High Minimum Wage - Good or Bad?

[Snypiuer]

O.K., Hjolnai posed the question:

 

I wonder what the flow-on effects are of having a high minimum wage. Australia's is very high and our unemployment rate isn't bad, but that doesn't mean the same would work anywhere else.

 

Discuss!

[Snypiuer]

I'm going with, while a high minimum wage has many benefits, it would be more beneficial if it were incentivize rather than mandated. When it is mandated, the only way to enforce it is by penalizing those who do not meet it. this brings about several negatives. First, employers will make up for the increase in wages by either cutting manpower (which may lead to higher unemployment), attempting to increase production, using cheaper materials (both of which may lead to lower quality) or increasing the price of their product (higher prices may, eventually, erase any benefit to a higher wage) - very few employers are altruistic enough to take a cut in their own bottom line. Employers will also be less likely to give applicants with little to no experience a chance, as long as there are applicants that they would have hired at the higher wage anyways. This means less opportunity for on the job training.

 

Now, take incentivizing. Say the government were to allow a company to lower its' over all tax liability by 1% for every WHOLE dollar (99.99999... cents is NOT a dollar) above a MODEST minimum wage that it pays its lowest paid employee an hour - up to, say, 5% (A minimum wage of $5 per hour would mean $10 an hour to receive the full 5% deduction). This would allow small businesses to meet a payroll at the modest minimum wage and provide a first job experience for people who could then move on to better paying jobs. Medium sized companies could offer anywhere from $1 to the full $5 above minimum, depending on what works for them, while bigger companies would most likely take the maximum deduction by having a base pay of $5 above minimum wage. By allowing a business to offset a higher minimum wage through deductions from it's overall tax liability, it lessens the likelihood of the previously mentioned negatives. Will there be businesses that take advantage and still cut workers, product quality, etc.? Yes. But, if we allow them to fail when their business practices bite them in the rear, other businesses will be more able to take over when they do (fail).

[Hjolnai]

Note: Extremely long post, more so than I expected when I wrote it. Sorry about this!

 

I'm going with, while a high minimum wage has many benefits, it would be more beneficial if it were incentivize rather than mandated. When it is mandated, the only way to enforce it is by penalizing those who do not meet it. this brings about several negatives. First, employers will make up for the increase in wages by either cutting manpower (which may lead to higher unemployment), attempting to increase production, using cheaper materials (both of which may lead to lower quality) or increasing the price of their product (higher prices may, eventually, erase any benefit to a higher wage) - very few employers are altruistic enough to take a cut in their own bottom line. Employers will also be less likely to give applicants with little to no experience a chance, as long as there are applicants that they would have hired at the higher wage anyways. This means less opportunity for on the job training.

 

Now, take incentivizing. Say the government were to allow a company to lower its' over all tax liability by 1% for every WHOLE dollar (99.99999... cents is NOT a dollar) above a MODEST minimum wage that it pays its lowest paid employee an hour - up to, say, 5% (A minimum wage of $5 per hour would mean $10 an hour to receive the full 5% deduction). This would allow small businesses to meet a payroll at the modest minimum wage and provide a first job experience for people who could then move on to better paying jobs. Medium sized companies could offer anywhere from $1 to the full $5 above minimum, depending on what works for them, while bigger companies would most likely take the maximum deduction by having a base pay of $5 above minimum wage. By allowing a business to offset a higher minimum wage through deductions from it's overall tax liability, it lessens the likelihood of the previously mentioned negatives. Will there be businesses that take advantage and still cut workers, product quality, etc.? Yes. But, if we allow them to fail when their business practices bite them in the rear, other businesses will be more able to take over when they do (fail).

 

This is an interesting approach, but I do have a concern with it: If the incentive is lower than the savings from keeping a lower wage, the company will stick to the lower wage. If, however, the incentive is higher than the saved wages, then the government is significantly subsidising businesses (with corresponding costs), including some businesses which only employ skilled workers anyway.

 

There are, however, other ways to get around the problem of giving workers the chance for work experience and on-the-job training. In Australia, our minimum wage is quite high: Australia's minimum wage is $15.51 per hour or $589.30 per week. ( http://www.fairwork....es/default.aspx ).

 

However, there are a number of ways in which first jobs and training are made less expensive for companies:

 

If you are less than 21, the minimum wage is lower, on a gradient from $5.71 per hour for workers under 16 to $15.15 for workers at age 20. This provides most people with the opportunity to gain work experience for their resume and pick up necessary skills before the point where it becomes too expensive for companies to take the risk of hiring you.

 

Apprentices have their hourly pay rates on a scale based on the year of their apprenticeships, from $9.93 in the first year to $17.16 (notably more than the normal minimum) in the fourth year. I don't particularly wish to delve into the trainee pay rates at the moment. These also provide a chance for people to get started in the work force and be trained without imposing potentially prohibitive costs on their employers.

 

All this information is taken from National minimum wage, http://www.fairwork....es/default.aspx , the Australian Government Fair Work Ombudsman.

 

Though these policies do create a subsidy, similarly to the incentivizing you suggested, it is more targetted at the specific issue of getting people into work, and does not provide any advantages to companies which would already pay well above minimum wage to most workers. Unfortunately, it doesn't provide the benefit to starting businesses which you suggested, but they can be addressed with other methods which don't involve paying workers less than they are considered to need.

 

With regard to high wages leading to unemployment, this is a more difficult problem to address. I will note that Australia's unemployment rate is quite low (at 5.2% at the moment, with a high of 10.9% in 1992 for data starting in 1978 as per Australia Unemployment Rate, http://www.tradingec...employment-rate , Trading Economics), but the high minimum wage could have a substantial impact which is cancelled out by other large advantages enjoyed by Australia. To rule out this possibility would take a larger amount of research than I am planning to do at this point.

 

If you assume that a low minimum wage is barely enough to get by without any luxuries, and a medium minimum wage also allows for basic luxuries such as renting more than the bare minimum of space, and having a television and maybe one or two other things not strictly needed, then a high minimum wage allows the earner to buy disproportionately more luxuries. The necessities like food and bedding have costs stabilised by the international market, although farms can operate competitively in Australia, so the high minimum wage doesn't necessarily raise the cost of these things. The extra income of minimum wage workers when the minimum is high is either a) spent on things which should have been available to people on a lower minimum wage, implying that that wage was really too low, or spent on things which are, essentially, luxuries.

 

This means that any business which provides luxuries, like electronics, furniture beyond simple beds, clothing (providing more than two of each garment is basically a luxury, as it means washing doesn't have to be done as often - incidentally, this reduces long-term costs of washing on the poor), and in fact almost everything we consume, will have a larger market. With more customers who can afford to buy things from them, and less customers who may buy on credit and be unable to pay, profits rise, which means that at least some of the impacts of paying a high minimum wage are mitigated. Ideally, the rise in income would outstrip the costs of paying more wages, but this seems unlikely, because businesses are not actively lobbying for minimum wage increases. Another benefit is that workers with access to more money have the potential to eat more healthily (as this is sometimes more expensive than unhealthy diets). Workers with better nutrition should have more energy and be more attentive, increasing productivity.

 

Businesses are still in competition with each other, so if one raises its prices more than needed to adjust (which will be less than the gains made by the workers), other businesses will out-compete it and it will lose sales.

 

For businesses using substandard practice, with substandard materials or quality control, there are reasons that this doesn't work. A business is just as likely to use this to improve its profits from 8% of capital to 10% as they are from 6% to 8% (although doing so to offset a drop in profit would be more likely). If that approach works, it will be in place either way, or legislation will already be in place to stop it. If it doesn't, businesses which attempt it will fail.

 

One area where Australian businesses have been adversely affected by the high minimum wage is in some sectors of manufacturing:

 

"Manufacturing is one of the industries that is most exposed to competition from overseas firms. In general, given international wage relativities, Manufacturing firms in Australia will have the most difficulty competing in non-differentiated traded goods that rely on low-skilled, labour-intensive processes, and have less difficulty competing in processes that draw on high-skilled workers." (Manufacturing Industry Profile, http://www.fairpay.g...try_Profile.pdf , Troy Wheatley, Australian Fair Pay Commission Secretariat, March 2009)

 

It is difficult for manufacturing industries dependent on large amounts of low-skilled labour to compete in Australia's market because they are competing with other countries where wages are lower. This is a problem that occurs for all first-world countries, however, because they cannot compete with the wages workers will accept in third-world countries. It is notable, however, that many third-world countries are reliant on this kind of production, and providing them with more market share makes it easier for them to lift themselves from poverty (if carefully managed). If these products are to be produced in a market with a high minimum wage, they mostly have to do something special to improve profitability - automation, minimising corporate overhead and developing brand loyalty can help, but it is a difficult position to compete in. If raising prices in the face of the global market were possible, then these are the products which would become more expensive - though not enough to erase the gains made by the workers.

 

I believe that Australia is significantly better off because of the high minimum wage and that some other countries could benefit from the same strategy, but there are significant risks in increasing the minimum wage. A rapid transition could be very uncomfortable, with costs up front while the benefits lag behind, and many countries could not deal with the change. A more gradual transition is easier to deal with, but may still cause problems in some places. Also, it requires long-term political willpower, which is hard to manage.

 

Disclaimer: My field of study has nothing to do with economics, so there could be some basic mistake I'm making, or my argument could otherwise be fundamentally flawed. Also, I haven't addressed the moral issues involved or examined a country with a low minimum wage, or even discussed how to measure whether a minimum wage is low or high (I think comparison to the average or mean wage is the most effective measure, but the key words there are "I think").

Edited January 25, 2012 by Hjolnai

[Snypiuer]

O.K., a lot of info!

 

We do need to point out that Australia has a population of about 23 million with a total workforce of about 10 million, as opposed to the USA's population of over 300 million with a total workforce of about 160 million. One would think that a larger workforce would lead to a higher number of jobs. It does, but it also leads to a lower number of jobs per capita - there is only a certain amount of things that have to be made (manufacturing - the basis of all economies). When a product can be made and transported from a nation with a cheaper workforce, they will be - something you also mentioned. A mandated higher minimum wage within a much larger pool of workers that already exist in a lower per capita environment will thus produce greater negative effects.

 

We also have to make the decision of whether or not a minimum wage job should be a life long career choice or a stepping stone to better employment and a safety net for individuals who, for one reason or another, need to take a minimum wage position. The fact is, most minimum wage jobs are unskilled, labor intensive, service, etc. type jobs. By making such jobs a viable career choice, through a mandated higher minimum wage, we promote the bare minimum of effort to better ones self through higher education. In a lower jobs per capita workforce, this is a very bad thing. If it is to be a stepping stone or safety net, a mandated higher minimum wage (once again, in a lower jobs per capita workforce) would make these jobs attractive to individuals who may not actually 'need' this type of employment and, thus, make it harder for those who do 'need' this type of job to obtain one.

 

You stated (basically) that businesses that cut back on quality will eventually fail - have you heard of Walmart or IKEA? Just saying !

 

We also must remember that, even an unemployment rate of even 10% in Australia is about 1 million unemployed. In the USA, 1 million unemployed translates to a rate of less than .65%. Even if we were to have an unemployment rate of 5% with a higher mandated minimum wage, there would be about 8 million people unemployed. By keeping a moderate minimum wage and giving incentives for, rather than mandating a, higher minimum wage, we can actually increase the jobs per capita. Which, in a higher workforce environment, has a greater benefit.

 

Oh yeah, I do not consider money that a government does NOT take from a company or individual a subsidy. If there wasn't a given company or individual to begin with, the government would not receive ANY money from it. A government can only GIVE what it TAKES from another, it produces and creates NOTHING. As long as the government does not actually transfer assets to a company or individual, there is no subsidy. By allowing a company to directly PAY a wider employed workforce, it, not only, lessens the need for the government to transfer wealth, it does it much more efficiently, effectively, cost effectively and with greater benefits.

 

Finally, even though Australia has, both, a higher jobs per capita and lower unemployment rate than the USA, Australia still has a higher cost of living. One must wonder if the higher minimum wage has something to do with this.

[Hjolnai]

We do need to point out that Australia has a population of about 23 million with a total workforce of about 10 million, as opposed to the USA's population of over 300 million with a total workforce of about 160 million. One would think that a larger workforce would lead to a higher number of jobs. It does, but it also leads to a lower number of jobs per capita - there is only a certain amount of things that have to be made (manufacturing - the basis of all economies). When a product can be made and transported from a nation with a cheaper workforce, they will be - something you also mentioned. A mandated higher minimum wage within a much larger pool of workers that already exist in a lower per capita environment will thus produce greater negative effects.

 

A minor correction: The employment-to-population ratios are actually closer than your numbers show. Australia has 11.4 million people employed ( http://www.abs.gov.a...@.nsf/mf/6202.0 ), while the US population is at 313 million ( http://en.wikipedia....ulation_density ). I can't find an updated number of US people employed, though, so the employment-population ratios may still be sufficiently different to make your point.

 

With regard to your point about high minimum wages discouraging working toward higher positions, this is indeed a serious issue. With modern society requiring more and more skilled and specialised workers, and less unskilled workers, it is important to encourage people to work harder at school and aim for a degree. The problem of finding some incentive for people to become more educated when they can easily get by on minimum wage is a difficult one.

 

However, a low minimum wage can also make it difficult to aim for higher education. In a family which does not have a high income earner, it is very difficult to support a student in a University (with the cost of expensive books, and possibly accommodation if the family doesn't live nearby, or transport if they do). With a high minimum wage, it is much easier for a full-time student to contribute to paying the costs of their education, and potentially even support themselves fully, without working so many hours that study is impractical. With a low minimum wage, low-income families cannot afford to educate their children enough to become high-income families. The rich stay rich, the middle class can become rich, but the lower income demographics have little chance to get out even in the long term.

 

If there is a point for the minimum wage which both provides the money needed to seek higher education and provides incentive to aim higher, then that would be a very good way of choosing the minimum wage which should be set. However, I doubt that such a point exists. Two options exist to resolve this: We can take a low minimum wage, but offer enormous government support for University students, or we can take a high minimum wage and use other methods to encourage learning, such as building a social perception which supports it or makes long-term minimum wage employment less "accepted".

 

You stated (basically) that businesses that cut back on quality will eventually fail - have you heard of Walmart or IKEA? Just saying !

 

If that's what it read like, then I didn't put it quite right. What I meant to say was that IF a business can gain from cutting back on quality, that business should already be doing so. Thus, a business which has not yet cut back on quality would probably fail if they did lower the quality of their products - if it was likely to succeed, they would already have done it.

 

Oh yeah, I do not consider money that a government does NOT take from a company or individual a subsidy. If there wasn't a given company or individual to begin with, the government would not receive ANY money from it. A government can only GIVE what it TAKES from another, it produces and creates NOTHING. As long as the government does not actually transfer assets to a company or individual, there is no subsidy. By allowing a company to directly PAY a wider employed workforce, it, not only, lessens the need for the government to transfer wealth, it does it much more efficiently, effectively, cost effectively and with greater benefits.

 

Say the government lowers the tax rate on car manufacturers by 10%. Is this not a subsidy? It's effectively increasing the amount they earn after tax, the same as if the government chose instead to give them $100 for each car sold (although the value of that subsidy would be different).

A tax break like this is an effective subsidy on construction and engineering firms, among many others, because they don't lose anything by paying above minimum wage (because they already wouldn't). The other way of seeing it is a tax on service industries (and some others), because the majority of their workers are likely to be at the minimum wage, so either they pay more tax or they pay more wages.

The other thing is that there are two possibilities for incentives like this: 1) the incentive is lower value than the benefits of not taking it, in which case it won't be taken, or 2) the incentive is of greater value than the costs of the higher wages, in which case you've effectively just increased the minimum wage anyway (for that business). There may be some benefit to the selection process, making some companies pay workers more while others don't need to, and a more carefully developed incentive (because legislation should be made a lot more rigorously than simple suggestions for a discussion like this) might choose the businesses which "should" pay more as those which will. However, I do not think that this is the most effective approach to take.

 

Finally, even though Australia has, both, a higher jobs per capita and lower unemployment rate than the USA, Australia still has a higher cost of living. One must wonder if the higher minimum wage has something to do with this.

 

This is an interesting point, probably the most important point to consider in a comparison between the countries when focusing on the issue of minimum wages.

I would say that, yes, the higher minimum wage is responsible for part of the higher cost of living. However, there are a number of factors which I think are more significant. Firstly, the issue of population density. The US has a population density of 32 people per square kilometer, while Australia's is merely 3 people per square kilometre. It is a lot more expensive to distribute goods to customers who are further away from each other. Admittedly there are large areas of practically uninhabited land in Australia, but even discounting those areas, I would estimate there are only about 1/5 as many people in an area of Australia as there are in the US (cities excluded). But these people still need powerlines, water supplies, petrol stations, grocery stores, and all the infrastructure that entails. With less people using a structure costing almost the same amount (or much more in the case of roads, powerlines, water, etc, where the structure must stretch over a longer distance), they must pay more. However, Australia's rate of urbanisation is at 89%, so this cost only applies to supplies for 11% of the population. Possibly the most important factor is the cost of land (and structures on it). Sydney is "the third least affordable city... after Hong Kong and Vancouver" ( http://www.abc.net.a...ity-twt/3788114 ), with a median house price 9.2 times the median household income. The study linked above found that Australia was second as a country only to Hong Kong in this measure (the study looked at metropolitan areas only). Also, when the cost of property is high, this drives up the cost of most goods (probably much further than the high minimum wage does) - a shop worth $2 million is paying about $150 000 in interest each year (and in Sydney, that would be a very small shop, unlikely to have more than a couple of workers). In fact, I think there would be very few places paying minimum wage even at its high current rate in Sydney - no one could afford to live there on it, except in the Western suburbs (which are much cheaper than central Sydney). I suspect that the high cost of land in cities is the main contributor to Australia's high cost of living, while the high minimum wage is a relatively small contribution.

 

It's also noteworthy that digital material is more costly here than the US despite the fact that the cost of supplying it is not that much higher. Right now, Steam has Skyrim for $90 US (about AUD$87), which I expect is significantly higher than the cost in the US. While Steam does have servers in Australia for that purpose, those servers would see just as much traffic (less servers, and Australia's density of gamers is high). Also, they do not need to be in cities, avoiding the higher land cost, and while internet costs are higher, it should not be by that much (or they couldn't make a profit on $5-$15 games). Perhaps the reason that the cost of some goods is so high, is because businesses can get away with it.

 

 

Oh, and I missed a couple of things to mention:

In Australia, our standard annual leave entitlement is 4 weeks per year (as a legal minimum, I think), and most businesses provide 10 days sick leave and 1-2 days compassionate leave; on top of that, most businesses choose to provide long service leave to encourage employees to stay long-term (at one week per 60 weeks worked, becoming available after 10-15 years - apparently 13 weeks after 15 years). ( http://www.workingin-australia.com/jobs/job-tools/annual-leave ).

In addition, casual workers (who do not get paid leave) have a significantly higher minimum wage to counter the fact that they don't get leave.

Edited January 27, 2012 by Hjolnai

[Snypiuer]

Have not forgot about this, just doing research to bolster my side! And I'm lazy and slow!

 

Anyone else have an opinion on this?

[Snypiuer]

O.K., where to start? Let's put up some statistics first.

 

Stats:

 

Source

https://www.cia.gov/...ok/geos/as.html Australia

and

https://www.cia.gov/...ok/geos/us.html USA

Population

Australia

21,766,711 (July 2011 est.)

USA

313,232,044 (July 2011 est.)

Urbanization

Australia

89% of total population (2010)

USA

82% of total population (2010)

Population of Major Cities

Australia

Sydney 4.429 million; Melbourne 3.853 million; Brisbane 1.97 million; Perth 1.599 million;

CANBERRA (capital) 384,000 (2009)

USA

New York-Newark 19.3 million; Los Angeles-Long Beach-Santa Ana 12.675 million; Chicago 9.134 million; Miami 5.699 million; WASHINGTON, D.C. (capital) 4.421 million (2009)

GDP

Australia

$917.7 billion (2011 est.)

Official Exchange Rate

$1.507 trillion (2011 est.)

Per Capita

$40,800 (2011 est.)

By Sector

agriculture: 4%

industry: 25.6%

services: 70.4% (2011 est.)

USA

$15.04 trillion (2011 est.)

Official Exchange Rate

$15.06 trillion (2011 est.)

Per Capita

$48,100 (2011 est.)

By Sector

agriculture: 1.2%

industry: 22.1%

services: 76.7% (2011 est.)

Labor Force

Australia

12.02 million (2011 est.)

By Occupation

agriculture: 3.6%

industry: 21.1%

services: 75% (2009 est.)

USA

153.4 million

By Occupation

farming, forestry, and fishing: 0.7%

manufacturing, extraction, transportation, and crafts: 20.3%

managerial, professional, and technical: 37.3%

sales and office: 24.2%

other services: 17.6%

Unemployment

Australia

5% (2011 est.)

USA

9.1% (2011 est.)

Population Below Poverty Level

Australia

NA%

USA

15.1% (2010 est.)

Household Income or Consumption

by Comparison Share

Australia

lowest 10%: 2%

highest 10%: 25.4% (1994)

USA

lowest 10%: 2%

highest 10%: 30% (2007 est.)

Taxes as % of GDP

Australia

31.1% of GDP (2011 est.)

USA

15% of GDP

Now, what can we take from this?

 

In terms of % of Population, more Australians actually live in cities than Americans do. In fact 11.851 million Australians (slightly less than 55% of all Australians) live in just 4 cities and about 80% of all Australians live within the Eastern Seaboard or coastal fringes (http://www.wilmap.com.au/ausfacts.html). This means that delivery of goods in Australia is much more centralized than they are in the USA - with over 50% of the population located in four cities and 80% of the total population living along waterways (coastline). Combine this with a far smaller population than the USA and it should be much more cost effective to supply goods/services in Australia.

 

While I maintain that a mandated higher minimum wage has a lot to do with this, another factor is rate of taxation. Australians are taxed at over twice that of Americans (31.1% vs. 15%) - it's a fundamental fact of business that all costs are transferred to the consumer, thereby increasing the cost to supply goods and services.

 

We can also see that, despite the USA having 15.1% of it's population below the Poverty level and Australia having a statistical 0% below Poverty level, the bottom 10% of the population in both countries have a comparison share of 2% of GDP while there is less than a 5% difference in the top 10%. This does translate to Australia having a slightly better distribution of wealth (due to the difference in population) but the difference in GDP lessens this disparity. Add the fact that every cost of living calculator I can find lists the cost of living in Australia as, anywhere from, 30% to 80% higher than the cost of living in the USA and a taxation rate of twice that of the USA and mandating a higher minimum wage just exacerbates things.

 

I will concede that, due to Australia's' smaller population and the actual distribution of the population, a mandated higher minimum wage has less of a negative effect in Australia than it would in the USA. Also, to make incentivizing a higher minimum wage more effective over all, a restructuring of the tax code would need to be done.

 

I have a basic outline of such a reworked tax structure and will attempt to post a simplified version. . . eventually!?

 

I know I'm missing something. . . just can't figure out what!

[Hjolnai]

A number of good points here, showing that I made some mistakes and bringing up things I needed to consider.

This should just be a short post, addressing some of what you brought up, mostly so that I'm still invested enough in the thread that it doesn't drop completely out of my awareness.

Clearly, you're right about the rural population costs - if it contributes at all, it's probably not a significant factor in the difference in cost of living.

We can also see that, despite the USA having 15.1% of it's population below the Poverty level and Australia having a statistical 0% below Poverty level, the bottom 10% of the population in both countries have a comparison share of 2% of GDP while there is less than a 5% difference in the top 10%. This does translate to Australia having a slightly better distribution of wealth (due to the difference in population) but the difference in GDP lessens this disparity. Add the fact that every cost of living calculator I can find lists the cost of living in Australia as, anywhere from, 30% to 80% higher than the cost of living in the USA and a taxation rate of twice that of the USA and mandating a higher minimum wage just exacerbates things.

 

You are making a mistake here - the GDP figures you're using are already based on purchasing power parity; that is to say, the difference in GDP is not extended by cost of living because that's already factored in (so "Add the fact that..." is inaccurate).

 

With regard to taxation, that moves into another area of economic discussion which could go into just as much depth - how high should taxes be? The current situation suggests that US taxes are too low as a portion of GDP (I suspect that if you added up the cost of what either major party considers core, it would outweigh the current revenue at 15% - but I'll have to look into that more deeply and now probably isn't the best time for that). If the low taxes are not sustainable, then the short-term economic situation is artificially improved to long-term loss. This would mean that the cost of living in the US is lower than its sustainable value, because of the same flow-on effects through businesses that you mentioned.

Household Income or Consumption

by Comparison Share

Australia

lowest 10%: 2%

highest 10%: 25.4% (1994)

USA

lowest 10%: 2%

highest 10%: 30% (2007 est.)

With regard to this: The problem with the Australian measure here is that it refers to events in 1994. I don't have the time right now to do research on it, but I've seen at least one chart ( http://en.wikipedia.org/wiki/File:Gini_since_WWII.svg ) which suggests that something caused inequality to spike in Australia at around that time. Another consideration is that the bottom 20% of household incomes almost certainly includes a significant portion of retirees, the unemployed, and the underemployed (and as such it could mean that Australian low-income households have more free time, because they're working less for the same cut of GDP).

The Gini coefficient numbers from your source are more recent:

Australia:

Distribution of family income - Gini index:

30.5 (2006) country comparison to the world: 115

35.2 (1994)

 

 

 

 

 

US:

Distribution of family income - Gini index:

45 (2007) country comparison to the world: 40

40.8 (1997)

 

 

 

 

 

(Higher number means more inequality - at 0 everyone has the same income, at 100 one person has all the income).

The Gini index is a measure across more demographics, which means that the bottom could still be about the same if the Australian middle class is relatively high-earning compared to the top earners. I may look into this possibility later.

This suggests that incomes in Australia are significantly more equal, most likely at least partially as a result of the high minimum wage.

 

In terms of % of Population, more Australians actually live in cities than Americans do. In fact 11.851 million Australians (slightly less than 55% of all Australians) live in just 4 cities and about 80% of all Australians live within the Eastern Seaboard or coastal fringes (http://www.wilmap.com.au/ausfacts.html). This means that delivery of goods in Australia is much more centralized than they are in the USA - with over 50% of the population located in four cities and 80% of the total population living along waterways (coastline). Combine this with a far smaller population than the USA and it should be much more cost effective to supply goods/services in Australia.

 

Here you're suggesting that a lower population makes distribution of goods more cost effective. This is not the case - economies of scale apply even when the lower bound is Australia. If you're going to import a significant amount of goods to a country (a single cargo ship can potentially carry around 200 000 tonnes), it's better if the economy will absorb fifty and a half standardised shipping containers than five and a half (as in the first, you're spending around 1% of freight costs on empty space, whereas the second has nearly 10% lost). Warehousing to deal with this also costs money, and the shipping company itself will probably want relatively more money for smaller cargoes (as it costs them more to transport goods for 10 different companies than 2, in managing the loading of 10 sections of cargo and various other costs). Furthermore, a larger market means more room to expand if you are successful.

At the moment, importing goods to Australia is very effective because of the high dollar. Buyers have to pay less local currency for the sellers to get the same amount of their currency. Furthermore, shipping from Asia is a much shorter distance, which also lowers costs, and I suspect costs are also lowered by the number of ships carrying iron ore outward which would otherwise come back empty (so the cost of carrying cargo back is less).

We do have significant red tape there - customs for goods has to be strict to protect crops from introduced pests, and other goods do have to conform to some standards, I believe - but I suspect this would not be significantly more troublesome than for the US, and it may actually involve less red tape (but more taxes).

In any case, the low cost of importing at current exchange rates would no doubt lower the cost of living if it were sustained - but in the short term companies will just take the extra profits, and more competition won't spring up to exploit this because the high dollar will not last, so it's too much of a risk (it won't be that long before the high iron ore price drops, and with it our dollar).

 

A major factor in our cost of living which I should have addressed in more detail and emphasised more before: the cost of property. As I mentioned before, Australia is one of the most unaffordable countries in the world to buy houses in. This is itself due to a number of factors. The cost of land in our cities is very high, because the supply is controlled (keeping the green spaces open, and controlling the city's outward growth). The cost of construction workers is high, because trade contractors' wages are high (which is where the minimum wage comes in again - while they don't get paid minimum wage, it would factor significantly in how much they expect to be paid). In fact, despite their high price, houses in many places are cheaper than their replacement cost - it's much cheaper to buy than to build. Finally, after taking out a much larger loan to buy property, you also pay much higher interest rates (From your source, the CIA factbook: Australia: commercial bank prime lending rate 7.279% (31 December 2010 est.). US: 3.25% (31 December 2010 est.)). This all combines to mean that any real estate is extremely expensive to hold, whether buying or renting. That then puts tremendous costs on businesses; (non-researched example) I would estimate that a large supermarket would cost somewhere between 5 and 15 million dollars to build in central Sydney. At the above rate, a $10M building is costing $730k per year in interest alone (ignoring the fact that it could only really be up to 80% loan, 20% investment). Even if a building cost the same in New York or whatever other city in the US, the lower interest rate would drastically reduce the cost to $330k - saving $400 000 per year. If this does not outweigh the higher wage costs, it must at least come close to matching them.

 

I might add more later, but that's it for now I think - I should probably get some sleep.