An unfair safety net?

• Author: Wooden, Mark
• Position: Invited Paper

On the 3rd June 2010, the Minimum Wage Panel of Fair Work Australia (FWA) increased minimum award rates by $26 per week (or by 4.8 per cent). This increase was justified on the grounds of maintaining 'a safety net of fair minimum wages' (FWA 2010, para. 321, p. 73), but is this decision really a fair one, and are the workers who benefit those most in need of a safety net?

How Poor are the Low Paid?

The Fair Work Act 2009 requires FWA, when making decisions about minimum award wages, to take into account 'relative living standards and the needs of the low paid'. Past research, however, has consistently shown that most low-paid workers do not actually live in poor households (e.g., Harding and Richardson 1999; Wooden, Wilkins and McGuinness 2007). This can be seen very clearly in Table 1, which uses data from a recent wave of the Household, Income and Labour Dynamics in Australia (HILDA) Survey to show where low-wage adult employees are located in the household income distribution (where the income measure is total after-tax household income, adjusted by an equivalence scale in order to take into account the impact of family size).

Rows 1 and 2 replicate the earlier analysis of Wooden et al. (2007), which defined Low-paid employees according to their position in the distribution of hourly earnings. The key finding from Table 1 is that low-paid employees are not concentrated in low income households, and instead are found scattered throughout the income distribution. Indeed, both definitions suggest that around half of the low paid live in households in the top half of the income distribution. Further, they are underrepresented in the households that are most in need of income support; that is, households at the bottom of the income distribution. And it needs to be borne in mind that we are restricting attention to adult employees. If we had included employees under the age of 21, the distribution would be more skewed towards the upper end, since many young low-paid workers live at home with their parents.

One obvious criticism of this type of analysis is that it does not actually identify those workers affected by adjustments in minimum award wages. The data from wave 8 of the HILDA Survey allow us to respond to this criticism given the inclusion, for the first time, of a question on how employees believe their pay is set. One of the response options was 'paid exactly the Award (or APCS) rate', which in theory is precisely the group that is affected by the FWA decision. Row 3 of Table 1 thus presents data on where these workers are located in the income distribution. As should be apparent, this group is also clustered in the middle of the income distribution, with relatively few living in the poorest households; just 6.2 per cent of adult employees who claim they are they are paid exactly the award rate are found living in the bottom two income deciles.

Unfortunately, these data are far from perfect. Comparison with employer-based data from the...