Here’s my reply to Russ Robert’s query about the Australian minimum wage.

Dear Russ

You may recall that I visited with you about a year ago at George Mason where we discussed, amongst other things, Say’s Law and Keynesian economics. But why I am writing now is because yesterday, when I opened Cafe Hayek as I regularly do, I found your query about the Australian minimum wage which is less of a puzzle to us here than it seems to be elsewhere. I will go into this a bit, but before I do I should just mention that I was the Chief Economist of the Australian Chamber of Commerce and Industry (ACCI) for a quarter of a century which drew me right into the very heart of the Australian industrial relations system. Although this won’t mean much in America, I wrote something like a hundred economic submissions in various test cases on industrial relations issues over the years, about a third of which dealt with the National Wage Case, which is the name given the process of minimum wage adjustment here in Australia. We have a quite unique industrial relations system and while it never appeals to anyone else – it hardly appeals to anyone here – it is a piece of institutional genius which has lasted for more than a century. It’s not perfect but then again nothing is.

Now when I saw your post the first thing I did was post it on our own blog here asking for comments. You can see the posting and the comments here.

What seems to surprise many others about Australia is how well we have fared during the period following the GFC. But there were three aspects of the post-2009 period that made the all important difference. The first was the economic policies of the previous Liberal Government from 1996 through to 2004 in which not only did Australia almost continuously run a surplus but we were the only country in the world that had zero debt. By sometime around 2001, the surplus could not even be used to pay off debt since there was none. So money was placed in a “future fund” which left the finances here in Australia extraordinarily robust when the GFC finally came.

There is then, secondly, our incredibly well managed financial system. Our banks held virtually none of the toxic assets that had weighed down the economies of other developed economies. But beyond that, we have a central bank that was the first to raise interest rates after the GFC and has kept them high every since. There is no easy money rolling around inside Australia. Artificially low interest rates are recognised by our central bank as part of the problem and not part of any sound solution.

Then, thirdly, the Chinese stimulus, whatever it may have done for China, caused a mining boom in Australia that continues. Rather than a disastrous downturn, our downturn was generally mild. Unemployment did shoot up from the low of 3.9% when the GFC began to reach 5.8% at its highest point. Sounds good to others but we did experience the two percentage points rise in the unemployment rate and avoided the official definition of two consecutive quarters of contraction by something like 0.2 percentage points. We had a recession but it did not last very long mostly because of the Chinese demand for resources which allowed Australia to pull forward almost immediately.

We naturally had a Keynesian stimulus which has been a cause of major havoc ever since. Billions entirely wasted. The debt and deficits that have accrued since 2009 have completely overturned the incredible position our Labor Government inherited. Having started with zero debt and no deficit, both are now high and uncontrolled. Our situation only looks good to others because no one appreciates the benchmarks which these outcomes have originated from.

Turning to the minimum wage, it is high on an exchange rate basis but in purchasing power parity terms is not as good as you might think. What $15 will buy you in Australia is about what $8-9 might buy you America. There is also an inflation ripping through the basic elements in our cost of living due to a number of factors, not least of which is the introduction of a carbon tax.

Australia has always had just about the highest minimum wage in the OECD (only France may be higher but it’s been a long time since I looked). The minimum wage is also a lot closer to the median wage than just about anyone else, or at least it was when I was last doing these Wage Case submissions. And while the official unemployment rate may seem low by American standards, the effect of the minimum wage has been detrimental on employment outcomes with the labour market visibly deteriorating for a large number of reasons beyond the minimum wage. Were we to have the same participation rate today as we did in the middle of 2010, the unemployment rate would be something like 6.5%. If one bears in mind that the average unemployment rate from 1945 till around 1970 was 1% (yes, one percent), you can see just how high our present unemployment rate is when looked at in our own terms.

Meanwhile, I have been looking at our latest ACCI economic survey and the trends in every important category are downwards, most notably in regard to employment. We have done rather better than most because where our current government has been unable to influence all aspects of policy – such as with our central bank and with the Chinese demand for minerals – we have done rather better than most. But where they have been able to intrude their policies, such as with fiscal policy, tax, wage outcomes and industrial relations, they have been poison to the economic system with these problems about to come to a head over the next twelve months. We could quite easily be looking at an unemployment rate no different from yours a year from today.

With kind regards

Steve