A Wage–Tax Policy to Increase Employment

We use MONASH, a dynamic general equilibrium model, in an analysis of the macroeconomic effects of combining a freeze on Award wage rates in Australia with the granting of tax credits to low-wage workers in low-income families. Our results suggest that if this policy were successful in lowering the actual real before-tax wage rates of workers in the Award system, then it would have favourable short-run effects on aggregate employment. These effects would persist into the long run if the policy led to rightward shifts in labour supply curves. The downside risk of the policy is that it would be counteracted by over-Award payments, leaving a budgetary problem with no compensating employment gain. At the same time, the Award system would be rendered irrelevant to the determination of wage rates, possibly increasing the costs of wage bargaining.