Minimum Wage: Concepts, Arguments and a Case Study on Australia

The essay discusses concepts of minimum wage with reference to a case study of Australia. It covers arguments for and against minimum wage, the framework of minimum wage in Australia, issues related to minimum wage, and the tradeoff between cost of living for workers and affordability of employers.

Running head: LABOR ECONOMICS
Labor Economics
Name of the Student
Name of the University
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A. Introduction
The determination of wage depends on contribution of workers in order to provide
direct or indirect, monetary or non-monetary reward guided by ability of the organization,
payment system and legal regulation. In deciding wage, minimum wage legislation is
considered as one important criterion. Levying a minimum wage actually protects weak,
isolated or ill-informed workers group from exploitation of employers (Sulaiman, Olanrewaju
& Tinuke, 2012) Minimum wage through the voluntary bargaining mechanism offers a
comprehensive protection to these group of workers. Minimum wage has now become a
global practice to protect used by different countries across the globe. The estimates of
International Labor Organization (2008) suggests that almost 90 percent countries today
practice the policy of minimum wage. One basic argument in favor of minimum wage is that
setting a minimum wage allows workers a reasonable income that can meet their basic
necessities and improve standard of living. The essay discusses concepts of minimum wage
with reference to a case study of Australia.
B. Definitions and concepts related to Minimum wage
In simple terms, minimum wage refers to the smallest hourly wage that an employee
has to paid as fixed by legislation. There is a periodic adjustment to the fixed minimum wage
in line with price level and inflation. The International Labor Organization defines minimum
wage as the minimum payable sum to a labor for the performance and services offered within
a given period, that is computed based on time or output, which may not be reduced, which
cannot be reduced either by collective agreement or by individual and is fixed such that it can
meet the minimum need of workers and their families in view of the prevailing condition of
the economy and society.

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The concept of fixing a minimum wage involves three basic ideas. First, minimum
wage is considered as the minimum payment to the workers to fulfil their daily necessities of
food, clothing, education, housing, recreation in relation to economic and cultural
development of the specific country. Second, minimum wage presents the minimum level of
permitted remuneration fixed by the law or fact irrespective of the remuneration method or
workers’ qualification (Blackburn, 2016). Third, minimum wage refers to the wage that each
nation implements by the force of law and is implemented under the threat of penal or other
jurisdiction sanctions.
The effective implementation of minimum wage depends on a number of factors. The
success of minimum wage legislation depends on the extent to which it can offer protection
to all the workers involve in an employment relationship including youth, women and
migrant workers irrespective of contractual agreement. Minimum wage needs to be set in
such a way that it can cover need of the workers and their families (ilo.org., 2019). Another
important factor in determining success of wage legislation is whether employers comply
with the regulation of minimum wage.
Figure 1: Main dimensions of minimum wage
(Source: ilo.org., 2019)

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C. Arguments for minimum wage
Several studies in the field of minimum wage support a legislative minimum wage by
indicating several benefits of minimum wage. Some arguments in favor of minimum wage
has been discussed below.
C.1 Positive effects of minimum wage on health, education and the society
A considerably higher minimum wage helps to sustain a healthy population and
reduces mortality. The minimum wage by securing a minimum income allows people to
afford enough food, do physical exercise and reduces premature deaths (Horn, B. P.,
Maclean, J. C., & Strain, 2017). As minimum wage increase wages of low-income people,
there is a significant improvement in condition of overall health along with a reduction in
health inequalities. Minimum wage in addition to improving state of health of worker also
increases school attendance and reduces the tendency of school drop outs. Studies found that
teenager living in poverty are three times more likely to miss schools compared to other who
living in a good condition (David, Manning & Smith, 2016) Minimum wage also has a
positive effect on society in terms of lowering crime rates. The minimum wage by ensuring a
sustained minimum income helps to reduce poverty related crime.
C.2 Minimum wage and poverty reduction
Implementation of minimum wage is seen as an effective way to reduce poverty and
income inequality. Minimum wage has a positive consequence on income of low-skilled poor
workers who previously receive a lower wage enjoy a considerable income gain (Sorkin,
2015). Higher minimum wage results in a considerable boost in income of people living in
bottom line of income inequality. Study on United State showed revealed that minimum wage
substantially increased earnings of lower tail of the income distribution since 1970. The effect
stopped with a substantial decrease in real value of minimum wage (Konczal, 2014). This

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provides empirical evidence on how a legislative minimum wage helped to deal with low
wage workers and fight inequality.
C.3 Minimum wage reduces government spending
Government of a country conducts different income support program to boost the
living standard of poor people. A considerable amount of money is spent for such programs.
If income is raised through minimum wage, then government no longer needs to carry out the
income support programs. This helps the government to save money and support expenditure
on other fields (Allegretto et al., 2017). By reducing cost burden of government, the
minimum wage legislation also helps to reduce burden of the taxpayers.
D. Arguments against minimum wage
Minimum wage however is not always beneficial for the economy and society. Critics
of minimum wage have put forward different arguments against levying a fixed minimum
wage. Some of the arguments against minimum wage has been discussed below.
D.1 Minimum wage and unemployment
The first economic argument against minimum wage is that, imposition of a minimum
wage above the market equilibrium wage results in unemployment in the labor market. The
imposition of minimum wage increases hourly wage of workers (Schmitt, 2013) Employers
respond to the increased wage cost by reducing work hours, contracting job opportunities or
both. In contrast, higher wage encourages more workers to do search for jobs at a higher
wage. This in turn creates a divergence between number of desired jobs and those are
available at the higher wage. The excess supply of labor in the market results in
unemployment. This is explained in the figure below.

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Figure 2: Minimum wage and unemployment
(Source: Heijdra, 2017)
In the above figure, the downward sloping curve indicates labor demand curve. The
curve that slopes upward is the labor supply curve. Under the state of free market, the
equilibrium wage is W1 with equilibrium employment given as E1 (Goodwin et al., 2015).
Now suppose government imposes a minimum wage given as WMin. At the higher wage
demand for labor reduces to E2 while the supply of labor increases to E3. The gap between E2
and E3 indicate unemployment in the economy resulted from minimum wage.
D.2 Minimum wage puts lower skilled workers at disadvantageous state
The legislative minimum wage put the low skilled workers at a relatively
disadvantageous position by exposing them to the same competition with high skilled
workers. The standard economic theory argues that workers should pay an amount equal to
their marginal productivity. From the view point of an employer, low skilled workers are
unable to justify the higher minimum wage because of a relatively lower marginal
productivity. They therefore have no choice but to compete with high skilled workers

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(Grimshaw, Bosch & Rubery, 2014). Because of lower productivity and staying at the
margin of minimum wage they are more likely to lose their jobs following a minimum wage.
D.3 Side effects of decline in government spending
There is an unintended adverse effect due to decline in government spending on
income support program after implementation of minimum wage (Agenor & Montiel, 2015)
People who are laid off because of higher wage suffer from cut in government budget on
different income support program.
E. Minimum wage legislation: a case study on Australia
E.1 Framework of minimum wage in Australia
Australia is one of the many countries having an effective system of minimum wage
legislation. A statutory minimum wage prevails in Australia following the regulation of Fair
Work Act 2009. As per section 135(2), 206, 285 and 294 of the act, more than one, minimum
wage can exist based on occupation and industry category. At present, there are three
categories of minimum wage in Australia – modern award minimum wage (industry
specific), national minimum wage (for all industries and occupation) and special national
minimum wage (applicable to vulnerable group of workers). The Fair Work Commission in
Australia is responsible for deciding a minimum wage that has to be complied by all
employers within the system of national workplace relation. In each financial year the
minimum wage panel of Fair Work conducts an annual review of wage and then issue a
decision regarding the national minimum wage (mywage.org., 2019) The panel consists of 7
workers. Out of 7, 4 are members of FWA while rest 3 are experts from different business,
academia and unions. The Fair Work Ombudsman makes regulatory compliance of the
minimum wage. The commission takes necessary actions in case of non-compliance of the

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minimum wage legislation. The current structure of minimum wage effective from July 1,
2018 to June 20, 2019 is given in the table below.
Table 1: Minimum wage in Australia
(Source: mywage.org, 2019)
E.2 Issues related to minimum wage in Australia
The obvious issue related to implementation of minimum wage is the on-going trade-
off between cost of living for workers and affordability of employers. The former is related to
the poverty levels in the nation while the latter issue is related to impact of minimum wage on
employment levels. Fair Work Australia supports the increase in minimum wage on the
ground that a relatively higher wage enables low-paid poor workers to raise their standard of
living. The economic indicators now point out a healthy state of the economy and labor
market (Knaus, 2018). The current economic situation indicates that it is appropriate to
increase the real wage to the employees who receive a wage as set by national minimum
wage or national minimum award. In the last panel discussion Fair Work Commission has
raised the minimum wage by 3.5 percent. As the rate of increase in wage exceeds that of the
inflation rate of 1.9 percent, there is an increase in real wage of workers (abc.net.au., 2018).
As against the expected favorable effect of minimum wage, the adverse effect of such

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legislation on employment cannot be ignored. One research study conducted by Andrew
Leigh using historical data on employment in Australia found that minimum wage in Western
Australia resulted in a decline in employment relative to jurisdiction where minimum wage
increase did not occur. The effect was more profound for young Australians. A substantially
higher minimum wage actually prevents new members to enter the labor market as it is
extremely difficult for a new entrant to find job at a higher wage. This in turn creates a
poverty trap which the legislation actually intends to alleviate.
The minimum wage legislation therefore exits in Australia to a great extent. The
proponents of minimum wage legislation support the legal minimum wage as it raises
standard of living for low paid workers by raising the real wage. The beneficial effect of
minimum wage however is criticized on the ground that it increases unemployment especially
among young workers and creates a poverty trap by making it difficult for vulnerable
Australians to step in the market.
F. Conclusions
The essay briefly discusses several aspects related to minimum wage. There are
arguments both for and against the proposition of minimum wage. The fixed minimum wage
aims to secure a basic income to the workers to support their living standard. A binding
minimum wage improve state of health and education, reduces crime rate, poverty and reduce
budgetary pressure of government. Any proposed legislation for minimum wage has been
criticized on the ground that it increases unemployment, put low skilled workers at a
disadvantageous position and affects different groups in the society adversely by decline
government spending on income support program. In Australia, Fair Work Australia
determines the minimum wage every year. It is believed that increase in minimum wage

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increase living standard of poor Australians. This has however been criticized because of its
adverse effect on employment and poverty alleviation.

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