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Denying low-paid workers their due is economic nonsense and an insult

By David Hetherington - posted Friday, 23 May 2003

The wage increase of $15-17 per week granted to Australia's 1.7 million low-paid workers by the Australian Industrial Relations Commission is a bare minimum in terms of acceptable outcomes. Against a backdrop of strong economic growth, rising corporate profits and increases in executive salaries well beyond inflation, it seems heartless to begrudge a small pay increase to our most vulnerable employee group. Furthermore, doing so fails to acknowledge this group's contribution to these rosy economic outcomes. The effect of this decision will not be to narrow the gap between rich and poor but to slow its growth and, as such, it should be seen as a (small) step in the right direction. But several employer groups disagree.

The Australian Chamber of Commerce and Industry (ACCI) in particular has argued that any increase in the award wage is unjustified and will do significant harm to the economy. It denounces award increases as "too high, too frequent and too predictable", and claims that the decision will cost jobs, reduce growth and undermine the viability of some businesses.

The ACCI says a 3.9 per cent increase is excessive because it is higher than inflation (currently three per cent per annum). However, its selective use of maths is misleading. It divides the highest possible numerator by the lowest possible denominator - a trick any 12-year-old could spot. In fact, the increase is higher than inflation only for the very lowest-paid workers (less than $570 a week). For workers on $700 a week, the increase is 2.4 per cent and for those on $900 a week, it's 1.7 per cent. This is less than inflation; that is, their real wage is decreasing.


Furthermore, the ACCI does not take into account improvements in labour productivity which have been a major driver of economic growth. Labour productivity, measured by Gross Domestic Product (GDP) per hour worked, grew by 3.8 per cent last year, continuing a record of strong growth. The Economist has hailed Australia's progress in this area, noting that average productivity growth over the previous decade has been "well ahead of America's much-acclaimed annual increase of 2.2 per cent". It could be argued that productivity improvements merely reflect process changes or systems investment, but the benefits of such initiatives are only extracted through the efforts of shopfloor workers. Productivity has improved in the specific sectors covered by the award (retail, hospitality, and childcare among others) and it is only fair that workers in these sectors are recognised for their contribution to GDP growth. A real wage increase for all award workers would be fair reward, but the Commission clearly disagrees.

The contention that an increase in award wages will cost jobs is misleading. It is certainly possible that some employers choose to cut jobs as a direct result of increased award wages, but historical evidence suggests that these are the exception rather than the rule. In the 12 months to February 2003, while last year's $18 award wage increase was being implemented, employment actually grew by 3.2 per cent. The UK's Low Pay Commission agrees with this view stating that, "[f]ormal tests of the impact of the minimum wage on employment of those directly affected suggest minimal negative effects".

Similarly, the wage increase will not reduce growth. It may mean that wage flows in the economy are slightly greater, and dividend flows slightly less, but the only difference in GDP terms is that incremental wages will be counted as consumer spending or asset investment, rather than as re-invested dividends. Arguments that reasonable wage rises drive consumer price inflation have been undermined by the low inflation rates of the last decade, a period in which the Commission regularly increased award wages. The wage increase may reduce the short-term competitiveness of some exporters, but in the medium term, it is likely either to drive productivity gains or to shift jobs to other sectors of the economy where labour is more competitively employed.

The assertion that an annual award-wage increase is too frequent ignores market reality. GDP, inflation rates and productivity rates are all annual measures and it is common practice for private-sector workers outside the award framework to receive annual performance and salary reviews. Why should award workers not be treated similarly?

Finally, the ACCI's description of the decision as predictable is based on the claim that the additional $1.5 billion wage cost would be better spent assisting the 600,000 Australians currently unemployed. Clearly, the unemployed do need greater assistance and government should continue to address the unemployment problem with urgency. But it is only too easy to imagine the ACCI's reaction if a dedicated tax increase were proposed to fight unemployment. It would certainly be predictable.

Economic arguments aside, common sense indicates that this wage rise is far from excessive. The weekly after-tax increase for an employee on the minimum wage is $12, which might buy a day's groceries. It would not buy a school textbook, a cinema ticket or a trip to the football. Workers under the award struggle to support families and $12 a week does not go far, so let's not kid ourselves that this decision is some kind of labour movement extortion.

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About the Author

David Hetherington is the executive director of Per Capita, a progressive think tank.

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UK Low Pay Commission
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