How Do Minimum Wages Affect The Gender Pay Gap?

Yes, back in July last year I said I would not be posting anything about economics for a while. But circumstances have changed, and as my wife would say, now I can pontificate about economics to my heart’s content.

Back in its 2009-10 annual wage review decision, the Minimum Wage Panel  of Fair Work Australia (now the Fair Work Commission) said that an increase in minimum (award) wages is likely to assist in promoting pay equity given the relatively high proportion of women among the award-reliant (para. 318). Actually, it turns out this isn’t likely to be true, and with a little bit of thought you can work out why. The ‘proof’ was presented in the final chapter of a 136-page(!!!) report that I got dragged into. But really the whole argument could have fitted onto a single sheet of paper*, as I’ll demonstrate below.

Assume that award wages are increased and nothing else changes.** Then the change in the overall gender pay gap will be close to the percentage of women that are award-reliant less the percentage of men that are award-reliant multiplied by the percentage increase in award rates of pay. In 2010, 17.5 per cent of adult women in Australia employed in non-managerial positions were award-reliant, compared to 12.2 per cent of men. So for a 1 percentage point increase in award rates of pay, the reduction in the difference in earnings between men and women is only about 0.04 percentage points. The overall gap in hourly earnings between men and women is over 10 per cent. So even an increase in award wages of 5-10 per cent is unlikely to make any significant dent in the gap in earnings between men and women. Now if, say, 90 per cent of women were reliant on awards, and only 10 per cent of men were, that would be a different story!

Note that this is a very different topic from whether Fair Work Australia/Fair Work Commission should adjust the pay rates of specific award-reliant employees so that award-reliant employees in female-dominated industries and award-reliant employees in male-dominated industries all receive equal pay for work of equal value. That’s an area where Fair Work Australia certainly does have an effect in removing pay disparities, because it controls the award rates. (See the equal remuneration order for the Social and Community Services award.)

*Not the Panel’s fault that it wasn’t, since it just picks the research topics, not how they’re carried through. In my view, many of the Minimum Wages Branch's research reports were way too long. 

**Of course, other things will change, but it seems unlikely that any of them will change by enough to affect the general result. I’m also assuming here that the Minimum Wage Panel wouldn’t just change award wages for one gender!