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Why The Minimum Wage And Newstart Need To Be Lifted ASAP

With Labor's election campaign focusing on wages, we're likely to hear "no one working full-time in Australia should live in poverty".

While we can all agree with this, we can and should go much further. Australia is one of the wealthiest countries in the world, and no one should have to live in poverty, whether they have paid work or not.

Despite decades of economic growth, and record corporate profits, governments have failed to introduce the policies needed to reduce our stubbornly high poverty rates: one in six children, and one in eight adults. Since the GFC, governments have cut away at social protections, particularly for single-parent families and people who are unemployed.

We have a moral imperative to reduce poverty, and our economy will be the better for it.

Unlike in decades past, our main economic problem now is not high inflation, it’s a lack of growth in household incomes that’s stalling spending on goods and services. Many people have gone heavily into debt to cover high housing costs and other essentials, and can’t borrow or spend more than they do now unless their incomes grow.

There are two steps the next government, along with business and unions, must take to reduce poverty and strengthen the economy at the same time: lift Newstart Allowance and lift minimum wages.

Newstart, the payment for people looking for paid work, has not been increased in real terms in 25 years. It's just $40 a day, and we're calling for it to be increased by about $10 a day, backed by widespread support. While neither major party has committed to this increase, the Labor Opposition agrees Newstart is too low and has promised a review in order to increase the rate should it win government.

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Newstart is less than $15,000 a year, so it’s no surprise most people relying on it live in poverty. At that income, there’s absolutely no money to save, so any extra income is spent immediately to cover the basics like food and rent. Also, it goes straight into those regions with the highest unemployment.

The minimum wage is $37,400 a year. After tax, it’s about double Newstart Allowance. Yet it’s still only about half the income received by a middle-income full-time wage earner (median wage), and people relying on it are still at risk of poverty. This is due to the low level of the minimum wage, intermittent paid work, and cuts to family payments over the past decade.

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So, along with recipients of Newstart Allowance, people on minimum wages are more likely to spend any wage rise on essentials. As the Reserve Bank of Australia (RBA) argues, solid growth in wages is needed to revive consumer spending.

As they’re now finding in the US, tax cuts won’t cut it as a means of boosting the economy. Their impact on investment and employment was always exaggerated. In Australia, the top 20 percent of households are able to save one-third of their income, so those high-end tax cuts the government has already legislated won’t all be spent. At the other end of the income ladder, most of the lowest 40 percent of households do not benefit from income tax cuts at all.

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There is no conflict between lifting the incomes of unemployed people and lifting minimum wages. The minimum wage and Newstart are twins. When minimum wages are too low, policymakers are reluctant to lift unemployment payments, condemning people to deep poverty, which makes finding paid work nearly impossible. Conversely, if Newstart is too low, unemployed people are pressured to take up jobs in the ‘grey economy’, undermining minimum wages in industries like hospitality and agriculture.

That’s why countries with low minimum wages also have low unemployment payments. We don’t want American-style minimum wages and unemployment payments here.

There’s no evidence to suggest that wage increases of the order of those granted by the Fair Work Commission reduce employment. In this low-inflation world, they are more likely to increase it through higher consumer spending.

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In the high-inflation world of the 1970s and 1980s, incomes policy was all about restraining growth in wages. In the low-inflation, high-inequality world we now inhabit, we need policies that lift the incomes of the lowest 40 percent of households -- people relying on social security recipients and wage earners -- who in reality are just the same people at different stages of life, sometimes week to week.

In the low-inflation, high-inequality world we now inhabit, we need policies that lift the incomes of the lowest 40 percent of households. (Image: Getty)

This is far from the whole answer to inequality, poverty and a sluggish economy. Lifting the incomes of people on the lowest 40 percent of households is nonetheless essential to improve the lives of people who are struggling financially and to lift the economy out of a slump.