Minimum wage and demand for labour Essay Example

Minimum Wage and Demand for Labour

Table of Contents

3Glossary of Key Terms

4Minimum wage and demand for labour


5Overview of the labour market

6Minimum wages in Australia

8Minimum wages on employment


13References List

Glossary of Key Terms

Demand The quantity of a product or service that is desired by buyers.

Supply The quantity of products that a market is able to offer.

Law of demand If all factors remain constant, the higher the prices of a good, the fewer buyers will demand the good. This relationship is depicted by downward sloping curve as illustrated in the figure below.

Minimum wage and demand for labour


The objective of this discussion is to analyse the impact of minimum wage on demand for labour for the low-paid workers in Australia. According to the Annual wage Review of 2013, Australia’s labour market offers the highest minimum wage rates in comparison to other leading economies in the world, and this negatively impacts on the ability of low-paid workers to get employment. According to Kramp (2009), an increase in minimum wage rates subsequently results in a decrease in employment opportunities. In evaluating the impact of minimum wages on employment opportunities for low paid workers, this discussion will focus on 3 aspects of the Australian labour market. These will include: an overview of the labour market, an analysis of minimum wages, and a theoretical and empirical analysis of the effects of minimum wages on employment in Australia. The paper will provide a summary of all the aspects and issues that have been raised in this discussion.

Overview of the labour market

According to Malcomson (2012), afundamental principle in economics is that the value or price of any commodity, asset is resource such as labour is depended on the supply and demand for it. The figure below provides an illustration of demand and supply of labour in production of a given commodity. SS represents the supply curve, while DD represents the demand curve. In the event that that the price level is kept constant, the amount of labour employed is represented by the horizontal axis, while the vertical axis represents the supposed wage for each unit of labour employed.

Demand and Supply of labour in the labour market in relation to the Wages

Minimum wage and demand for labour

The curve for demand of labour is in most cases negatively sloped. This is attributed to two factors: first, an increase in wage rates subsequently results in an increase in the cost of production of the commodity, compelling firms to raise the price at which the commodity is sold. The implication is that less amounts of labour is required to produce the commodity. Secondly, an increase in wage levels implies that labour will more expensive, and in response firms end up substituting labour with production techniques that are less labour-intensive

Minimum wages in Australia

The objective of the Minimum wage panel’s AWR process is to establish and develop a minimum wage safety net for workers in the lower income bracket. This is superposed to be achieved in consideration of economic aspects including business competitiveness, productivity, employment growth, workforce participation, and general needs of low paid workers such as equity in opportunities. Australia’s federal Minimum Wage after social security contributions and other taxes was ranked by Immervoli in 2005 to be the forth highest in 21 OECD countries (Malcomson, 2012).

As indicated in the data found in the 2013 annual wage review, Australia’s industrial; relations system is not as regulated and centralised as is commonly perceived. In the period between 1990 and 2006 for instance, there was a decline of the award reliance cover of four out of five people to one in five people. In consideration of the objectives of the award system, the minimum wage is far more than simply a safety net for low skilled and low paid workers, or those who are not able to have access to the bargain system. Decisions regarding minimum wages should therefore not be perceived to only affect those that are wholly depended on awards. Decisions concerning minimum wages that disregard those that are closely l inked to the awards especially in policy formulation and implementation would be deemed to be significantly flawed.

As indicated by the data in figure below, Average Weekly Ordinary Time Earnings (AWOTE) for workers in Western Australia has in the past decade increased by 84.2 percent, from the figure recorded in November 2002 of $859.00 to $1,582.60 in November 2012. In the same duration, there has been an increase of 45.5 percent in minimum wage, approximately $431.40 to $ 627.70. Despite the disparities in the size of these increments, the differences are largely attributed to various factors that generally indicate variations in the States labour force, as well as stringent labour market regulations.

Increases to the Western Australian Minimum wage, actual and real value measurements 2002-2012

Minimum wage and demand for labour 1

(Horstman, 2013)

As illustrated in the figure, there has been an increase of 8.6 percent in the real value of the state minimum wage over the last decade. It should however be noted that the Average Weekly Earnings series that ABS produces is often used to distinguish trends in wage differences. The Australian treasury often prefers to use WPI to measure trends in wage rates, as it provides a more accurate indication of movements in wage rates for comparable work.

Minimum wages on employment

Recent empirical labour economics literature has contributed significantly to minimum wage controversies in modern economies. It is argued in this literature that moderate increments in minimum wages do not necessarily result in adverse outcomes in employment for for low-paid employees (Shapiro& Stiglitz, 2011)

Theoretical arguments

In reference to the popular neoclassical theory of minimum wage increase, it is argued that in competitive markets, a minimum wage that exceeds the market clearing wage results in workers whose service is not worth the minimum wage ultimately loose their jobs. Decrease in the quantity of labour that is demanded is depended on the increase in wage rates and the corresponding wage elasticity in demand for labour. More elasticity in the demand for labour results in higher chances of substituting other inputs, such as better skilled workers and more capital, for the services offered by low-skilled workers (Preston, 2010).

Additionally, with an increase in minimum wages and the subsequent increase in labour costs, production processes and technologies that were previously deemed to be unprofitable are now considered by firms to be profitable. There is a subsequent rise in the cost of production as minimum wages are increased, but they would rise even more if complimentary resources had not been substituted for labour by new production technologies which often demand superior skill, and hence unskilled workers are either displaced or discharged. Fair Work Australia (2010) points out that the same effect trickles down to employee welfare. Minimum wage increase is determined by wage elasticity of demand. Workers become better of, as they are able to maintain their working hours while being paid higher wages.

Empirical evidence

Guillermo and Wellisz (2009) talk about empirical literature as regards the negative impact of increases in minimum wages on employment. Having analysed more than 90 case studies in their research, it emerged that most of the studies indicated negative employment effects that are attribute to minimum wages. In the event of a downturn, there is decreased growth in aggregate wages and subsequent decline in job opportunities. In such situations, increases in the minimum wage are considered to have an amplified effect on unemployment levels (Rogers, 2010).

As it was estimated by the CIE, if AFPC had continued to increase minimum wages in the year 2009 and successive years as it did in 2008, then the Australasian economy would have continued to experience a further deterioration of its labour market with worse unemployment consequences (Albon, 2009).

The table below depicts the changes in WPI for different industries in Western Australia in the past two years. The table also highlights the large differences in wage increases in different sectors. Apparently, increases in sectors that are award reliant fall behind the increases in sectors that are keen on negotiation as a mode of determining minimum wage.

WPI annual increase by industry Western Australia, to December Quarter 2012

Minimum wage and demand for labour 2

(Horstman, 2013)

When developing the State Wage Order, needs of the low-paid workers are supposed to be of priority to the commission. As illustrated by the figures in the table above, this has not been satisfactorily realized, and this can be attributed to a lack of consensus in the last ten years on which categories of employees should be considered to be low-paid. In consideration of the significant challenge of identifying and evaluating needs of the low-paid workers, increases in minimum wages at the rate of CPI is a fairly accurate approach for providing better living standards for the low-paid workers (Horstman, 2013)


As indicated in previous studies , workers that have superior skills have better chances of securing employment, and thus less chances of being unemployed than wow-skilled workers not just in Australia alone, but across the world.. Most low- skilled workers often have minimal firm specific human skills and competencies and thus the y easily is discharged or displaced Changes in the minimum wage that is offered by firms have in the past decade had a negative effect on low-skilled employment than high-skilled employment.

References List

Albon, R. P 2009, Rent Control: Costs and Consequences, The Centre for Independent Studies, Sydney.

Guillermo, A. C. & Wellisz S. 2009. Hierarchy, Ability and Income Distribution», Journal of Political Economy, 87, 991-1010.

Kramp O 2009, Minimum Wage legislation in Australia, GRIN Verlag, Melbourne.

Rogers, B 2010, Australian Fair Work Act 2009: With Regulations and Rules, CCH Australia Limited, Melbourne.

Fair Work Australia, 2010, Annual wage review. Melbourne, VIC., Australian Fair Pay Commission.

Preston, A 2010, The structure and determinants of wage relativities: evidence from Australia. Alsershot, England, Ashgate.

Malcomson, J. M 2012, Work Incentives, Hierarchy, and Internal Labour Markets, Journal of Political Economy, 92, 486-507.

Shapiro, C. & Stiglitz J. E 2011, Equilibrium Unemployment as a Discipline Device», American Economic Review, 74, 433-444.

Horstman, B 2013, In the Western Australian Industrial Relations Commission no. 1 of 2013 on the Commission’s Own Motion, Industrial Relations Act 1979.