Australia Wage Policy - Literature review Example

Running Header: Australia Wage Policy Student’s Name: Instructor’s Name: Course Code & Name: Date of Submission: Introduction A wage policy is aimed at ensuring equitable distribution of income in order to reduce poverty levels in a country. According to Smyth (2007, p. 2) a wage policy refers to a government action or a legislation that is undertaken in order to regulate the structure and the level of wages in a country. The wage policy focuses at accomplishing specific goals in relation to the social and economic welfare of the society. Wage policies are established so as to eliminate extremely low wages, to protect the workforce from exploitation and to set up fair compensation standards as well as to improve the economic well being of the society. This has in turn motivated the Australian Labour Party (ALP) to adopt a wage policy in the country. This paper is going to explore whether the wages policy adopted by ALP has achieved its aims in benefiting interests of both employers and wage earners using theoretical approaches. The Neoclassical Wages theory The neoclassical wages theory is founded on the assumption that the utility of workers is based on their hours of work and their wages (Blaug 1997, p. 528). According to this theory, the workers do not make reference to the wages and the number of hours worked by their fellow employees in determining their utility. The neoclassical wages theory states that wages should be determined by the demand schedule and this is based on the marginal productivity and the supply schedule which is based on the workers utility function. Adler (2005, p. 3) emphasizes that the neoclassical wages theory utilizes the marginal productivity of labour in order to determine the wages to be paid to a worker. This theory holds the opinion that increasing the wages of workers would result in unemployment. Therefore, the neo classical economists discourage the use of unions to advocate for the raise in the wages paid to the workers because this would create an inevitable situation of unemployment. Webb (2010, p.4) notes that the neoclassical wages theory requires the workers marginal product to be higher than the wage. Workers should be paid wages that are below the marginal product in order to maintain their value in the production process. Thus, by raising the wages the marginal product of the workers would be less than the amount of income paid to them. This would make the value of the marginal output for each worker to be below the new wage hence the employers will be forced to fire some employees in order to generate revenues. Additionally, the neoclassical wages theory holds the view that when the amount of wages are increased beyond the workers marginal output the production process becomes inefficient and this leads to the creation of unemployment in the economy (Richard 2009, p. 683). According to Murphy (2006, p. 5) the neoclassical wages theory states that wages should be equal and this is based on the assumption of profit maximization, perfect competition and uniformity of workers. The theory asserts that employees who are homogenous should receive equal wages. According to the neoclassical theory the price of labour should be determined by identifying equilibrium between the supply of labour and the demand of labour The Institutional Wages theory According to Kaufman (2010, p. 427) the institutional wages theory supports the minimum wage in order to ensure fair labour standards for the employees. The institutional theory was developed to improve and at the same time to reform and stabilize the labour market. The theory advocates for the setting of the minimum wages in order to reduce the poverty among the workers. Minimum wage assists in lifting workers and their families from poverty and it facilitates the allocation of income in order to favor the workers with low incomes. Moreover, the theory holds the belief that a minimum wage will ensure equitable redistribution of income from the rich to the poor hence ensure social justice. Additionally, by setting a minimum wage the labour unions are protected from engaging in low wage competitions. Herr and Kazandziska (2011, p. 7) note that the minimum wages advocated by the institutional theorists promote full employment and macroeconomic stability. The minimum wage increases employment by supplementing the income of workers hence this increases the aggregate demand. Additionally, a minimum wage ensures better balance between production and spending by promoting the sharing of production profits between the employees and the employers. Furthermore, minimum wage prevents destructive competitions that may arise during the periods of unemployment. This can lead to the reduction of wages in order to eliminate unemployment. The Australia Wage Policy According to Watson, Buchanan and Briggs (2010, p. 2) the wages policy adopted by the ALP Federal Government is aimed at promoting wage equality and at the same time to promote fair wages for workers. The policy is aimed at increasing Australia’s GDP by shifting the economy of the country from inflation to balanced payments. Moreover, the policy ensures that the workers are given more incentives in order to enhance productivity. The wage policy adopted by the ALP Federal Government combines both the neo classical wage theory and the institutional wage theory by giving the tribunals, the employees, the employers and the trade union the power to set the minimum wages. Parsons (2012, p. 662) note that the classical theorists gives the power of setting the minimum wages to the employer and the employees. On the other hand, the institutional theorists give the trade unions and the government tribunals the power of setting the wages. The ALP Government requires that in setting the wages the employees and the employers as well as the trade unions be involved in the process. The fair work Australia must incorporate the suggestions brought forward by the three independent bodies in determining the minimum wages. This ensures that the interests of the employees, the employers, the trade union and those of the government are taken into consideration when determining the wages hence the policy has achieved its objectives in benefiting both the salary earners and the employers. According to Scott (2005, p. 2) the institutional wages theory notes that workers suffer from an inequality in bargaining power. This is because of the fact that there exists an imperfect distribution of resources which puts the employers at a dominant position when bargaining for wages. The inequality in the bargaining power puts the workers at a weaker and dependable position hence the need to set the minimum wages in order to protect them. The Australian labour market is characterized by inequalities in income distributions hence the need to set wages in order to ensure uniformity in the workers incomes. The ALP wages policy sets the minimum wage as advocated by the institutional theorists in order to protect the workers and ensures a balance in social outcomes. In setting the minimum wages the interests of both the employees and the employers are taken into consideration. Therefore, the policy incorporates the bargaining power of both the employees and the employers. This in turn benefits the interests of the wage and salary earners as well as those of the employers hence this has made the policy to achieve its objectives. The neo classical wage theory states that increasing wages can create unemployment. On the other hand the institutional wage theory states that the minimum wage can be substantially raised without creating unemployment and reducing the flexibility of the labour market (Leonard 2010, p. 133). According to Rapanos (2010, p. 100) the wage policy that has been set by the ALP Federal Government takes into consideration the effects of increasing wages on unemployment. The policy seeks to determine the appropriate amount of wages to be paid to the workers. This ensures that the increment in wages does not create unemployment and inflexibility in the labour market. In addition, it ensures that the wages are set within the employer’s capability. Therefore, the policy makes sure that the interests of the employers and the employees are well thought-off and this has made the policy to achieve its objectives. The Institutional theorists advocate for wage setting in order to eliminate poverty and poor employment standards. On the other hand, the neoclassical theorists state that wages should be determined by the forces of demand and supply of workers. The Australian wage policy by the ALP Federal government combines both the institutional and the neoclassical methods in fixing the minimum wages. The government sets the minimum wages by taking into consideration the factors in the labour market (Webb 2008, p. 45). The process ensures that benefits of both the employees and the employers are taken into consideration. Therefore, the policy has been able to achieve its objectives and this is by setting wages in accordance to the needs of the employees and the employers. The wages policy that has been adopted by the federal government ensures that the imperfect competition that exists between the employees and the employers is eliminated in determining the minimum wages. According to Murphy (2006, p. 7) the institutional wages theory notes that the imperfect competition that exists in the labour market may either empower the employees or the employers and this can lead to imbalance in labour negotiations. This is common in the Australian labour market where employers are more powerful than the employees and this creates an imperfect competition. The policy sets minimum wage and this eliminates the imperfect competition that exists between the workers and the employees. The policy also ensures that the employers are not exploited by the workers and the trade union while negotiating for wages. The policy incorporates the interests of the employers and the employees and this ensures that uniform outcomes are made in the labour market by eliminating the imperfect competition. According to Kaufman (2007, p. 445) the institutional wages theory support the minimum wage law in order to prevent the inefficiency that may arise due to social costs of labour and market externalities. On the other hand, the neoclassical wages theory notes that imperfections in the labour market can arise when wages are increased beyond the marginal products of the employees. This is applicable in Australia where the social costs of labour can lead to low outputs hence create inefficiencies in the labour market. Therefore, by setting the minimum wage the interest of the workers are meet and this ensures they are able to meet their social needs. Moreover, the minimum wage motivates the employees to improve their output hence this assists in reducing inefficiency in the production process. Conclusion The neoclassical wage theory requires wages to be determined by the forces of demand and supply of workers as well as by considering the marginal productivity of workers. On the other hand, the institutional wage theory advocates for the setting of minimum wages in order to ensure equitable distribution of wages. The wage policy which has been adopted by the ALP Federal government combines both the institutional wage theory and the neoclassical wage theory in determining the minimum wages in the country. This has in turn made it to achieve its aims in meeting the interests of both the employers and the employees. References Adler, A 2005, ‘The Neoclassical Theory’, In Economics Presentation, pp. 1-40. Blaug, C 1997, New Classical Theories, Cengage Learning, Mason. Herr, H, & Kazandziska, N 2011, ‘Principles of Minimum Wage Policy- Economics, Institutions and Recommendations’, International Labour Office, vol. 1, no. 11, pp 1-28. Kaufman, B 2007, ‘Institutional Economics and the Minimum Wage: Broadening the Theoretical and Policy Debate’, ILR Review, vol. 63, no. 3. , pp. 427-453. Leonard, T 2010, ‘The Very Idea of Applying Economics : The Modern Minimum Wage’, Journal of Economics, vol. 4, no. 1, pp. 119-142. Murphy, E 2006, ‘Minimum Wages and Employment: A Critical Appraisal’, In Economics Frameworks, pp. 1-40. Rapanos, V 2010, ‘Technical Change in a Model with fair Wages and Unemployment’, International Economic Journal, vol. 10, no. 4, pp. 99-121. Richard, P 2009, ‘Economic Theories of Wage’, ASBBS Annual Conference, vol.15, no. 1, pp. 681-691. Watson, I, Buchanan, J & Briggs, C 2010, ‘Wages Policy in an Era of Deepening Wage Inequality’, In Academy of Social Sciences, pp. 1-48. Scott, W 2005,Institutional Theory, Oxford University Press, Oxford. Smyth, P 2007, ‘The Role of Wage, Welfare and Industry Policy’, In Centre for Public Policy, pp. 1-17. Webb, R 2008, ‘Wage Policy and Income Distribution’, International Economics Journal, vol. 15, no. 1, pp. 40-61. Read More