More low-paid work is part of the problem, not the solution.

Employer organisations such as the Australian Retailers Association, supported by the federal government, have recently argued that wages for Australia’s lowest-paid workers should be increased by less than inflation. This would mean a cut in real wages. But none of their assertions are sustained by evidence or research.

Three arguments have been put forward to cut the minimum wage. First, that the cut will ensure employers create more low-paid jobs, thereby reducing unemployment. Second, that low wages are not a problem anyway, as low-paid workers are “often found in high-income households”. Finally, that there have not been sufficient productivity improvements to support wage increases for the low-paid.

This is counter to the current thinking on wages. After advocating for decades that Australia needed more (downward) “wage flexibility” to solve unemployment, key international agencies – including the World Bank, IMF and the OECD – now recognise this misses the point. Australia’s award wages for our lowest-paid workers are among the highest in the world and this is now recognised as a good thing.

Meanwhile, deepening inequality, much of it originating in the labour market, is retarding the demand necessary to sustain output and employment growth. If people’s real earnings fall, then they have less to spend. When people spend less, demand for goods and services falls, and in turn so does the demand for labour (i.e. jobs). This is why a cut in wages for low-paid workers will not create jobs; rather it will reduce living standards for those earning them.

In Australia, there is modest alarm at just how low wages growth has become. Wages are growing at only 1.9% per annum, which is significantly down on the rate over the last decade.

The RBA recently released research noting workers now have too little bargaining power in wage setting. Even the federal treasurer has said slow wage growth is one of the economy’s biggest problems. It could also cause issues for the budget, as it means less income tax for the government.

Cutting wages for the lowest-paid will only make these problems worse, not better.

Originally Published by The Conversation, continue reading here.

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