Employers First™ calls for new approach to Fair Pay

Employers First™ has called on the new Australian Fair Pay Commission (AFPC) to approach the minimum wage setting task as part of a process that will ensure greater employment opportunities for low paid workers. In its submission to the AFPC, it has called for new minimum wage determination principles and argued for a break from the old practice of artificially setting wage levels on a reactive “catch-up” basis. It has urged the AFPC to adopt an economically sustainable approach that combines a minimum wage with long-term government policies on skills training, social welfare and tax.

Background

The AFPC, set up under the federal government’s WorkChoices legislation, is now responsible for the setting of the minimum wage, as well as minimum wages for award classifications, juniors, trainees/apprentices, employees with disabilities and casual loadings. It has called for submissions from interested parties on the approach to be adopted and the appropriate minimum wage level for its first determination. In setting wages, the AFPC will be restricted in observing the last increase afforded to awards by the 2005 National Wage Case. This means that minimum wages for award classifications will be locked in at the current levels and no employee will experience a decline in wages. The AFPC will then determine any subsequent increases to wage rates. The main thrust of the Employers First™ submission may be summarised under the headings below.

Jobs for the low paid

Any sensible approach to the minimum wage must take into account the capacity of the unemployed and low paid to obtain and remain in employment – and the impact of the minimum wage on the decision by employers to hire. The minimum wage, currently $484.40 a week (or $25,188 per annum) is too high, in proportion to median and average earnings, to induce employers to employ larger numbers of unemployed and under-employed people, especially in periods of low economic activity. This negative impact on employment is made even worse by other factors, such as labour on-costs and the high cost of workers compensation and OHS compliance.
Many economists agree that a system in which minimum wage to median earnings ratios are close to 60% means that many of the unemployed are simply priced out of the labour market.  To avoid this effect, the minimum wage must be set at a level that does not deter job creation.

What is clear is that the level of the minimum wage mostly affects the disadvantaged in the labour market, who are most exposed to the factors affecting an employer’s decision to hire.  For an employer to consider hiring a low-skilled or inexperienced worker, their productivity has to match their overall labour cost, not just the cost of their wage.  When the cost of an unskilled, or low skilled worker increases, fewer of them will be employed. If the wage level exceeds the total cost of employing, then employers will quickly consider de-hiring, thus lowering the level of employment.  In this sense, the minimum wage can act as either:

• a factor increasing the speed at which employers reduce the demand for labour in a difficult economic situation, or
• a factor minimising the reduction in employment.

One of the problems in the past has been that the minimum wage has been seen as an income safety net, rather than as part of an income safety net. Such an approach has made it harder to meet the objective of improving the capacity of the unemployed and low paid to get and keep jobs. What is required is for the federal minimum wage to be focused on employment creation/retention, and only on minimum income when placed in the context of a range of government policies. This includes the interaction of the minimum wage with tax, welfare (tax credits), in-work government benefits and training support.

Costs of employment to a firm

There is limited knowledge about the process of job generation, particularly in those firms likely to employ minimum or low wage employees. However, the starting point is clearly the cost of the job to the firm, and it is worthwhile outlining the components of this cost, and showing how the components, in addition to the direct wage cost, can act as a brake on job generation.

The costs of employment include:

• recruitment, selection and staff administration
• wages and other benefits
• training
• supervision and monitoring
• leave and family friendly adjustments
• absenteeism
• workers compensation and payroll tax
• potentially, claims which may be made for workers compensation
• OHS liabilities, discrimination and termination.

In addition, the employer has also to contend with other business overheads including the cost of plant, equipment and materials, all of which will affect their capacity to employ.

The position of small business

A large proportion of low wage employees are located within small businesses. Compliance costs have a disproportionate impact on small business because, as a percentage of wages, compliance costs are higher for small business. Mean compliance costs, as a percentage of turnover of the smallest category of firms, have been calculated at more than six times that of the largest firms and more than twice that of the medium sized firms.

In reaching the decision to employ, small business operators have to take into account the total costs and risks of employing an additional person.  The overall impact of an ever-widening burden of financial and administrative obligations, including workers compensation and OHS obligations, has plainly raised the bar on the point at which employers will employ.  Clearly, market conditions will always be the prime determinant of employment.  However, regardless of prevailing demand conditions, business income now has to reach a far higher level before the decision to employ is made.  It is very clear that small employers regard taking on a new employee as a costly and high-risk activity, and will avoid doing so until there is no alternative.

New minimum wage determination principles

The AFPC must adopt a new framework for minimum wage determination. Its focus should be on minimising barriers to employment for those in low paying jobs. Because it needs by law to provide for “a safety net for the low paid”, the AFPC should focus on “aggregation”, that is the interaction of the minimum wage with tax and welfare arrangements for the low paid.  The use of the minimum wage as a safety net should be measured in concert with these other factors.
Wages and wage increases are dependent on business conditions, productivity, performance and employee attributes. They are, and should wherever possible be, set by individual or other agreements reached at the workplace. This process is entirely different to the social welfare and equity function that has been assigned to minimum award wages in the past. Consequently, the determination of the minimum wage in relationship to the safety net should be dependent on entirely different factors, primarily its interrelationship with tax and welfare measures. The new minimum wage setting process must avoid the outcome of the previous minimum award wage system, which produced almost automatic annual minimum wage increases. These in turn set a very high floor for increases in rates across all work classifications in the economy.

Australia’s past experience with both high minimum wages and high wage and employment regulation demonstrates the adverse effects caused by regulators artificially increasing real labour costs. Even after a decade of unprecedented economic growth and official unemployment figures falling to around 5 per cent, there are still:

• almost 600,000 Australians identified as unemployed
• over 500,000 people on a disability pension (compared to 300,000 a decade ago)
• around 25 per cent of people on part-time work who would prefer an increase in hours.

Despite economic success and steadily rising national wealth, there are still large numbers of low skilled Australians finding it hard to meet employer recruitment expectations. The fact that employers have not taken up the services of this group of over one million people in Australia can be attributed to many complex factors. However, of significance have to be:

• the uncertainties of demand
• technological change
• the general difficulties of employing labour
• a reluctance to employ if the costs and risks are too high.

Ideally the minimum wage should not form part of, or interfere with, market determined rates and should not create any flow-on effects further up the wage scales.  It should be structured so that higher paid workers do not have to bargain to retain their wage relativity with minimum wage workers. For many firms, hiring low skilled workers may be too costly if they are covered by the same collective agreement as higher skilled workers and receive across the board wage rises based on the productivity improvements of higher skilled workers. In these cases, the wage rises of lower skilled workers will exceed their productivity growth.

In addition to general wage inflation, the flow-on effects of an inappropriately set minimum wage would particularly affect small firms because:

• they are most likely to be affected by minimum wage changes
• they generally provide a narrow range of wages

So the minimum wage should be decoupled from award and bargained rates and become primarily an instrument which, in combination with other measures such as tax, welfare and training:

• addresses equity objectives for the low paid
• provides employment as the best way out of welfare and poverty.

It should be kept in mind that significant upward income mobility exists in Australia for low paid workers. More than six in ten workers have moved out of the lowest income bracket over the period 2001 to 2003. Overseas evidence also suggests that, for many workers, payment at or below the minimum wage is of relatively short duration, with many moving into higher paid jobs. So it is important to have an effective mechanism to provide affordable jobs at this level. However, the minimum wage alone will not achieve this outcome.

Even the Organisation for Economic Cooperation and Development (OECD) agrees the use of minimum wages alone is not an effective anti-poverty measure. It advocates the use of minimum wages as a complement to other strategies in order to make work a more attractive proposition than welfare. This approach has the advantage of focusing attention on the factors underlying unemployment and low income, being predominantly a lack of skills or job capability (especially in a well-performing economy). The Employers First™ submission argues that the minimum wage should be but one part of a tax/welfare and skills development package that focuses on improving the skill levels of the low paid as the main solution to moving individuals out of poverty.

Importantly, to make the system work effectively, attention has to be paid to certain other aspects of welfare benefits, in particular the leakage from workers compensation into disability pensions. Although the welfare system must provide for those who are incapable of working, it must also provide the maximum incentives to be employed.
In response to the argument that employers will always seek lower wages, the fact is that there will not be jobs for the low paid or unskilled unless the safety net is set low enough. On the other hand, there must be clear financial gains from working as compared to receiving welfare benefits. So whilst a wage safety net is the preserve of the AFPC, it should have regard to the measures taken by the other arms of government that aim to expand the capacity of the low paid to be employed.

It is recommended that, allowing for a reasonable time for relevant research to be carried out and structures to be developed, the AFPC should establish the minimum wage as part of a social safety net which comprises an entry level wage for those workers lacking the skills or experience to work at award rates. The minimum wage would be integrated with compensatory tax and welfare measures. Employers should be required to pay the minimum wage only to those individuals who are in receipt of additional tax and welfare benefits, which should include affordable skills training and other measures to enhance their employability.

A targeted approach

There is a need also for the AFPC to research and target those sectors of the economy where the minimum wage will have most impact. Research here and overseas indicates widespread consistency in the characteristics of low paid workers, their occupations and the industries in which they predominate. Broadly, they are prevalent in:

• agriculture and related services
• the retail industry
• accommodation, catering and hospitality
• community services
• service industry jobs.

These sectors will be impacted on more than others because they employ relatively large numbers of minimum wage employees. There is also a higher proportion of low pay employees in small/medium enterprises, an important but highly vulnerable source of employment.

But equally important is an understanding of the features of employers in these sectors. The AFPC should research and take into account factors such as:

• the employers’ labour cost structure
• the wage levels at which employers will be prepared to take on minimum wage recipients
• the non-wage factors that may be operating to dissuade  employers  from taking on the low paid (eg training, retention, supervision intensity, propensity for OHS risk and workers compensation claims)
• the effects of adjustments made in response to increased pay rates, reduced hours, increased prices, substitution of staff, reduced services and production and reduced profits.

Conclusion

 The reality is that businesses in the commercial sector create jobs in order to make a profit – not for social justice, equity, better “work-life” balance or developing new ways to work. If making a profit is made too difficult or too risky, or the price of job for skill level and job content is too high, jobs will not be created.

Additionally, there will always be a low wage component of the labour market, with all the problems inherent in low wage labour markets: poverty traps, churning, misdirected resources etc. These cannot be remedied by seeking the  “right” minimum wage level.  It is clear that the minimum wage alone cannot meet all expectations – to coax the unemployed into the labour market, provide a desired standard of living and at the same time be affordable for employers. In its submission to the AFPC, Employers First™ has argued for a reformulation of the minimum wage (whilst acknowledging that this must be a process over time) and its complete integration with tax and welfare measures.

 

Contact the Employers Hotline™ on (02) 9264 2000 if you need to know more.