Yahoo Finance Australia shows why raising the minimum wage doesn’t always fix poverty
Amid all the doom and gloom of this peculiar, frightening US election cycle, one of the few shining lights has been the emerging bipartisan support for a raise to the federal minimum wage. Such a gesture is well overdue—the current federal minimum wage in America, set in 2009, is a paltry $7.25 per hour. When you take inflation into account, it’s lower than it was back in 1968.
The logic of lifting the minimum wage seems ironclad: More money for low-paid workers means less poverty and a stronger consumer economy. But if we look at the example set by the country with one of the highest minimum wages in the world—my homeland of Australia—you start to see that things aren’t quite as simple as that. There’s still an excellent argument to be made for raising the minimum wage, but it may not be the anti-poverty one that its most ardent proponents believe. Instead, we could be better served by seeing the minimum wage as the salvation of America’s fading middle class (and what’s left of the American dream).
For the first time in recent memory, both presidential candidates for a major party are advocating for an increase to the hourly rate guaranteed to America’s most vulnerable workers. On the Democratic side, Hillary Clinton has committed to increasing the minimum wage to $12 per hour with the potential for a future raise to $15 if no detrimental impact is shown on areas of the country with a lower cost of living. The Republican message is, perhaps unsurprisingly, muddled, but Trump has recently come out in support of a $10 minimum wage (albeit with the party-endorsed caveat that states should be the ones dictating what that wage should be). This is bad news for the residents of Wyoming and Georgia, who at $5.15 are the only places to have minimum wages set below the national level.
From a purely political standpoint, the renewed focus on the minimum wage makes sense. According to a recent Huffington Post poll, a solid majority of Americans of all political persuasions now support increasing it to at least $10.10 per hour, with a massive 73% of Democrats advocating for an increase to $15.
However, the economics of the issue are a little more clouded. While doubling the minimum wage would undoubtedly provide a vast economic benefit to those receiving it, there is the long-standing concern that adding such a financial burden to employers will lead them to cut the number of people they employ or the hours their current employees actually work. Whether this is true or not is the subject of much debate—both the right and the left can find ample evidence to back their positions. But there is some consensus that it could harm people on the fringes of the employment market, especially the young and the unskilled.
This is not to deny the undoubted benefit an increased minimum wage would bring to America’s poorest families. But in the cold, unfeeling calculus of the economic mind, there are more targeted ways in which a nation can lift their citizens out of poverty: namely, through low-income tax breaks and improved social safety nets.
As it stands, America’s minimum wage sits roughly in the middle of the developed nation pecking order: slightly behind Canada, slightly ahead of Japan, and a long, long way behind Australia. As of July this year, the lowest paid full-time adult workers in Australia receive AUD$17.70 per hour, which is roughly $11.16 in US dollars when you take account purchasing power parity into account. This puts us only a shade behind the current world leader, Luxembourg, which pays their workers a minimum $11.20 an hour in US dollars.
Perhaps $11.16 sounds generous. But consider this: The Australian minimum wage is only 43% of the average full-time wage, down from 50% in the early 2000s. In the United States that ratio is 27%, which is the worst result in the OECD and a figure that puts a single parent on the minimum wage solidly below the poverty line.
But this basic rate understates the case for most of Australia’s workers, because we’re also covered by a complex series of so-called “awards.” These rules dictate the minimum wages for different industries by taking into account the type of work being done, as well as your level of seniority. To call on the perennial example, if you’re flipping burgers in a McDonald’s, you’re covered by the Fast Food Industry Award, under which the lowliest employee is guaranteed AUD $738.80 a week, or AUD $19.45 an hour.
The result? In my adult life, I’ve never earned less than AUD $18 per hour, and I’ve also saved enough money to go traveling twice in my early 20s, and I managed to reach my 30s without carrying any debt. (Individual results may vary.)
Australia was the second country in the world to adopt a minimum wage, with the earliest nationally mandated efforts stretching back to 1907. These days, the Australian minimum wage is dictated by the Fair Work Commission, which stages an Annual Wage Review every year to determine the adequacy of the basic rate. The Fair Work Commission is almost certainly the reason why Australia’s minimum wage is as high as it is. Independent and equipped with significant power, its operations are untouched by the prevailing government of the day. This offers a stark contrast to America, where the minimum wage is set by Congress itself, with all the hyperpartisan gridlock that entails.
Interestingly, however, the number of people in Australia living below the poverty line—defined as half the median wage—remains comparatively high by OECD standards: It’s still at around 14% of the population, which is almost exactly in line with the US. (My relatively charmed experience of earning the minimum wage was perhaps offset by my relatively charmed middle-class background.) People who are unemployed or under-employed have found themselves increasingly left adrift by an underfunded welfare system and an ever-tightening array of low-income tax concessions. This is a reminder that the minimum wage is, of itself, not a catch-all panacea for poverty.
However, the strength of our minimum wage has led to a comparatively equal society, a metric where the United States usually comes in last among developed nations. Ensuring that those who are fully employed can afford the basics of life has led to a strong and resilient middle class: Australia leads the world, with some 66% of the population falling into this bracket. America, meanwhile, languishes far behind, with only 38% of the population qualifying as middle class.
Few dispute the need to raise the American minimum wage from its present level. But the amount of the increase depends on the candidates’ policy priorities. Is the minimum wage a gesture towards restoring the stability of the middle class? Or is it a tool to try and bring the poverty-stricken in from the cold? The answer should obviously be some balance between the two. But in the febrile, slogan-rich environment of a US presidential election, especially one as charged with working class discontent as this, nuance can be a rare commodity.
You can follow Luke on Twitter at @lukeayresryan. We welcome your comments at ideas@qz.com.
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