On the same page is a link to Oxfam and its pushing of the Socialist barrow.
    Very good article which asks why Oxfam is funded with taxpayer money to nearly 200 million Pounds per year.

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