Americans don't understand how Australia's labor market works

8/10/2013 03:46:00 PM
Worth \$1.37 in the United States (hand not included).
My facebook feed is full of memes about the brilliance of Australia's \$16 minimum wage law, and how despite this high minimum wage unemployment is only 5.4 percent.

First of all, as commenter Max alluded to on my previous post, you can't judge a minimum wage law based on the unemployment rate--I am always careful to say that a minimum wage could reduce employment, not necessarily raise the unemployment rate. In the comments, I discussed this problem in the context of a so-called 2 by 2 by 2 Ricardian model--that is, a trade model with two countries, two consumption goods, and two inputs (capital and labor). Perhaps that is a blopic for later--but for now it will suffice to say that if one of those countries enacts a minimum wage but the other does not, then we could easily see a decrease in both employment and the unemployment rate in the country with the minimum wage, as jobless workers simply move to the other country to get a job. Thankfully, FRED also gives us the employment-population ratio for Australia:
What we see is that historically, the US labor market has generally been much stronger than Australia's, but that Australia has done much better since the Great Recession began. This is no doubt because Australia managed to escape the recession (though, they are starting to feel headwinds), which surely has nothing to do with their minimum wage laws (though it could be because of their financial regulations!)

But that isn't really my main point here. My main point is that the underlying claim--that australia has a \$16 minimum wage--is totally, completely, utterly false. The \$16 figure actually only applies to paid, adult, full-time workers over the age of 20 who are not subject to an "award," which is a weird regulatory regime for which there is no US analogue, and not covered by a labor agreement. That's basically no one.

I did some digging. These "awards," as best I can tell, are actually top-down government regulations on work conditions, wages, and employment contracts. And in many cases, they authorize a minimum wage that is way, way lower than the \$16 figure. For example, here is the regulation for food service workers, which shows that a 16 year old worker at McDonalds can be paid as little as \$7.19 per hour in Australian dollars.

We now get into what is for me one of the most frustrating parts of discussing international economics with non-economists. Most people know that you need to adjust for exchange rates, which is 0.92 right now for Australia (that is, right now 1 australian dollar can be exchanged for 0.92 US dollars). But the less-obvious fact is that to compare minimum wage laws, or any other economic data, you also need to adjust for what's called purchasing power parity, which is the ratio of Australian to American prices of a representative basket of goods and services. So it turns out that you actually need 1.46 Australian dollars to purchase the same quantity of goods and services in Australia as 1 US dollar can purchas in the USA. Therefore, the Australian "minimum wage" being reported actually works out to \$10.80 USD. That is close to, but still higher than, the \$9.19 minimum wage for Washington, the highest in the USA.

However, as I noted, almost all Australians are exempt from this headline minimum wage. Instead Australia has a myriad of industry and region specific wage regulations. So rather than functioning like the US, where everyone within a state is subject to the same minimum wage regardless of industry, the Australian system actually has hundreds of separate minimum wages that treat everyone differently, making comparison to the US difficult. But, just to get an idea of what we are talking about, I looked up the minimum wage for a 16 year old fast food worker in Syndey, Australia--it works out to \$4.92 USD at purchasing power parity, way less than the \$7.25 minimum wage for the exact same job anywhere in the US.