An American perspective on the 2010 increase in the Australian minimum wage.

• Author: Burkhauser, Richard V.

The minimum wage provisions of the Fair Labor Standards Act of 1938 have been repealed by inflation. Many voices are now taking up the cry for a higher minimum. Economists have not been very outspoken on this type of legislation. It is my fundamental thesis that they can and should be outspoken, and singularly agreed. The popular objective of minimum wage legislation the elimination of extreme poverty is not seriously debatable. The important questions are rather (1) Does such legislation diminish poverty? and (2) Are there efficient alternatives? The answers are, if I am not mistaken, unusually definite for questions of economic policy. If this is so, these answers should be given. Some readers will probably know my answers already ("no" and "yes," respectively); it is distressing how often one can guess the answer given to an economic question merely by knowing who asks it. But my personal answers are unimportant; the arguments on which they rest are ... (Stigler 1946).

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As part of its decision making process, the Australian Fair Pay Commission sponsored a Minimum Wage Forum of economists and policymakers in October 2008 to consider the consequences of a 2009 increase in the Australian minimum wage. I was asked to give a keynote speech on the topic of how the U.S. experience, with our federal and state minimum wage laws, could inform this debate. In that address (Burkhauser and Sabia 2008), I urged Commission members not to raise the Australian minimum wage again until they could respond to the questions contained in the preamble of Stigler's seminal American Economic Review article quoted above: (1) 'Does such legislation diminish poverty?' and (2) 'Are there efficient alternatives?' While fully recognizing the difference between correlation and causation, I was pleased to see that in the Commission's final year, the Australian minimum wage remained frozen at 2008 levels.

In contrast, in Fair Work Australia (2010), the newly created Minimum Wage Panel mandates an increase in the already high Australian minimum wage from $14.31 to $15.00 per-hour via a report that ignores Stigler's two questions and is virtually silent on the international and even the domestic evidence on how such an increase will affect the most vulnerable working families in Australia. This is unfortunate, because the preponderance of the U.S. evidence over the past 15 years is that minimum wage increases have no impact on poverty and that alternative policies can more effectively protect the families of low skilled workers from poverty.

What is the Evidence?

Card and Krueger's Myth and Measurement: The New Economics of the Minimum Wage (1995) blasted the decades old consensus in the economics literature, best articulated by Brown, Gilroy and Kohen (1982), that minimum wage legislation will increase the wages of affected workers but at the cost of statistically significant but modest reductions in their employment (demand elasticities in the range of -0.2). Card and Krueger weighed the actual empirical evidence for this consensus view and...