RDP 2018-06: The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss 3. Minimum Wages Policy in Australia

The operation of Australian minimum wages is notoriously complex (Leigh 2007). In Australia the NMW sets a legal floor on wages. As of 1 July 2017, this was equal to $18.29 per hour for a full-time adult employee. Australia also has a detailed system of award wages that are layered on top of the NMW; this is in contrast to most other countries, which tend to have a single minimum wage.^[4] The Australian awards often set a different minimum wage depending on an employee's age, skill, industry and location. For example, an employee who supervises lift operators at a ski resort is entitled to a wage of $23.80 per hour, 30 per cent above the NMW. As such, while many employees are paid the NMW – particularly lower-skilled workers and those not covered by an award or enterprise agreement – many others are entitled to a higher wage. The distribution of these award wages across different job classifications is shown in Figure 1.

The NMW and all award wages are adjusted at the same time every year, usually in early July. The size of these adjustments is decided at a national level by the FWC. Adjustments are applied consistently across awards; historically the FWC has either added a flat dollar amount to all award wages (1993–2010) or raised all award wages by the same percentage amount (2011–2017). Adjustments to individual awards are rare, and are seldom made in response to industry-level demand shocks. Indeed, an award-specific adjustment is only made to ensure an award is consistent with the principle of ‘equal remuneration for work of equal or comparable value’, to remove an ambiguity or to correct an error (Stewart 2015).^[5]

Australia's detailed system of awards has generally been seen as an impediment to estimating the effects of minimum wages in Australia (Lee and Suardi 2011; Productivity Commission 2015a). This is certainly true when researchers have simply tried to apply methodologies developed in the United States and United Kingdom to Australian data. But this should not be surprising; such methodologies were designed for countries with very different wage-setting institutions. For example, studies that attempt to define a control group as individuals paid slightly above the NMW – as is common in UK research – face the issue that such employees are potentially caught up in the awards system, and hence are not a valid control given that awards are adjusted at the same time as the NMW each year. Indeed, when using this approach the Productivity Commission (2015a) found evidence that their control group was contaminated by these spillovers.

In contrast to previous Australian studies, I treat Australia's complicated system of awards as a unique source of variation in minimum wages, rather than a factor that complicates identification. In particular, I exploit changes to the entire distribution of minimum and award wages stemming from FWC decisions. This not only provides additional variation with which to estimate the relevant effects, but it also makes it much clearer who the control group actually are.

Footnotes

New Zealand once had a system of awards similar to Australia's, but that system was abandoned in 1991. Although some countries have skill-based tiers of minimum wages, these generally use very broad tiers. For example, Hungary sets separate minimum wages for skilled and unskilled workers. [4]

Occasionally an industry will apply for a deferral in the annual award increase for their industry if they are facing exceptional circumstances and can demonstrate incapacity to pay. A common case is in the agricultural sector, which has often applied for a deferral due to drought. I have not included the agricultural sector in my analysis. [5]