2020 Minimum Wage Decision

The Fair Work Commission, as in prior years, has received a number of submissions in relation to the 2020 Minimum Wage Decision.

The issues impacting on the traditional mid-year review of the minimum wage as will be observed are profound and will impact on all communities across Australia.

Wage adjustments have traditionally had primary regard to inflation, economic growth including the level of employment and unemployment, and employers’ capacity to pay as well as prevailing taxation and other costs imposed by Government and regulators.

In recent years the Fair Work Commission has progressively increased the minimum wage which has had a flow-on impact through Award wages then to management and executive reward.

Effective July 2019 the Fair Work Commission increased the minimum wage by 3%.  At that time unemployment was steady at 5.2%, underemployment and underutilisation rates stood at 8.3% and 13.5% respectively for the year to June 2019.

Following the 2019 decision by FWC, the hourly rate was established at $19.49 or $38,521.60 per annum. The minimum wage represents around 53.7% of the estimated full time median weekly earnings ($1,380 per week). ( ABS August 2019)

Full-time adult average weekly earnings had increased by 2.7% to the year ending May 2019, with employees in the mining industry receiving the highest average weekly earnings while concurrently unions in the Construction, Forestry, Mining and Energy sectors were pursuing a 5% pay increase for an indefinite period.

Set out below are extracts from the Australian Government’s Submission, the National Farmers’ Federation, the Australian Retailers Association, the Australian Council of Trade Unions, the Restaurant and Catering Industry Association and the Australian Industry Group. www.fwc.gov.au annual wage review 2019-20

We note that the majority of State Governments have also made submissions.

The Australian Council of Trade Unions

The submission of the Australian Council of Trade Unions (“ACTU”), the peak body for Australian unions, retains its traditional comprehensive compilation of data representing 2,000,000 working individuals across all industries, it is seeking a uniform percentage increase to the minimum wage and modern award minimum wages of 4%.

The ACTU state in their submission that the current economic environment and the uncertainty surrounding how it progresses should not be a deterrent to an increase in the minimum wage and awards.

They propose that on the contrary, the minimum wage increase would both provide a stimulus and offer long term certainty in regard to income flows, especially for the least well paid.

Their submission, drawing on recent data on award reliance, reveals that more than one in five employed persons nationally are paid at the lowest wage that they may legally be paid.

In this context, they observe that decisions by FWC constitute not only a safety net but, by definition, also a cap and reveal in that context that the panel’s decision must inform what constitutes a fair and relevant safety net.

They comment in their submission that over the past five years real unit labour costs have fallen while company profits’ growth has far exceeded the growth in wages, though acknowledge recent poorer profit disclosures are, in their view, related to the decline in consumption growth which itself is the natural consequence of modest wage growth.

They also reveal that the minimum wage as a proportion of both median earnings and average earnings was 0.5% lower in 2019 than it was in 2009 at the beginning of the global financial crisis and the minimum wage freeze implemented under WorkChoices legislation.

Australian Government Submission

We note in the Government submission that in 2018 up to 21% of Australian employees, or 2.2 million, received pay under an award.

The Government indicates the award reliance by industry sector (page 5), with the highest dependence being in Accommodation, Food Services, Administrative and Support Services and the least dependent being in Information, Media and Telecommunications, Financial and Insurance Services, Electricity, Gas, Water, Waste Services, and Mining.

In acknowledging the current economic circumstance, the Government highlighted a number of contemporary measures being used to boost the economy in the current pandemic setting.

The Government’s submission also revealed that wage growth as measured by the Wage Price Index had been materially lower than the panel’s 2019 decision, growing at 2.2% through the year to the December 2019 quarter.

Their submission also revealed that bushfires had a significant negative environmental, social and economic impact which are likely to be revealed through lower household consumption and tourism.

Their submission revealed that the ABS labour force data suggest that the Australian labour market, prior to the pandemic, had been resilient though equally revealed that COVID-19 will have a substantial negative impact on global and domestic economic growth and labour market activity in Australia going forward.

While acknowledging that the unemployment rate in Australia stood at 5.1% in February 2020, they revealed that the current global response to the pandemic is likely to have a dramatic impact on the near-term increase in unemployment, though equally acknowledge the criticality of keeping Australians at work.

Their submission identifies research which reveals that increases to minimum wages have a greater impact on employment opportunities for youth.

According to the Australian Government submission, “The international evidence suggests that the younger the worker the more at risk they are from minimum wage increases and minimum wages being set too high, which is why the strongest adverse effects are generally found for those aged under 20, especially those aged under 18” (Low Pay Commission, 2019, ap36) .

The Government’s submission reveals that the Act governing the minimum wage review process highlights the requirement for the Panel to take into account a range of considerations, in particular the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth.

In that context this provides the Commission with broad discretion to determine fair minimum wages by ordering an increase, decrease or no change to minimum wages.

The Government states that in light of the rapidly evolving events, the delay in the 2021 budget and the significant challenges facing the economy, make reliable, robust economy forecasts problematic at this time.

The absence of such data will, in the Government’s view, clearly impact on the panel’s ability to assess the performance and competitiveness of the national economy including productivity, business competitiveness and viability, inflation and employment growth as required by the Act.

They state in particular that the Panel should take a cautious approach, prioritising the need to keep Australians in jobs and to maintain the viability of the businesses, particularly small businesses that provide those jobs.

The Government’s submission reveals there is considerable uncertainty around the potential economic implications of the pandemic for the June quarter and beyond, and that the economic shock will be significant.

At the time of making their submission, the Government also state that there is considerable uncertainty around the magnitude of the increase in the employment rate that will result.

Australian Industry Group

In their submission, the Australian Industry Group (“AiG”) state that the effects of the COVID-19 pandemic will affect every segment of the economy in 2020.

In their submission, in addition to reflecting on the impact of the pandemic, they also acknowledge that the bushfire crisis had a broad impact on economic activity and in that context believe there is merit in the Fair Work Commission delaying the annual wage review. Accordingly they are recommending a change in the timetable for the Annual Wage Review, with no decision being handed down until the Panel have considered the first quarter 2020 national accounts scheduled for release in June 2020.

Without having that knowledge, AiG have not quantified a particular minimum wage increase in their submission given the current economic uncertainty. They reveal that in respect of the 2019 minimum wage increase they had proposed 2%.

In their submission they state that an excessive minimum wage increase can create a significant risk of disemployment and of adversely affecting the employment opportunities of low skilled and young workers.

AiG’s submission sets out comprehensive economic and employment data available in March 2020.  They comment on both private sector and public sector wage growth in the final quarter of 2019 and the Reserve Bank of Australia’s anticipated wage growth over the 2020 and 2021 calendar years.

Their submission acknowledges a difference between Treasury’s forecast and those of the RBA and they provide interesting graphs including the ABS’s Wage Price Index at December 2019 (page 23).

Their submission also highlights the fact that OECD data confirms that Australia regained its place as the country with the highest hourly minimum wage in the world in 2018 when calculated in constant US dollars at purchasing power parity (PPP adjusts for differences in living costs, inflation rates and exchange rates).  This estimate did not include the minimum wage rise of 3% in Australia from 1 July 2019.

Equally, in their research OECD estimates that Australia ranks only seventh in relation to average annual wages for full time employees, being behind both the USA and a number of small European countries.

The Australian Retailers Association

We note that the Australian Retailers Association (“ARA”) comprises over 130,000 retail businesses employing 1.3 million people, being Australia’s largest private sector industry and second largest employment sector overall after health.

We further note in their submission that retail is a key industry sector for female workforce participation, with over 55% of employees in the sector being women.  It is also the largest employer of young people in Australia.

We note in their submission, that the ARA reveal that members consistently rank labour costs in the top two issues of concern in the retail sector. In the current environment it is widely acknowledged that the nation’s retailers face difficult operating conditions, further aggravated by the retail sector’s shift due to globalisation toward the digital economy.

In their submission, ARA strongly recommend that the FWC panel defer any decision on the minimum wage until after the March quarter 2020 GDP figures are available, with any subsequent decision to increase the minimum wage to be limited to the rate of the CPI growth over the preceding twelve months or less.

In their submission, ARA believe that such a position is responsible, realistic and reasonable.

Based on ARA’s perspective at the time of their submission, they foreshadowed an increase in the NMW of $13.33 per week to $754.13 per 38-hour week.

This position reflects ARA’s consideration of economic risks and the state of the economy whilst assessing the capacity of the retail sector to pay.

They set out the foundation for their recommendation in their submission.

Restaurant and Catering Industry Association

We note in the submission by the Restaurant and Catering Industry Association (“R&CA”) to the 2019/20 review that the majority of employers in the sector are small businesses employing 19 people or less.

They also reveal that the sector is low in capital intensity and highly dependent upon their employees, revealing that any significant increase in their wages will adversely affect potential growth in an industry which is sensitive to economic prosperity.

While acknowledging that the 2019 Minimum Wage was increased by 3%, they reflect on their proposal for that increase to be 1%, primarily predicated on the cumulative effect of the prior four year increases to the minimum wage.

Their submission has comment unique to their industry reflecting on junior employee wages, the importance of apprentices and trainees, the significance of casual employees and the cost associated with casual loadings.  With that background they reflect on the current economic context and COVID-19 and the industry’s challenge, R&CA has advocated a twelve-month freeze to any changes to the modern award wage and the minimum wage.

In their view it would be unreasonable in the current circumstance for the modern award wages and the national minimum wage to be increased, which would adversely affect small and medium sized businesses in the current climate.

National Farmers’ Federation

We note in their submission, the National Farmers’ Federation (“NFF”) reveal that farming employs approximately 230,000 Australians with the agricultural sector providing the vast majority of the nation’s domestically consumed food and fibre.

Their submission reveals that Australian farms currently face serious adverse conditions that threaten productivity and business sustainability, including market conditions, faltering economic growth, an unprecedented series of social and environmental crises.

They highlight the ongoing drought, bushfires and the unfolding COVID-19 pandemic.

The NFF state that these factors have contributed to an environment of deep uncertainty and created additional and compounding financial pressures that have left many farm businesses highly vulnerable to further disruption.

They further reveal that workforce costs make up a significant proportion of total expenditure for agricultural businesses, identifying horticultural producers as those where labour expenses account for up to 70% of production costs.

In their submission, the NFF have called for the current minimum wage level to be maintained in order to minimise the financial pressure on agricultural businesses.

The NFF’s submission highlights the criticality of maintaining a viable agricultural sector with public policy conditions that foster growth and productivity and, in that context, comment that Australian minimum wages are very high by international standards though in parallel recognise the nation’s general standard of living which is of benefit to the sector’s employees.

The NFF acknowledge that the minimum wage is a significant instrument in the pursuit of social equity objectives though quote Professor John Freebairn from the University of Melbourne, that “modern Australia with its progressive income tax and social security systems has more direct and effective instruments to address society equity objectives than the minimum wage instrument”.

The NFF’s submission highlights economic growth movement over an extended number of years and the key pressures on the agricultural sector.

In light of less than favourable conditions operating in the sector, together with the RBA’s most recent quarterly assessment, the NFF have recommended that the minimum wage be maintained at current levels until conditions have stabilised and the level of financial risk for agricultural businesses has decreased.

Egan Associates’ View

In considering potential outcomes in the current setting, we note that during the global financial crisis after increasing the minimum wage in 2008 by approximately 4.1%, in their 2009 Review the Fair Pay Commission chose to leave the prior minimum wage unchanged, adjusting it two years after their 2008 review by approximately 4.8% in mid-2010.

The impact of COVID-19 on the world of work, in our judgement, will lead to declining revenues and as a consequence, profitability and enterprise value.

In the context of past experience and the uncertainty in relation to the economic impact of COVID-19, and the fact that many rural and other communities suffered loss during the drought and bushfires, an adjustment to the national minimum wage at the current time in our judgement would not be appropriate.

Should the expert panel in having regard to all submissions, including those that represent employees in the workforce, reach a conclusion that the minimum wage should be increased having regard to the key economic factors which traditionally drive their decision and are set out in the Act, in our view their recommendation flowing on to modern awards should be capped at the hourly increase established for the minimum wage and not applied as a percentage increase to the current modern award wage rates in respect of the 2020 decision.

We note that recent initiatives of the Federal Government include financial support ($130 billion) for those who have lost their job as well as support to SME’s and not-for-profits to encourage their continued retention of employees and their business operations. Banks are also offering SMEs deferral on loan repayments and landlord asset managers similar support in an environment of low interest compared to prior years.