Minimum wages and unemployment

Australia raised the minimum wage by 3.5% this month.

Hurrah for all the lowest-paid workers, I hear you cheer.

Some cynics have suggested that this might not be the universally good news that most commentators suggest, however.

Their argument goes something like this; an organisation has a finite amount of available funds to pay workers. If the rate at which they must pay these workers is raised by legislation, there will be less money and therefore fewer hours of work will be offered to the workers.

The finance and economics commentator, Stephen Koukoulas, disagrees in this article on Business Insider. It’s worth reading in full but a fair summary might be, “price signals work in both directions; if wages were higher, the 5.5% of the potential working age population who are currently unemployed would find paid work more compelling than whatever else it is they do with their time“.

The Kouk is a well-respected commentator and generally talks a lot of sense but his position doesn’t ring quite true on this occasion.

He uses the technique of looking at the extremes to seek the truth, which is a useful method. If the wage was $100 an hour, who in their right mind would sit around at home watching daytime TV, for example?

There’s a problem with this however; it assumes everyone is capable of finding and keeping a job.

This chart shows the flaw in that argument;

It’s the distribution of IQ across the bell curve.

Look closely at the left hand side; 2.2% of the population have an IQ below 70. A score below 70 is a crushing intellectual disability, with very few suitable jobs available that could be undertaken by someone in that part of the distribution. Cognitive abilities will be severely limited and reading, reasoning and basic mathematics will be real challenges for them.

13.6% of people are between 70 and 80 on the IQ distribution. Although not as severe an inhibitor, these people will struggle with more complex tasks and interactions.

It gets worse…. of the jobs we are rapidly automating, the first cabs off the rank are the ones more easily codified into simple rules and processes. Mainly, these sit in the distribution to the left of a score of 80. Anyone who has been into a McDonalds recently will have noticed that orders can be placed on automatic tellers now; it’s not the manager who has been replaced but the entry level staff.

Bill’s Opinion

There is a point beyond which raising the minimum wage will have no effect on the level of unemployment if one of the reasons for unemployment is a fundamental incompatibility between the potential workers and the vacant roles due to genetics.

It’s not necessarily the fault of the person with an IQ of 70 that they can’t get a job.

“Full employment”, is a utopia that will never be achieved. Is an unemployment rate of 5.5% as close to full employment as Australia can get? Unlikely but it might not be too far off either.

3 Replies to “Minimum wages and unemployment”

  1. And when higher wages tempt the idle poor to look for work, an increase in supply of labour should do what to the price? It’s a long time since I did Econ 101 but the rules can’t have changed that much.

Leave a Reply

Your email address will not be published.