I never thought it could happen in Australia, but Morrison with his temerarious judgment has decided to pick a fight about a $1 rise to the minimum wage, which is 38 cents more than the rise the business community has made in its submission to the Fair Work Commission (FWC).

Take that fact in for as many minutes as you need to; a Prime Minister who has legislated for very generous tax cuts for high income earners, who has accrued about $1Trillion in debt which there are not any long term national benefits for such borrowing, is saying the lowest paid wage earners, the people who will spend every single cent of those 38 cents, should not receive a pay increase in line with CPI inflation for which they hold no blame for it occurring (I refer you, the reader, to my previous article regarding why Australia should not be suffering this inflationary pressure).

The Reserve Bank of Australia (RBA) Governor has not said the increase in inflation has been caused by wage growth, which makes our inflationary pressure different to the rest of the world. People’s wages in Australia have been essentially suppressed to 2013 rates (see Crikey review below). Morrison is saying these lowest paid workers should receive a pay cut.

To make matters even more ridiculous, Morrison is claiming the 38-cent increase beyond what business has submitted will crush the economy.’ This is the same economy which Morrison was claiming after the Federal Budget is a strong economy. Morrison initially said Labor could not change wages; now like a weathervane moving in the wind Morrison is claiming Labor will change the minimum wage. What? Even worse, Ms Hume says Labor’s intervention is unusual, unprecedented, which is once again incorrect. It is not improper for government to intervene in the FWC by making a submission about an actual figure, indeed the Howard Government did so. What is also rare is for the national minimum wage to increase by less than the rate of inflation.

Notwithstanding the factual matters referred to above, Morrison is still bludgeoning away as he has by his own fault wedged himself on the issue of the measly 38 cent increase above the 62 cents which business has submitted to the FWC as a pay increase for the minimum wage earner in Australia. It is absolute nonsense the 38-cent increase will “crush” the Australian economy and set out below are the facts and empirical research which support my opinion.

Crikey’s Opinion

I am indebted to Rod Welford, the former Queensland Attorney-General during the Beattie Government’s time in power here in Queensland, for posting this selected component of Mr Bernard Keane’s (@BernardKeane) of Crikey’s article on Thursday, 12 May 2021:

“Morrison says that there’s no magic wand to lift wages, and that businesses raise wages, not government (ignoring that he’s the biggest employer in the country, and was told by Reserve Bank governor Philip Lowe to ditch his public sector wage cap to help wages growth).

But the history of the past decade is Australian businesses don’t lift wages. What they do is use multi-year enterprise agreements to lock workers into lower wages growth, demand increases in immigration to put downward pressure on wages, rely on the Coalition stacking the Fair Work Commission with employer group representatives and Coalition mates, and engage in economy-wide wage theft that has left workers out of pocket by billions.

And all along profits rose at the expense of wages, with the profit share of income surging from 2015 at the expense of the labour share – it currently stands near the all-time high level of 2020 – with real unit labour costs falling 9% between 2015 and 2021. Employers have banked all that, while ordinary households were stuck with real wages at 2013 levels.”

I concur with Mr Keane’s opinion regarding the parlous state household wages are left in after nine years of regressive Neoliberal economic theory being unleased on the Australian public.

However, the issue of economic theory is the subject which I wish to share with you today readers, as there is now taking place across the divide of the social sciences a new empirical approach to analysing data, including economic data relating to wages.

Harvard University

On 12 January 2020 Ms Natalia Emanuel and Ms Emma Harrington of the Harvard University School of Economics published a research paper titled “The Payoffs of Higher Pay” (Harvard article). Ironically, the subject matter of their study involved a pay rise of only $1.00. Surely somebody in either the Morrison Government or Department of Treasury (Treasury) should know about this research paper, and if they don’t, then a broom needs to be taken to Treasury, as well of course the Morrison Government.

The Harvard article confirmed what I had known for years from being educated in economics by my stepfather Mr Baldev Joshi (who was the top of his class in economics at the University of Queensland), but it was nice to see the economic theory being confirmed in writing in the United States, as unfortunately that is where this horrible 20^th Century Friedman exercise of market economics was first postulated. The Harvard paper in its opening introduction of ‘Abstract’ reports as follows:

Page 1:‘We document finite wage elasticities of turnover (between −3.0 and −4.5) and recruitment (between 3.2 and 4.2), which suggest the firm has some wage-setting power. Yet, on the margin, raising wages by $1 increases productivity by more than $1, giving the firm an incentive to pay more, even if they could pay lower wages.’ 

Page 3: “We estimate that the increase in productivity caused by raising wages fully pays for itself. This contributes to the important literature on efficiency wages, which has hypothesized about the effect of higher pay on productivity, but has struggled to quantify the elasticity of productivity with respect to pay Our findings echo the analysis of Ford Motor Company where high wages reduced turnover rates and elicited greater effort from workers (Raff and Summers, 1987) and Cappelli and Chauvin (1991), who find that higher relative pay in a multi-plant firm reduced disciplinary infractions as well as Cohn et al. (2014) who find a 25 percent pay cut reduces productivity by 15 percent among sales associates, and Hesford et al.…” 

Page 5: “Our estimates reveal that women’s turnover is less responsive to pay then that of men in customer service, which would be consistent with a 6-cent pay gap. ” Importantly, we find that women’s productivity response to higher pay is substantially larger than men’s, suggesting a force that would push female wages higher than male wages. Together, these estimates underscore the importance of including productivity responses in addition to turnover responses when considering how worker responses to pay may affect firms’ pay-setting.”

The Harvard paper then proceeds to address in greater detail the summation of the findings set out in the Abstract, by making these observations or findings in chapter 1, Conceptual Framework:

Page 7: “Intuitively, if workers are unwilling to come to work except at high wages, or are willing to leave at lower wages, wages will be driven upward. The expression also shows that if productivity is increasing in wages, then wages will also be larger. Several explanations are plausible: If ability and reservation wages are positively correlated, then higher pay enhances the selection of workers (Weiss, 1980). Alternatively, if the job is more valuable, higher wages deter shirking (Shapiro and Stiglitz, 1984). Finally, if workers are more likely to feel that they are being paid fairly, they may respond with greater effort in a sort of gift exchange (Akerlof and Yellen, 1990).”

Page 7: “We estimate p(w), the worker output, based on what the firm had previously been paying for a given level of output, inclusive of taxes. Implicit in this usage is the assumption that any misoptimization in the payment is of second order. This means that when we arrive at a cost-benefit calculation, the concerns about taxes appear both on the cost-side and on the benefit-side, effectively cancelling out.”

At chapter 2, the Harvard paper reports its data is obtained from two Fortune 500 firms, however the second firm is critically important as the: “second source of data is the segment of a large staffing agency that provides temporary staffing for production and warehouse companies.”

Chapter 3 of the Harvard paper then proceeds to address productivity response to higher pay, and the following passages are relevant to the matters at hand regarding the value to businesses from the measly sum of a $1.00 increase in minimum pay:

Page 11: “We find that in both the retailer’s warehouse and among their on-site customer service agents, productivity increases when pay, or relative pay, increases. In the warehouse, when pay increases the number of boxes moved per hour by 7 percent (0.325/4.92 boxes per hour), reflecting an elasticity of 1.2. Among customer service representatives, paying $1/hour more than the local outside option increases calls taken per day by 7 percent, reflecting an elasticity of 1.12.”

Page 13: “… in the three months following the pay jump at the warehouse, boxes moved per hour increased by 0.328 off a base of 4.92 boxes moved per hour, an increase in productivity of 7 percent. This corresponds to an elasticity of 1.2. Our metric of boxes moved per moving hour is 0.316, an increase of 4 percent. Finally, we find an increase of 0.018 in the ratio of moving to total hours, which corresponds to an increase of 8.6 minutes of moving per person per day.”

Page 15: (the retailer data) “There is no statistically significant change in the share of absences that are unapproved by a manager in advance and thus difficult for the retailer to respond to.”

The Harvard paper at chapter 4 then examines the costly question of turnover elasticity, and in particular:

Page 16: “According to both estimates provided by the retailer and analysis of both warehouse and call-centre data, turnover is costly, even for workers in jobs that are relatively routine and do not require an advanced degree…(retailer data) Given the trajectory of learning, a higher rate of churn means that at any given time more workers will be new to the firm and have developed less skill in answering calls. This dynamic also suggests that retention of senior customer service representatives is more valuable than retention of junior ones because they will walk away with more human capital accumulated in the firm.…”

Page 16: “Using the same pay jump used to estimate the effect of pay on productivity in the warehouse context, we estimate the effects.”

Page 17: “In the three months before the pay increase, out of every 100 workers in the warehouse, on average 13.4 would be leave per month – a monthly retention rate of 86.6 percent. Paying an additional $1/hour decreases turnover by 2.5 individuals – a decrease in attrition of 18.7 percent, and an increase in retention of 2.8 percent. Since our point estimate captures the effect of a $1/hour increase off of $16.20/hour, our point estimate reflects an elasticity of turnover of 3.03… Since two of the three of these warehouses are within a 13-minute drive of the treated warehouse, if there were a shock to the local labour market for warehouse workers that were driving the decreased turnover, one would expect to see it decrease turnover in these warehouses as well. However, as Table B.9 shows, there is no decrease in turnover in other in-state warehouses.”

Page 17: “We likewise explore whether higher relative pay is associated with reduced turnover among customer service representatives. As in Section 3, we use the retailer’s sticky wages alongside changes in the local pay for customer service representatives as in Equation 3 to assess the value of an additional dollar in relative pay to reach these estimates.”

Page 18: “We find that higher pay is particularly effective at retaining representatives who start in the top third of daily call volume in their first month, as shown in Table B.6, Panel B. Each $1/hr of additional relative pay reduces turnover by 44% for initial top performers, implying a turnover elasticity of 6.6. …also find that in response to a commission adjustment that effectively lowers wages, high-performing call-centre workers are more likely to leave the company than low-performing workers.”

The Harvard paper also considers the impact on recruitment when the employer is paying $1 more an hour than a competitor:

Pages 18-19: “We find that when the retailer’s advertised wages are $1/hour higher than the local outside option, they recruit 23 to 30 percent more employees in the MSA, reflecting a recruitment elasticity between 3.2 and 4.2. Likewise $1/hour higher wages are associated with a 5 percent increase in the likelihood of employing a worker rated as excellent by their manager.” 

Page 19: “We find that the retailer hires throughout the country and higher relative pay increases recruitment in MSAs throughout the country.”

Page 20: “As shown in Table 4, Panel A, every additional dollar the retailer pays above the average, local entry-level rate is associated with between 0.17 and 0.22 more customer service recruits in the MSA off of an average of 0.73. This translates into an elasticity of recruitment with respect to the wage of between 3.2 and 4.2.30 When customer service representatives are considering different options at the recruitment stage, their decision-making seems heavily swayed by relative pay.” 

At chapter 6 the Harvard paper then examines the issue of the return to higher pay, and it opines:

Page 20: “We find that in both the warehouse context, where estimates arise from a deliberate increase in pay, and the customer service setting, where estimates arise from keeping pay constant, productivity shifts are instrumental in offsetting the costs of higher wages.”

Page 21: “We find that an increase of $1/hour means the warehouse has 2.5 fewer workers per hundred employees leave each month, yielding a savings of (2.5 fewer turnovers x $1849) $4623 per month… The gross returns of increased productivity in the warehouse are $1.44. Based on hourly pay in the treated warehouse, in the quarter before the pay jump, the firm was spending $4.27 per box moved ($16.20 in hourly wages * 1.30 in taxes / 4.92 boxes moved per person-hour). Since the higher pay increased the warehouse level productivity by 0.336 boxes per person-hour, the gross return on a $1 pay increase, which costs the firm $1.30/hour, is $1.44.”

Page 21: “Among customer service representatives at this retailer, the gross return on a $1/hour increase in the relative wage is also positive… Among customer service representatives, we find moderately small decreases in turnover from increasing relative pay. We estimate the cost of replacing a customer service representative to be $2,100, consisting of $1800 over the course of their 3-week training and $300 in badges and other administrative costs. According to these estimates, increased retention would thus reflect a savings of $2,730… A higher wage increases call volume by 1.90 calls per day, so the return on an $8/day in wages ($10.40 in total costs to the firm) in higher wages is $12.48 ($6.57 x 1.90) – or $1.56 on the $1/hour investment.”

To be thorough, the Harvard paper at chapter 7 examines the mechanisms of selection at behavioural responses, and it draws these interesting findings from the data:

Page 22: “To understand what share of the effects come from the same worker facing different wages and adjusting their behaviour accordingly, we leverage data from a staffing agency. While the dataset is distinct from the retailer data, the staffing agency places many workers in similar warehouse jobs, allowing us to consider the effects of pay on this occupation. Because we observe the same worker in multiple, comparable jobs with different pay, we can see what percent of the reduced form relationship is present when the same worker faces different pay rates. We find that over half of the turnover reduction and productivity increase arises from behavioural responses of the same worker facing different wages.”

Page 23: “Our estimates are thus identified off of variation in hourly pay across firms and workers in the same local labour market and industry… We find that an additional dollar of pay increases job completion by 2.6 percentage points, off a base of 40 percent completion. This is equivalent to an elasticity of 0.72. We estimate that 83 percent of that effect arises within the same worker… In this case, we find that 50% of the increase associated with higher pay arises within the same worker.”

At chapter 9 the Harvard paper then takes the reader to the important issue of benchmarking:

Page 26: “We find that higher relative pay increases job completion rates by 1.2 percentage points of a baseline completion rate of 83 percent… We estimate that an extra dollar in relative pay is associated with an 8 percent decrease in quits (-0.48 percentage points off of a base quit rate of 5.9 percent). We see no change in the evaluations proffer by on-site managers… Of the 8,477 temporary assignments that the shipper secures through the staffing agency, 75% are retained in our sample. To construct the outside option, we include all other warehouse jobs begun in the same season and in the same commuting zone filled through the staffing agency.”

Page 27: “We estimate that an additional dollar in relative hourly pay means the shipper is 6.7 percent (0.87 percentage points off a base of 13 percent) more likely to have a worker to is predicted to be reviewed excellently and 2 percent (0.75 percentage points off a base of 39 percent) less likely to have a new worker. There is no statistically significant difference in workers who are predicted to be poor.”

Page 28: “When the shipper is hiring at all, quits at rival firms increase by 12.4 percentage points off a base of 28 percent. An additional dollar of pay over the outside option is associated with a 1.45 percentage point increase in quits. We also assess bad endings– namely when workers be terminated for performance or attendance, or to receive a “Poor” Evaluation. When the shipper is hiring, bad endings at rival firms increase by 8 percentage points, off a base of 24 percent.”

The Harvard paper then delivers its overall opinion at chapter 10 under the heading of “Conclusion”, reporting these findings:

Page 28: “In this paper we present evidence that warehouse workers and customer service representatives are responsive to wages, not only with regard to recruitment and turnover, but also with regard to their on-the-job productivity. We estimate recruitment elasticities in excess of 3, turnover elasticities between -3 and -4.5, as well as productivity elasticities in excess of one. The productivity response to higher pay yields a net positive return. We estimate that 80 percent of the improvement in turnover arises from workers’ behavioural responses to higher pay… This paper also estimates gender differences in these elasticities. We find that while women’s labour supply is slightly less elastic than men’s, women increase their productivity in response to higher pay more than do men. The gender difference in labour supply elasticity is important because it suggests that when the concentration of firms is used as a measure of monopsony power, we may underestimate firms’ power to set female wages. The productivity response is particularly intriguing because it suggests that if wage discrimination were not illegal, women should be paid more than men in this context.”

Page 29: “Increases in the minimum wage will increase wages without decreasing employment. To the extent that our results are often measuring the difference between a firm’s pay and workers’ outside options, minimum wage changes change the outside option. If a minimum wage increase compresses the wage distribution, workers who were paid above the minimum wage will have less difference between their wages and their outside options. Our results suggest that firms can capture lower turnover and higher productivity by raising wages. Thus our paper suggests that in the wake of a minimum wage change, firms may seek to raise wages even for workers who were not paid the minimum wage.”

I have been meticulous as I can be with the content of the Harvard paper so that you the reader can understand the benefits the writers of the Harvard article found in increasing wages by only $1.00. Here in Australia, it is a measly 38 cents which Morrison is trying to run a scare campaign on. I just hope all the staff and students at the Harvard University School of Economics, when they eventually stop laughing about Morrison’s scare campaign, understand that his view does not conform with the views of most of the Australian public. One final comment, notwithstanding the pandemic, and the current inflationary pressures in the United States, this paper has not been changed in any respect to reflect a different finding, and therefore it remains an invaluable empirical resource to consider the question at hand. I have set out here the webpage address if you may wish to read this paper yourselves:

The 2021 Nobel Laureate Economics Prize

There can be no finer piece of empirical resource to resolve the 38 cents debate than the 2021 Nobel Laureate Economics Prize, which to describe the observations in the summation:

“This year’s Laureates – David Card, Joshua Angrist and Guido Imbens – have shown that natural experiments can be used to answer central questions for society, such as how minimum wages and immigration affect the labour market. They have also clarified exactly which conclusions about cause and effect can be drawn using this research approach. Together, they have revolutionised empirical research in the economic sciences.” I have set out below the webpage address for you to examine the summation, if you may so desire to do:

What this opening to the summation conveys for the benefit of the dilettante (the uninitiated) of social sciences is that Mr Card, Mr Angrist and Mr Imbens have now revolutionised the approach for analysing data, particularly in economics. Their studies include how minimum wages affect the labour market. The summation refers to the following key points for the matter under consideration in this article:

1. One way of establishing causality is to use randomised experiments, where researchers allocate individuals to treatment groups by a random draw. This method is used to investigate the efficacy of new medicines, among other things, but is not suitable for investigating many societal issues – for example, we cannot have a randomised experiment determining who gets to attend upper-secondary school and who does not.
2. The Laureates have demonstrated that many of society’s big questions can be answered. Their solution is to use natural experiments – situations arising in real life that resemble randomised experiments. These natural experiments may be due to natural random variations, institutional rules or policy changes. In pioneering work from the early 1990s, David Card analysed some central questions in labour economics – such as the effects of a minimum wage, immigration and education – using this approach. The results of these studies challenged conventional wisdom and led to new research, to which Card has continued to make important contributions. Overall, we now have a considerably better understanding of how the labour market operates than we did 30 years ago.
3. In an innovative study from 1994, Joshua Angrist and Guido Imbens showed what conclusions about causation can be drawn from natural experiments in which people cannot be forced to participate in the programme being studied (nor forbidden from doing so). The framework they created has radically changed how researchers approach empirical questions using data from natural experiments or randomised field experiments.
4. In the early 1990s, the conventional wisdom among economists was that higher minimum wages lead to lower employment because they increase wage costs for businesses. However, the evidence supporting this conclusion was not fully convincing; there were indeed many studies that indicated a negative correlation between minimum wages and employment, but did this really mean that higher minimum wages led to higher unemployment? Reverse causation could even be the issue: when unemployment rises, employers can set lower wages which, in turn, may lead to demands to increase the minimum wage.
5. To investigate how increased minimum wages affect employment, Card and Krueger used a natural experiment. In the early 1990s, the minimum hourly wage in New Jersey was raised from 4.25 dollars to 5.05 dollars. Just studying what happened in New Jersey after this increase does not give a reliable answer to the question, as numerous other factors can influence how employment levels change over time. As with randomised experiments, a control group was needed, i.e., a group where wages didn’t change but all the other factors were the same.
6. Card and Krueger noted that there was no increase in neighbouring Pennsylvania. Of course, there were differences between the two states, but it is likely that the labour markets would evolve similarly close to the border. So, they studied the effects on employment in two neighbouring areas – New Jersey and eastern Pennsylvania – which have a similar labour market, but where the minimum wage was increased on one side of the border but not the other.
7. Card and Krueger focused on employment in fast-food restaurants, an industry where pay is low and minimum wages matter. Contrary to previous research, they found that an increase in the minimum wage had no effect on the number of employees.
8. The overall conclusion is that the negative effects of increasing the minimum wage are small, and significantly smaller than was believed 30 years ago.
9. The Laureates’ contributions from the early 1990s demonstrate that it is possible to answer important questions about cause and effect using natural experiments. Their contributions complement and strengthen one another: Angrist and Imbens’ methodological insights about natural experiments and Card’s applications of this approach to important questions led the way for other researchers. We now have a coherent framework which, among other things, means that we know how the results of such studies should be interpreted. The work of the Laureates has revolutionised empirical research in the social sciences and significantly improved the ability of the research community to answer questions of great importance to us all.

I implore you the reader to take in the Laureates findings, consider them carefully, and then ask yourselves why 38 cents an hour on top of what business is arguing for as a minimum wage increase could possibly crush the economy as Morrison so inelegantly claims? The answer is it won’t, it will just assist the lowest paid workers in Australia to keep up with CPI in relation to their ever day costs of living expenses.

So why are we here?

To the educated mind the natural response would be “beats the living daylights out of me.” For everyday Australians earning the minimum wage it means a lot, as they struggle to pay their rent and other daily living costs.

For Morrison it is a poorly considered political tactic in an already sinking ship, and his whole approach to political life has been one of trying to manipulate the various Australian communities’ fears or passions, rather than doing what he should be, namely governing in the best interests of the nation. We have seen this week Morrison has had no moral compass when it comes to trying to manipulate social issues by supporting Ms Deves repulsive remarks, all in the name of trying to secure votes by trying to divide the nation. Morrison is not an economist, nor does he have a future vision for Australia, rather he tries to survive day by day by seeking opportunities for political expediency.

On this occasion Morrison jumped too soon, he did not consider the empirical research over the past 30 years, and now he has nothing but a ludicrous scare tactic which once again demonstrates he does not care if he causes harm to any people or group in Australian society. Indeed, his submission to the FWC has a whole chapter devoted to how keeping people below the poverty is good for the economy, which it isn’t.

The sought after 38 cents which means a $1.00 an hour increase to the minimum wage will not crush our economy, as it will just help the lowest paid workers keep up with the costs of living, and every single cent they receive will in any event be spent to keep the cycle of the economy running. However, what Morrison’s scare campaign does is it highlights his propensity to lie or be a hypocrite, not only for all the reasons stated herein, but also because he started this campaign by spruiking how strong the Australian economy is. Once again, Morrison’s dreadful character flaws are displayed.

Our lowest paid workers deserve that extra 38 cents. There is no sensible reason to militate against this happening.

Australia deserves a better future under an Albanese Government. On Saturday, 21 May 2022 vote 1 Labor, for a government which will govern for every Australian.