Australia’s Minimum Wage in a Global Setting

A recent perspective offered by Bill Shorten, the leader of the Federal Opposition, has outlined an approach which Labor would consider supporting to improve the rewards available to those on the national minimum wage. He expressed the view that the “minimum wage is no longer a living wage.” He said on Monday the 29th of January, “our goal should be a real living wage, effectively raising the pay of all Australian’s, particularly the 2.3 million who depend upon the minimum rates in the awards.” 

The concern expressed by Labor’s leader was clearly sponsored by recent data revealing the challenges facing many individuals and households associated with the cost of housing, managing debt and rising energy costs. The observations from Mr Shorten might have been influenced by recent wages growth in the United States, where the corporate tax rate has been reduced to 21%, and the growth in listed company enterprise values has increased significantly over the past 12 months (despite recent market volatility), a phenomenon not reflected in Australia. These perspectives were put forward when a number of employers were concerned with wages growth in an environment where their costs of supplies were increasing and productivity was not demonstrating significant improvement.

Living wages are important for workers, although, Chris Richardson at Deloitte Access Economics stated, “A higher minimum wage hurts jobs because basically it is trying to make businesses do what a better social security system could do cheaper and more efficiently.”

He added that a higher minimum wage will weigh on Australian employers more than in other countries. This is due to the fact that Australia’s minimum wage is higher than the average wage among the rest of the Organisation for Economic Cooperation and Development (OECD) member countries.

In the context of the above, research from the OECD reveals that Australia’s real minimum wage in US dollars is high by global standards – a fact implicitly revealed in initiatives by many local companies to outsource an increasing proportion of their administrative workload to low cost economies, particularly within the Asian region.

Subsequent analysis provided by the Melbourne Institute of Applied Economic and Social Research, revealed that the purchasing power of Australia’s minimum wage in an environment of rising domestic costs has been curtailed. It also revealed that 13% of workers effectively on minimum wages live in households that enjoy the top 20% of incomes in the nation. These wage earners being young adults in study, potentially living at home and primarily aged between 21 and 34 years as well as many women with a secondary household income.

The research from the Institute reveals that only 21% of those on minimum wages might be termed “harvester workers” or those supporting a household on a single minimum wage.

Further analysis and consideration needs to be given to the appropriateness of the minimum wage, as a living wage given the Opposition Leader’s statement that 2.3 million Australian’s who are dependent on minimum rates in awards are significantly influenced by Australia’s minimum wage.

Many of Australia’s leading service providers manage their wages productivity through offshoring key administrative and data management roles.

We know that in the services sector, where a significant number of participants are global organisations, their work is undertaken by a global hub, often not based in Australia. We also note as revealed in the financial press that a leading advisory firm is testing the use of virtual Executive Assistants based in the Philippines to contain costs. With local remuneration for Executive Assistants in Australia nominally being in the range of $60,000 to $100,000 it was revealed that similarly qualified staff in the Philippines received between a $5,000 and $20,000 a year.

Enterprises of all scales will have increased capacity to pay higher wages if corporate taxes are reduced and profits improve. The latter will be influenced substantially by input costs, which at present in Australia, are increasing, not reducing.  The euphoria expressed by some in relation to the United States improvement in wages needs to be considered in the context of more moderate basic living costs and their historic low minimum wage compared to Australia as observed in the table above.

In the Australian Financial Review an article, “Half of Bill Shorten’s Minimum Wage Workers are in the Top 50 pc” published on the 7th of February, revealed that official figures show that the relative share of national income won by employees and companies have been little changed for decades, with labour capturing 58 cents of each dollar of income in 2016-2017 according to the Australian Bureau of Statistics. Similarly, profit share has stayed remarkably steady, fluctuating between 41 cents and 44 cents over the past 30 years.

Deloitte Economist Chris Richardson, commented that significant swings in the profit and wages share during the 30 year period was influenced when the commodity and resources boom took off at which stage wages growth galloped ahead of productivity growth.  At the end of this era, in 2012, wages growth slowed. Although wages growth in the past 12 months in Australia appears to be contained below 2%, over the 2017 calendar year average hourly earnings grew by the equivalent of 2.9% in the United States being the best year on year wage increase in that country since 2009.

In exploring the ingredients which impact on pressure for wage increases, the Reserve Bank in its recent quarterly report (February 2018) reflects on the high level of household debt, the medium term prospect for interest rate adjustments and the impact that this may have on consumption and therefore demand for labour. 

In further commenting on wages growth, the bank’s quarterly report reveals that the average Enterprise Bargaining Agreement signed in the 2017 calendar year will lead to lower wages growth over the next two to three years than experienced in prior periods.  They also reveal that Australia’s average earnings per hour growth is about half the wage price index and while revealing that the outcome of the Minimum Wage Case in 2017 contributed to average award wage increases above trend, this circumstance appeared to have minimal impact on overall wages movement.

In the context of observations made by politicians, economists and the Reserve Bank comment has recently emerged which reflects, among many factors, on the prospect that workers should not be forced to lock away a rise in their wages in superannuation.  This observation arose from a recent report from the Grattan Institute which indicated that amid persistent low wages growth, the current 9.5% rate is adequate to fund a decent retirement income for the typical worker and as a consequence the demand from certain quarters to increase that rate to 12%, while increasing employment cost, may be better allocated to fund a living wage for those on modest wage levels.

These observations do not reflect concerns of a number of commentators who are of the view that the superannuation funds of the majority of people retiring will not prove adequate in an environment where retiring workers are living longer and will be doing so in an environment where they will be experiencing higher living costs.

These views are clearly placing pressure on legislators and those advising governments on their future financing needs to provide a quality lifestyle for retired workers while at the same time addressing a number of competing challenges in a rapidly changing workforce in relation to skills and education requirements which are impacting on the nation domestically and its economic advantage in generating export income.

While evidence can be found to support many competing perspectives, it is increasingly important to Australian businesses to ensure their sustainability through exploring the inputs to their costs and the opportunity to contain or reduce those inputs, while at the same time reviewing their operational alternatives in order to ensure both growth and longer-term sustainability in what is a high wages cost nation.  Managing the future clearly requires considered input from governments whose policy frameworks and oversight of significant expenditures impact directly on citizens’ costs and Australia’s international competitiveness.

Addressing these challenges will require careful consideration and planning by governments, business and the labour force with each major stakeholder having the potential to contribute positively to a prosperous and fair future as Australia explores its optimal pathway in a global setting for both the nation and its citizens.

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