Monday, January 24, 2011

Back to Harvester?

Until 4:00 this morning, I’d never heard of David Harvey, an “eminent Marxist geographer” from the US. As I was whiling away my nightly bout of insomnia, I followed a link in this post by Don Arthur at Club Troppo, commenting on this post by Kim at Larvatus Prodeo and found  this interview with  Harvey and then this one. Both the Harvey interviews make interesting reading, particularly this section of the second:

I was part of, or very close to, one of the first living wage movements in Baltimore back in the early 90's. They now have become quite wide spread through many jurisdictions of the United States and I think there is a push going on at the grassroots level that says you cannot have people employed at something that is below a living wage. Therefore we have to pay very close attention to that locally, and I think that local movements are likely to push more and more into the national consciousness.

This immediately reminded me of the Harvester Judgement (PDF) of 1907 which, despite being overturned in the High Court, became the basis for setting minimum wages for most of the last century. This account of the judgement’s history is as good as any if you want to brush up on it.

There’s a sad irony here - while growing numbers of states and cities in the USA have been passing ordinances which require employers to pay a living wage here in Australia we’ve completely killed that idea off. According to the conventional wisdom of economics, we’ve come to our senses and those US states and cities that have living wage ordinances have lost theirs. The conventional wisdom is exemplified in a 1998 book review by Paul Krugman:

So what are the effects of increasing minimum wages? Any Econ 101 student can tell you the answer: The higher wage reduces the quantity of labor demanded, and hence leads to unemployment. Indeed, much-cited studies by two well-regarded labor economists, David Card and Alan Krueger, find that where there have been more or less controlled experiments, for example when New Jersey raised minimum wages but Pennsylvania did not, the effects of the increase on employment have been negligible or even positive. Exactly what to make of this result is a source of great dispute. Card and Krueger offered some complex theoretical rationales, but most of their colleagues are unconvinced; the centrist view is probably that minimum wages "do," in fact, reduce employment, but that the effects are small and swamped by other forces.

Krugman is one of the unconvinced; he continues:

What is remarkable, however, is how this rather iffy result has been seized upon by some liberals as a rationale for making large minimum wage increases a core component of the liberal agenda--for arguing that living wages "can play an important role in reversing the 25-year decline in wages experienced by most working people in America" (as this book's back cover has it). Clearly these advocates very much want to believe that the price of labor--unlike that of gasoline, or Manhattan apartments--can be set based on considerations of justice, not supply and demand, without unpleasant side effects...

I have little trouble with Krugman’s arguments at this point. Either that’s because Krugman has a “Nobel Prize” in economics and I don’t or it’s the reason Krugman has a “Nobel Prize” in economics and I don’t. It seems to me that if you’re engaged in any form of rational inquiry and you find that besides having no evidence for a theory, empirical observation shows the exact opposite of what your theory predicts then it’s time to come up with a new theory. If instead you hang onto the theory until the evidence you’d prefer turns up then what you’re doing is irrational unquiry. What you really have, when theory trumps evidence is no theory at all - it’s dogma. of course Krugman’s had 13 years to change his mind on the Living wage issue and who knows - maybe he has. In December 2009 he had this to say to Fox News pundits and assorted others on the subject of cutting minimum wages to reduce unemployment:

...let me repeat a point I made a number of times back when the usual suspects were declaring that FDR prolonged the Depression by raising wages: the belief that lower wages would raise overall employment rests on a fallacy of composition. In reality, reducing wages would at best do nothing for employment; more likely it would actually be contractionary.

The Harvester Judgement is very much a dead letter now - the Howard Government killed it off with WorkChoices. The Australian Fair Pay Commission created by the Workchoices legislation existed “to promote the economic prosperity of the people of Australia". In setting minimum wages it was required to take into account the ability of the unemployed to get work that is, apply the Eco 101 dogma above.The ousting of John Howard in favor of Kevin Rudd and the introduction of the Fair Work Act of 2009 didn’t change that.

The 2009 Act  is a pretty bizarre piece of legislation; an ugly miscegenation of legalese and corporate mission speak Here’s how it deals with the issue of setting minimum wages:

284 The minimum wages objective

  • What is the minimum wages objective?
    • (1) FWA [Fair Work Australia] must establish and maintain a safety net of fair minimum wages, taking into account:
      • (a) the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth; and
      • (b) promoting social inclusion through increased workforce participation; and
      • (c) relative living standards and the needs of the low paid; and
      • (d) the principle of equal remuneration for work of equal or comparable value; and
      • (e) providing a comprehensive range of fair minimum wages to junior employees, employees to whom training arrangements apply and employees with a disability.
    • This is the minimum wages objective.
Once again, the Eco 101 dogma gets top priority.

Finally, here’s what you get when you search Google News for articles from Australian news sources on the USA’s living wage movement, and its growing number of successes over the past 13 years. For Australian news organisations, the only grass roots political movement that exists right now is the Tea Party.


  1. As a matter of statutory interpretation, I don't think the Eco 101 dogma gets 'top priority'. Paragraphs (a) to (e) have equal priority. Of course, I don't envy FWA in trying to reconcile all 5 aims, but then again it's not as though this is a new problem. Rather than claim, as you do, a special place for WorkChoices, the minimum wages objective pretty closely mirrors the legislation put in place by the Coalition government in 1996, so you have at least 9 safety net decisions by the old AIRC to see the process in action. And the result has been that the federal minimum wage has increased in real terms over the past 14 years (probably by around 5 per cent or so).

    The problem, of course, is that most workers who had their wages set by the AIRC and now by FWA don't actually sit on the minimum wage but on various classifications above it, and many of these rates have declined in real terms.

  2. Hi Gummo

    You're being a bit unfair to Julia IMO. As a matter of basic statutory interpretation the order of relevant factors to be considered in a provision like s 284(1) of the Fair Work Act is irrelevant. Each relevant factor has equal weight; the first item in the list does not have "top priority".

    Moreover, in its 2009-2010 minimum wage decision (see, Fair Work Australia cited the following submissions with evident approval:

    "ACCER defined a fair minimum wage as “one that provides a decent standard of living”, while the Australian Government submission also made reference to a fair wage in this context. The New South Wales and Queensland Governments both submitted that providing fair minimum wages involves maintaining the real value of minimum wages.

    The Australian Government noted that “cost of living increases have a bearing on the ability to maintain relative living standards and the needs of the low paid” and that “there is a community expectation that wage increases, especially for the low paid, are sufficient to cover general cost of living increases”."

    At the same time, FWA noted that it had declined to award a minimum wage increase in the previous year (2008-2009), mostly due to uncertainties surrounding the GFC. In other words, while maintaining a decent standard of living (i.e. at the very least a living wage) is acknowledged as a core principle in setting a minimum wage, as is RELATIVE living standards, the latter at least might occasionally be subordinated to pressing needs of the national economy and business viability in times of drastic uncertainty such as the GFC. I don't think the FWA minimum wage principles are inconsistent with Harvester principles.

    Australia's wage-fixing principles are radically different from those of the US, where indeed the low paid "working poor" may receive a less than living wage.

  3. Anthony,

    I take your point on the statutory interpretation, that is how FWA would be expected to apply the legislation. I might have to revisit that bit.

    On reconciling the possibly conflicting priorities , you're right, it's not a new problem. In those national wage cases we used to have (they're sooo last century) there was always someone who turned up at the hearings to argue that the economy couldn't afford a minimum wage rise that met the Harvester criteria for a fair and reasonable wage.

    And the problem you raise in the last paragraph isn't a new one either: under the old C & A Commission system, there was always that discrepancy between the minimum national wage and the wages of people sitting above it.

    OK, so this isn't really a finished post, more of a fixer-upper. But I really shall have to defer the fixer-uppering until a later time and maybe even date.

  4. A "little unfair" to Julia, Ken? That's a worry, given the sort of commentary that's considered fair to Julia around the media traps. I know that you wouldn't share that prevalent standard of fairness but if by your standards I'm being a little unfair to Julia then by mine I'm close to the line ;)

    And for now that's it with the comments folks - time for me to get off-line: fish to see, places to do, people to fry. You know how it is. Please comment away at will, but expect the twin gratifications of seeing them published and replied to to be delayed.

  5. Ken, it wasn't FWA that refused to award a wage increase for 2008-2009, but the old Fair Pay Commission, which was operating under a slightly different legislative mandate from both the AIRC and FWA.

    But you're right, the "needs" principle has historically often been overshadowed by other macroeconomic concerns which have influenced wage tribunals' decisions - eg, unemployment in the 1930s depression; inflation in the 1950s