What is the best way to achieve equity?

Equity is a measure of fairness, and therefore a matter of opinion. The difference of opinion extends beyond what the best distribution of income is to how we should achieve it.

Some people believe that the way to achieve equity is through evening up in-work income. That can be done by raising minimum wages and taxing incomes progressively. Others believe that the best path is to pay benefits to those who require additional income. Both approaches will help reduce income inequality.

In Australia there is presently a debate between government and Trade Unions on the setting of the minimum wage. Australia has for many years had a very high minimum wage, but it has been falling in terms of the proportion of average wages this represents.

The Trade Unions want the minimum wage raised so that it is maintained at 60% of average incomes. The government does not want to commit to that because it fears that this may raise unemployment. (That would be cause real wage unemployment where the minimum wage in some industries is set above the market equilibrium.)

This is actually an argument of equity vs efficiency. There is no doubt that a high minimum wage promotes equity, the difference in take home pay will be made smaller. However it may harm efficiency.

Markets work through incentives. Earning  higher profit incentivises  firms to lower costs and improve quality in order to sell more products. It is a similar issue with workers, they are incentivised to work through wages. Higher wage rates attract more hours of work from workers.

If the minimum wage is too high there are two possible detrimental effects.
1. Firms cannot pay different rates of pay to different workers below the minimum wage
 A worker who is more productive should earn more than one who is less productive. However if both workers value to the firm is less than the minimum wage then both receive the same wage or, possibly, neither is employed.

2. The incentive to work harder and achieve improved skills and position is removed when there is equality in payment. The rational choice is to do the easier job yet get paid the same. Any move towards greater equity in income risks enhancing this effect and the economy suffers.

Overall this means that the economy is denied the competition it needs to achieve productive and allocative efficiency and as a result resources are misallocated.

There is no right answer to the question of the 'best' distribution of income. The trade-off between equity and equality is a real one though and must be considered in any policy proposal.

The Guardian covers the story here

This matter is of value to VCE students as the minimum wage is a key part of policy for the goal of equity. For IB students this has wider implications including the causes of unemployment and supply side policy.