18 February 2012

Increase the minimum wage by...$8? $149?

This has been another of those times when several topics come together and prompt another.  In this case it was the combination of reading a number of blogs on the theme of things in Australia being pretty fine (all things considered), numerous references to the "fiscal consolidation" we are undergoing at the moment and the fact that the national minimum wage setting process is about to get underway for this year.

In my previous post I had a chart which showed that for single people on incomes that had stayed the same in real (ie, CPI adjusted) terms, disposable income had been slowly but surely declining since 1 July 2010.  This reflected the absence of tax cuts (in fact there were tax increases in the period) and shows a tax-transfer outcomes aspect of fiscal consolidation.  What the chart did not show was the effect of wages growth.

Stephen Koukoulas is one of a number of bloggers who has referred to sustained periods of above-CPI wages growth in the context of continually improving standards of living (at least in longer run periods - eg a decade or so).  Certainly through much of the Howard era, and the Rudd-Gillard first term, the tax transfer system and wages growth were pushing up average disposable incomes.  However, this has arguably changed over the term of the current Government, with tax-transfer changes (or a lack of them on the tax cut side) pulling disposable incomes down.

This trend raises the question of just how much wages have to increase to offset the tax-transfer tightening.  One way to look at this is to calculate disposable incomes at 1 July 2010 (the tax-transfer system settings "inherited" by the current government), and then convert these to January 2012 equivalent values.  These can be compared with disposable incomes at 1 January 2012 (the start date for the current tax-transfer settings, at least as I model them) assuming that no increase in wages has  occurred.  It's then possible to work out how much extra has to be earned to return the current (January 2012) disposable income to the July 2010 equivalent value.

My first chart shows two things.  First, how much a single person's disposable income would have fallen from July 2010 to January 2012 in real terms if they did not have a wage increase in that period.  Second, how much gross wages would need to increase (in % terms) to return the person to their July 2010 position.

This suggests that for singles under 55 with July 2010 earnings of $20,000 or more, gross wages need to have increased by a little over 5% in 18 months to maintain the status quo.  The wide variations at incomes under $20,000 reflect interactions with the lower single rate of Newstart allowance.

Of course, the results will differ depending on the household type.  At the other extreme (maybe) is the single income couple (and yes, I know I've been banging on about them in earlier posts, but they are an intriguing example of a marked shift in policy settings in a short period).  The same type of chart for them looks like this:

This is an amazingly higher requirement, and far exceeds average wages growth in the period.  The reason is that we are not just looking at the erosion of value caused by inflation, but a deliberate policy shift in tax-transfer outcomes.  In this case it's the abolition of the dependent spouse tax offset.

These two quite disparate results provide a segue into the minimum wage issue.  Imagine trying to come up with a minimum wage decision that provides a "safety net" when the goalposts move about like this.  But that's what is required by 1 July, when the new minimum wage is supposed to come into effect.  1 July itself confuses the issue because that is also the start of the new tax scales and household assistance measures associated with pricing carbon.

Just as a teaser though, here's a tip for the minimum wage increase.  Based on the charts above, at this stage (ie, January  2012 parameters) an increase in the minimum wage of just $8.09 a week will keep a single person at the 1 July 2010 standard (this takes account of the increase already provided in July 2011).  For a single income couple though, the increase needs to be more like $149 a week!

So, my tip is that the increase will be somewhere between $8 and $150 a week.  Bet I'm right!