Analyzing Minimum Wage: The Government's Role in Macro Management

This essay examines the role of the Australian government in contemporary macro-economic management, specifically focusing on the issue of minimum wage. It discusses the problem of ensuring fair wages for low-skilled workers, the economic concepts of demand and supply in the labor market, and the potential consequences of minimum wage policies, such as unemployment and wage theft. The analysis includes an evaluation of alternatives like limiting labor supply, increasing demand for unskilled labor, and targeted direct transfers to low-income households. The essay concludes that addressing wage theft and enforcing existing minimum wage laws may be more effective than simply increasing the minimum wage, suggesting a more sustainable balance between labor demand and supply is needed. The author uses the AD-AS model to explain the potential inflationary impacts of wage increases and references various sources to support their claims.

CONTEMPORARY MACRO-ECONOMIC MANAGEMENT
Role of Government
Thomas Tang

Contemporary Macro-economic Management
Topic: Should there be a minimum wage and should it be increased?
Issue DONE
The issue relates to ensure that the employees are not exploited by employers especially
with regards to labour jobs where the employer may have a significant advantage with
regards to bargaining. As a result, it makes sense to have a law which defines the minimum
wages to be given to the employees so that the cost of living may be met (Mankiw, 2016).
Problem DONE
The increase of minimum wage is a controversial topic in Australia currently. There is a huge
debate in Australia every year about increasing minimum wage.In nations where there is
lack of a minimum wage, there is evidence to suggest that the wages given are quite low
and often incapable of providing a decent living standard to the concerned worker. The fact
that these jobs are low skilled implies that finding a replacement if often easy and hence the
low wages can be kept on a perpetual basis. This leads to a problem where there may be a
shortage of workers interested in low skilled jobs (Barro, 2017). Also, considering that there
is inflation and rise in the cost of living, hence it is imperative that there is increase in
minimum wages. However, it leads to rising production costs for various goods and services
thereby leading to loss of competitiveness and higher prices to consumers.Therefore the
minimum wage is to ensure workers earn enough and to support themselves to live on.
Since the minimum wage is first introduces in 1938 at a rate of $0.25 an hour, the minimum
wage has increased 22 times.
Where is it present DONE
The issue of minimum wage is primarily relevant only for the low skilled jobs as the wage
rates are higher for semi-skilled and skilled jobs. Further, security in terms of minimum
wage is also sought by these workers engaged in low skilled jobs as these are at times causal
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Contemporary Macro-economic Management
in nature and have low wages. In this regards, the minimum wage related protection is
relevant for these workers. Further, this acts as a benchmark based on which the
wages/salaries of other workers can also be fairly determined (Koutsoyiannis, 2013).
Evidence of the problem
As per a survey conducted in 2018, it is estimated that wage theft is quite prominent in
Australia with about one third of international students and temporary migrants working for
less than half of the minimum wage. The survey highlighted that the problem was severe in
some sectors such as farm work and vegetable picking. In these two sectors, there are 15%
workers where the hourly wage is less than $ 5 (Davey, 2018). Other surveys have also
highlighted similar discrepancies with regards to violation of minimum wage. The key issue
here is that if the monitoring of the minimum wage is ineffective, then the underlying
objective to introduce the same is defeated. Further, the problem may be more acute if
there is no defined minimum wage. If the problem persists in the presence of minimum
wage, then it can be understood that the problem would be more acute in the absence of
minimum wage. With regards to increase in minimum wage, the current minimum wage
level is quite healthy at $18.93 per hour or $719.2 a week and has been increased in both
3.5% as on June 1, 2018 (ABC, 2018).This is shown below.
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Contemporary Macro-economic Management
Source:https://tradingeconomics.com/australia/minimum-wages
This minimum wage is higher than the corresponding minimum wage level in other
developed countries and hence it seems sufficient. This is indicated below.
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Contemporary Macro-economic Management
Source: https://www.businessinsider.in/Heres-How-Americas-Minimum-Wage-Stacks-Up-Against-Countries-
Like-India-Russia-Greece-And-France/articleshow/21922146.cms
Economic Concepts
The equilibrium wage is dependent on the fundamental economic concept of demand and
supply. The intersection of demand curve for labour and supply curve of labour tends to
lead to equilibrium price and quantity. Price floors are used by the government to prevent
prices from being too low. The minimum wage sets a minimum price that can be paid for
labour. This following graphs are shown below.
Source: https://edgewortheconomics.com/experience-and-news/edgewords-blogs/edgewords/article:02-28-
2013-a-9-minimum-wage-and-a-lesson-in-price-floors/
Typically with regards to low skilled jobs, there is an excess supply owing to which the
equilibrium wages can shift downwards to levels where a minimum standard of living may
not be feasible (Barro, 2017). As a result, there is intervention from the government
whereby minimum wage levels are defined that is termed as floor price. Based on the above
diagram, it is apparent that the minimum wage has been defined at a level which is higher
than the equilibrium wage level defined by the intersection of the demand and supply curve
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Contemporary Macro-economic Management
for labour. At the minimum wage labout, it is apparent that the demand for labour is lesser
than the corresponding supply which creates potential unemployment on account of surplus
of labour. This has been indicated in the graph shown on the right. Fixing the floor price of
wages leads to demand supply mismatch as the supply at this minimum wage level is higher
than the corresponding demand (Mankiw, 2016).
Goals and focus of evaluation
The objective of this evaluation is to ensure that adequate wage levels are given to
employees (especially low skilled labour). While minimum wage law aims towards the same
but it has implications. A key perspective that the government seems to have missed if that
the minimum wage fixed at an artificially higher level than the equilibrium level determined
by the market forces leads to supply exceeding demand. As a result, the minimum wage is
accorded to a limited few which thee vulnerable population have to choose between
remaining unemployed and working at lower wage rates. If the minimum wage are
increased further, the demand supply gap situation would worsen and the benefit would be
limited to only a few people and the incidence of people working below minimum wages
would increase further. It would be worthwhile to consider alternatives which can
potentially lead to a higher demand of unskilled labour or limiting supply in terms of altering
the work hours for international students (Froyen, 2013).
Cause of Issue
The imposition of minimum wage level but this has clear implications in terms of demand
supply mismatch leading to vulnerable groups (migrants, international students) working at
sub-minimum wage. Clearly, increasing the minimum wage would not resolve this issue as
the problem in Australian context is not that the minimum wage level is low but the
incidence of wage leakage. Wage leakage refers to the extent of wages saved by employers
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Contemporary Macro-economic Management
by paying employees wages that are lower than the minimum wages. It is imperative to
plug this wage leakage instead of enhancing minimum wage.
Impact of Issue
The key stakeholders would include all those people who are engaged in low skilled jobs
especially temporary migrants and international students who are especially vulnerable to
wage theft. Also, the various industries such as fast food, vegetable & fruit picking along
which employ these workers would also be key stakeholders. The government would be a
stakeholder as the minimum wage has implications for demand and price of products and
services. This is because any change in the minimum wage would have impact on the
underlying production costs associated with goods and services which would alter the
supply curve and leave to alternation of the equilibrium position. In case of higher minimum
wage, the equilibrium price would increase accompanied with decrease in quantity. In case
of lower minimum wage, the equilibrium price would decrease accompanied with increased
quantity. Besides, the educational institutions especially those tend to attract significant
inflow of international students would be impacted as the earnings of some of these while
studying might be adversely impacted.
Evaluation of Alternatives
A potential alternative is to limit the supply by modifying the immigration policies and
increasing the restrictions on working during studying especially for international students
so that the supply of unskilled labour is reduced and thereby reducing the wage theft issue
and allowing minimum wage regime to be more successful. The key benefit is that the
availability of cheap labour for certain sectors would reduce which would ensure that the
equilibrium wage would be nearer to minimum wage. However, there are costs associated
with regards to plunging enrolments from international students owing to financial
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Contemporary Macro-economic Management
constraints, as well as possible loss of future talent (experienced/skilled labour). This would
adversely impact higher education institutions. Further, increasing wages in key sectors such
as fruit and vegetable picking would lead to cost pressure and fuel inflation which would
create an issue for the consumers and also the government. This may be explained on the
basis of AD-AS model whereby on account of higher production costs, there would be an
decrease in SRAS (Short Run Average Supply) while the SRAD would remain constant. This
would result in higher prices and lead to inflation.
Another potential alternative is for the government to increase the demand for unskilled
labour through interventions. However, such a move does not seem feasible owing to
limited population of Australia and relatively geographical isolation owing to which Australia
cannot become an export hub for products requiring unskilled labour (Mankiw, 2016). Yet
another alternative to achieve the intended goal is to keep the minimum wage at the
present level and take steps to minimum the incidence the wage theft. One of the crucial
steps in this direction would be to closely monitor the wages paid by defaulting industries
such as fruit and vegetable picking along with farm work. Also, the wages received by
international students and temporary migrants would require monitoring. This would
ensure lowering demand for workers being deployed at lesser than minimum wage and also
lowering supply from vulnerable groups. It is possible that immigration policies would also
require tweaking so as to ensure that immigrants and students have the requisite financial
support when coming to Australia.
Another alternative that the government may look into is targeted direct transfer to low
income households which would provide support without avoiding the adverse impacts of
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Contemporary Macro-economic Management
increasing the minimum wage. The potential cost of this alternative is that it may lead to
higher burden on the government especially if transfers are not well targeted.
What are the benefits (tangible and intangible)
The obvious benefit of the above measure would be lower incidence of wage theft and
better enforcement of minimum wage law. However, there would be costs particularly with
regards to increased cost associated with certain items such as food leading to
inconvenience to consumers. Also, there might be temporary dip in the international
students visiting Australia in the pretext of studying. However, this solution would lead to a
more sustainably balance between demand and supply of labour in the long run and is thus
preferred. With regards to targeted direct benefit transfer, the immediate benefit would be
with regards to improvement in living standards which in the long term could result in
upgrading of skills owing to improvement in wages.
Bibliography
ABC (2018) Australian minimum wage increased by Fair Work Commission to $719.20 a
week, Retrieved from https://www.abc.net.au/news/2018-06-01/australian-
minimum-wage-increased-by-3.5-per-cent/9824282
Barro, R. (2017). Macroeconomics: A Modern Approach (4thed.). London: Cengage
Learning.
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Davey, M. (2018) A third of Australia's foreign workers paid less than half minimum wage
– study, Retrieved from
https://www.theguardian.com/australia-news/2018/oct/29/a-third-of-
australias-foreign-workers-paid-less-than-half-minimum-wage-study
Dombusch, R., Fischer, S. &Startz, R. (2015).Macroeconomics(10thed.). New York:
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