The Agenda

Academics divided on impact of penalty rates cut 

Professor Phil Lewis* from the University of Canberra, a well-regarded and experienced economist, issued a scathing response recently to findings of an online survey purporting to refute predicted increases in employment intended to result from changes to Sunday penalty rates, describing the research as having, “a major hole”.

The research paper, “The Short Run Employment Impact of the Fair Work Commission Penalty Rates Decisions” written by academics** Dr O’Brian, Dr Pol and Professor Markey and presented to the Western Economic Association in early January, surveyed 1,300 workers.

The authors concluded that the number of people working in the retail industry on Sundays fell 7 percent last July (from June) following the reduction of penalty rates from 200 to 195 percent of the award hourly rate set by the Fair Work Commission.

The purpose of the rates cut by the Commission was to make the cost of hiring workers cheaper, thereby increasing jobs.   However, the authors of “Short Run...” claim their findings contradict Professor Lewis’ research which supported the rates cut, suggesting that “labour demand may be extremely inelastic”.

Professor Lewis represented the retail industry in hearings which led to the rate changes made by the Fair Work Commission.  He found the “Short Run…” research had not mentioned the important fact that the hourly adult Sunday minimum wage rate increased in July 2017 from $35.41 per hour to $35.67.

According to the Australian Financial Review, Professor Lewis said the “Short Run..” paper seemed “designed to reach a predetermined conclusionthat the awards have not had any positive effect on employment” and would not be considered worthy of journal publication.

In response to Professor Lewis, Dr. O’Brian acknowledged that, “true, the minimum wage increased on the same date negating the penalty rate decrease to an extent…however it is a fact that Sundays still became relatively less costly than previously because of the penalty rate decrease compared to other days.”

According to the Financial Review, disagreement prevails between certain business groups and Labor as to whether reducing penalty rates will have the effect of increasing jobs or will reduce employment by giving workers less money to spend.

*Professor Phil Lewis is a Professor of Economics and Director of the Centre for Labour Market Research at the University of Canberra.  Professor Lewis has researched and produced widely acknowledged work on the labour market and was awarded Life membership of the Economic Society of Australia in 2001.

**Dr O’Brian is a Lecturer in Economics at the University of Wollongong;  Dr Pol is a Senior lecturer at the Centre for Small Business and Regional Research at Wollongong University; and Professor Markey is a Director of the Centre for Workforce Futures at Macquarie University.


Labour Shortage

In the most recent National Australia Bank Business Survey, it was revealed that labour shortages are the highest they have been since the GFC.  The report revealed a sharp increase in labour unavailability as a constraint on output at the end of the 2017 calendar year, rising from about 45% in the June Quarter to above 55%. 

Around 17% of survey participants indicated that labour unavailability was a significant constraint on output in the final quarter of the 2017 year.  The research reflected the highest level of labour shortage since September 2008.

Following the publication of the survey, we note that the Reserve Bank forecast that unemployment would fall further than their estimates in late 2017, from the present level of 5.5%.  Notwithstanding, we note that the NAB survey found that wage cost pressures would not grow in the near term and had fallen back to previous lows of below 2%.

The bank’s research however forecast enterprise agreements would see average wage growth of 2.6% over the coming 12 months which is higher than the 2.25% reported at the end of June 2017.


Decline in Industrial Disruption a factor in slow wages growth

It is understood that the Fair Work Commission’s decision recently, to stop Sydney train workers from taking industrial action, arose in part because of the impact such initiatives would have on the economy.

We further note that recent analysis by the Australian Institute’s Centre for Future Work, authored by Jim Stanford, has revealed there has been a 97% decline in industrial action from the 1970s to the present decade.

They revealed that in the first 9 months of 2017 the number of industrial disputes was close to a post-war era low.  They further indicated that there is a close statistical relationship between the reduction in industrial activity and low wages growth.  Their research also revealed that frequent industrial action has traditionally been associated with faster wage growth.

The CEO, Innes Willox, of the Australian Industry Group, in responding to the research, revealed that the level of industrial action in Australia has fallen significantly since 2006 when secret ballots for industrial action were introduced, though also revealed that over the past decade there have been periods of high wages growth and low wages growth with no apparent link to the level of industrial action.

We note that the Chief Executive of the Australian Chamber of Commerce, James Pearson, commented that wages growth is a function of more factors than workplace relations with rising business competitiveness and confidence to invest as well as consumer confidence being key factors.

We understand that the Secretary of the ACTU, Sally McManus, commented that the recent research provided evidence that onerous industrial relations laws needed to change if workers are to benefit.

It is also understood that the Reserve Bank has acknowledged that slow wage growth may reflect an erosion of workers’ bargaining power in order to achieve improved working conditions.


Jobs Growth in December

The unemployment level rose to 5.5% at the end of the 2017 calendar year after a third quarter with an unemployment rate of 5.4%.  This was despite job gains of 34,700, seasonally adjusted, in December which was significantly above that predicted though well below the 61,000 new jobs that were created in November.  Full time employment grew by 15,100 in December but was surpassed by part time increases of 19,500 on a seasonally adjusted basis.

Over the 2017 calendar year full time employment rose by 322,000 with trend employment increasing 3.3% above the average yearly growth over the past two decades of 1.9% and the highest since September 2005.

The participation rate also increased from 65.5% to 65.7% though monthly hours worked per employee fell by 0.5%.

The jobs growth outcome at the end of the 2017 calendar year reflected a likely growth in employment to September 2018 of 1 million additional jobs as promised by the coalition when they came to government in 2013.