RDP 2018-06: The Effect of Minimum Wage Increases on Wages, Hours Worked and Job Loss 9. Discussion

There is widespread interest in understanding the effects of minimum wage increases. I add to the evidence base by using an identification strategy uniquely suited to Australia and a dataset that provides several advantages over those used previously in the literature. I provide the first causal estimates of the effect of minimum wages on wages in Australia, and one of the few credible estimates of the effects on hours worked and job loss. I find that small, incremental adjustments to awards are mostly passed on to wages in award-reliant jobs. These adjustments appear to have little adverse effect on hours worked or job loss. These findings are consistent with the international evidence and the FWC's (2017) current assessment of that evidence base.^[16]

There are several things to keep in mind when interpreting these findings. Firstly, as discussed earlier, my results are for adult employees only and do not include juniors. Secondly, the results may not necessarily generalise to large, unanticipated changes in award wages. There will always be some point at which a minimum wage adjustment will begin to reduce employment. Thirdly, my paper studies fairly tight windows around FWC decisions, and thus gives valid estimates of the effect of the minimum wage on hours worked and job loss only if employers take less than six months to adjust to changes in the award wage (Borland 2018). Finally, although I find no statistically significant evidence of an effect of award adjustments on job destruction, this does not rule out an adverse effect on employment. For instance, the adverse consequences of higher wage floors may be borne by job seekers, rather than job holders. Evidence from the Productivity Commission (2015a, p 67) tentatively supports this possibility.

Australia's rich tapestry of minimum wages provides other avenues for future work. Given that award wages are set at many levels throughout the distribution of wages, marginal effects could be estimated at multiple minimum wage levels. This could contribute to our understanding of the optimal level of the minimum wage.

Footnote

In its most recent review of award wages, the FWC (2017) cited international research that ‘modest and regular’ wage increases do not result in an increase in unemployment. [16]