Minimum Wage Decision Nears

The Fair Work Commission’s annual minimum wage review will soon return a verdict, with input from submissions already completed by unions, government and industry.

The Australian Council of Trade Unions (ACTU) recommended a 4.3% increase. The Australian Industry Group (AI Group) proposed a 1.6% increase. The Australian Chamber of Commerce and Industry (ACCI) proposed a 1.3% increase. The Commission of Audit recommended setting a minimum wage benchmark at 44% of average weekly earnings and transitioning to this benchmark by indexing the current national minimum wage to grow in line with CPI less 1 percentage point for a period of 10 years. It also recommended that the states be able to adjust the minimum wage to suit their situation.

Industry labelled the ACTU recommendation as “unrealistic, unaffordable and unsustainable” and likely to cause significant economic damage while the ACTU labelled industries’ recommendations as leading to a cut in real wages and further increasing inequality. The Australian Government urged caution, given the transition from mining-based growth to other sectors of the economy.

The submissions focused on similar data regarding the economy’s health, but arrived at vastly different conclusions.

Industry and government submissions stated that the economy was staring down the barrel of further below trend growth while the ACTU was more optimistic, stating that growth was forecast to improve.  While the AI Group, the Australian Government and ACCI pointed to high levels of unemployment and underemployment and cautioned that these levels were likely to rise, the ACTU was of the opinion that the figures had reached their peak.

According to the government and industry submissions, raising the minimum wage would further dampen the prospects of unemployed people, especially young unemployed, while the ACTU repeated that there is no consensus that modest increases in the minimum wage impact employment.

Indeed, it has become an international bone of contention whether higher minimum wages lead to higher unemployment. The US recently proposed an increase in minimum wages from $7.25 to $10.10 an hour. The proposal was partly based on a letter from 600 economists that said increases in the minimum wage have had little or no negative effect on the employment of minimum-wage workers, even during times of weakness in the labour market, and could in fact have a small stimulatory effect as those workers would have money to spend. The Bill has been blocked in the US Senate.

The Australian Government noted that another 500 economists had also written a letter to US federal policy makers stating that businesses with tight profit margins would have to cut costs or pass on costs to their customers. It also noted that while the economy wide effect of a minimum wage rise may not be large, it would affect certain industries disproportionately and that Australian small businesses were more likely to be award-reliant and therefore burdened by any increase in minimum wage.

AI Group stated that higher wages could lead to a willingness to work more hours, but that it might be counteracted by less work being available if the demand was not there to soak up supply, which it argued was not the case.

Industry and government highlighted that business had already been impacted by the increases the Commission had ordered for apprentices, social and community sector workers and the general retail industry award, such that any further increases would be a burden. The increase in the superannuation guarantee should also be taken into account. Yet the ACTU believed that any reductions in minimum wage growth made for these reasons would be undermining prior decisions.

In other international comparisons, AI Group and the government focused on Australia’s minimum wage being one of the highest in the OECD on a purchasing power parity basis, while the ACTU highlighted that Australia’s tax transfer system does not reduce inequality as much as other nations in the OECD, making the minimum wage more important.  The ACTU noted that the minimum wage as a proportion of the average wage had been falling over the last decade.

“For low-paid workers to be socially included they must have an adequate income to participate in their community. This is a relative consideration; to be socially included entails (in part) being able to purchase a range of goods and services that are socially defined as being necessary. Rising inequality of earnings and income is likely to entail rising social exclusion,” it said.

The government meanwhile quoted a paper that stated “the most important source of inequality in Australia is whether you have a job or not”.  It said it had done some modelling showing that Australia’s minimum wage already provides a significant incentive for the unemployed to take up work and that given the economic situation, the Commission should place greater weight on the creation of jobs rather than the role of wages as an incentive to work.

It noted that minimum wage jobs were often a springboard to higher paid jobs and as the first step on the ladder should be encouraged. Of those people who entered low paid work, 61.4% left within a year and a further 25.3% left in the subsequent year.

There was also concern that any increases in the minimum wage would not actually go to households in need – according to the government’s submission, low paid workers are spread across the entire distribution of household income, meaning that minimum wage increases would be directed toward relatively well-off households as well as low income households. It also drew out figures stating that 17.8% of award-reliant workers were paid more than the median hourly wage for non-managerial employees, such that any increase to award wages would raise the earnings for a number of award-reliant works who earned more than the median hourly wage. Less than one third of award-reliant workers could be defined as low paid, the government noted.

Productivity is often noted as a driver of wages. Although there was consensus that there had been an uptick in labour productivity, opinions differed on whether that was a long term trend and if so, what it meant for the minimum wage.

The ACTU was of the opinion that workers should be reaping the benefit of the increased productivity, noting that the growth in minimum wages had lagged behind productivity growth.

The government, however, stated that over the last ten years, labour productivity growth in industries with the highest concentration of award-reliant employees generally had labour productivity growth well below the national average of 1.6%, while others mentioned capital deployment as a major driver of labour productivity and the ACCI noted that the increase in productivity had likely been caused by employees working harder to maintain their jobs in a tough environment and less productive employees leaving the workforce.

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