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Abolishing the minimum wage

shopping3Imagine you run a small retail business. You have two casual staff members on duty (plus yourself). One earns $25 p/h and one earns $20 p/h. The lunchtime rush is over, and it is quieter than usual. You need to send one of them home. Who do you send?

Invariably, the most expensive one goes. You could argue about the theoretical benefits of not doing this, but practically, this is what happens nine times out of ten.

Saving $20 for the next few hours doesn’t sound like much, but that is only if you don’t appreciate the true economic cost of employment.

Multiply the $20 over 300 days, and multiply that over multiple employees and add in the cost of tax/super/workers’ comp etc and the numbers add up be a material consideration.

That is why you go into so many retail outlets and see only young people.

In a previous post I outlined all the common responses to the strife caused (in particular the hospitality/ retail industry) by the existence of the minimum wage. As it happens, the minimum wage in Australia has just been increased – the exact opposite of what is required.

Proponents for the minimum wage are hypocritical

Consumers, casual readers and industry outsiders who are not actually directly impacted by the minimum wage like the idea of a minimum wage because it makes them feel good.

This is hypocritical, because research has proven that people will say they support social causes (e.g. climate change initiatives) but don’t want to pay more for the option that is ‘climate-friendly’.

At least not in sufficient numbers to make it viable. They can take this hypocritical stance because they like the idea and the support does not cost them anything. (Much like company executives like splashing corporate funds on their favourite charities and social causes, rather than spending their own money). It is easy to be generous with other people’s money.

Abolition of the minimum wage will harm the most vulnerable and lead to abuse by owners. No, it won’t.

Business owners create an environment that is ultimately counterproductive if they pay poorly. Some do because they don’t believe there is a way out because if you don’t do it in the short term, there will be no long term.

The fact is, paying poor wages attracts poor workers, workers without options and workers without skills. All that leads to poor service, poor quality and low productivity – which starts a cycle that is hard to break out of.

Successful businesses become successful because they recognise the real value of human resources – and forcing poor businesses to pay more simply enables the ‘dark’ economy as people seek to find ways around it. Left to their own devices these businesses will fail sooner or later anyway, so the poorest paying businesses won’t be paying those wages forever. They will realise they can’t get staff and pay more or they will go out of business.

The minimum wage legislation is unequal

Selective interference with the free market mechanism disproportionately impacts those who are least able to withstand the impact. In Australia, the Sydney Morning Herald published this list in 2015 of the top ten companies NOT paying tax.

● Qantas Airways earned $14.9 billion
● GHP 104 160 689 Pty Ltd, earned $11.731 billion
● ExxonMobil Australia earned $9.617 billion
● Lend Lease Corporation, earned $7.683 billion
● Citic Resources, earned $5.051 billion
● Mitsubishi Development earned $4.615 billion
● Glencore Investment earned $4.612 billion
● Hope Downs Marketing earned $4.445 billion
● Virgin Australia earned $4.3 billion
● General Motors Australia earned $4.138 billion

In fact, they will also tell you that of 1539 corporate entities operating in Australia, 38 per cent did not pay tax. (The list may be different in 2018, but there is a list like that whatever the names are.)

You would think that, from an ROI perspective, the government would get its act together and go after the 40% who pay NOTHING instead of pursuing the few who attempt cheat at the margins.

Every small business, especially in retail, act as de facto tax collectors (GST) and consequently are so tightly regulated that there is very little room to avoid tax legally. Large corporations don’t seem to struggle to pay the minimum wage because they know how to play the tax avoidance game. ( I am not suggesting tax avoidance is wrong, just that small business don’t have the wherewithal to play that game.)

If not the minimum wage, how do we ensure we have a decent standard of living?

This may seem like a fair question, but it assumes that the minimum wage contributes to a (better) standard of living. American and Australian policies are approached are obviously different, but given that Australia leans more left than America in terms of welfare generally, I would argue that the arguments laid out below are more salient here.

The official definition of ‘poverty’ excludes social benefits available to the disadvantaged. (At least 83 programs in the US – and probably more in Australia.) By including these benefits, the poverty rate declines from over 12% to just over 2%.

The key point here is that the level of (social/financial) support available to the poor is significant, and more importantly, I hypothesise that it amounts to more than the weekly earnings of the average minimum wage worker.

Implication #1: Given the level of existing welfare support, the ‘poor’ are virtually non-existent. (The people we see begging on the street are certainly poor, but largely because they don’t avail themselves of the support already available.)
Implication #2: The ‘safety net’ for those on the lowest rung of the socio-economic ladder is higher than that created by the minimum wage. I.e. the minimum wage being less than what is available, cannot have a net positive economic impact – or at the very least does not make the type of ‘contribution’ to a standard of living that its proponents advocate.

The vastly better option (rather than introducing penalty rates that only penalises the smallest and most vulnerable businesses who can’t and don’t know how to fight back) is to increase the Government Revenue so that it enables them to provide better social services / safety nets.

For instance, if the government had more money to make university tuition free, the university student could earn $10 an hour because that is all they would need earn to cover their incidental expenses.

The minimum wage issue can’t be addressed without due consideration of broader tax reform

The best tax reform policy would adopt the following principles:

1. Minimal (if any) exemptions = no incentive for tax avoidance or minimisation
2. Low cost of compliance
3. Broadest base possible means tax it at the consumption level (maybe even GST only – and see rule #1 above)
4. Don’t penalise job creation, innovation and entrepreneurship – tax the spenders/users (which means GST).

I haven’t done the numbers, but I am sure there is a percentage (say 15% or 20%) that everything can be taxed at (including milk, books and tampons; and, flights, iron ore and whatever else the big companies make) that will produce more revenue than a complicated, unfair system that forces people (and organisations) into dubious and even illegal practices to survive or prosper.

My arguments are not new, nor extensive – I am sure there are better articulated arguments out there; but we do need to have the debate. And if industry associations and labour bodies want to do something worthwhile that would have a benefit for their members, then this issue is one worth tackling – instead of another, irrelevant ‘retailer of the year’ event.

I won’t hold my breath that any politician will ever mess with the minimum wage, because there are more votes to lose from the self-righteous, indignant social justices types than there are to gain from a few thousand business owners.

But here’s to hoping… and if not the politicians, then some entrepreneur with a knowledge of cryptocurrency will find the way. Now that economy won’t be the ‘dark’ economy, it will be a black hole that no government will be able to penetrate. And it will happen, because human nature is such that when the incentive is big enough, human ingenuity will find a way to exploit

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