The Agenda – June 2017

Why are wages flat when unemployment is relatively low?

The Reserve Bank of Australia Governor Phillip Lowe has told workers to ask for a pay rise, voicing hopes that workers would not continue to accept flat wages in return for job security.

Remuneration and governance news

Recent GDP figures surprised on the upside, but at 1.7% year on year are still well below Australia’s trend level of 3%. The increased spend wage rises bring would boost GDP growth and allow the Reserve Bank to begin the process of normalising interest rates.

The Governor’s opinion was that despite worries about job security, workers were in a position of strength.

“Workers feel like there are more competitors out there, they’re worried about the foreigners and the robots,” he said, adding that it was clear the labour market was “actually quite tight” in a number of countries.

“Hopefully running for a few years now with quite tight labour markets [will be] re-energising workers to get more of the labour share”.

Business Council of Australia head Grant King stated on the other hand that business would like to be able to increase wages, but increases to productivity and profits need to come first. Interestingly, the profit share of national income has been rising and is now at its highest level since the 60s according to the AICD’s chief economist Stephen Walters, meaning that workers are getting a smaller slice of the pie.

The Bank of England’s Chief Economist has also commented on low wage growth this month, stating that it cannot be explained by the unemployment rate or a lack in productivity growth. He stated that there was some evidence technology and globalisation was reducing the bargaining power of workers such that the share of income going to wages falls.

One question in Australia is whether the unemployment rate is truly representative. The current unemployment rate released by the ABS is 5.5%. Yet Roy Morgan’s May 2017 unemployment estimate completed using a different methodology to the ABS sits at 9.8%. Over the last ten years (including the financial crisis), the unemployment rates look like this.

Roy Morgan Estimate of Unemployment

These figures do not indicate that employees are in a strong position to request wage rises.

Minimum wage to rise by 3.3%

The Fair Work Commission decided this month to increase the minimum and award wages by 3.3% from 1 July 2017.

Some economists were “stunned” by the increase, high in comparison to growth in the wage price index and average weekly earnings. They believed the adjustment would increase unemployment.

Others were less concerned.

“Clearly they’ve been holding wages down for quite some time and there hasn’t been a surge in employment – so if the problem’s on the demand side, then increasing consumption from raising the wage could actually have positive effects,” University of Sydney labour economist John Buchanan said.

Penalty rate cuts

The Fair Work Commission ruled in February that penalty rate cuts would be cut for workers in fast food, retail, hospitality and pharmacy industries, with Sunday and public holiday rates cut from 25% to 50% depending on the industry.

The Fair Work Commission has now ruled that the penalty rate cuts for public holidays will be fully effective as of 1 July. Cuts to Sunday rates will occur gradually until 2020.

For fast food and hospitality workers as well as casual retail workers, the cuts will be split into three annual instalments.

Workers on the pharmacy award and the balance of the retail workers will have their rates decreased in four annual instalments.

Unions have lodged an appeal in the courts to stop the changes becoming effective, so there may be further delays.

Federal Labor leader Bill Shorten has also pledged legislation that would undo the effect of the cuts if his party were to win government.

Remuneration Tribunal sets public office remuneration increases at 2%

The Remuneration Tribunal has decided to increase the remuneration of public officers under its jurisdiction by 2% from 1 July 2017. The last increase approved by the tribunal came into effect from 1 January 2016 making it a 1.6% increase per annum.

In making its decision, the tribunal had tried to balance private and public sector pay movements while considering the government’s policy of wage restraint and the tribunal’s view that office holders including heads of agencies, members of Boards and technical/professional specialists did not expect or require their monetary compensation to be set at private sector levels.

This decision is in line with where Egan Associates believes executive remuneration increases should be pitched, and is certainly not aligned to the minimum wage decision.

AICD concerned by lower appointment rate for female Directors

The monthly appointment rate for female Directors in the ASX 200 fell in the first half of 2017, reaching approximately 30% compared to a 44% appointment rate in 2016.

AICD Chairman Elizabeth Proust was concerned the drop would make it more difficult to reach the institute’s goal of 30% female Directors by 2018. The current proportion of female Directors is 25.4%.

She believes the issue is not one of supply, but rather demand, with some Boards holding out against increasing gender diversity.

Insolvency reforms

Long awaited reforms that will create a safe harbour for company Directors from the civil insolvent trading provisions of the Corporations Act 2001 are currently before the Senate after passing the House of Representatives on 22 June.

The current laws are considered to be “draconian” by international standards. Directors may be liable for company debt if there were reasonable grounds to suspect the company was insolvent when the debt was incurred. This leads to Directors placing an organisation in insolvency even if there was a possibility of being able to trade out of trouble.

Under the reform, Directors would not be liable for the debts if it could be shown that they were developing or taking a course of action that was reasonably likely to lead to a better outcome than the immediate appointment of an administrator or liquidator. This exemption would not be available where the company was not paying company employees or complying with tax reporting obligations.

The reform also deals with ipso facto clauses (when one party can terminate or modify the operation of a contract upon the occurrence of a specific event, regardless of continued performance of the other party). Such provisions can hinder a company that might have been able to transform successfully without the clause coming into effect. Under the reform, certain types of these contractual rights would be unenforceable when a company is restructuring under administration.