Economics: Principles, Models, and Policies - Minimum Wage Analysis

This economics report provides an in-depth analysis of the impact of minimum wage policies on the Australian economy. It examines the current unemployment scenario, the minimum wage system, and the factors of demand and supply in the labor market. The report highlights how the minimum wage affects employment rates, particularly among low-skilled workers and the younger population, leading to structural and cyclical unemployment. Using economic models, the report demonstrates the effects of price flooring policies and suggests the government should introduce a lower minimum wage rate equivalent to the equilibrium wage rate rather than abolishing the policy. The report concludes with recommendations for government intervention to safeguard the rights of low-skilled workers and promote employment and economic growth. The analysis includes data on unemployment rates and youth unemployment trends, supported by references to relevant economic research and news articles.

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Economics: Principles, Models and Policies
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Executive Summary
Australia is a well developed country with high per capita GDP and low unemployment
rate. In the recent years, the hike in the minimum wage rate introduced by the Australian
Government has negatively impacted the employment status of the economy. For instance, a
Multinational Organisation will not employ a poorly skilled worker at a higher wage rate of
$16.87 per hour. Furthermore, the policy of equal compensation for both highly skilled and
poorly skilled workers may create an imbalance in the economy. However, the abolition of the
price flooring policy may lead to monopoly power of the large scale organisations that may
negatively impact the economic balance of the country. Hence, it is important for the Australian
Government to introduce a lower minimum wage rate that is equivalent to the equilibrium wage
rate in place of abolishing the minimum wage rate policy.

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Table of Contents
Introduction......................................................................................................................................4
Analysis...........................................................................................................................................4
Current unemployment scenario and minimum wage system.....................................................4
Demand and Supply Factor in Labour Market.............................................................................6
Recommendation.............................................................................................................................8
Conclusion.......................................................................................................................................9
References......................................................................................................................................10

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Introduction
The identified study focuses on the current economic debate on whether Australian
government should abolish the existing minimum wage as a part of economic reforms. Precisely,
a number of economists and policymakers have advocated the burden of the system of
discriminatory minimum wage pointing out the negative aspects of the system. The existing
minimum wage arrangement in Australian economy states that an employer must hire an
employee at a minimum of $16.87 per hour in 2016 (ABC News, 2016). Evidently, the
restriction in employment under the minimum wage system arrangement has incurred the fiscal
burden of the government. In the current economic scenario, many of the economists have voted
for abolishing the minimum wage system.
One of the leading points of the discussion is whether the minimum wage system is a job
killer or job creator in the Australian economy. Since the inception of the minimum wage system
in 1907, the system has been criticised for a number of times as it is believed that the system
creates restrictions in employment. At the same time, the study identifies how the high rate of
minimum wage can increase the rate of unemployment in Australia. Based on the studies and
economic model of supply and demand, at the end of the study, the verdict has been made
whether the government should abolish the system of the minimum wage.
Analysis
Current unemployment scenario and minimum wage system
While the debate on abolishing minimum wage system continues, it is important to
identify how the system affects the rate of unemployment in an economy. Evidently, based on

ECONOMICS: PRINCIPLES, MODELS AND POLICIES 5
the economic concepts and theoretical models, it is extremely difficult to accurately track the
impact of minimum wage rate on employment status (Novak, 2014). In an economic research
paper, David Metcalf stated that it is almost impossible to record the change in employment
status based on the minimum wage policy of government as employment scenario reacts
gradually in accordance with the change in the minimum wage rate (ABC News, 2016).
In the long-term view, there are a number of other factors than minimum wage rate
affecting the employment condition of an economy. From the research study of the author, it can
be found that due minimum wage system, the employers want to reduce working hours for the
low-skilled employees (Meer and West, 2013). However, the overall rate of unemployment will
remain unchanged. In the context of the system of the minimum wage rate, the current
unemployment condition in Australia has been elaborated to signify whether the increase in
minimum wage rate has affected the unemployment.
Figure: Australia Unemployment Rate
Source: (Abs.gov.au, 2017)

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In the current state of scenario, the adjusted unemployment rate in Australia is recorded
at 5.6 percent in July, 2017 (Abs.gov.au, 2017). The rate of unemployment is revised from 5.7
percent in the previous month to 5.6 percent as the economy has added 27,900 jobs. Clearly, the
unemployment rate pattern in Australia remained over the mark of 5 percent since 2012.
However, in a recent labour market reform, the Fair Work Commission increases the minimum
wage rate by 3.3% from $17.70 to $18.29 per hour for low-paid workers (Hannan, 2017).
In the meanwhile, employers in Australia have slammed the decision of the Fair Work
Commission stating that the verdict will slow down economic growth (Hannan, 2017). Precisely,
the outcome of the decision may contribute towards an increase in unemployment as well. Due to
high rate of minimum wage, Australian employers will surely adopt the technique of outsourcing
instead of hiring employees (Karp, 2017). Thus, the risk of unemployment will be influenced by
the decision of high wage rate.
Demand and Supply Factor in Labour Market
By applying the theory of demand and supply in the Australian Labour market, it is
important to note that the equilibrium wage rate depends upon the quantity demanded and
quantity supplied of labour in the employment market. Currently, the increase in the supply of
unskilled labours and fall in the demand is leading to a decrease in the equilibrium wage rate in
the market (Basu and Felkey, 2008). However, the government of Australia is keeping on
increasing the minimum wage rate by using its price flooring policy. Hence, an excess in the
supply and fall in the demand can be evident in the Australian Market that has become a major
political concern for the current government. A diagram has been presented herein below for
better understanding:

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Figure: Demand and Supply in the Australian Labour Market
Source: (Zhang, 2011)
It can be seen from the above diagram that the current demand and supply in the
Australian Labour market presents the equilibrium wage rate at We and equilibrium quantity at
Qe. On the other hand, the government’s price flooring policy increases the minimum wage rate
to Wm that results in a fall in quantity demanded to Qd and increase in quantity supplied to Qs
(Danziger, 2014). Hence, an increase in the unemployment rate can be evident in the Australian
market occurring due to structural and cyclical unemployment. The International Monetary Fund
presented a report on 2014 saying that the hike in the minimum wage rate impacts the

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employment of the younger population that makes up the large proportion of low pay and low
skilled workers in the economy (ABC News, 2016). For instance, it can be seen from the ABS
report that the youth unemployment rate in Australia has increased with the increase in the
minimum wage rate in the last 5 years. A figure has been presented herein below for further
understanding:
Figure: Youth Unemployment Rate in Australia
Source: (Abs.gov.au, 2017)
Recommendation
Furthermore, a conflict can be seen between the Abott Government and the opposition
regarding the minimum wage rate in the Australia Labour market (Novak, 2015). On the basis of
the above analysis, it can be seen that the minimum wage rate impacts the employment level of
the younger generation people and unskilled workers leading to cyclical and structural
unemployment. However, it is important for the government to regulate the labour market in
order to safeguard the rights of the low skilled people and younger generation who have lesser

ECONOMICS: PRINCIPLES, MODELS AND POLICIES 9
experiences (ABC News, 2016). Hence, the abolishment of the price flooring policy in the labour
market will not be a good idea. In place of abolishing the minimum wage rate, the government
can implement a lower minimum wage rate for the younger generation people and labour class
people with lower skills to eliminate the issue of fall in demand and excessive supply in the
market.
Conclusion
By considering the above analysis, it can be seen that the price flooring policy
implemented by the Australian government in the labour market helps to safeguard the rights of
equal compensation for the people. However, the increase in the minimum wage rate has
emerged to be a major problem for the younger population that makes up a high proportion of
low pay and low skilled workers. A drastic fall in the demand and oversupply of workers can be
evident in the Australian market resulting from structural and cyclical unemployment. Hence, it
is important for the Australian Government to introduce a lower minimum wage rate that is
equivalent to the equilibrium wage rate in place of abolishing the minimum wage rate policy to
promote employment and growth in the economy.

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References
ABC News. (2016). Does the minimum wage increase unemployment?. [online] Available at:
http://www.abc.net.au/news/factcheck/2015-03-12/minimum-wage/6290482 [Accessed Aug.
2017].
Abs.gov.au. (2017). Unemployment Rate Australia. [online] Available at:
http://www.abs.gov.au/ausstats/abs@.nsf/mf/6202.0?opendocument&ref=HPKI [Accessed Aug.
2017].
Basu, K. and Felkey, A. (2008). A theory of efficiency wage with multiple unemployment
equilibria: how a higher minimum wage law can curb unemployment. Oxford Economic Papers,
61(3), pp.494-516.
Danziger, L. (2014). The elasticity of labor demand and the minimum wage. 4th ed. Bonn,
Germany: IZA.
Hannan, E. (2017). Minimum wage rise ‘devastating’. [online] Theaustralian.com.au. Available
at: http://www.theaustralian.com.au/national-affairs/industrial-relations/minimum-wage-to-be-
lifted-by-33-per-cent-to-1829-an-hour/news-story/ea540d229e58b82a4b41b07cb60957dd
[Accessed Aug. 2017].
Karp, P. (2017). Minimum wage to rise by $22 a week after Fair Work Commission ruling.
[online] the Guardian. Available at:
https://www.theguardian.com/australia-news/2017/jun/06/minimum-wage-to-rise-by-22-a-week-
after-fair-work-commission-ruling [Accessed Aug. 2017].

ECONOMICS: PRINCIPLES, MODELS AND POLICIES 11
Meer, J. and West, J. (2013). Effects of the minimum wage on employment dynamics. 2nd ed.
Cambridge, Mass.: National Bureau of Economic Research.
Novak, J. (2014). Minimum wage is anti-jobs and should be abolished. [online] Canberra Times.
Available at: http://www.canberratimes.com.au/comment/minimum-wage-is-antijobs-and-
should-be-abolished-20140512-zra8p.html [Accessed Aug. 2017].
Novak, M. (2015). Time for discriminatory minimum wage to be abolished. [online] The Sydney
Morning Herald. Available at: http://www.smh.com.au/comment/time-for-discriminatory-
minimum-wage-to-be-abolished-20150206-137pde.html [Accessed Aug. 2017].
Zhang, T. (2011). International Outsourcing and Unemployment in a Minimum-wage
Economy. Review of International Economics, 19(4), pp.776-786.