The annual wage conundrum

14 Mar 2018

Each year the Fair Work Commission is presented with submissions that are used to determine the minimum wage of millions of Australian workers. The submissions presented to the Fair Work Commission however, are largely based on vested interests with powerful unions and business advocacy groups fighting tooth and nail for a mere percentage increase in wages.

The two voices that arguably bear the most weight in the debate include the nation’s largest business advocacy groups and the most represented employee group, the Australian Council of Trade Unions (ACTU).

Whilst both employee and employer groups make strong compelling arguments, their conclusions and proposals are viewed as being highly biased in favour of their member interests. The highly biased nature of the arguments presented leaves the Fair Work Commission with very little head space to make an informed, well-considered decision.

The ACTU has made the claim that the annual wage review is becoming burdensome and that Australia should have medium term targets set every 3-4 years. The issue with their argument however, is the aim of the medium-term target is to peg annual wage growth to support a 'living wage' as has been recently adopted by the UK. The ACTU argues that if we don't aim to restore the minimum wage, as the UK has done, the current decline in income equality will lead us to a similar situation to the US - where low-income earners take home approximately 30% of average income earners.

In this year's annual wage review the ACTU will argue that wage policy is a necessary lever to spur economic growth as the propensity to spend extra earnings is high for those on minimum wages. The extra earnings will quickly absorb back into businesses which, by logic, will lead to an overall lift in consumer spending and economic growth.

They will also suggest that monetary policy has simply become less effective in driving economic growth and that most of that extra cash flow has now been locked into highly inflated mortgages. They will make very broad assertions that Australia should have a minimum living wage as the UK has and they will attempt to back their claims through a very large survey of their members. Their members however make up only 10% of the workforce and statistical inferences that are not representative of the broader population should be viewed cautiously.

The ACTU will be emotive and anecdotal with their statements and evidence and they use this tactic to 'guilt' decision makers into viewing their arguments favourably.

Employer and business groups will suggest that wage policy is not the appropriate pathway to address social policy concerns as raised by the ACTU. They will distance themselves from international jurisdictions because Australia has comprehensive safety nets, affordable education and healthcare and these features are fundamentally absent in the US economy.

They will suggest that taxation policy is currently out-dated, and that tax incentives rather than wage policy is the appropriate lever to incentivise consumer spending and investment.

They will suggest that driving up wages artificially will lead to fewer jobs as labour costs typically make the largest proportion of business costs. This in turn will impact business investment decisions, their profitability and their ability to employ additional staff.

They will also suggest that inflationary pressures have remained relatively low and that the record number of jobs created last year would not have been possible without measured wage policy as observed by last year's decision to increase the minimum wage by 3.3%.

They will also claim that industries that are most highly impacted by wage increases are retailers and hospitality businesses - and they are currently experiencing very high competition, particularly with the recent introduction of Amazon to the Aussie retail market.

They will show that productivity has fallen for the first time in 7 years - with the latest ABS data showing that GDP per hour worked (the common measure of worker productivity) has fallen by 0.1% in 2017 on average compared to 2016. In economic theory, worker productivity is a powerful indicator of wage inflation and is used as a leading indicator to wage growth.

They will also show disaggregated data on jobs and employment rates and suggest that the most vulnerable communities and sectors - such as those still adjusting to the downside of the mining boom - will be most heavily impacted.

The most powerful point of all will be the issue of youth unemployment. Those on minimum wages are likely to be in their first job, and many young people are finding it increasingly difficult to get one. If employers are finding them increasingly expensive to hire, they will simply delay and/or forgo hiring them.

The annual wage decision sets a floor on minimum wages, which by and large affects all other wages. Awards for pilots for instance earning over $150k are affected by the percentage increase as decided by the Fair Work Commission.

While both sides of the debate are compelling, they are both framed to represent powerful interest groups. The Commission is unusually vague about their decision-making process also. It's easy to assume that the Commission throws their hands up and ends up agreeing on something that falls somewhere in the middle.

While this attempts to politically appease the two major players in the review process - both sides are aware of it. Last year the Australian Chamber proposed a 1.2% increase while the ACTU proposed upwards of 6.6% - a political move that worked in their favour as the decision fell close to the middle at 3.3%.

Given these tactics are being used by both sides of the debate shouldn't we be asking whether this is a truly sustainable, fair or indeed economically feasible approach? What alternatives exist and should we have a discussion about adopting them?

The World Economic Forum's latest Global Competitiveness Index (GCI) reports that Australia's flexibility of wage determination ranks a dismal 109th and restrictive labour regulations are the most problematic factors for doing business in Australia. Surely we can do better! 

Isn’t it time we took a fresh look at how the minimum wage affecting millions of Australians and the businesses that employ them is determined?

(Please note that the views expressed in this article are my own and do not represent the views of employers past or present)


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