By Elise Williams

If you’re a university student, you’re more than likely familiar with soul-sucking, mental health-destroying, minimum wage jobs. Here in Australia, very few people are exempt from this cursed rite of passage. Nonetheless, we need to be grateful that our country legislates a mostly-liveable minimum wage for these types of jobs, which is currently $19.84 per hour for an adult [1] – or approximately $15 USD at time of writing (yes, this is heading where you think it is).

It’s not hard to believe anymore that there are people who are fervently opposed to increasing the minimum wage to align with the increasing cost of living that is associated with inflation. They claim a living wage would harm “small business owners”, that it’ll affect those seeking jobs, and drive up the cost of living for everyone else [2]. But if one dares to click on the blood-boiling comment section of any article relating to employment, it is painfully clear that a lot of these people simply believe that some jobs don’t deserve a living wage at all, which defeats the purpose of having a minimum wage. Particularly, in the US, the shockingly low wages do not only apply to your local “hey babes” fast fashion salesperson, or the teenager who repeatedly messes up your McDonald’s order. Various “respected”, educated professions – such as teachers [3], are subject to not being compensated enough to get by, considering the burden of their higher education loans.

It is not the point of this article to analyse the thinly veiled class drama going on in America (the prime suspect nationality for most of these comments), but more so to actually examine what happens when wages are increased, through the lens of economic theory. After all, what is an economics article without a graph?

Let’s go back to a fairly simple Keynesian-style model, which many economics students would be familiar with. Plotting wages w on the vertical axis and labour “quantity” N on the horizontal axis, a basic model can provide some insight into what occurs with the labour market when wages are raised.

Figure 1: Basic graphical model showing the theoretical impact of raising wages

When the initial wage w1 is raised to new wage w2, things are thrown out of equilibrium. To theoretically correct this, either labour demand or labour supply must shift to create the perfect x-shaped equilibrium we all know and love. Unfortunately for our theoretical labour force though, it is likely that Nd will shift to the left (decrease), which means a lower value of N, which means lower employment. Theoretically, it is inefficient and undesirable.

Does this incredibly limited, theoretical analysis prove minimum wage naysayers right? Perhaps. It does not prove them wrong at least.

Before we go into the more philosophical side of things, however, let’s look at the empirical evidence. To anyone with a passing grade in Introductory Microeconomics, it’s no surprise that the greater demand for goods and services enabled by a higher minimum wage would enable the price of those goods to increase [2]. The question is, how big is this impact? While no major changes to the minimum wage have occurred in Australia recently, it’s a good example to visualise. Using data sourced from the RBA website [4] and Fair Work Commission [5], below is a graph displaying the trends of the Consumer Price Index (CPI), the inflation rate, and the hourly minimum wage for the year.

Figure 2: Graphical comparison of the trends of CPI (blue), Inflation % [4] (green), and minimum hourly wage [5] (red)

As visible in the graph, the three indicators tend to follow the same general trend of a slow incline. However, CPI actually does increase visibly over time. Whether this is due to wage increases or other factors is a different matter, but it is clear that there is perhaps some basis for the concerns people have about minimum wages. However, there is evidence that the large increase in minimum wage that residents of Washington state, USA were awarded did not actually impact the prices of the food items that had their prices tracked [6].

Now that the pretty graphs are out of the way, it’s time to confront the ethics of the matter. While putting a more liveable wage in place for low-income workers may have a potential adverse effect on some elements of the economy, does the effect on prices outweigh the benefits that workers will receive? Raising wages cannot combat poverty entirely, as there are those affected who cannot or do not work, but it is a start for ensuring more equity in society, and a better standard of living, which reflects well on a country. The outraged reactions that are provoked when the matter of raising wages is brought up, and the victimisation of other professions and small businesses that tends to be done, implies that the issue may be with the way modern economies and businesses have relied on operating for so long.

Like it or not, anyone who is willing to work full time as any sort of employee should be able to confidently afford a stable roof over their head. Can an economy really claim to be successful if so many of its constituents are an unexpected expense away from poverty? Addressing the suitability of a region’s minimum wage legislation is one way to move towards a higher standard of living and economic justice.

UQES Publications welcomes reader correspondence on our articles. If you wish to reply to points raised, or believe a perspective has been missed, feel free to send respectful responses to publications@uqes.com.au. We will endeavour to publish correspondence in subsequent articles.

References

[1] Fair Work Ombudsman. (2020, June 19). The Commission has announced a 1.75% increase to minimum wages.

[2] Smith, K. A. (2021, February 26). What You Need To Know About The Minimum Wage Debate.

[3] Weir, M. (2019, October 5). 10 alarming facts about teacher pay in the United States.

[4] Reserve Bank of Australia. (2021). Statistical Tables (Consumer Price Inflation – G1 document).

[5] Fair Work Commission. (2020, July 1). National minimum wage orders.

[6] Constant, P. (2021, February 20). How to respond to the 5 most tired, trickle-down arguments against the $15 minimum wage.

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