Application Exercise 4d: Wages too high or low?
- This is because it is likely to have a negative impact on staff morale given that teachers working the same number of hours per week will be given different rates of pay. It is unlikely to be considered a fair outcome given that the argument will be mounted that all teachers are in the profession to improve the educational outcomes for students. As such, teachers will argue that their remuneration should be linked to their contribution to output (i.e. teaching educational advancement of students) rather than any differences between the demand and supply for the particular type of teacher. The practicality of achieving different rates of pay in Victoria is also hindered by the fact that schools lack autonomy to pay at different rates given that the majority of schools are administered centrally by the Victorian government (i.e. the Victorian government is the ultimate employer of Victorian public school teachers).
- The equilibrium wage will typically be low in those professions where labour shortages are evident. For example, over recent years Victoria has experienced shortages for taxation accountants, engineers, registered nurses and some other medical professionals, motor mechanics and other trades such as Carpenters and roof plumbers. If wages in each of these professions were to increase it would help to reduce the shortage and returned the labour market equilibrium.
- When wages are above equilibrium (e.g. caused by minimum wages that are ‘too high’, it will result in fewer people being employed given that the relatively high wage is reducing business demand for labour. This means that some workers who would have been prepared to work at lower wages will be prevented from gaining employment. In this respect it is a waste of labour resources (and adds to unemployment) because willing labour is prevented from achieving employment.
- The total cost of employment is made up of wages plus a host of other costs, including non-wage work-related expenses such as WorkCover insurance, superannuation, training expenses and payroll taxes. Accordingly, a reduction in any non-wage cost will help to reduce the overall costs of employing labour without actually reducing the rate of pay (e.g. the wage) to employees. For example, if the government reduced payroll taxes it would help to increase the demand for labour, create employment and reduce the unemployment rate.
- Given that minimum wage laws ultimately result in wages being higher than the equilibrium level it leads to an increase in wage costs for business. To the extent that businesses pass on the increased costs to consumers via higher prices, it will reduce Australia’s international competitiveness because Australian businesses competing in the export market (or those businesses competing against importers) will be competing against many foreign firms who do not face a government induced increase in wage costs (e.g. wage rates are significantly lower in many Asian countries and even in the USA).