Australia has a long history of Union intervention, but the current reality is that only a small percentage of the workforce is represented by Union members. Cameron Murray argues that we should be looking to Germany when it comes to inspiration for our workplace relations.
Germany has a long history of organised labour wage bargaining, and a hands-off approach by government. This allowed the strong industry unions to negotiate their own wage agreements in response to sector specific conditions. This history explains why Germany is one of the nine OECD countries without a national statutory minimum wage. Yet union membership is falling, following a global trend, and as election time rolls around, Angela Merkel is proposing to adopt a national minimum wage for industries not covered by independently bargained wage agreements.
The global trend away from labour unions is requiring governments to play a more active role in wage negotiations. In Australia, a mere 18% of the workforce are union members, down from 50% in the early 1980s, despite a long history of government minimum wages intervention. Yet only a tiny fraction of the workforce is on minimum wages (stable around 3% of the workforce), and our minimum wage level is very high (as measured by the ratio of minimum wage to average wage). From this measure wage bargaining in Australia could be seen as successful, but we have seen some declines in relative minimum wage levels seen since 2000 (along with the US).
Germany is catching up to Australia in the trend away from unionism, with only 22% of the workforce now union members, which explains the growing expectations of government involvement in wage setting for low income earners. But there is still no agreement about how best for governments to set minimum wages, even in situations when they are called upon to arbitrate union disputes – a challenge now facing Fair Work Australia for the first time following the QANTAS dispute.
In its most basic form, a minimum wage is a social choice within a welfare state. The existence of welfare (such as unemployment benefits) represents a de facto minimum wage, and any statutory minimum wage needs to stay ahead of the welfare curve. An effective welfare system needs a strong an incentive to work, and the minimum wage ensures a gap between earnings on welfare and the bottom rungs of the workforce, making the transition to work more attractive.
The level of this whole system of welfare is simply a social choice about the minimum standards of living expected in the country. Other social decisions include regulations of minimum working conditions, which are a form of non-financial ‘wage’ that costs the employer and benefits the employee. None of these decisions are ‘optimal’ in any economic sense, but they are a bargained suboptimal outcome based on the trade-offs made by the institutions are the negotiating table.
Beyond this social framework, economists remain unconvinced of the market impacts of minimum wages in the real world. Theory predicts strong impacts on unemployment from wage bargaining, but assumes a starting point of optimal wages. A number of world-class researchers are finding that the following effects often negate traditional supply and demand analysis of the labour market.
- Labour supply effects. A higher wage encourages labour supply from the margins (from the pool of unemployed).
- Investment effects. Employers may have monopsony power in the labour market (meaning wages are below the optimal level). Olaf Storbeck describes how this provides a disincentive for investment – "Imagine a fast food restaurant in a small city. Opening a second outlet might be profitable for the owner of the restaurant. However, he might have to pay higher wages for hiring the extra staff he needs in the second restaurant. Since he is not able to differentiate the wages between both restaurants, he would drive up his labour costs in the existing restaurant. This effect harms the profitability of the first restaurant less and might discourage the expansion of the business completely. However, if the government introduces a minimum wage, labour costs rise anyway and the second restaurant might become more attractive again."
- Demand effects. Low paid workers are earning more money and can then consume more and increase demand, boosting local economic activity.
On balance, the net employment and income effects from increasing minimum wages, and indeed bargaining for higher sector-specific wages, are anything but certain.
What that leaves is a simple bargain over the sharing of returns between business owners and the labour force, with no particular optimal point. There are a range of wages that could be bargained that will have little to no impact on output levels. A voluntary agreement is likely to fall within this range regardless of the bargaining power of each side.
Governments therefore need to be careful not to support a minimum wage above this range. But exactly how they are expected to know if you wages are beyond this point is anything but clear. In short, government negotiation is going to replicate the traditional union bargaining, yet they might not always have the incentives to find a minimum wage near the high end of the range. If concerns of ‘destroying jobs’ are sensitive in the electorate, they may bargain with less vigour, or when the industry holds electoral sway, they push for a wage that does crimp industry output.
Hence, in both cases, Australia and Germany, minimum wages in various sectors are more likely to be in the optimal range if the labour force of the industry itself has well organised representation rather than a government umpire.
Cameron Murray is a professional economist, writer and blogger with a broad range of interests. He writes a daily column as Rumplestatskin at MacroBusiness. Cameron’s background includes roles in property development, as a government economic advisor, and as a regulatory analyst. He holds a Bachelor of Applied Science (Property Economics) and Master of Business (Research) from Queensland University of Technology, and is a recognised environmental economics researcher and occasional lecturer at his alma mater.