2006 review of minimum wages · recent minimum wage cases and changes to the social safety ......

2006

REVIEW OF MINIMUM

WAGES

Submission to the

Australian Fair Pay Commission

July 2006

2006 Review of Minimum Wages Ai Group and EEASA 2

Table of Contents

Page Chapter 1 – Introduction

5

Chapter 2 – Ai Group’s Position

8

Chapter 3 – Approach which should be taken by AFPC

10

Chapter 4 – Economic Conditions and Outlook

13

The Australian Economy 13 The Manufacturing Sector 18 Construction and Services Sectors

24

Chapter 5 – Minimum Wages and the Social Safety Net

27

Recent Minimum Wage Cases and Changes to the Social Safety Net

27

The Importance of Changes in the Social Safety Net 29 Changes to the Social Safety Net in the Past Year 34 Illustration of Impacts of 2006 Tax and Income Support

Changes on Families with Children

40

Chapter 6 – Interactions Between Minimum Wages, Income Taxation, Income Support and Non-wage Costs

43

Effective Marginal Tax Rates 44 Benefit to Cost Ratios

45

Chapter 7 – The Impacts of Increases in Minimum Wages on the Capacity of the Unemployed and the Low Paid to Obtain and Remain in Employment

48

Joblessness can be More than it Seems 49 Employment Opportunities and Minimum Wages 51 Minimum Wages and Poor Employment Outcomes: The Burden

of Proof

54


Chapter 8 – International Competitiveness, Minimum Wages and Trade Exposed Sectors

56

Wages Growth in Established Economies’ Manufacturing Sectors

56

Implications for Australian Minimum Wages

58

Chapter 9 – Impacts of Minimum Wage Increases – Ai Group Survey

60

Sample and Response Rate 60 Key Findings

61

Chapter 10 – Disproportionate Negative Impacts of Minimum Wage Increases on Small Businesses

64

Chapter 11 – Impacts of Minimum Wage Increases on Bargaining

68

Chapter 12 – Rationalisation of Australian Pay and Classification Scales

70

The AFPCSs which are now in Existence need to be Published 73 The Rationalisation of Awards by the AIRC and the

Rationalisation of Wages and Classifications by the AFPC should not be Treated as Unrelated Exercises

74

An Appropriate Starting Point for Developing a Structure for Rationalisation

76

The Wages Guarantee 76 Removal of Coverage Rules Within APCS which are Described

by Reference to State and Territory Boundaries 79

What should the AFPC do about Rationalisation during its First Minimum Wages Review?

79

Chapter 13 – Minimum Wages for Adults

80

The Period of Time Which has Elapsed Since the AIRC’s 2005 Safety Net Review Decision

82

The Application of the Proposed Minimum Wage Increase to all Classifications

84

The Relevance, if any, of Recent State Wage Case Decisions to the AFPC’s Deliberations

85


Chapter 14 – Minimum Wages for Juniors

86

Chapter 15 – Minimum Wages for Employees to Whom Training Arrangements Apply

89

Minimum Wage Rates for Employees Undertaking Traditional Apprenticeships

90

Chapter 16 – Minimum Wages for Employees with a Disability

93

Chapter 17 – Casual Loadings

97

Chapter 18 – Research Priorities

100

Identification and Characteristics of the Low Paid 100 Who Receives Minimum Wage Increases? 101 Impacts of Minimum Wage Levels on Employment

Opportunities 101

Interactions between Wages, Wage Costs and Effective Marginal Tax Rates

102

The Effects of Decisions of the Australian Fair Pay Commission

103

Annexure A – Implications of minimum wage increases on Australian Industry survey report

104

Annexure B – Ai Group Survey Questionnaire

121


2006 REVIEW OF MINIMUM WAGES

Submission

1. Introduction

1. During its first review of minimum wages, there will no doubt be a great deal of

public scrutiny of the Australian Fair Pay Commission’s (AFPC’s) processes

and the decision which it ultimately makes. The AFPC is taking over a function

which has rested with the AIRC for a very long period of time. As a new

tribunal it is essential that the AFPC build confidence within the community.

2. The Commission needs to adopt a cautious approach in increasing minimum

wages. While the economy is continuing to grow at a moderate pace, capacity

constraints, skill shortages and rapidly rising oil prices create risks for the

economy. In addition, the combination of a poor export performance and a

rapid growth in imports has seen the trade deficit grow appreciably.

3. In considering the capacity of the economy to absorb increases in minimum

wages, the AFPC needs to be mindful of Australia’s current poor productivity

record which could impact on the capacity for employers to absorb such

increases.

4. The AFPC also needs to be mindful of the growing inflationary pressures

within the economy. If the increase awarded is too high, the resultant

inflationary pressures could lead to interest rate rises and harm the very

people that the minimum wage review process is intended to benefit – that is,

the low paid.

5. Further, Australia, like other established industrial countries, is facing an

intensification of global competition due to the rapid development of a number

of “emerging” economies. In this context, domestic wages outcomes have


become particularly important both in terms of maintaining competitiveness

and maintaining the momentum of employment growth.

6. One of the factors to which the AFPC is to have regard in setting minimum

wages is the capacity of the unemployed and the low paid to obtain and

remain in employment.

7. The explicit attention to be given to the interests of the unemployed is an

opportunity to broaden the range of considerations that are brought to bear on

adjustments to Australian minimum wages. In view of the logic of the

association between poor employment outcomes and high minimum wage

levels, the burden of ‘proof’ should rest with those who claim that there is no

association rather than those that claim that an association is likely.

8. On average, small businesses are much more likely to be impacted by

minimum wage increases than larger businesses. When making its minimum

wage decision it is vital that the AFPC not lose sight of the negative impacts

that a large minimum wage increase will have on small businesses.

9. It is also important that the level of increase in minimum wages determined by

the AFPC not reduce the scope for bargaining over wages at the workplace

level. This would conflict with the objects of the Act.

10. Important changes have been made to the social safety net in the past year,

including income tax cuts and increases in income support payments. These

impact on the disposable incomes of all household types and should be

considered when regard is had to the role that minimum wages play in the

overall safety net.

11. Minimum wage increases provide a disproportionately small benefit to low paid

workers whilst having a disproportionately harsh impact upon employers. On

average, employers face costs of around double the amount received by low-

paid workers from a minimum wage increase. In this context, given all of the


risks, the AFPC should adopt a cautious approach to increasing minimum

wages and adjust minimum wages by the amount proposed by Ai Group.

12. A necessary part of the process of building community confidence in the AFPC

will be to ensure that its decisions are made in a consultative manner and after

rigorous analysis. This includes decisions about the rationalisation of

Australian Pay and Classification Scales (APCSs). Ai Group submits that the

AFPC should not rationalise APCSs as part of its first minimum wages review,

given the potential for negative economic effects and potential unfairness to

arise for employers and/or employees. A cautious and consultative approach

needs to be taken.

13. In determining the level of a fair and reasonable minimum wage increase

increase, Ai Group submits that a $14.00 per week increase would assist the

low paid whilst not damaging the Australian economy. This level of increase

takes into account the period of time which has elapsed since the AIRC’s 2005

Safety Net Review Decision.


2. Ai Group’s Position

14. Ai Group proposes that minimum wages be increased by $14.00 per week

across all classifications. This would increase the Federal Minimum Wage

(FMW) to $13.12 per hour.

15. This level of wage increase takes into account:

• The non-adversarial nature of the AFPC’s deliberations and the importance

of avoiding “ambit” positions;

• The objects of the Act and the AFPC’s wage-setting parameters;

• Current economic conditions and the outlook for the Australian economy;

• The need to avoid inflationary pressures, which could lead to increases in

interest rates;

• The capacity for the unemployed and the low paid to obtain and remain in

employment;

• Employment and competitiveness across the economy;

• The need to provide a safety net for the low paid;

• The need to provide minimum wages for junior employees, employees to

whom training arrangements apply and employees with disabilities, which

ensure they are not disadvantaged in the labour market;

• The importance of taking into account the interactions between different

elements of the social safety net, including minimum wages, income

taxation, income support and non-wage costs;


• The impact on small businesses;

• The need for minimum wage increases to be positioned at a level below

average workplace agreement wage outcomes in order to avoid

diminishing the primacy which is given to workplace agreement-making

under the Act; and

• The period of time which has elapsed since the AIRC’s 2005 Safety Net

Review Decision.

16. The $14.00 per week increase proposed by Ai Group represents:

• A 2.9 per cent increase in the FMW; and

• A 2.4 per cent increase in the base trade rate (C10).

17. Ai Group proposes that, on this occasion, the AFPC apply the proposed

$14.00 wage increase to all classifications. However, the appropriateness of

continuing to adopt such a practice should be considered in detail in

subsequent reviews of minimum wages.


3. Approach Which Should be Taken by the

AFPC

18. During its first review of minimum wages, there will no doubt be a great deal of

public scrutity of the AFPC’s processes and the decision which it ultimately

makes. The AFPC is taking over a function which has rested with the AIRC for

a very long period of time. As a new tribunal it is essential that the AFPC build

confidence within the community.

19. Section 23 of the Workplace Relations Act (“the Act”) sets out the AFPC’s

wage-setting parameters. The Commission’s objective, in performing its wage-

setting function, is to promote the economic prosperity of the people of

Australia having regard to:

• The capacity for the unemployed and low paid to obtain and remain in

employment;

• Employment and competitiveness across the economy;

• Providing a safety net for the low paid;

• Providing minimum wages for junior employees, employees to whom

training arrangements apply and employees with disabilities that ensure

those employees are competitive in the labour market.

20. The AFPC’s wage-setting parameters place a greater emphasis on ensuring

that the unemployed and the low paid have the capacity to obtain and retain

employment, than the objects which guided the AIRC in Safety Net Review

Cases.

21. The new wage-setting parameters are intended to promote fairness. Fairness

has many different aspects. Minimum wages and conditions need to be fair. At

the same time, fairness requires consideration of those employees who risk

losing their jobs if companies fail to survive in a fiercely competitive global


environment. Fairness also requires that the needs of the unemployed be

taken into account.

22. Australia faces many challenges and the AFPC has a vital role to play in

ensuring that minimum wages are adjusted in a manner which assists the

nation meet those challenges.

23. In addition to the challenges presented by intense global competition and

Australia’s sub-optimal productivity performance, demographic factors will

present many challenges over the years ahead.

24. Australia’s ageing population and inadequate fertility rate create an imperative

to improve workforce participation. The AFPC has an important role to play in

achieving improved participation.

25. The AFPC’s decisions will have positive effects on participation if the

interactions between wages, income taxation, income support and non-wage

costs are recognised and taken into account. In recent Safety Net Review

Decisions, the AIRC made statements about the importance of such

interactions but it was not evident that such interactions had a significant

impact upon its decisions. The AFPC has the opportunity to adopt a more

sophisticated approach in this area.

26. The AFPC has significant funding for research and this provides an important

opportunity to develop a better understanding of the impacts of minimum wage

increases and an understanding of a wide range of associated issues.

27. If optimal economic and social outcomes are to be achieved from minimum

wage decisions, over time it will be important for the AFPC to ensure that

research is carried out to assess the effects of its decisions, including:

• Effects on the economy, including any inflationary, employment or other

effects;


• Effects on special groups of employees including women, employees with

a disability, apprentices, trainees, young persons and mature-aged

employees; and

• Effects on the workforce participation rate.

28. A necessary part of the process of building community confidence in the AFPC

will be to ensure that its decisions are made in a consultative manner and after

rigorous analysis. This includes decisions about the rationalization of

Australian Pay and Classification Scales (APCSs).

29. Ai Group submits that the AFPC should not rationalise APCSs as part of its

first minimum wages review, given the potential for negative economic effects

and potential unfairness to arise for employers and/or employees. A cautious

and consultative approach needs to be taken.

30. If the AFPC determines that minimum wages should be increased in 2006,

then the level of increase which it determines as appropriate should be applied

to preserved and new APCSs.


4. Economic Conditions and Outlook The Australian Economy 31. Ai Group, in putting its views to the AFPC has taken into account the current

and expected growth in the Australian economy.

32. As Chart 4.1 highlights, the economy continues to grow at a moderate pace

(3.1% in seasonally adjusted terms) over the year to March quarter 2006, with

strong business investment, moderate consumption demand, and to a lesser

extent, public demand contributing to growth. Average growth since 2002

(running at 3.0%) however has under-performed the experience between 1996

and 2002 (averaging 3.9%).

33. As the Reserve Bank of Australia noted in its recent (May 2006) Statement on

Monetary Policy, the strength of the world economy over recent years “has

been accompanied by sustained upward pressure on a range of international

commodity prices” and “as a major resources exporter, Australia is one of the

countries that most benefits from these developments”1.

34. Over the past three years, Australia's terms of trade have increased by more

than 30 per cent, and this has had a significant expansionary effect on

domestic incomes and spending.

35. While consumers have benefited from higher real incomes, the outcomes

across industy sectors have been mixed. In particular, it has contributed to

output in the resources sector rising, while output in the manufacturing sector

has fallen. As the Secretary of the Australian Treasury recently acknowledged,

the “loss of manufacturing jobs is, no doubt, precisely what theory predicts

would be the consequence of an increase in the terms-of-trade”2.

1 Reserve Bank of Australia, Introduction, Statement on Monetary Policy, May 2006 2 Ken Henry, “The Fiscal and Economic Outlook”, Address to the Australian Business Economist, 16 May 2006


Chart 4.1 - Annual and quarterly change in GDP growth

36. Household spending and dwelling investment played a key role in driving

growth during the later part of the 1990s. However, over the last few years,

the momentum has shifted more towards business investment (Chart 4.2).

Business investment has increased at an average annual rate of 14% since

the middle of 2002. Investment in the resources sector has been the fastest

growing component, but the growth has been broadly based across industries.

Chart 4.2 - Composition of private final demand


37. The main down-side to Australia’s sound economic performance has been our

poor export performance given the favourable international conditions. While

export earnings have increased substantially, this has been mainly due to

higher prices rather than growth in volumes. The consequence of this poor

export performance, and a rapid growth in imports, has seen the trade deficit

grow appreciably, and this has acted to detract from overall economic growth.

38. Australia now suffers from having a sizeable deficit in the trade sector and

considerable personal debt in the household sector. But unlike other

developed nations, it is one of the few nations that maintain a healthy fiscal

surplus.

39. The main risks to the maintenance of Australia’s economic growth record

appear to be from three sources – capacity constraints (particularly in the

resources sector); labour and skills shortages in a tight labour market, where

unemployment has fallen to a record 30 year low; and from rapidly rising

global oil prices, heightened by the geo-political conflict in the Middle East.

40. Overall, Ai Group concurs with the Federal Government’s and Reserve Bank’s

assessments of the year ahead. As the RBA in its most recent Statement on

Monetary Policy concluded:

“Overall, the Bank's assessment is that demand and output growth over the next year

or two are likely to converge to a pace broadly in line with the growth of the economy's

productive capacity. This outlook implies that the economy will continue operating at a

relatively high level of capacity utilisation, although strong business investment will

undoubtedly contribute to capacity expansion over time.”

41. Table 4.1 outlines the main forecasts for the Australian economy for 2006/7 as

presented by the Federal Government in its budget papers. The Australian

economy is expected to strengthen in 2006-07, with the world economy

continuing to provide significant impetus to Australia's economic growth and

business investment, particularly in the resources sector. Gross national

expenditure growth is forecast to remain moderate, with growth in business


investment offsetting slower growth in household consumption and a modest

decline in dwelling investment. After a period of strength, employment growth

is forecast to ease in 2006-07, and while the Treasury has forecast inflation to

moderate, more recent data points to a significantly higher inflation outcome.

Table 4.1 - Domestic economy forecasts(a)

a. Percentage change on preceding year unless otherwise indicated. b. Calculated using original data. c. Chain volume measures. d. Excluding transfers of second-hand assets between the public and private sectors. e. Percentage point contribution to growth in GDP. f. For presentational purposes, inventories held by privatised marketing authorities are included with the inventories of the

farm sector and public marketing authorities. g. The estimates in the final column are the forecast rates in the June quarter 2007.

Source: Australian Bureau of Statistics (ABS) cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury.


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Manufacturing Economy

42. In considering the capacity of the economy to absorb further adjustments to

minimum wages, the AFPC needs to be mindful of Australia’s current poor

productivity record which could impact on the capacity of employers to absorb

such increases. Labour productivity, measured by GDP per hour per worker,

fell substantially in 2004/5 both in the broad economy and in manufacturing

after a number of years of moderate to strong performance (Chart 4.3). While

the outcome partly reflects the cyclical slowdown in growth over the period, it

was well below the long-term average growth rate of 2.2% a year (between

1964-65 and 2004-053). More recent data from the March 2006 quarter

National Accounts points to an improvement, but it is difficult to determine

whether this is caused by cyclical or structural factors.

Chart 4.3 - Labour productivity in manufacturing and the economy

Source: Australian Bureau of Statistics

43. The other major factor that the AFPC will need to take into account is the

implications for inflation, and any interest rate adjustment in response by the

Reserve Bank of Australia. Ai Group has identified that a consequence of last

year’s minimum wage adjustment was a flow-on effect onto selling prices (for

at least one in three surveyed companies). Full details of the Ai Group survey

results are contained in Chapter 9 of this submission.

3 Productivity Commission website, www.pc.gov.au/commission/work/productivity/performance/markethighlights.html


44. Both the official Consumer Price and Producer Price Indexes highlight the

growing inflationary pressures within the economy. Inflation is currently

running at 4% based on the June quarter CPI. The quarterly increase of

1.6%, reflected the effects of higher fuel, food and health costs. Even using

the RBA’s preferred “trimmed mean” measure of inflation, the June quarter

outcome (0.9%) was the highest since June 20014.

45. Upstream pressures also continue to build. Prices at the final stage of

production rose by 1.6% in the June quarter 2006, the largest quarterly

increase since the June quarter 2000 (and more than double the 0.7%

increase in the March quarter). The increase over year-earlier levels

subsequently jumped to 4.5% (from 3.7% the previous quarter), also the

largest increase since the December quarter 2000.

46. Market expectations are that the release of these inflation measures will add

weight to the RBA making a decision in August to lift the official cash rate.

47. There is a risk that an excessive increase in minimum wages could lead to

these increases being passed on to final selling prices, contributing to higher

inflation and necessitating the RBA to adjust the official cash rate. If this was

to occur, the benefits of a minimum wage adjustment would be lost to the low

paid through higher mortgage payments.

The Manufacturing Sector

48. The manufacturing sector is going through a period of significant restructuring.

49. Despite other parts of the economy experiencing moderate growth conditions,

manufacturing is experiencing the effects of a cyclical slowdown in activity, as

well as significant restructuring arising from global competition.

4 Australian Bureau of Statistics, Consumer Price Index, no 6401; Producer Price Indexes, no 6427; and RBA, Measures of Consumer Price inflation


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50. While the economy grew by 3.1%, seasonally adjusted (year ending March

2006 quarter), the manufacturing sector declined by 0.9%. It was the third

weakest sector in the economy measured in the National Accounts.

Cyclical slowdown

51. The release of the latest National Accounts for the March quarter 2006

highlights the weak conditions currently being experienced by the

manufacturing sector (Chart 4.4).

Chart 4.4 - Quarterly change in gross value added (sa)

Source: Australian Bureau of Statistics, Table 16, 5206

52. The Australian Industry Group - PricewaterhouseCoopers’ Australian

Performance of Manufacturing Index® (PMI), which provides a monthly

measure of business activity, shows that this weakness has continued into the

June quarter 2006 (Chart 4.5). June saw an improvement in manufacturing

activity across Australia (after a poor April and May), with the Australian PMI

rising to 54.5 points. Nevertheless, conditions remain well below the peak of

late 2004 and early 2005.


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Chart 5 - Australian Performance of Manufacturing Index® Source:

Australian PMI, March 2006

53. In an environment where manufacturers are experiencing difficult business

conditions, there is little scope to accommodate wage adjustments.

54. As Chart 4.6 shows, the Ai Group forecast for Australian manufacturing in

2006 (derived from a survey of 800 manufacturers) is that overall sales will

increase by the order of 3.7%, largely made up of movements in selling prices,

leading to the prospect of a decline in the volume of sales (that is, in real

terms) for the second consecutive year.

Chart 4.6 - Annual change in manufacturing sales, nominal and real terms,

Australia, 1990/91 - 2006

Source: Ai Group, Business Prospects for Australian Manufacturing in 2006, Another testing year ahead for manufacturing, February 2006, p.1

Annual change in sales

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Restructuring

55. This situation is compounded by the substantial restructuring being

experienced by industry. This restructuring process is seeing many

companies downsizing the number of employees, becoming more capital

intensive, moving production offshore, and looking to use more imported

materials in domestic production.

56. This restructuring is an outcome of globalisation, a strong Australian currency,

a faster pace of import competition, and the emergence of China.

57. In terms of the currency, the World Economic Forum (WEF) in its most recent

release of the Global Competitiveness Report stated that despite Australia’s

solid performance, rising four places to tenth out of 117 countries, “a possible

source of concern in this otherwise bright outlook is the strength of the

currency which suggests the need to continue to implement structural reforms

to improve productivity”5.

58. Compared to the average level of the Australian dollar since 1990, the WEF

noted that in 2005 the Australian dollar was 14.7% higher than its average

level since 1990. It ranked Australia’s currency as 113 out of 117 in terms of

being a competitive currency, a significant drag on Australia’s performance.

59. The implications of a high Australian dollar for manufactured exports and

growth was highlighted in an Ai Group report, Aussie Dollar Challenges

Manufacturing Competitiveness (2004)6. The study found the US$0.70 mark

was a critical point for the manufacturing sector as a whole. At this level our

most sophisticated manufactured exports become uncompetitive on world

markets, and for basic manufacturers, the exchange rate threshold is even

lower.

5 Australian media release to World Economic Forum, Global Competitiveness Report, 28 September 2005 6 Australian Industry Group, Aussie Dollar Challenges Manufacturing Competitiveness, 2004


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60. The study found that for each one cent appreciation of the Australian dollar

against the US dollar, export earnings for manufacturing overall were reduced

by around 0.3 per cent. This amounts to an annual loss of $210 million for

every one cent appreciation.

61. The higher Australian dollar has been doubly felt by manufacturing through its

impact on import penetration. Australian manufacturing in 2005 faced much

stronger global competition than it did almost a decade ago. Chart 4.7 shows

how imports of manufactured goods have grown, equivalent to about 46% of

manufacturing sales in early 2006 compared with 27% a decade ago.

Chart 4.7 - Imports as a percentage of manufacturing sales Sources: Derived from ABS

publications, Business Indicators, Australia, 5676.0 and International Merchandise Imports, 5439.0

62. The rapid increase in import penetration has been driven by falling prices.

Since the start of 2002, prices of imported final products have fallen in 11 of

the 14 quarters (to June quarter 2005). For manufacturing, over the same

period, the price of manufactured goods (SITC 6) has declined by 9.8%;

chemical products (SITC 5) by 11.5%; machinery and transport equipment

(SITC 7) by 27.5% and miscellaneous manufactures (SITC 8) by 25%.


63. Finally, the emergence of China is transforming the nature of manufacturing in

Australia. The transformation underway in the Chinese economy, while

providing Australian manufacturers with opportunities, has also presented

major challenges.

64. China’s manufacturing sector has been growing rapidly over the last decade,

on average around 12% a year7 since 1990 compared with around 2% for

Australia (measured in annual value terms). China’s manufacturing sector

constitutes about 39% of its economy compared to around 13% in Australia.

65. In August 2004, Ai Group released a report examining the implications of

China on Australian manufacturing, titled Australian Manufacturing:

Opportunities and Challenges8. The study found over 68% of firms surveyed

had been affected by China in either customer or supplier markets. While

some had benefited from China’s emergence as an export market and as a

source of low cost inputs, China was having an overall negative net impact on

activity and profits through its competitiveness in the domestic and export

markets of Australian firms. It was estimated that the net financial loss to

manufacturers was in the order of $560 million in 2004.

66. Ai Group will be releasing a new updated report on Australian Manufacturing

and China in the next few weeks. This report shows that the financial impact

of China on Australian manufacturing has deepened appreciably over the last

two years9.

67. Firms are implementing a range of strategies in response to China and other

global pressures. The recently released Manufacturing Futures, outlines

these strategies, including developing new products and services; using global

supply chains; moving production offshore; and upskilling. As well, companies

7 World Bank. Note: data relates to the period 1990 to 1997 8 Australian Industry Group, Australian Manufacturing and China: Opportunities and Challenges, August 2004 9 Australian Industry Group, Australian Manufacturing and China: Deepening Engagement, forthcoming August 2006


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are looking to be lean in their operations and more capital intensive10.

68. In an environment where companies are rapidly making adjustments to

respond to heightened global competition, considerable care is needed in

determining wage outcomes. Excessive wage adjustments could force

employers to make deeper adjustments, resulting in greater cuts to domestic

activity and jobs.

69. Ai Group has forecast that manufacturing employment will fall by 3.9% in 2006

(Chart 4.8). This forecast is premised on further tight business conditions in

2006.

Chart 4.8 - Annual change in manufacturing employment, 1990/91 – 2006f

Source: Ai Group, Business

Prospects for Australian Manufacturing in 2006, Another testing year ahead for manufacturing, February 2006, p.1 Construction and Services Sectors

70. The weak conditions in the manufacturing sector are in contrast to the more

moderate conditions prevailing in the construction sector and the services

sector. Chart 4.9 shows the seasonally adjusted, annual movement in gross

product for each sector.

10 Australian Industry Group, Manufacturing Futures: Achieving Global Fitness, April 2006


-20

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Construction Services (private sector)

Chart 4.9 - Annual change in construction and services gross product (sa) 1990/91 - 2006

71. In the construction sector, annual growth is running at 7.5% in seasonally

adjusted terms. The sector is made up of four major activities – housing,

apartments, commercial and engineering. Recent unpublished (monthly) data

collected by Ai Group and the HIA points to the housing market starting to gain

some modest momentum in recent months (after a sustained period of

easing), while apartment activity remains depressed. Commercial

construction activity continues also at a moderate pace, with the major

strength in activity being in engineering activity. Nevertheless, as the table

below highlights, the strong conditions currently prevailing in commercial and

engineering construction are likely to lead to weaker activity in 2006 and 2007.

Table 4.2

Source: Australian Industry Group-Australian Constructors Association, Construction Outlook, May

2006


45

50

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72. In the services sector, growth has moderated. In the March quarter 2006,

activity in (market sector) services grew by 3.4% on an annualised basis.

While this was an improvement on the previous quarter, growth is appreciably

lower than two years ago, when services were growing by over 4.5%.

73. More recent data collected by the Ai Group and the Commonwealth Bank, as

part of the Australian Performance of Services Index® (Chart 4.9), suggest

that growth remains modest. While there was some improvement in June,

higher fuel and interest rates are continuing to dampen demand, particularly in

consumer and leisure related services11. As well, the property market

continues in most states to act as a sobering influence on household

spending, as wealth accumulation from higher property prices is no longer

acting as a significant influence on consumer behaviour.

Chart 4.9 - Australian Performance of Services Index®

74. Overall, Ai Group’s analysis of economic conditions highlights that while

growth conditions remain moderate, there are significant differences across

sectors. In particular, in manufacturing and parts of the services sector, where

employees on minimum wages predominate, business activity remains well

down on previous years.

11 Ai Group-Commonwealth Bank, Australian Performance of Services Industries, June 2006


5. Minimum Wages and the Social Safety Net

75. One of the factors to which the AFPC is to have regard in performing its wage-

setting function is the provision of a safety net for the low paid.

76. In Australia minimum wages overlap with a broader social safety net that

affects the low paid as well as other members of the community. Australia’s

broader social safety net includes the provision by governments of a range of

goods and services. These include the supply of health, education and

housing services. The social safety net also includes a means-tested income

support system under which cash payments are made available to a wide

variety of individuals and households and a progressive income tax system

that interacts with changes in incomes to impact on disposable incomes.

77. These areas of government involvement in economic outcomes are clearly

relevant to the consideration of the role of minimum wages in providing a

safety net for the low paid.

Recent Minimum Wage Cases and Changes to the Social

Safety Net

78. Some, albeit very limited, guidance about the interactions between the

broader social safety net and minimum wage adjustments, can be gleaned

from recent AIRC deliberations.

79. In view of the interactions between minimum wages and the broader social

safety net, over a number of years Ai Group urged the AIRC to take into

account changes to the broader social safety net when it determined

adjustments to minimum wages.


80. The AIRC did indicate some interest in this area in its 2002, 2003 and 2004

Safety Net Review Decisions. Although it not take into account any changes in

the social safety net, nevertheless it intimated that it may take into account

what it perceived to be “significant” adjustments to the broader social safety

net when adjusting minimum wages.

81. In its 2003 Decision, the Full Bench said:

“[228] We also note AiG’s submission that the Commission should accord

greater recognition of the interrelationships between wages and the broader

social safety net. We reiterate what we said in the May 2002 decision about

this issue:

‘[153] For our part, we accept that significant adjustments in the social

safety net may be relevant to the determination of the level of the award

safety net. We note that there is no proposal on this occasion that we

should adjust the amount that we would otherwise award because of a

particular change in the social safety net.’

[229] We note that on this occasion there are again no specific proposals to

make significant adjustments to the social safety net”.

82. In its 2004 Safety Net Review Decision, the Commission agreed with Ai

Group’s argument that:

“Changes in income tax and income support arrangements that improve

disposable incomes of the low paid are clearly relevant to the questions of

whether, and by how much, minimum wages should be increased to address

the needs of the low paid.12

12 2004 Safety Net Review Decision, Para 301.


83. In its 2005 Safety Net Review Decision, faced with very large increases in a

variety of income support measures and adjustments to income taxation, the

AIRC acknowledged that “some of the changes to the income tax and tax

transfer system … have had a beneficial impact on the disposable income of

some low-paid employees.”13

84. The AIRC stated that “[w]e have taken these changes into account in deciding

the amount of the safety net adjustment”, but it did not indicate which changes

it regarded as significant or which changes it had taken into account.

Moreover, it did not indicate the manner in which changes to income support

payments and income taxation were taken into account. It simply stated that

“we have not taken a mechanistic approach to this issue. Rather, the social

safety net changes have formed part of the broad exercise of judgment we

have undertaken to determine the quantum of the safety net adjustment.”14

85. While the AIRC did come to the view that the social safety net was relevant in

adjusting minimum wages, it did not develop any systematic or explicit

methodology that might be adopted or refined.

The Importance of Changes in the Social Safety Net

86. The relevance of the social safety net to the needs of the low paid was borne

out in a study published in 2004 by Dr Michael Keating.15 The study showed

the significant changes over time in the level of government income support.

Keating pointed out:

“[G]overnments have dramatically increased their income and other support to

low income families. For example, in January 2003 a single income family with

a dependent spouse and two children under five, earning two thirds of average

male earnings and renting privately, received 46 percent of their net

13 AIRC, Safety Net Review 2005, Decision, 353. 14 AIRC, Safety Net Review 2005, Decision, 353. 15 Michael Keating (2004), “The Case for Increased Taxation”, Academy of Social Sciences, 2004, pp.1-28.


disposable income from government transfers. By comparison these transfers

accounted for 41 per cent of that family’s income in January 1996, but only 4

per cent of their income in January 1983”.16

87. Further indication of the extent of changes in the broader social safety net is

illustrated below. Table 5.1 sets out the maximum level of payment for Family

Tax Benefit Part A and the income free areas from the middle of 2000 to 1

July 2006. Family Tax Benefit Part A (FTBA) is income tested and is payable

in full or in part to most families with children. It is a central component of

Australia’s income support system. Table 5.1 - Maximum Rates of Payment and Income Free Areas for Family Tax Benefit Part A, 2000 to 2006

Child under 13 years

Child 13 to 15 years



Date Payable From

$ per year per child

Income free area

($pa)

1/7/2000 3,029.50 3,839.80 974.55 1,306.70 28,200 1/7/2001 3,204.70 4,062.45 1,029.30 1,383.35 29,857 1/7/2002 3,303.25 4,190.20 1,062.15 1,427.15 30,806 1/7/2003* 4,001.80 4,914.30 1,695.00 2,070.95 31,755 1/7/2004* 4,095.30 5,029.70 1,733.75 2,120.65 32,485 1/7/2005* 4,201.15 5,157.45 1,777.55 2,175.40 33,361 1/7/2006* 4,317.95 5,332.65 1,828.65 2,237.45 40,000 * Annual amounts from the year beginning 1 July 2003 include the supplement payable on reconciliation of annual income. Sources: Department of Family and Community Services, Family Assistance Guide, 2006; Centrelink, A Guide to Australian Government Payments, 1 July – 19 September 2006.

88. As shown in Table 5.2 below, the rate of increase in both the maximum levels

of payment of FTBA and in the income free area (up to which the full amount

of payment is made) have been significantly greater than rate of inflation over

the period 2000 to 2006.

16 Keating 2004, p. 9.


Table 5.2 - Rates of Increase in FTBA Maximum Payments and Income Free Area 2000-2006 Nominal

Increase 2000 to 2006

(%)

Real Increase* 2000 to 2006

(%)

Child under 13 years 42.5 16.6 Child 13 to 15 years 38.9 13.6 Child 16 to 17 years 87.6 53.5 Child 18 to 24 years 71.2 40.0 Income free area 41.8 16.0

* The All Groups CPI (weighted average for all capital cities) rose by 22.3% over this period.

89. Another important element in the overall income support system is Family Tax

Benefit Part B (FTBB). This is payable to two-parent families with children that

are highly reliant on a primary income earner and to all single income families.

Table 5.3 below illustrates the extent of change in rates of payment and in the

income free area for FTBB since 2000.

Table 5.3 - Maximum Rates of Payment and Income Free Areas for Family Tax Benefit Part B, 2000 to 2006

Youngest Child

under 5

Youngest eligible

child/full-time student

under 18

Income free area ($pa)

Date Payable From

$ pa per family

1/7/2000 2,602.45 1,814.05 1,616 1/7/2001 2,752.10 1,919.90 1,679 1/7/2002 2,836.05 1,978.30 1,752 1/7/2003 2,920.00 2,036.70 1,824 1/7/2004 2,989.35 2,084.15 4,000 1/7/2005* 3,372.60 2,445.50 4,088 1/7/2006* 3,467.50 2511.20 4,234

* Annual amounts from the year beginning 1 July 2005 include the supplement payable on reconciliation of annual income. Sources: Department of Family and Community Services, Family Assistance Guide, 2006; Centrelink, A Guide to Australian Government Payments, 1 July – 19 September 2006.


90. As shown in Table 5.4, the rate of increase in both the maximum levels of

payment of FTBB and in the income free area (up to which the full amount of

payment is made) have been significantly greater than rate of inflation over the

period 2000 to 2006.

Table 5.4 - Rates of Increase in FTBB Maximum Payments and Income Free Area 2000-2006

* The All Groups CPI (weighted average for all capital cities) rose by 17.6% over this period.

91. For low income households, FTBA and FTBB provide a very sizeable

contribution to disposable income. For families with children renting their

accommodation in the private market, an additional payment of Rent

Assistance is incorporated into the payment of FTBA.17

92. Table 5.5 below sets out for the years 2000 to 2005 the contribution of

different components of disposable income for a single income family reliant

on the minimum wage (C14). The Family is eligible for the maximum rate of

Rent Assistance and has two children under 13 (and the youngest less than

5).

17 This is indexed each six months and for a couple with one or two children the maximum payment is currently $118.30. The maximum amount of Rent Assistance is currently payable to a family of this sort if weekly rent is rent is more than $167.

Nominal Increase 2000 to 2006 (%)

Real Increase* 2000 to

2006 (%)

Youngest child under 5 years 33.2 9.0 Youngest child/full-time student under 18

38.4 13.2

Income free area 162.0 114.3


Table 5.5 - Components of Disposable Income for a Two-Child Family with a Single Earner on the Minimum Wage (C14), 2000-2005 Year beginning

Weekly Minimum Wage (C14)

Annualised Minimum Wage (C14)

Income Tax Payable*

Family Tax Benefit A and B and Rent Assistance

Disposable Income*

Income support as a proportion of disposable income

$ pw $ pa 1/07/2000 400.40 20,876.86 2,528.13 11,249.30 29,598.02 38.0% 1/07/2001 413.40 21,554.68 2,758.59 11,847.90 30,643.99 38.7% 1/07/2002 431.40 22,493.20 3,077.69 12,212.90 31,628.41 38.6% 1/07/2003 448.40 23,379.58 3,022.06 13,777.90 34,135.42 40.4% 1/07/2004 467.40 24,370.24 3,358.88 14,103.60 35,114.96 40.2% 1/07/2005 484.40 25,256.62 3,348.25 14,775.20 36,683.57 40.3%

93. Table 5.6 sets out the rates of increase over the period 2000 to 2005 of the

components of disposable income detailed in Table 5.5.

Table 5.6 - Components of Change in Disposable Income Single income, two-child family on the minimum wage (C14) renting privately 2000-2005

Increase

2000 to 2005

$

Nominal Increase 2000 to 2005 (%)

Real Increase*

2000 to 2005 (%)

Pre-tax wage 4,379.76 21.0 2.9 Private income after-tax 3,559.64 19.4 1.5 Income support payments

3,525.90 31.3 11.7

Disposable income 7,085.54 23.9 5.4 * The All Groups CPI (weighted average for all capital cities) rose by 17.6% over this period.

94. Tables 5.5 and 5.6 illustrate a number of features of the interaction between

minimum wages and the broader social safety net.

• Clearly the income support system and changes to it are highly relevant to

the well-being of low paid people.


For the particular family considered in these examples and over this five-

year period, rises in income support payments were around 80% of the

value of increases in minimum wages before tax.

• Table 5.5 in particular illustrates the erosive effect of income tax burden on

wages. For example, in 2001 even though pre-tax wages at the C14 level

were lifted by $677.82, over one third of this amount (34%) was lost to

income tax and the wage-earner received less than $450 extra.

• In contrast, in the same year the increases to income support payments

were considerably less than the increase in the pre-tax wage but because

they are not taxed, they had a significantly larger impact on family

disposable income than did after tax-wages.

• The tax system can play a more advantageous role – as in 2003 when

significant tax cuts saw a decrease in amount of income tax paid on the

minimum wage even though the wage level rose strongly in that year.

On this point it is relevant to note that the years covered in the example

above present an unusual impression of the role of adjustments to the

income tax system. The “base year” of 2000 saw the introduction of large

tax reductions and further very large tax cuts took effect from 1 July 2006.

Neither of these years changes are reflected in the examples presented in

Tables 5.5 and 5.6.

Changes to the Social Safety Net in the Past Year

95. Important changes have been made to the social safety net in the past year.

These impact on the disposable incomes of all household types and should be

considered when regard is had to the role that minimum wages play in the

overall safety net.


Income Tax Changes

96. One set of changes involve two interrelated adjustments made to the personal

income tax system. These are the increase in the Low Income Tax Offset and

a lifting of the threshold at which the 15% income tax bracket ends. These

measures are closely targeted to concentrate benefits on low-income

individuals. Where there are two low-income earners in a single household

these tax changes deliver benefits to both earners.

97. The Low Income Tax Offset (LITO) is an income-tested rebate of tax available

to low income earners. It does not require any specific application process and

is calculated automatically on submission of an income tax return. The LITO

which was previously $235 was raised to $600 in the 2006-07 Budget. The

threshold at which the 15% tax rate ends was raised from $21,600 to $25,000

at the same time. This higher threshold is also the threshold at which the LITO

begins to shade out. Both measures took effect from 1 July 2006. Table 5.7

below summarises these changes.

Table 5.7 - Central Changes in Income Tax in the 2006-07 Budget

Previous

Level Level from 1 July 2006

Increase

$ % Low Income Tax Offset (LITO) 235 600 155.3% Level of income below which no tax is paid 7,567 10,000 32.2% Threshold at which 15% tax bracket ends 21,600 25,000 15.7% Income level at which LITO shades out totally 27,475 40,000 45.6%

98. Table 5.8 sets out the impacts of these changes over a range of lower

incomes. It shows the impacts on disposable income are greatest both in

dollar and proportional terms at around the new threshold at which the 15%

tax bracket ends ($25,000 pa).


99. Table 5.8 also calculates the equivalent proportional increase in pre-tax

wages. This shows the before-tax wage increase that would have been

required to deliver the same after-tax increase in disposable income had the

previous tax arrangements remained unchanged.

Table 5.8 - Impact of Major Tax Changes in the 2006-07 Budget

* The equivalent increase in pre-tax wages is calculated using the previous income tax scale. A wage increase of the proportion indicated would yield the same increase in after-tax income as the changes to income tax arrangements.

Private Earnings Reduction in tax paid

Percentage increase in disposable income

Equivalent to an increase in pre-tax wages*

$ pw $ pa $ pa % % 200 10,428 365.00 3.7% 4.1% 250 13,035 365.00 3.0% 3.3% 300 15,642 365.00 2.5% 2.7% 350 18,249 365.00 2.2% 2.4% 400 20,856 365.00 1.9% 2.1% 450 23,463 718.97 3.5% 4.6% 500 26,070 1,011.00 4.5% 5.9% 550 28,677 962.92 4.0% 4.8% 600 31,284 858.64 3.3% 3.9% 650 33,891 754.36 2.7% 3.2% 700 36,498 650.08 2.2% 2.5% 750 39,105 545.80 1.7% 2.0% 800 41,712 510.00 1.5% 1.7%

Income Tax Cuts and Low Paid Single People

While they have broader application also, the changes presented in Table 5.8

record the impact of income tax changes in 2006-07 for low paid individuals

who do not qualify for any income support.

These changes suggest that even in the absence of any change in minimum

wages during the current year, low-paid single people have generally

experienced a significant improvement in nominal disposable incomes due to

the targeted income tax changes introduced in the 2006-07 Budget.


Changes to Family Tax Benefit and Rent Assistance

100. Each year changes are made to the level of Parts A and B of the Family Tax

Benefit and to the level of Rent Assistance. Additional changes are regularly

made to the thresholds at which these payments begin to be income tested.

The parameters used to adjust benefits and thresholds and the combination of

changes in thresholds and benefit levels implies, for most recipients, a real

increase in the level of benefit received. These changes to nominal

entitlements are clearly relevant to assessing the adequacy or otherwise of the

social safety net.

101. Two additional discretionary changes were made to Family Tax Benefit

arrangements in the 2006-07 Budget.

• The threshold at which Family Tax Benefit A (FTBA) begins to reduce was

lifted sharply to $40,000. The previous level was $33,361. This means that

families with children with incomes in the range $33,361 to $40,000 will

receive the maximum amount of FTBA payment. The impacts of lifting the

threshold will also echo further up the income distribution as a result of the

workings of the income test.

• The large family supplement was extended to a greater number of families

by making families with three children eligible for an additional payment of

$9.80 per fortnight (previously only families with four or more children were

eligible). The Budget estimated the number of eligible families would

increase from around 100,000 to 440,000. Families with three or more

children are also entitled to a higher level of Rent Assistance.

.


102. Table 5.9 summarises the changes to Family Tax Benefits and Rent

Assistance that had taken effect from 1 July 2006 relative to the levels that

applied from 1 July 2005. The impacts of these changes on families with

children are set out in greater detail in the next section.

Changes to Taxation and Income Support Arrangements for Families with

Children

Low-income families with children have benefited from the targeted reductions in

income taxation as well as the changes to income support arrangements. As is the

case for single people the pattern of taxation benefits peaks when individual

income is close to the $25,000 level.

This creates a different pattern of benefits depending on the distribution of private

income between the adults.

The increase to $40,000 in the lower tax free limit in the Family Tax Benefit income

test benefits all low-income families similarly regardless of the distribution of

income between the adults. This is because Family Tax Benefit A employs a

household income test.


Table 5.9 - Major Changes to Family Tax Benefits Arrangements 2006

Effective 1 July 2005

Effective 1 July 2006

Family Tax Benefit A Maximum Amount (per child per fortnight)

Child under 13 137.06 140.84 Child 13 to15 173.74 179.76 Child 16-17 44.10 45.36 Child 18-24 59.36 61.04

Lower income free limit 33,361 40,000 Lower shade out rate 20 cents for each

$1 20 cents for each

$1 Base Rate (per child per fortnight)

Child under 18 44.10 45.36 Child 18-24 59.36 61.04

Higher income free limit One child only 86,213 88,622 Plus per extra child 3,341 3,504

Higher shade out rate 30 cents for each $1

30 cents for each $1

Supplement (per child pa) 627.80 645.05 Family Tax Benefit B Maximum amount (per family per fortnight)

Youngest under 5 117.60 120.96 Youngest between 5 and 15 82.04 84.28 Income free limit 4,088 4,234 Shade out rate 20 cents for each

$1 20 cents for each

$1 Supplement (pa) 300.00 313.90 Rent Assistance Maximum rates (pa) 1-2 children 3,000.30 3,080.25 3 or more children 3,390.85 3,485.75 Income test applies in conjunction with FTBA test


Illustration of Impacts of 2006 Tax and Income Support Changes on Families with Children

103. This section sets out for a range of low to middle-income households with two

children the impacts of tax changes and increases in income support for

families between 1 July 2005 and 1 July 2006. In each case households have

two children under 13, the youngest is under 5 and the family receives the

maximum level of rent assistance.

Table 5.10 - Single Income Family

104. The changes recorded in the Table above separate the income tax impacts

and the income support impacts. The income tax pattern is the same as for

individuals in Table 5.8. Both the dollar amount and the proportional reduction

in tax peak at around $25,000. The pattern of benefits from changes to income

support rises up to a level of family income of $40,000. This reflects the large

increase in the threshold for Family Tax Benefit A to this level of income.

Household private income

Increase in income support

Reduction in income taxation

Increase in disposable income

$pw $pa $ pa $ pa $ pa % 200 10,428 413.05 365.00 778.05 3.1% 250 13,035 413.05 365.00 778.05 2.9% 300 15,642 413.05 365.00 778.05 2.7% 350 18,249 413.05 365.00 778.05 2.5% 400 20,856 413.05 365.00 778.05 2.3% 450 23,463 413.05 718.97 1,132.02 3.2% 500 26,070 413.05 1,011.00 1,424.05 3.8% 550 28,677 413.05 962.92 1,375.97 3.5% 600 31,284 413.05 858.64 1,271.69 3.1% 650 33,891 519.05 754.36 1,273.41 3.0% 700 36,498 1,040.45 650.08 1,690.53 3.9% 750 39,105 1,561.85 545.80 2,107.65 4.7% 800 41,712 1,740.85 510.00 2,250.85 4.8% 850 44,319 1,740.85 510.00 2,250.85 4.7% 900 46,926 1,740.85 510.00 2,250.85 4.6% 950 49,533 1,740.85 510.00 2,250.85 4.5% 1000 52,140 1,740.85 510.00 2,250.85 4.4%


Table 5.11 - Two-Income Household: Both adults with the same level of income

105. The pattern of increase in disposable income for a two income household is

somewhat different from that of the single income household. This is mainly

due to the fact that the two-income family derives two sets of benefits from the

changes in income taxation.





$pw $pa $ pa $ pa $ pa % 200 10,428 442.25 0.00 442.25 1.8% 250 13,035 442.25 0.00 442.25 1.6% 300 15,642 442.25 76.30 518.55 1.8% 350 18,249 442.25 467.35 909.60 2.9% 400 20,856 442.25 730.00 1,172.25 3.5% 450 23,463 442.25 730.00 1,172.25 3.3% 500 26,070 442.25 730.00 1,172.25 3.1% 550 28,677 442.25 730.00 1,172.25 3.0% 600 31,284 442.25 730.00 1,172.25 2.8% 650 33,891 548.25 730.00 1,278.25 3.0% 700 36,498 1,069.65 730.00 1,799.65 4.0% 750 39,105 1,591.05 730.00 2,321.05 5.0% 800 41,712 1,770.05 730.00 2,500.05 5.3% 850 44,319 1,639.35 942.61 2,581.96 5.3% 900 46,926 1,639.35 1,437.94 3,077.29 6.1% 950 49,533 1,639.35 1,933.27 3,572.62 7.0%

1000 52,140 1,639.35 2,022.00 3,661.35 7.0%


Table 5.12 - Two-Income Household: One adult earns twice as much as the other

106. The pattern of increase in disposable income for a two income household

when income is not evenly divided between the adults lies between that of the

single income family and the family in which both spouses have the same

level of private income.





$pw $pa $ pa $ pa $ pa % 200 10,428 413.05 0.00 413.05 1.6% 250 13,035 442.25 169.15 611.40 2.2% 300 15,642 442.25 365.00 807.25 2.7% 350 18,249 442.25 365.00 807.25 2.5% 400 20,856 442.25 365.00 807.25 2.4% 450 23,463 442.25 401.98 844.23 2.3% 500 26,070 442.25 532.20 974.45 2.5% 550 28,677 442.25 662.42 1,104.67 2.7% 600 31,284 442.25 730.00 1,172.25 2.8% 650 33,891 548.25 921.01 1,469.26 3.3% 700 36,498 1,069.65 1,251.39 2,321.04 5.1% 750 39,105 1,591.05 1,376.00 2,967.05 6.4% 800 41,712 1,770.05 1,362.12 3,132.17 6.6% 850 44,319 1,770.05 1,292.57 3,062.62 6.3% 900 46,926 1,770.05 1,223.01 2,993.06 6.0% 950 49,533 1,770.05 1,153.46 2,923.51 5.7%

1000 52,140 1,770.05 1,083.90 2,853.95 5.4%


6. Interactions Between Minimum Wages, Income

Taxation, Income Support and Non-wage Costs

107. In this Chapter we address the issues relating to the interactions between

increases in minimum wages, income taxation, income support and labour

costs. These interactions have two broad impacts:

• They dilute the impacts of rises in minimum wages on disposable incomes.

This occurs when the additional income received gives rise to the

employee having a higher income tax burden and/or when the additional

income received decreases an employee’s (or his or her household’s)

entitlements to income support. This is the issue of effective marginal tax

rates.

• They drive a wedge between the costs borne by employers and the

benefits received by employees. Costs to employers are amplified by non-

wage costs imposed when wages rise. These include payroll tax, workers’

compensation premiums and compulsory employee superannuation

contributions. When combined with the impact of effective marginal tax

rates the wedge between costs to employers and the benefits received in

the hands of the intended beneficiaries is substantial.

108. We conclude that, as a rule of thumb, the benefits of minimum wage increases

– as received by employees in the form of higher disposable incomes, are on

average about 50 per cent of the costs borne by employers after non-wage

costs are taken into account. This rule of thumb does not rely on any extreme

instances of effective marginal tax rates. Rather it is derived from the effective

marginal tax rates that are very widespread among low and middle income

Australians.


Effective Marginal Tax Rates

109. A lot of attention is placed on the very high effective marginal tax rates that

arise for particular categories of low paid people. Some are listed below.

• Some second earners in two-income families

Over particular combinations of individual and household income, second

income earners can be subject to income taxation and the simultaneous

withdrawal of Part A and Part B of Family Tax Benefit. People in this

situation often face effective marginal tax rates of around 55 per cent even

though their wage income is below $20,000.

• Single parents working part time

Single parents can face income taxation, the withdrawal of Parenting

Payment and the withdrawal of Family Tax Benefit Part A. The effective

marginal tax rates faced by single parents are often above 65 per cent over

an extended income range.

• Other people in receipt of income tested pensions or allowances

The interactions between income tax and the withdrawal of income support

entitlements can be severe and can impose high effective marginal tax

rates. Where these interact with the withdrawal of Family Tax Benefit,

effective marginal tax rates can exceed 60 per cent.

110. While the distinct impacts of very high effective marginal tax rates on these

particular groups is of clear relevance, emphasis on them may create the

impression that the overall issues relating to the interactions between wages,

income taxation, income support and non-wage labour costs are confined to

these particular groups. In fact the situation faced by these particular groups is

simply a magnification of a more widespread issue.


Table 6.1 - Widespread Effective Marginal Tax Rates for Lower and Middle Income Australians

Single people 25,000-40,000 35.5% Parents with Children

25,000-30,000 34.0% 30,000-40,000 35.5%

Single-income earner in a two-parent family (with one child and eligible for rent assistance)

40,000-67,850 51.5% 20,000-25,000 36.5% 25,000-33,925 55.5%

Dual-income earner in a two-parent family (with both earning the same income) (Family with one child and eligible for rent assistance) 33,925-40,000 35.5%

111. As shown in Table 6.1, it is very common for low paid and middle income

Australians to experience effective marginal tax rates in the range between 35

per cent and 55 per cent.

112. As far as employees experiencing these effective marginal tax rates are

concerned, each dollar increase in minimum wages will be associated with an

increase in disposable income of between $0.66 (when the effective marginal

tax rate is 34 per cent) and $0.44½ (when the effective marginal tax rate is

55.5 per cent).

Benefit to Cost Ratios

113. The effective marginal tax rates faced by employees present one side of the

phenomenon of low benefit to cost ratios associated with minimum wages

increases.

114. The low benefit to cost ratios arise from the interaction between these

effective marginal tax rates faced by employees and the proportional non-

wage costs that flow from increases in minimum wages. The proportional non-

wage costs faced by employers when minimum award wages rise include

payroll tax; compulsory employer superannuation contributions; workers’

compensation premiums and proportional allowances.


115. These costs vary from industry to industry and from state to state. For the

purposes of illustrating the typical magnitude of the benefit to cost ratios a

range of proportions of non-wage costs to wage costs of between 15 per cent

and 25 per cent can be examined. Most employers would experience

proportional non-wage costs along this range. As indicated below, the benefit

to cost ratios are not highly sensitive to variations in non-wage costs within this

range.

116. Table 6.2 below presents benefit to cost ratios arising from the interaction of a

range of effective marginal tax rates along the range of proportional non-wage

costs. The benefit to cost ratio records the proportion of extra costs borne by

employers, received by employees in the form of additional disposable

income.

The benefit to cost ratios can be expressed using the formula:

Benefit to Cost Ratio = (1-emtr)/(1+nwcp)

Where:

• “emtr” is the effective marginal tax rate; and

• “nwcp” is the proportion of non-wage costs to wage costs.


Table 6.2 - Benefit to Cost Ratios Associated with Minimum Wage Adjustments

Benefit to Cost Ratios (proportion of extra costs borne by employers received by employees in the form of higher disposable income)

Range of extra non-wage costs as a proportion of extra wage costs

Effective Marginal Tax Rate 15% 20% 25% 15.0% 0.74 0.71 0.68 20.0% 0.70 0.67 0.64 25.0% 0.65 0.63 0.60 30.0% 0.61 0.58 0.56 35.0% 0.57 0.54 0.52 40.0% 0.52 0.50 0.48 45.0% 0.48 0.46 0.44 50.0% 0.43 0.42 0.40 55.0% 0.39 0.38 0.36 60.0% 0.35 0.33 0.32 65.0% 0.30 0.29 0.28

117. The shaded range in Table 6.2 indicates the range of effective marginal tax

rates identified above as widespread among low and middle income

Australians. The range of benefit to cost ratios for this range of effective

marginal tax rates varies around 50 per cent.

118. On the basis of these calculations Ai Group suggests that, as a rule of thumb,

benefits to employees as a result of increases in minimum wages average

around 50 per cent of the costs borne by employers.


7. The Impacts of Increases in Minimum Wages on

the Capacity of the Unemployed and the Low

Paid to Obtain and Remain in Employment

119. One of the factors to which the AFPC is to have regard in setting minimum

wages is the capacity of the unemployed and the low paid to obtain and

remain in employment.

120. The explicit attention to be given to the interests of the unemployed is an

opportunity to broaden the range of considerations that are brought to bear on

adjustments to Australian minimum wages. Similarly, the explicit attention to

be given to the capacity of the low paid to obtain and remain in employment

has the potential to add important new dimensions in the consideration of

Australian minimum wages. These include the ability of people who are

presently employed to continue to be offered employment; to increase their

participation in the labour market if they would like to do so; and to face a

broad range of alternative employment opportunities.

121. In this Chapter we put forward a case that a broad view of the nature of

unemployment and employment should inform considerations about minimum

wages. We look at some recent commentary by the OECD on the association

between minimum wages and unemployment. Finally we propose that in view

of the logic of the association between poor employment outcomes and high

minimum wage levels, that the burden of ‘proof’ should rest with those who

claim that there is no association rather than those that claim that an

association is likely.


Joblessness can be more than it seems

122. In a paper that Ai Group brought to the attention of the AIRC in submissions to

the 2005 Safety Net Review Case, the respected economist and policy

commentator Fred Argy examined the dimensions and the nature of

joblessness in Australia. His paper contained some welcome insights into the

nature of the association between minimum wage levels and unemployment –

particularly among the low skilled.18

123. One of the more fundamental observations made by Mr Argy is that the official

unemployment (and employment) data provide only a partial, and misleading

picture of the extent of underutilisation of labour in Australia. Mr Argy points

out that definitions of unemployment omit both under-employment and

discouraged workers. The total of 800,000 “hidden unemployed” compares

with, and is in addition to a “headline” level of unemployment of 600,000.19

124. In total, about 1.4 million working age people are “underutilised” in the sense

that they do not find sufficient opportunities to match their workforce

expectations. Mr Argy argues that the relative significance of the hidden

unemployed has risen over the past twenty years.20

125. According to Mr Argy, the significance of the large and growing group of

hidden unemployed is that impressions of declining unemployment over recent

years:

“overstate the trend improvement in the labour market and understate

the present level of labour underutilisation in Australia.” 21

18 Fred Argy, 2005, “An Analysis of Joblessness in Australia”, Economic Papers, Vol.24, No.1, pp. 75-96. 19 Argy, 2005, pp. 76-77. 20 Argy, 2005, pp. 78. 21 Argy, 2005, pp. 76.


126. Mr Argy classifies labour underutilisation into several categories. The two

largest categories are “classical” and “structural”. The classical category

describes underutilisation that arises because wages are too high relative to

the rate at which employers can profitably engage workers. The structural

category describes underutilisation arising from mismatches between the skill

levels and location of potential employees and the requirements of

employers.22

127. In practice Mr Argy maintains that because labour market mismatches are

“aggravated by rigidities in wage relativities” these two categories are best

viewed in conjunction. Combined, according to Mr Argy, they account for over

half (55%) of total labour underutilisation.23

128. In line with the dominant role attributed to classical and structural labour

underutilisation, Mr Argy also finds it concentrated among those with lower

levels of workforce skills. Mr Argy finds:

“The people most vulnerable to long term joblessness or underemployment

are the over 50 year olds, sole parents, indigenous Australians, people with

disabilities and migrants with English as a second language.” 24

129. Further, in the light of the dominance of the classical and structural categories

of unemployment and in light of estimates of employment elasticities ranging

between –0.15 and –1.0, Mr Argy identifies Australia’s high level of minimum

wages as a causal factor in the persistently high level of underutilisation. He

concludes that:

“Few economists believe that there will be no employment gain from

appreciable real wage cuts, especially as Australia’s minimum wage is high

relative to median earnings by OECD standards.”25

22 Argy, 2005, pp. 80-83. 23 Argy, 2005, p. 84 and p. 80. 24 Argy, 2005, p. 79. 25 Argy, 2005, p. 83.


130. While Ai Group does not advocate a reduction in the level of minimum wages,

one element in particular of Fred Argy’s contribution to the analysis of

joblessness should be taken into account in considering the impacts of

minimum wages on the capacity for the unemployed and low paid to obtain

and remain in employment.

131. Emphasis should be placed on a wider consideration of the employment

impacts of minimum wages rather than merely the level of employment or

unemployment. In addition to the officially unemployed, discouraged workers

and casual and part-time workers who would like to work more hours should

be taken into consideration when assessing the full impact of changes to

minimum award wages on employment opportunities for the unemployed and

low paid workers. The association between Australia’s high level of minimum

wages and the underutilisation of unskilled labour is clearly relevant to these

considerations.

Employment Opportunities and Minimum Wages

132. According to the latest OECD Employment Outlook:

“Simple economic reasoning indicates that a statutory minimum wage or

labour costs set at too high a level will become a barrier to employment for

low-productivity workers, reducing national output while also frustrating the

equity goals motivating these measures.“ 26

133. The OECD report makes a number of important observations about the

empirical evidence noting in particular:

• The size of employment losses resulting from minimum wages is far from

clear;

26 OECD, 2006, OECD Employment Outlook: Boosting Jobs and Incomes, p.86.


• There is mixed empirical evidence concerning a negative impact of

minimum wages on employment. 27

134. The OECD Employment Outlook concludes that:

“Recent evidence suggests that a moderate minimum wage generally is not a

problem but that adequate allowance for sub-minima for youth and possibly

other vulnerable groups is essential. Another insight is the potential for a well

designed minimum wage to contribute to a broader strategy to foster higher

employment by guaranteeing that work pays better than remaining on social

benefits. However, the danger posed by negative policy interactions has also

been confirmed, particularly that between a too-high minimum wage and high

rates of labour taxation.” 28

135. Several observations can be made about these contributions by the OECD.

• The OECD report shows that Australia’s minimum wage does not fall into

the “moderate” category. Indeed, consistent with other evidence about the

relatively high level of Australia’s minimum wage, of the 21 countries with

statutory minima, Australia records the highest measure of the ratio of

employers’ labour costs for minimum wage workers relative to that of

median wage workers. Labour costs in this context are a measure of the

gross wage plus employer social security contributions. It is important to

note that Australia does not impose employer social security

contributions.29

• The studies to which the OECD study refers appear to focus only on the

relationship between minimum wages and unemployment. They do not

appear to take into account broader measures of labour-force

underutilisation. Following from the discussion in the preceding section,

broader measures of underutilisation would seem to be a more appropriate

27 OECD, 2006, pp.86, 216. 28 OECD, 2006, pp.88. 29 OECD, 2006, pp.87.


basis for assessment of the impact of minimum wages on employment

opportunities.

In this regard it is instructive to note that in comparison with other OECD

countries, Australia has exceptionally high levels of part-time employment.

In 2005, for example part-time employment as a proportion of total

employment was 15.7% for Australian men compared with a ratio of 7.4%

for the OECD as a whole. For women Australia’s rate of part time

employment was 41.7% in 2005 compared with a rate of 25.5% for the

OECD as a whole. 30

In line with the appeal of the basic economic reasoning about the

relationship between high minimum wages and employment opportunities

to which the OECD refers, it would seem appropriate to regard Australia’s

high rate of part-time employment (as a tentative indicator of high

underutilisation) and its comparatively high minimum wage with a good

deal of suspicion.

• Finally, in noting the susceptibility of youth to suffer poor employment

outcomes as a result of high minimum wages and the importance of

different minimum wage levels for this group, the OECD study also raises

similar risks faced by other “vulnerable groups” and points to the possibility

of establishing separate minima for other vulnerable groups.

In this context, it is relevant to note Fred Argy’s finding presented above

that those most at risk to joblessness and underemployment are people

over 50; sole parents; indigenous Australians; people with disabilities; and

migrants with English as a second language.31

30 OECD, 2006, Statistical Annex, Table E, p.263. 31 Argy, 2005, p. 79.


It is difficult to imagine how separate minima could be set in place for all of

these groups. It does however help to identify those groups who are most

likely to suffer lower employment opportunities as a consequence of high

minimum wages.

Minimum Wages and Poor Employment Outcomes: The

Burden of Proof

136. As the OECD study indicates, notwithstanding the clear force of the basic

economic reasoning, there is not incontrovertible proof of a strong association

between minimum wage levels and levels of unemployment.

137. The absence of such proof is perhaps not surprising.

• ��It is always difficult, if not impossible, to “prove” with empirical measures

the associations between economic variables – such as wages and

employment levels – particularly when these variables are subject to

influence from a variety of factors.

• The particular association under consideration can manifest itself in a

variety of ways. The impacts of high minimum wages on the employment

opportunities for low-skilled people may manifest themselves in high

concentrations of unskilled people among the unemployed; in greater

casualisation of the less skilled workforce and/or in the slower growth in

low-skilled employment opportunities relative to employment opportunities

in higher skilled occupations.

• Further, the relative importance of these different outcomes may change

over time and may vary significantly between different countries.


138. Notwithstanding the fact that the empirical evidence falls short of “proof” it is

clear that there is a wide acceptance of the underlying logic of the association

between high minimum wages and poorer employment opportunities for the

low skilled than would otherwise apply. In simple terms that economic logic

can be summarised as follows:

• To the extent that Australia’s minimum wages are effective in propping up

wages that would otherwise settle below the minimum, they will reduce the

quantity of labour cleared in the market at the supported price.

• The impacts on employment opportunities are likely to fall heavily on less

skilled workers who are likely to be overrepresented in the population of

people whose wages would have settled below the minimum.

139. Ai Group acknowledges the difficulties in obtaining incontrovertible verification

of this logic. We submit, however, that these difficulties provide no reason to

reject the logic itself and that weight should be given to the widely accepted

nexus between minimum wage levels and employment opportunities for low

skilled people.

140. Given the appeal of the logic of the association between high minimum wages

and less favourable employment outcomes for the low skilled, Ai Group further

submits that the onus of ‘proof’ should rest with those who claim that there is

no association between poor employment outcomes for low skilled people and

high minimum wages.

141. Rather than seeking active “proof” of association, it would be more appropriate

for those who would argue against the association to put forward evidence

that falsifies the hypothesis that high minimum wages reduce the employment

opportunities faced by the low skilled.


8. International Competitiveness, Minimum Wages

and Trade Exposed Sectors

142. Australia, like other established industrial countries, is facing an intensification

of global competition due to the rapid development of a number of “emerging”

economies. These include China, India, Brazil, the Russian Federation and a

number of Eastern European countries.

143. In this context, domestic wages outcomes have become particularly important

both in terms of maintaining competitiveness and maintaining the momentum

of employment growth.

144. Information presented in this Chapter points to signs that labour markets –

particularly in countries’ manufacturing sectors - may be responding to more

intense competition and dampening wages growth. This development is very

relevant to decisions about administered wage levels – such as Australia’s

minimum wage. There is a distinct risk that unless there is similar moderation

of growth of administered wages, that competitiveness - and labour market

outcomes – will suffer.

Wages Growth in Established Economies’ Manufacturing

Sectors

145. One of the implications of the intensification of globalisation appears to be a

slowing of wages growth in the more trade-exposed sectors of the established

economies. Chart 8.1 below presents OECD measures of annual average

wages growth in the manufacturing sectors of OECD countries as a whole and

among the G7.


Chart 8.1 - Manufacturing Wages Growth; OECD and G7

(Rolling average of annualised growth rates)

Source: OECD. Average hourly earnings in Manufacturing – percentage changes of 3 monthly moving averages.

146. Comparison of manufacturing sector wages growth in the US and Europe (see

Chart 8.2 reveals that both areas have experienced broadly similar outcomes

over the past five or six years in particular. The Japanese experience has

been more volatile.

Apr-90 Apr-92 Apr-94 Apr-96 Apr-98 Apr-00 Apr-02 Apr-04 Apr-06

8

7

6

5

4

3

2

1

OECD

G7


Chart 8.2 - Manufacturing Wages Growth: US, Euro Area and Japan

(Rolling average of annualised growth rates)

Source: As for Chart 8.1

147. While further investigation is needed in this area, it appears that the greater

exposure to competition from lower wage economies has put pressure on

labour markets to respond by reducing wages growth. The fact they have

done so is likely to have ameliorated somewhat the competitive pressures

faced by manufacturers and resulted in a less severe impact on manufacturing

employment opportunities in the established economies than might otherwise

have been the case.

Implications for Australian Minimum Wages 148. The greater level of global competitive pressure that appears to be at work in

the labour markets of the established economies has important implications in

the setting of administered wage levels.

149. If administered wages such as Australian minimum wages do not echo the

moderation in growth that appears to be occurring in labour market outcomes

in trade exposed sectors such as manufacturing:

May-90 May-92 May-94 May-96 May-98 May-00 May-02 May-04 May-06

7

6

5

4

3

2

1

0

-1

-2

-3

Euro area

Japan

USA


• domestic producers in trade exposed sectors will suffer a greater loss of

comparative cost competitiveness than would otherwise be the case; and

• there are likely to be fewer employment opportunities in these trade

exposed sectors for employees whose wages are impacted by the

minimum wage decision.

150. These considerations arising from the intensification of global competition

point to further advantages of a moderate increase in the level of Australian

minimum wages.


9. Impacts of Minimum Wage Increases – Ai Group

Survey

151. In order to project the impact of any minimum wage increase awarded by the

AFPC in 2007, Ai Group conducted a random survey of 2000 businesses

across Australia in June 2006. The impacts reported by survey respondents of

the previous $17 minimum wage rate increases arising from the AIRC’s 2005

Safety Net Review Decision, were used as the basis for making these

projections.

152. Survey respondents were asked to provide information on:

• The proportion of the workforce on award rates of pay;

• The extent of wage increase flow-ons to employees not on award rates of

pay;

• The implication of the 2005 minimum wage rate increases on

redundancies, selling prices, the employment of additional staff, the use of

labour hire staff, the use of overtime and overall competitiveness; and

• Quantifiable outcomes on employment numbers, price rises, overtime

reductions and sales losses.

153. The survey report (Annexure A) provides an important insight into the

implications of minimum wage increases on the economy.

Sample and Response Rate

154. Of the 2000 businesses across Australia which were surveyed, 433 responded

– resulting in a response rate of 22%. The 433 responding companies

employed around 52,300 people and had a combined turnover of $19.5 billion.

The survey questionnaire is set out in Annexure B.


155. Half of the firms were located in metropolitan centres, 36% were located in

regional cities and a further 14% were located in regional towns.

156. The largest proportion of firms responding to the survey were from the metals

based sectors of fabricated metal and basic metal products, together

accounting for a quarter of responses. Miscellaneous manufacturers and

machinery and equipment manufacturers also formed a significant proportion

of respondents. The remaining respondents were broadly based across other

sectors of manufacturing and the service sector.

157. Based on employment, the most significant sectors in the sample were from

the miscellaneous manufacturing, basic metals, food and beverage and

services sector (comprising ICT, labour hire, call centre and construction firms)

158. Employment by the respondent firms is broadly reflective of employment

across industrial sectors of the economy. More than one third of all employees

were within the occupational category of labourers or machine operators, one

quarter were employed as sales, administration or clerical staff, 16% were

tradespeople, while one in five employees were para-professional or

professional employees.

Key Findings

159. Key findings arising from the survey include:

• Employees receiving award rates of pay make up approximately 10.5

percent of total employment, equivalent to around 6.6 percent of the total

wage bill of respondent firms. Small and medium sized employers have

over 19 percent of employees on award wage rates while large employers

have 8.6 percent of workers on award rates of pay.


• The impact of minimum wage rate increases is larger on small and medium

sized employers. A minimum wage increase of $10 per week is equivalent

to 0.28% and 0.23% of their total wage bills respectively, compared to

0.09% of total wages for large employers.

• There is evidence of the practice by employers of passing on the minimum

wage rate increases to non-award rate of pay employees. One in five firms

report that they flow on the minimum wage rate increases to all employees

not on award rates of pay. An additional 12 percent of firms indicate that

they pass on the minimum wage rate increases to at least a proportion of

those not on award rates of pay. Consequently, increases in minimum

rates of pay have a broader impact on the economy than is typically

recognised.

• Minimum wage rate increases have a larger impact on small firms

(employing less than 25 employees), those located in regional cities and

towns, and those firms in the more globally exposed sectors of the

Australian economy.

• There is a small impact on staffing levels overall. As a result of the last

minimum wage rate increases, firms implemented 134 redundancies

equivalent to 0.26% of total employment. The majority of this impact was

on lower skilled employees. Some three in five job losses were amongst

labourers and machine operators. In regional locations, the impact on

lower skilled workers lifts to more than three in four job losses.

• Another impact of the last minimum wage rate increases was a curtailment

of additional employment, although this figure remains relatively small at

230 employees. Firms indicate the jobs created would have been broadly

based across occupational categories.

• In a tight labour market, the increase in minimum wage rates in 2005 had a

substantial impact on selling prices and the competitiveness of businesses.


One third of firms indicate they increased selling prices as a result of the

minimum wage rate rise by an average of 4.7%. More than one in four

firms (27%) report an impact on business competitiveness of the last

minimum wage increase with sales losses estimated at 0.16% of total

turnover. Those affected the most by these impacts are small and medium

sized businesses (up to 100 employees) and those based in regional

towns (1.7% of total sales).

160. Given the impacts described above, the AFPC should adopt a cautious

approach in determining the level of any minimum wage increase.


10. Disproportionate Negative Impacts of Minimum

Wage Increases on Small Businesses

161. Small businesses are vital to the Australian economy. Such businesses:

• Employ well over three million people within 1,162,000 small

businesses and are the largest employer in Australia;32

• Account for 47% of all private sector non-agricultural employment;33

• Account for 96% of all business in the private sector (excluding

agriculture);34

• Make a major contribution to employment growth in Australia and are

an important source of new jobs in the economy.35

162. In 2003, a Senate Committee conducted a comprehensive inquiry into small

business employment. The report which arose from the inquiry reproduced the

following extract from a recent OECD publication which highlights the

importance of small businesses to modern economies:36

“SMEs [Small and Medium Enterprises] are at the core of future economic

growth in OECD countries. Productivity growth is fuelled by competitive

processes in industry, which, to a large extent, build on the birth and death,

entry and exit, of smaller firms. Over 95 per cent of enterprises in the OECD

are SMEs, which account for 60-70 per cent of jobs in most countries. They

are the source of most new jobs and make significant contributions to

innovation and high-technology employment. In addition, they are of

considerable importance for regional developments and social cohesion.

However, less than one-half of small business start-ups survive for more than

five years and only a fraction develop into high-performance firms…”. 32 Small Business Employment: Research Note, Department of Parliamentary Library, September 2002 33 Ibid 34 Australian Bureau of Statistics (ABS) Small Business in Australia 2001, Cat No 1321.0 35 Report on Small Business Employment, Senate Employment, Workplace Relations and Education References Committee at p.27 36 Ibid, p.51


163. The findings of the Senate Committee inquiry into small business employment,

include the following:

• The cost of employing staff remains a significant deterrent to

employment growth in the small business sector;37

• Employment levels in small businesses can be highly volatile;38

• Small businesses face difficulties and disadvantages in obtaining the

key inputs of capital and skilled labour, and are treated less

favourably by banks, insurance companies and other big businesses

in many areas including settling of accounts, terms of trade, interest

rates and bank fees and charges;39

• Most small businesses rely on their own equity or borrowings and

frequently use the family home as security;40

• They are more susceptible to being given risk finance and require a

strong cash flow and ability to repay debts. Most small businesses

typically face uncertain cash flow streams;41

• Many small businesses operate on an overdraft and have a high level

of debt. The limited financial resources of small businesses is a

constraint on their capacity to weather downturns and grow and

compete with larger businesses;42

• Many small businesses operate on small margins, with highly variable

cash flow, particularly in their early years;43

• Late payments are a constant problem;44

• The fundamental characteristic that distinguishes small businesses

from large businesses is their higher probability of ceasing to trade.

Almost half of the small businesses in operation have been in

37 Report on Small Business Employment, Senate Committee on Employment, Workplace Relations and Education References, February 2003, pp.6, 49 38 Ibid, p.32 39 Ibid, pp.6, 13 40 Ibid, p.12 41 Ibid, pp.13, 44 42 Ibid, p.12 43 Ibid, p.12 44 Ibid, p.12


business for less than five years. Larger small businesses (for

example those approaching the Corporations Act definition of 50

employees) are more likely to have been in business for longer

periods.45

164. Table 10.1 below is drawn from ABS Cat. No. 6306. It shows that a much

higher proportion of the employees of employers with up to 100 employees

are award-reliant than the employees of employers with 1000 or more

employees.

Table 10.1 – Proportions of Award-reliant Employees by Employer Size

Size of Employer

Proportion of the employees of employers of different sizes whose method of pay setting is “Award Only”

Under 20 employees 27.5 20 to 49 employees 30.9 50 to 99 employees 31.5 100 to 499 employees 20.7 500 to 999 employees 17.4 1000 and over employees 4.5

165. Table 10.2 below, which is also drawn from ABS Cat. No. 6306, highlights that

award reliant employees engaged by small businesses receive much lower

average weekly total earnings than those employed by larger businesses.

Table 10.2 – Average Weekly Total Earnings of Award-reliant Employees by Employer Size

Size of Employer

Average Weekly Total Earnings ($)

Under 20 employees 407.50 20 to 49 employees 465.20 50 to 99 employees 431.90 100 to 499 employees 477.10 500 to 999 employees 502.90 1000 and over employees 498.40

45 Ibid, p.22


166. The above statistics clearly show that, on average, small businesses are much

more likely to be impacted by minimum wage increases than larger

businesses.

167. In its 2005 Safety Net Review Decision (at para 264), the Full Bench of the

AIRC said:

“We accept that businesses employing up to 100 employees employ a larger

proportion of award-reliant employees than larger businesses. We have had

regard to the impact on small business of the safety net adjustment we

propose to award.”

168. When making its minimum wage decision it is vital that the AFPC not lose

sight of the negative impacts that a large minimum wage increase will have on

small businesses.


11. Impacts of Minimum Wage Increases on

Bargaining 169. The Act emphasises the importance and primacy of agreement-making

between employers and employees with regard to the determination of wages

and working conditions. The Principal Object of the Act includes:

• Ensuring that, as far as possible, the primary responsibility for determining

matters affecting the employment relationship rests with the employer and

employees at the workplace or enterprise level (s.3(d)); and

• Enabling employers and employees to choose the most appropriate form

of agreement for their particular circumstances (s.3(e)).

170. It is important that the level of increase in minimum wages determined by the

AFPC not reduce the scope for bargaining over wages at the workplace level.

This would conflict with the objects of the Act.

171. According to the Department of Employment and Workplace Relations’ Trends

in Federal Enterprise Bargaining report, average annualised wage increases

for agreements certified or approved in the March Quarter 2006 were:

Sector AAWI Change from Dec Qtr

All Industries 3.8% down 0.7%

Private Sector 4.0% down 0.2%

Union Certified Agreements (s.170LJ) 3.8% down 0.7%

Non- Union Certified Agreements (s.170LK) 3.7% down 0.1%

All Manufacturing 4.1% up 0.2%

Metals Manufacturing 4.0% no change

Non- Metals Manufacturing 4.2% up 0.3%

Construction 4.9% down 0.1%


172. In its 2005 Safety Net Review Decision, the Full Bench said:

“We are conscious that increases in the award safety net have the potential to

influence the pace at which bargaining, either formal or informal, is taken up at

the enterprise level”.46

173. Minimum wage increases need to be positioned at a level below average

enterprise agreement wage outcomes in order to avoid diminishing the

primacy which is given to workplace agreement-making under the Act.

46 Paragraph 300 of the 2005 Safety Net Review Decision.


12. Rationalisation of Australian Pay and

Classification Scales

174. The Act empowers the AFPC to adjust, revoke and make Australian Pay and

Classification Scales (APCSs).

175. The Federal Government has established an Award Review Taskforce to

develop proposals for the rationalisation of awards, wage rates and

classifications. The Taskforce is comprised of only one person, Senior Deputy

President O’Callaghan of the AIRC - the Chair of the Taskforce. SDP

O’Callaghan is supported by a Secretariat which has been set up within the

Department of Employment and Workplace Relations, together with a

Reference Group. There are no employer or employee representative bodies

on the Reference Group.

176. On 1 May 2006, the Award Review Taskforce was reported to have submitted

two interim reports to the Minister for Employment and Workplace Relations

on:

• The rationalisation of awards; and

• The rationalisation of wages and classifications.

To date the reports have not been publicly released.

177. Further, the Chair of the Taskforce, SDP O’Callaghan, was reported in the

media on 28 July 2006 as stating that he intended submitting the Award

Review Taskforce’s final report on the rationalisation of wages and

classifications to the Minister on 31 July 2006.47

47 “Workforce”, 28 July 2006.


178. In exercising its wage setting powers, the AFPC is required under s.177 to

“have regard” to any relevant recommendations made by the Award Review

Taskforce. Ai Group submits that “have regard” requires that the AFPC do

nothing more than consider the recommendations made by the Taskforce and

if it believes that those recommendations are not appropriate then such

recommendations can and should be rejected.

179. Ai Group strongly submits that it would be highly inappropriate for the

AFPC to adopt any of the recommendations of the Award Review

Taskforce until employer and employee representative bodies (including

Ai Group) have had the opportunity to consider such recommendations

and make detailed submissions to the AFPC on them.

180. There are some 4000 APCSs and the process of rationalising them without

causing harsh and unfair outcomes for employers and/or employees is likely to

be highly complex.

181. A simplistic, “one-size-fits-all” approach to the rationalisation of wage rates

and classifications would undoubtedly lead to numerous negative

consequences for both employees and employers. It is essential that the

APCS rationalisation exercise be conducted in a consultative and careful

manner.

182. It is vital that the rationalisation exercise not result in the levelling-up of wages

and casual loadings. This would be a backward step which would decrease

the competitiveness of Australian industry and have negative effects on

employment.

183. In whatever model that is developed, scope needs to be retained for

appropriate exclusions, modifications and exceptions to apply within particular

industries, where circumstances justify them.


184. Developing a coherent model to rationalise wage rates and classifications is

fraught with difficulty. Any model implemented needs to meet the following

criteria:

• It should not result in employers being forced to pay substantial wage

increases;

• Any wage increases which do arise should generally be phased-in to avoid

cost pressures for employers and negative employment effects;

• The rationalisation of classifications should not result in employees who

are currently “award free”, becoming covered by an APCS. For example, if

the APCS arising from the Metal, Engineering and Associated Industries

Award (which has a 14 level structure) is combined with the APCS arising

from the Graphic Arts General Award (which has an 8 level structure which

was inserted into the award in October 2005 following 16 years of AIRC

proceedings48) then employees above Level 8 in the Graphic Arts Industry

should not become covered by an APCS as a result;

• Classifications should not be removed within an industry without good

reason as this creates significant potential for unions to pursue claims for

employees engaged in a removed classification to be levelled-up to a

higher classification.

48 Throughout the 16 years of negotiations and AIRC proceedings the AMWU pursued a 14 level classification structure which Ai Group and the Printing Industries Association opposed given the negative effects which it would have on the industry. A decision was finally handed down by Senior Deputy President Marsh on 26 October 2005, PR964271.


The APCSs which are now in Existence need to be

Published

185. There are some 4000 APCSs which are now legally binding yet no APCSs

have yet been published.

186. It is almost impossible to undertake the task of rationalising APCSs in a

methodical and careful way (so as to avoid unfairness for employers and

employees) until the APCSs which are in operation are published. This is the

logical starting point for any APCS rationalisation exercise, and should be a

priority for the AFPC.

187. The AIRC has made available copies of all federal awards – the instruments

which it is responsible for – on its website. The AFPC should make available

all APCSs – the instruments which it is responsible for – on its website.

188. Under the WorkChoices reforms, APCSs have much wider application than

awards. Awards no longer apply to parties covered under a workplace

agreement, whereas APCSs are part of the Australian Fair Pay and

Conditions Standard and apply even to parties covered under a workplace

agreement. This reinforces the need for these important new instruments to be

published so that employers and employees can better understand their rights

and obligations.

189. The APCS coverage rules in s.205 also add weight to the argument that the

AFPC should publish all APCSs which are in existence. Employers and

employees need to have a ready means on determining what APCSs are in

operation and what the content of each one is.


The Rationalisation of Awards by the AIRC and the

Rationalisation of Wages and Classifications by the AFPC

should not be Treated as Unrelated Exercises

190. The rationalisation of awards by the AIRC and the rationalisation of wages and

classifications by the AFPC should not be treated as completely unrelated

exercises. A much simpler system will result if the scope of the rationalised

awards and the scope of the rationalised APCSs are similar. Accordingly, the

AFPC should generally rationalise wage and classification structures in an

industry once the AIRC has rationalised awards in that industry.

191. If the scope of APCSs following rationalisation by the AFPC, does not align

with the scope of awards following rationalisation by the AIRC, there is the

potential for an illogical and complex safety net of minimum wages and

conditions to be created.

192. For example, after receiving an award rationalisation request from the Minister

relating to awards in the information and communications technology (ICT)

sector, the AIRC may logically decide that the appropriate award structure for

the industry is the following one49:

• One award covering non-professional employees in the ICT industry to

replace the Telecommunications Services Industry Award 2002, the

Contract Call Centre Industry Award 2003, the Business Equipment

Industry – Technical Service – Industry Award 1999 and the Business

Equipment Industry – Clerical Officers – Award 2000; with

• Another award covering professional employees in the ICT industry to

replace the Information Technology Industry (Professional Employees)

Award 2001 and the Telecommunications Industry (Professional

Employees) Award 2002.

49


193. The scope of the above two ICT awards could be readily drafted from the

combined scopes of the six existing industry awards referred to above.

194. If the AFPC decided to adopt a similar model for rationalising the APCSs

which arose from the abovementioned six awards, a very logical and simple

safety net of minimum wages and conditions would be created for the ICT

industry.

195. In contrast, if the AFPC headed off in a different direction regarding the

rationalisation of APCSs in the ICT industry, an illogical and complex safety

net of minimum wages and conditions could be created.

196. Accordingly, Ai Group submits that the AFPC should generally rationalise

wage and classification structures in an industry once the AIRC has

rationalised awards for that industry.

197. The Act imposes a timeframe on award rationalisation which will ensure that

the rationalisation exercise is completed without undue delay. Section 118 of

the Act states that each award rationalisation request made by the Minister to

the President of the AIRC must specify “the time by which the award

rationalisation process must be completed, which must not be later than 3

years after the making of the request”.

198. In making this submission, Ai Group does not wish to see the process of

rationalising wages and classifications unduly delayed but the issues are very

complex and the approach which we have proposed is workable, logical and

fair to employers and employees.


An Appropriate Starting Point for Developing a Structure

for Rationalisation

199. A logical starting point for the development of a structure for rationalising

classifications and wage rates is to consider the structure within the Victorian

Minimum Conditions. The classification and wage structures within the

Victorian Minimum Conditions are based upon the ANZSIC system and were

developed between employer groups and the unions with the extensive

involvement of the AIRC. These structures have been in operation within

Victoria for more than a decade and few problems have arisen for employers

or employees.

The Wages Guarantee

200. Section 190 of the Act states that the AFPC, in exercising its powers to adjust,

make or revoke APCSs, must ensure that the minimum wage rates applicable

to employees are not less than the minimum award rates of pay that each

employee was entitled to before the reforms commenced.

201. The Wages Guarantee in s.190 makes the process of rationalising APCSs

more complex than would otherwise be the case. In rationalising wage rates

within APCSs, the guarantee would appear to allow for three main options:

• Option One – Level-up the classification wage rates for all APCSs to

the highest wage rates within the group of APCSs which are being

rationalised

This Option is highly inappropriate. The APCSs in the metal and

engineering industry highlight this. The main APCS in the industry is the

one which arose from the Metal, Engineering and Associated Industries


Award. This APCS covers some 150,000 employees50 and the wage rates

in this APCS would logically be adopted for any group of rationalised

APCSs in the industry unless there are compelling reasons to the contrary.

In addition to the APCS which arose from the Metal, Engineering and

Associated Industries Award, there are most likely a small number of

APCSs in the industry with higher wage rates, eg. APCSs which arose

from enterprise awards. It would not be fair on employers across the metal

and engineering industry to be forced to apply wage rates that are based

on an APCS applicable to only a small number of employers and/or

employees (and one which may have classifications and wage rates that

reflect unique characteristics of an enterprise or of a small sector of the

industry)

• Option Two – Adopt the lowest wage rates in the group of APCSs

which are being rationalised and freeze all higher wage rates until the

frozen wage rates are overtaken

This option would not disadvantage any employers nor have any negative

economic consequences but it could result in the adoption of an

inappropriate set of wage rates and relativities in an industry (simply

because those rates are the lowest amongst the APCSs in the group being

rationalised), rather than the adoption of the most appropriate set of wage

rates for the industry.

• Option Three - Establish the most appropriate level for classification

wage rates for the group of APCSs being rationalised, then level-up

any lower wage rates and freeze any higher wage rates until the

frozen rates are overtaken

The appropriate level for wage rates could be determined on the basis of

criteria such as:

50 See decision of SDP Marsh re. Metal, Engineering and Associated Industries Award 1998, 11 March 1998, Print P9311.


• The fact that APCSs are intended to provide minimum safety net

entitlements; and

• The need for minimum wage rates to be set at a level which

preserves high employment and international competitiveness.

With this option, wage rates which are below those in the schedule of wage

rates established for the group of APCSs would be levelled-up, with

phasing-in where necessary. Wage rates above the level established

would be frozen until the main schedule of wage rates overtakes the frozen

wage rates.

Given the Rules in s.205 of the Act - in particular the fact that new APCSs

override preserved APCSs – there would be some complexity involved in

drafting new APCSs to achieve the above structure. However, once the

frozen rates in an APCS were overtaken, the APCS could be worded in a

simple manner.

This may be a better option than option one and option two but caution is

needed before it is adopted. There could be negative economic

consequences, and unfairness may arise for some employers forced to

level-up wage rates.

202. The Wages Guarantee ensures that no employee will be treated harshly by

the rationalisation exercise (in terms of his or her pay rate) but it does not

protect employers from harsh treatment or employees from the negative

employment effects of such treatment.

203. As set out above, a cautious and consultative approach needs to be taken to

the rationalisation of APCSs. Also, the AFPC should ensure that the economic

impacts of whatever rationalisation model is adopted are thoroughly analysed

and considered before any decisions are made.


Removal of Coverage Rules Within APCS which are

Described by Reference to State and Territory Boundaries

204. Section 206 of the Act states that, by 27 February 2009, APCSs must not

contain coverage rules that are described by reference to State or Territory

boundaries. Accordingly, the differences in minimum wage rates in the APCSs

arising from the various state awards need to be removed by 27 February

2009.

205. This legislative requirement is likely to cause harsh outcomes for employers in

a small number of industries (eg. retail) given the substantial differences in the

rates within the APCSs which arose from the various state awards, and given

the Wages Guarantee in s.190 of the Act.

206. It is important that the requirements of s.206 not lead to the AFPC proceeding

to rationalise APCSs with undue haste. A better approach would be for the

AFPC to recommend to the Federal Government that s.206 be amended to

enable the differences in minimum wage rates between states and territories

to be removed over a more workable timeframe.

What Should the AFPC do about Rationalisation During its

First Minimum Wages Review?

207. Ai Group submits that the AFPC should not rationalise APCSs as part of its

first minimum wages review, given the potential for negative economic effects

and potential unfairness to arise for employers and/or employees. A cautious

and consultative approach needs to be taken.

208. If the AFPC determines that minimum wages should be increased in 2006,

then the level of increase which it determines as appropriate should be applied

to preserved and new APCSs.


13. Minimum Wages for Adults

209. Ai Group proposes that minimum wages be increased by $14.00 per week

across all classifications. This would increase the Federal Minimum Wage

(FMW) to $13.12 per hour.

210. This level of wage increase takes into account:

• The non-adversarial nature of the AFPC’s deliberations and the importance

of avoiding “ambit” positions;

• The objects of the Act and the AFPC’s wage-setting parameters (see ss.3

and 23 of the Act);

• Current economic conditions and the outlook for the Australian economy;

(see Chapter 3);

• The need to avoid inflationary pressures, which could lead to increases in

interest rates (see Chapter 3);

• The capacity for the unemployed and the low paid to obtain and remain in

employment (see Chapters 4, 7, 8, 9 and 10 and s.23(a));

• Employment and competitiveness across the economy (see Chapters 4, 7,

8, 9 and 10 and s.23(b));

• The need to provide a safety net for the low paid (see Chapters 5, 6 and 7

and s.23(c));

• The need to provide minimum wages for junior employees, employees to

whom training arrangements apply and employees with disabilities that

ensure those employees are competitive in the labour market (see

Chapters 14, 15 and 16 and s.23(d));


• The importance of taking into account the interactions between different

elements of the social safety net, including minimum wages, income

taxation, income support and non-wage costs (see Chapters 5 and 6);

• The impact on small businesses (see Chapter 10);

• The need for minimum wage increases to be positioned at a level below

average workplace agreement wage outcomes in order to avoid

diminishing the primacy which is given to workplace agreement-making

under the Act (see Chapter 11 and s.3(d) and (e)); and

• The period of time which has elapsed since the AIRC’s 2005 Safety Net

Review Decision.

211. The $14.00 per week increase proposed by Ai Group represents:


• A 2.4 per cent increase in the base trade rate (C10).

212. In contrast the excessive $30.00 wage increase which the ACTU announced

to the media on 27 July that it would proposing to the AFPC represents:


• A 5.2 per cent increase on the base trade rate (C10).

213. If the AFPC increased minimum wages by $30.00, as proposed by the ACTU,

the effects would be:

• Reduced employment;

• Higher inflation;

• Higher interest rates; and

• Reduced international competitiveness.


214. The ACTU’s proposed $30 wage increase would also reduce the scope for

bargaining over wages at the enterprise level. This directly conflicts with the

objects of the Act.

The Period of Time Which has Elapsed Since the AIRC’s

2005 Safety Net Review Decision

215. The $14.00 per week minimum wages increase proposed by Ai Group takes

into account the fact that the 2005 Safety Net Review Decision was handed

down on 7 June 2005 and the fact that the AFPC is expected to hand down its

decision in Spring 2006.

216. Whilst it is appropriate to take into account the period of time which has

elapsed since the last increase, it is also important for the AFPC to give

consideration to the fact that the operative dates for safety net adjustments in

different federal awards are staggered over many months, as highlighted by

the table below. The table sets out the operative dates of the last safety net

adjustment incorporated within the following sample of industry awards

applying to Ai Group members.

Table 13.3 – Operative dates of Safety Net Adjustments in Various Federal Awards

Award

Operative Date - 2005 Safety Net Adjustment

Manufacturing Industry Awards: Clothing Trades Award 7 June 2005

Food Preservers’ Award 28 June 2005

Glass Industry – Glass Production - Award 23 August 2005

Graphic Arts – General – Award

21 June 2005

Manufacturing Chemists Award 20 June 2005


Award


Manufacturing Grocers Award

16 June 2005

Metal, Engineering and Associated Industries Award 7 June 2005

Metal, Engineering and Associated Industries (Professional Engineers and Scientists) Award

29 June 2005

Rubber Plastic and Cablemaking Industry – General Award 7 June 2005

Scientific Services Professional Scientists Award 21 July 2005

Textile Industry Award 28 June 2005

Timber and Allied Industries Award 7 June 2005

Vehicle Industry Award 7 June 2005

Wine Industry – AWU - Award 4 July 2005 Construction Industry Awards: AWU Construction and Maintenance Award 28 August 2005

National Building and Construction Industry Award 8 June 2005

National Electrical, Electronic and Communication Contractors Award

8 July 2005

National Metal and Engineering On-site Construction Industry Award 14 July 2005

ICT Industry Awards: Business Equipment – Clerical Officers Award 22 July 2005

Business Equipment Industry – Technical Services – Award 1 August 2005

Contract Call Centre Industry Award 15 July 2005

Information Technology Industry (Professional Employees) Award

13 July 2005

Telecommunications Services Industry Award

1 August 2005

Television, Radio and Electronics Services Industry Award

This award has not been varied for the 2005 SNA. The 2004 SNA is operative from 13 February 2005.

Aviation Industry Awards: Aircraft Engineers General Aviation Award

This award has not been varied for the 2002, 2003 or 2004 SNAs. The 2001 SNA is operative from 1 September 2005.


Award


Overseas Airline Award 5 July 2005

Pilots (General Aviation) Award 2006 31 March 2006

217. It should also be noted that the operative date for the 2005 safety net

adjustment in every Victorian common rule award is 1 August 2005 or later.

The Application of the Proposed Minimum Wage Increase

to all Classifications

218. Ai Group proposes that, on this occasion, the AFPC increase minimum wages

by $14.00 and apply such increase to all classifications.

219. The appropriateness of continuing to adopt such a practice should be

considered in detail in subsequent reviews of minimum wages. It would be

beneficial for the pros and cons of doing so to be evaluated during the process

of rationalising APCSs.

220. The relativities within skill-based classifications structures in APCSs are

already compressed due to the many flat dollar safety net adjustments which

have been awarded by the AIRC, but the compression has not yet reached a

stage where the relativities are meaningless. If the minimum wage increases

awarded by the AFPC are not applied to all classifications, the relativities

between classifications will soon become meaningless.

221. This is not necessarily a problem because market factors and the incidence of

over-award payments reduce the detrimental impact of compressed relativities

between minimum rates. However, the impacts should be thoroughly analysed

and understood before any view is formed by the AFPC that it is no longer

important to maintain meaningful relativities between classifications.


The Relevance, if any, of Recent State Wage Case

Decisions to the AFPC’s Deliberations

222. It is important that the AFPC not be influenced by the various State Wage

Case decisions when making its minimum wages decision.

223. In the NSW and Queensland State Wage Case proceedings, Ai Group argued

strongly that the State Industrial Commissions should delay their decisions

until after the AFPC had handed down its minimum wages decision. Such

argument was rejected by the NSW and Queensland State Commissions.

224. Given that a high proportion of the employees who remain under the State

industrial relations systems are State Government employees, undoubtedly

the State Commissions gave great weight to the wage increases which the

State Governments proposed in the proceedings. The circumstances are

totally different in the national workplace relations system where the

overwhelming majority of employees covered are engaged in the private

sector.

225. The role of the AFPC would be substantially undermined if it gave any weight

to the State Wage Case Decisions. Doing so would simply encourage the

State Commissions to conduct State Wage Cases in future years, prior to the

AFPC’s deliberations. The appropriate approach is for the AFPC to make its

decision on minimum wage increases for those in the national workplace

relations system, and then for the State Commissions to schedule

proceedings to consider whether the AFPC’s decision should be flowed on to

employees in the State system.


14. Minimum Wages for Juniors

226. Junior wages are contained within a large number of APCSs. Different wage

rates apply in different industries which reflect industry characteristics, the

nature of the work performed and historical factors.

227. Any rationalisation of junior wage rates should be carried out as part of the

process of rationalising APCSs. This will enable the reasons why junior rates

differ markedly from one APCS to another to be analysed and valid

differences preserved. This will also enable the reasons why junior rates are

not contained within the APCSs in certain industries (eg. construction) to be

analysed.

228. Under s.197 of the Act, the AFPC is empowered to determine a special FMW

for: all junior employees; or a class of junior employees.

229. The AFPC should determine a special FMW for junior employees, but it would

not be workable to have one special FMW for all juniors, regardless of their

age. An appropriate approach would be to determine a special FMWs for

juniors consisting of a series of wage rates based upon age, with each rate

reflecting a particular relativity to the FMW for adults.

230. The relativities in the APCS arising from the Graphic Arts – General – Award

2000 (formerly subclause 5.1.2 – Junior Wages, of the Award), would appear

to be appropriate as a safety net for all industries. Such an approach would

result in the following special FMW for juniors, (based upon relativities to the

current FMW):


Table 14.1 – Special FMW for juniors (based upon the relativities in the APCS arising from the Graphic Arts – General – Award 2000)

Age % of the FMW Rate per Hour

($12.75 per hr) $

Under 16 years 30 3.83

16 years 40 5.10

17 years 50 6.38

18 years 60 7.66

19 years 75 9.56

20 years 90 11.48

231. If the AFPC is of the view that the above rates are too low, then the relativities

in the APCS arising from the Metal, Engineering and Associated Industries

Award 1998 – Part I (formerly clause 5.5 - Unapprenticed Junior Rates of Pay,

of the Award) could be adopted, as set out below:

Table 14.2 – Special FMW for juniors (based upon the relativities in the APCS arising from the Metal, Engineering and Associated Industries Award 1998 – Part I)

Age % of the FMW Rate per Hour

($12.75 per hr) $

Under 16 years 36.8 4.69

16 years 47.3 6.03

17 years 57.8 7.37

18 years 68.3 8.71

19 years 82.5 10.52

20 years 97.7 12.46

232. The above special FMW for juniors would need to be adjusted in line with any

increase to the FMW arising from the AFPC’s decision.


233. The abovementioned proposed special FMW for juniors is more appropriate as

a safety net than the following junior wage rates in operation in the WA and

SA State workplace relations systems, which are higher than the junior rates in

a large number of federal awards:

• WA Minimum Conditions of Employment Act: Adult (100%) - $12.75; 20 yrs

(90%) - $11.47; 19 yrs (80%) - $10.20; 18 yrs (70%) - $8.92; 17yrs (60%) -

$7.65; 16 yrs (50%) - $6.37; Under 16 yrs (40%) - $5.10;

• SA Minimum Standard for Remuneration: Adult (100%) - $12.75; 20 yrs

(90%) - $11.47; 19 yrs (80%) - $10.20; 18 yrs (70%) - $8.92; 17yrs (60%) -

$7.65; Under 17 yrs (50%) - $6.37.

234. Under s.198 of the Act, when determining a special FMW the AFPC is

required to state whether the special FMW will operate as a minimum standard

in respect of any APCSs. Given the large variation in junior wage rates

between different APCSs, we submit that the special FMW should not operate

as a minimum standard for any APCS. That is, the special FMW for juniors

should only apply to employees not covered under an APCS.


15. Minimum Wages for Employees to Whom

Training Arrangements Apply

235. There are a myriad of apprenticeships and traineeships provided for within

APCSs with numerous different wage rates. Therefore, caution is needed in

implementing new minimum wage structures for employees to whom training

arrangements apply.

236. The wage rates in the APCS arising from the National Training Wage Award

2000 apply to trainees covered under the APCSs arising from most federal

industry awards. However, in addition to National Training Wage Award rates,

there are many other trainee and apprentice wage rates set out within APCSs.

For example, the Manufacturing and Associated Industries – Skills

Development – Wages and Conditions Award 2004 contains wage rates for

employees undertaking a Technology Cadetship – an important new training

qualification in the manufacturing industry.

237. Attempts to implement new “across the board” minimum wage rates for

employees to whom training arrangements apply could disturb many existing

wage structures to the detriment of employees and/or employers.

238. The appropriate approach is to deal with the rationalisation and modernisation

of wage rates for employees to whom training arrangements apply as part of

the process of rationalising APCSs.

239. Section 221 of the Act requires the AFPC to consider whether, as part of its

first exercise of powers, it should determine an APCS for all, or a class of,

employees to whom training arrangements apply. The guarantee under s.190

of the Act does not limit the AFPC’s powers to determine appropriate wage

rates in such an APCS. If such an APCS is to be determined, we propose the

following approach:


• The APCS should only apply to one class of employees to whom training

arrangements apply, with that class being those employees who are not

covered under another APCS (NB. Defining the class in this way is

necessary to avoid this APCS prevailing over all other APCSs as a result of

s.205 of the Act);

• The content of the APCS would logically be similar to the content of the

APCS arising from the National Training Wage Award 2000;

• The APCS should not cover traditional apprenticeships, as these are

comprehensively dealt with in other APCSs;

• The APCS would not need to deal with school-based apprentices and

trainees because Part 23 of the Act provides minimum wages (and

conditions) for these persons.

240. Under s.197 of the Act, the AFPC may determine a special FMW for all or a

class of employees to whom training arrangements apply. Given that wage

rates for these employees are comprehensively dealt with in APCSs, Ai Group

does not see a need for such special FMW to be established.

Minimum Wage Rates for Employees Undertaking

Traditional Apprenticeships

241. As set out above, Ai Group proposes that minimum wage rates for employees

undertaking traditional apprenticeships be dealt with in APCSs, and that any

new wage structures generally be implemented as part of the process of

rationalising APCSs. This will allow time for appropriate analysis and

consultation with relevant employers and employees.

242. This will also allow more time to analyse recent developments relating to

minimum wage rates for apprentices such as the effects of the significant

decision handed down by Senior Deputy President Marsh of the AIRC on 21

February 2006 (PR968890). Arising from this decision, the Metal, Engineering

and Associated Industries Award 1998 was varied to implement new

apprenticeship structures and wage rates.


243. The new pay rates are based upon the level of schooling that an apprentice

had completed at time of commencing an apprenticeship.

244. The negotiations between Ai Group and the unions relating to the unions’

claim to increase wage rates for apprentices under the Award commenced in

2004 and regular negotiations were held until the outstanding matters were

arbitrated in early 2006.

245. While there continued to be differences between the parties regarding

apprentice wages, it was evident from an early stage that a great deal of

common ground existed on the reforms needed to other aspects of

apprenticeship structures. All parties recognised that changes needed to be

made in order to attract high calibre people to pursue careers as

tradespersons in the manufacturing industry and to decrease the rate of non-

completion of traditional apprenticeships. During the course of the

negotiations, it was agreed between Ai Group and the unions that changes

needed to be made to apprentice structures to:

Stage of apprentice-ship

Relevant attribute of person at the time of entering into an indenture or

contract of training as an apprentice

Completed

Year 10 or less

Completed

Year 11

Completed Year 12

Adult (ie. over 21 years

of age)

Weekly

Rate $

Hourly Rate

$

Weekly

Rate $

Hourly Rate

$

Weekly

Rate $

Hourly Rate

$

Weekly

Rate $

Hourly Rate

$

Stage 1

242.80

6.39

273.80

7.21

273.80 (from 6 Mar 06 until 5 Sept 06) 293.00 (from 6 Sept 06)

7.71

455.00

11.97

Stage 2

318.00

8.37

318.00

8.37

340.00

8.95

484.40

12.75

Stage 3

433.70

11.41

433.70

11.41

433.70

11.41

501.10

13.19

Stage 4

508.80

13.39

508.80

13.39

523.60

13.78

523.60

13.78


• Emphasise competency-based progression through apprenticeships and

de-emphasise progression on the basis of time-served;

• Provide multiple entry points to apprenticeships with recognition of skills,

knowledge and qualifications acquired;

• Provide multiple points for persons to exit from apprenticeships with formal

qualifications;

• Create a new trade qualification at the AQF 5 level to complement the

existing qualifications at the AQF 3 and AQF 4 levels.

246. With regard to the minimum wage rates, Ai Group accepted in the AIRC

proceedings that:

• All of the issues of detail which it had raised had been addressed by the

unions and that the unions had amended their application accordingly; and

• The model for apprentice wage rates in the unions’ amended application

was consistent with changes which have occurred elsewhere within the

national training system and the workplace relations system – in particular

the approach taken within the National Training Wage Award and the

Manufacturing and Associated Industries – Skills Development – Wages

and Conditions Award.

247. Accordingly, Ai Group limited its submissions in the proceedings to the general

issue of whether rates for apprentices should be increased.

248. After hearing the submissions of the parties, SDP Marsh decided to vary the

award in line with the amended wage structure sought by the unions.

249. The new wage rates have been in operation since 6 March 2006 and Ai Group

acknowledges that, to date, there is no sign of any negative effects associated

with them. However, only a short amount of time has elapsed. It should also

be noted that the wage rate which increased by the highest amount (ie. Stage

One apprentice who has completed year 12) is being phased in, with a further

increase payable from 6 September 2006.


16. Minimum Wages for Employees with a Disability

250. Minimum wage rates for employees with a disability are contained within a

large number of APCSs in a standard clause which provides for a Supported

Wage System.

251. The standard clause was inserted into numerous awards as a result of a Full

Bench decision in 1994 (Print L5723). At the time, the AIRC described the

Supported Wage System as “an important social and industrial advance”.

252. In addition to the Supported Wage system, there are other elements which

function outside of the workplace relations system to assist persons with a

disability obtain and retain employment include a disability wage supplement

paid through the social security system and other forms of support, such as

on-the-job support and financial support for employers with respect to some of

the additional costs of employing a person with a disability.

253. The Supported Wage System incorporates a schedule of relativities which are

to be applied to the rate of pay which is prescribed in the relevant APCS for

the class of work which the person is performing, based on assessed capacity.

Also, the standard clause includes a minimum amount which no employee can

be paid less than (around $61.00).

254. The clause contained within the APCS arising from the Metal, Engineering and

Associated Industries Award is set out below.

5.8 SUPPORTED WAGE SYSTEM FOR PEOPLE WITH DISABILITIES

5.8.1 Workers Eligible for a Supported Wage

This clause defines the conditions which will apply to employees who because of the effects of a disability are eligible for a supported wage under the terms of this award. In the context of this clause, the following definitions will apply:

5.8.1(a) "Supported Wage System" means the Commonwealth Government system to

promote employment for people who cannot work at full award wages because of a disability, as documented in "Supported Wage System: Guidelines and Assessment Process".


5.8.1(b) "Accredited Assessor" means a person accredited by the management unit

establishment by the Commonwealth under the Supported Wage System to perform assessments of an individual's productive capacity within the Supported Wage System.

5.8.1(c) "Disability Support Pension" means the Commonwealth pension scheme to provide

income security for persons with a disability as provided under the Social Security Act 1991, as amended from time to time, or any successor to that scheme.

5.8.1(d) "Assessment Instrument" means the form provided for under the Supported Wage

System that records the assessment of the productive capacity of the person to be employed under the Supported Wage System.

5.8.2 Eligibility Criteria

5.8.2(a) Employees covered by this clause will be those who are unable to perform the

range of duties to the competence level required within the class of work for which the employee is engaged under this award, because of the effects of a disability on their productive capacity and who meet the impairment criteria for receipt of a Disability Support Pension.

5.8.2(b) This clause does not apply to any existing employee who has a claim against the

employer which is subject to the provisions of workers' compensation legislation or any provision of this award relating to the rehabilitation of employees who are injured in the course of their current employment.

5.8.2(c) The award does not apply to employers in respect of their facility, programme,

undertaking, service or the like which receives funding under the Disability Services Act 1986 and fulfils the dual role of service provider and sheltered employer to people with disabilities who are in receipt of or are eligible for a disability support pension, except with respect to an organisation which has received recognition under section 10 or section 12A of the said Act, or if a part only has received recognition, that part.

5.8.3 Supported Wage Rates

5.8.3(a) Employees to whom this clause applies shall be paid the applicable percentage of

the minimum rate of pay prescribed by this award for the class of work which the person is performing according to the following schedule:

Assessed Capacity Percentage of Prescribed (Subclause 5.8.4) Rate of Pay

10% 10% 20% 20% 30% 30% 40% 40% 50% 50% 60% 60% 70% 70% 80% 80% 90% 90%

(Provided that the minimum amount payable shall be not less than $61.00 per week).

5.8.3(b) Where a person's assessed capacity is 10 per cent, they shall receive a high

degree of assistance and support.


5.8.4 Assessment of Capacity

For the purpose of establishing the percentage of the award rate to be paid to an employee under this award, the productive capacity of the employee will be assessed in accordance with the Supported Wage System and documented in an assessment instrument by either:

5.8.4(a) The employer and a union party to the award, in consultation with the employee or

if desired by any of these; or

5.8.4(b) The employer and an accredited assessor from a panel agreed by the parties to the award and the employee.

5.8.5 Lodgement of Assessment Instrument

5.8.5(a) All assessment instruments under the conditions of this clause, including the

appropriate percentage of the award rate to be paid to the employee, shall be lodged by the employer with the Registrar of the Industrial Relations Commission.

5.8.5(b) All assessment instruments shall be agreed and signed by the parties to the

assessment, provided that where a union which is party to the award is not a party to the assessment, it shall be referred by the Registrar to the union by certified mail and shall take effect unless an objection is notified to the Registrar within ten working days.

5.8.6 Review of Assessment

The assessment of the applicable percentage should be subject to annual review or earlier on the basis of a reasonable request for such a review. The process of review shall be in accordance with the procedures for assessing capacity under the Supported Wage System.

5.8.7 Other Terms and Conditions of Employment

Where an assessment has been made, the applicable percentage shall apply to the wage rate only. Employees covered by the provisions of this clause will be entitled to the same terms and conditions of employment as all other workers covered by this award paid on a pro rata basis.

5.8.8 Enterprise Adjustment

An employer wishing to employ a person under the provisions of this clause shall take reasonable steps to make changes at the enterprise to enhance the employee's capacity to do the job. Changes may involve re-design of job duties, working time arrangements and work organisation in consultation with other workers in the area.

5.8.9 Trial Period

5.8.9(a) In order for an adequate assessment of the employee's capacity to be made, an

employer may employ a person under the provisions of this clause for a trial period not exceeding 12 weeks, except that in some cases additional work adjustment time (not exceeding four weeks) may be needed.

5.8.9(b) During the trial the assessment of capacity shall be undertaken and the proposed

wage rate for a continuing employment relationship shall be determined.

5.8.9(c) The minimum amount payable to the employee during the trial period shall be no less than $61.00 per week.


5.8.9(d) Work trials should include induction or training as appropriate to the job being

trialled.

5.8.9(e) Where the employer and employee wish to establish a continuing employment relationship following the completion of the trial period, a further contract of employment shall be entered into based on the outcome of assessment under subclause 5.8.4.

255. Section 220 of the Act enables the AFPC to determine an APCS for all, or a

class of, employees with disabilities. The guarantee under s.190 of the Act

does not limit the AFPC’s powers to determine appropriate wage rates in such

an APCS. We propose that such an APCS be determined as follows:

• The APCS should apply to all employees with a disability;

• The content of the APCS should be as similar as the Act enables, to the

standard Supported Wage clause as set out above;

• The coverage rules in s.205 would apply with the result that the proposed

APCS would prevail over other APCSs.

256. Under s.197 of the Act, the AFPC may determine a special FMW for all or a

class of employees with a disability. If our proposed approach is adopted and

wage rates for these employees are comprehensively dealt with in the

abovementioned APCSs, Ai Group does not see a need for such special FMW

to be established.


17. Casual Loadings

257. The increase in the level of casual employment has been well documented.

Figures in a Research Paper entitled Casual Employment: Trends and

Characteristics51, indicate that 28 per cent of all wage and salary earners (32

per cent of females and 24 per cent of males) were employed on a casual

basis, and in the period between 1988 and 2003, more than half (54 per cent)

of all new jobs created went to casual workers.

258. Times have moved on from the days when casual employment was regarded

as legitimate only when short-term or irregular. Nowadays the engagement of

employees on a casual basis is an essential form of labour flexibility for

companies. Also, many employees prefer casual employment because of the

flexibility which it provides.

259. In a survey commissioned by Ai Group,52 respondents were asked why casuals

with six months or more of service were engaged. Meeting fluctuating work

demands was a major factor. Employee preference was also a factor that

ranked highly among most sectors surveyed. Other factors of importance to

many organisations were leave replacement and skill shortfall. A small number

of organisations cited reasons such as to reduce the administrative burden or to

reduce costs associated with regular employment.

260. More recent data is found in the Australian Bureau of Statistics report Social

Trends Australia 2005 which shows that many casuals have long term and

continuous jobs, with 57 per cent of casuals being with their employer for over

12 months in 2003.53 This demystifies the idea that all casual employment is

insecure and short-term.

51 Casual Employment: Trends and Characteristics, Parliamentary Library Research Note 2003-4 No.53, May 2004 52 A Report On A Survey Of Members Of Six Employer Organisations On Current Practices And Implications Of The NSW Labor Council Claim To Vary A Number Of NSW State Awards (28 March 2004), Associate Professor Benson. 53 ABS Report Social Trends in Australia 2005.


261. In the fast growing labour hire industry, the vast majority of employees are

engaged on a casual basis. Also, casual employment accounts for around 60

per cent of all employees in hotels, cafes and restaurants54.

262. A high proportion of casual employees are young people. This no doubt reflects

the strong preference for casual employment amongst students. In addition, a

higher proportion of women than men occupy casual positions.55

263. It is important that the level of the loading payable to casual employees not

operate as a disincentive to the employment of casuals.

264. Casual loading provisions are contained within most APCSs. There are,

however, significant variations in the loadings contained within them.

265. For example, the APCS arising from the federal Metal, Engineering and

Associated Industries Award contains a 25 per cent loading, whereas the

APCSs arising from the NSW State Metal, Engineering and Associated

Industries Award and Electricians & c (State) Award contain 15 per cent and

12 per cent loadings respectively.

266. The significant differences which exist in the loadings in APCSs should be

considered as part of the rationalisation process.

267. Section 186 provides for a “default casual loading percentage” of 20 per cent.

The AFPC has the power to adjust this percentage subject to the provisions of

s.187 and other relevant provisions of the Act.

268. The current “default casual loading percentage” of 20 per cent remains

appropriate for the following reasons:

• It is consistent with the level of the loading in a large number of APCSs; 54 ABS Cat. No. 6310.0 55 ABS Cat. No. 6310.0.


• It is already substantially higher than the loading in many APCSs (eg. the

APCSs arising from the NSW State Metal, Engineering and Associated

Industries Award and Electricians & c (State) Award, as referred to above);

• In some relatively recent Industrial Commission decisions a 20 per cent

loading was found to be appropriate (eg. the August 2003 decision of the

AIRC in respect of the Glass Industry – Glass Production – Award 1998

(PR935981));

• It is consistent with the loading in the WA Minimum Conditions of

Employment Act and the SA Minimum Standard for Remuneration;

• If the loading is increased it will have a negative impact upon employment;

and

• The level of the loading should not operate as a disincentive to the

employment of casuals.


18. Research Priorities

269. Although the setting of minimum wages in Australia is a century-old practice,

there are surprisingly large gaps in the availability of high quality relevant

information.

270. This Chapter puts forward a set of suggestions about areas in which the AFPC

might undertake or commission research.

Identification and Characteristics of the Low Paid

271. Greater information about the groups that make up “the low paid” would be of

great interest and usefulness. In particular:

• To what extent is low pay due to low wage rates and to what extent is it due

to the number of hours worked?

• Do specific groups predominate among the low paid? Investigation in this

area could identify the roles of gender, education attainment, disability,

location, other socio-economic characteristics, ethnicity, and the importance

of the absence of or low level of specific skills (language, literacy,

numeracy).

• To what extent are low paid people working in the hidden or cash economy?

• To what extent does a position of low pay reflect a stage in life-cycles and to

what extent does it persist over people’s working lives?

272. In view of the safety net role attributed to minimum wages a number of issues

could be investigated. These include the extent to which low paid people are

reliant on their own pay. For instance:

• Does their membership of a family/household provide access to other

private sources of income?


• Do low paid people have access to non-wage income (eg. are they self

funded retirees working part-time)?

• To what extent is their wage income supplemented by the formal income

support system and/or by access to state-provided or subsidised goods and

services – for instance housing and pharmaceutical goods?

Who Receives Minimum Wage Increases?

273. Wage earners may be affected directly or indirectly by increases in statutory

minimum wages. The direct impact would arise if an employee’s pay rates must

rise because they are paid the statutory minimum rate. The indirect impact

would arise because, whether by custom or as a result of formal contract

clauses, adjustment in rates of pay are linked to changes in statutory minimum

wages.

274. Close investigation of these different impacts would assist in considerations of

the broader economic impacts of the minimum wage decisions.

275. Another dimension of investigation of the impact of minimum wage decisions on

wage earners is the degree to which those affected, directly or indirectly, are

low paid. This is highly relevant to the consideration of the importance and

effectiveness of adjustments in minimum wages in supplementing the broader

social safety net.

Impacts of Minimum Wage Levels on Employment

Opportunities

276. Greater data on the impact of minimum wages on the availability of

employment opportunities would be invaluable. Research into the possibly

different impacts on different groups would also be important.


277. Such research would assist in understanding the impacts on the ability of

businesses to offer employment opportunities as well as the willingness of

employees or potential employees to take up available opportunities.

278. An important dimension of research in this area could address the question of

the availability of low-skilled jobs relative to higher skilled jobs.

279. Many of these areas may involve international comparisons.

Interactions between Wages, Wage Costs and Effective

Marginal Tax Rates

280. The interactions between wages, wage costs and effective marginal tax rates

are important to both the impacts of minimum wage rises and their

effectiveness in achieving broader social objectives.

281. A thorough assessment of the costs and benefits of a particular wage increase

would benefit from:

• More information about the relationship between wage increases and

changes in non-wage costs;

• Greater understanding of interactions between effective marginal tax rates,

wages and labour supply.

282. Greater information about these factors would also inform policy in relation to

the social safety net.

283. General social policy would benefit from information about the cost

effectiveness of using minimum wage adjustments as an instrument in

augmenting the broader social safety net. The suggestions that the benefit cost

ratios of minimum wage change may be very low points to this as an area of

improvement to broader social policy.


The Effects of Decisions of the Australian Fair Pay

Commission

284. Over time, it will be important that research be carried out to assess the effects

of specific decisions of the AFPC, including:

• Effects on the economy, including any inflationary, employment or other

effects;

• Effects on special groups of employees including women, employees with a

disability, apprentices, trainees, young persons and mature-aged

employees;

• Effects on the workforce participation rate – which needs to improve given

Australia’s ageing population and inadequate fertility rate.


Annexure A

Implications of minimum wage

increases on Australian industry

July 2006


CONTENT Sample ..................................................................................................................3 Survey Objectives .................................................................................................5 Key Findings .........................................................................................................6 Implications of minimum wage increases of total wage bill ....................................7 Implications of minimum wage rate increases for businesses ...............................11 Impacts on staff redundancies, employment and overtime ...................................14 Impacts on selling prices and competitiveness .....................................................16 Figures and Tables Figure 1: Industry composition by numbers of firms............................................3 Figure 2: Industry composition by numbers of employees..................................4 Figure 3: Employment by occupational category ................................................5 Figure 4: Employees employed on above award rates of pay ............................7 Figure 5: Figure 5: Award wages as a proportion of total wages, by sector .......8 Figure 6: Flow on of increases to non-award rate employees ............................9 Figure 7: Flow on of minimum wage rate increases to at least a proportion of non-award rate employees, by sector ....................................................................10 Figure 8: Impacts of 2005 minimum wage rate increase on firms, by location ...11 Figure 9: Impacts of 2005 minimum wage rate increase on firms, by size .........12 Table 1: Impacts on proportion of firms within each sector ................................13 Figure 10: Business impact by companies who pass on minimum wage rate increases to non-award employees and those who do not ....................................14 Figure11: Redundancy impacts by occupational category, by location ...............15


Sample A random survey was conducted of 2000 businesses across Australia. In total, 433 companies responded to the survey – resulting in a response rate of 22%. The 433 responding companies employed around 52,300 people and had a combined turnover of $19.5 billion. Half of the firms were located in metropolitan centres, 36% were located in regional cities and a further 14% were located in regional towns. More than four in five firms were Australian privately owned companies, 13% were overseas owned business operations while just 4% were Australian listed companies. The largest proportion of firms responding to the survey were from the metals based sectors of fabricated metal and basic metal products, together accounting for a quarter of responses (Figure 1). Miscellaneous manufacturers and machinery and equipment manufacturers also formed a significant proportion of respondents. The remaining respondents were broadly based across other sectors of manufacturing and the service sector. Figure 1: Industry composition by numbers of firms

0% 5% 10% 15% 20% 25%

Services*

Food and Beverages

TCF

Wood & Furniture

Paper, printing, publishing

Chemicals, petrol, coal

Construction materials

Basic Metals

Fabricated Metals

Transport Equipment

Machinery & Equipment

Electrical and electronic products

Miscellaneous Manufacturing

Other

Proportion of total employment

* Services include ICT, labour hire, call centres and construction firms


Based on employment, the most significant sectors in the sample were from the miscellaneous manufacturing, basic metals, food and beverage and services sector (comprising ICT, labour hire, call centre and construction firms) (Figure 2). Figure 2: Industry composition by numbers of employees

0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 20%

Services*

Food and Beverages

TCF

Wood & Furniture




Basic Metals

Fabricated Metals

Transport Equipment




Other

Proportion of total employment


Employment by the respondent firms is broadly reflective of employment across industrial sectors of the economy (Figure 3). More than one third of all employees were within the occupational category of labourers or machine operators, one quarter were employed as sales, administration or clerical staff, 16% were tradespeople, while one in five employees were para-professional or professional employees.


Figure 3: Employment by occupational category

37%

25%

16%

11%

10%

Labourers/ Machine Operators

Sales/ Admin

Trades

Supervisor/ Technician

Manager/ Professional

Within sectors, occupational distribution varied. The production based manufacturing sectors such as food and beverages and TCF had much higher proportions of labourer and machine operators, while the service based manufacturing sectors such as machinery and equipment had greater proportions of trades-related employees. The service sector had much greater proportions of administration and clerical employees as well as supervisor or technical workers. Survey Objectives The survey was conducted in June 2006 for the purposes of projecting implications of a minimum wage increase awarded by the Australian Fair Pay Commission in 2007. The basis for making these projections was the impacts reported by survey respondents of the previous $17 minimum wage rate increases in 2005. Respondents were asked to provide information on:

• The proportion of the workforce on award rates of pay; • The extent of wage increase flow-ons to employees not on award rates

of pay;


• The implication of the 2005 minimum wage rate increases on redundancies, selling prices, the employment of additional staff, the use of labour hire staff, the use of overtime and overall competitiveness; and

• Quantifiable outcomes on employment numbers, price rises, overtime reductions and sales losses.

Key Findings The survey provides some key insights into the impact of minimum wage increases on Australian industry. These include:

• Employees receiving award rates of pay make up approximately 10.5 percent of total employment, equivalent to around 6.6 percent of the total wage bill of respondent firms. Small and medium sized employers have over 19 percent of employees on award wage rates while large employers have 8.6 percent of workers on award rates of pay.

• The impact of minimum wage rate increases is larger on small and

medium sized employers. A minimum wage increase of $10 per week is equivalent to 0.28% and 0.23% of their total wage bills respectively, compared to 0.09% of total wages for large employers.

• There is evidence of the practice by employers of passing on the

minimum wage rate increases to non-award rate of pay employees. One in five firms report that they flow on the minimum wage rate increases to all employees not on award rates of pay. An additional 12 percent of firms indicate that they pass on the minimum wage rate increases to at least a proportion of the those not on award rates of pay. Consequently, increases in minimum rates of pay have a broader impact on the economy than is typically recognised.

• Minimum wage rate increases have a larger impact on small firms

(employing less than 25 employees), those located in regional cities and towns, and those firms in the more globally exposed sectors of the Australian economy.

• There is a small impact on staffing levels overall. As a result of the last

minimum wage rate increases, firms implemented 134 redundancies equivalent to 0.26% of total employment. The majority of this impact was on lower skilled employees. Some three in five job losses were amongst labourers and machine operators. In regional locations, the impact on lower skilled workers lifts to more than three in four job losses.


• Another impact of the last minimum wage rate increases was a curtailment of additional employment, although this figure remains relatively small at 230 employees. Firms indicate the jobs created would have been broadly based across occupational categories.

• In a tight labour market, the increase in minimum wage rates in 2005

had a substantial impact on selling prices and the competitiveness of businesses. One third of firms indicate they increased selling prices as a result of the minimum wage rate rise by an average of 4.7%. More than one in four firms (27%) report an impact on business competitiveness of the last minimum wage increase with sales losses estimated at 0.16% of total turnover. Those affected the most by these impacts are small and medium sized businesses (up to 100 employees) and those based in regional towns (1.7% of total sales).

Implications of minimum wage rate increases for total wage bill The total number of employees on minimum rates of pay was around 5500 employees, representing 10.5% of all staff employed by the respondent firms. Based on information provided by respondents this is equivalent to $177 million in wages or 6.6% of the total wage bill. The proportions of employees within firms that are employed above award rates of pay are shown in Figure 4. Figure 4: Employees employed on above award rates of pay

0% 10% 20% 30% 40% 50% 60% 70% 80%

100%

76-100%

66-75%

51-65%

36-50%

21-35%

1-20%

none

% o

f em

ploy

ees

rece

ivin

g ab

ove

awar

d ra

tes

% of firms


On the basis of size of firm, small employers (less than 25 employees) had much higher proportions of workers on award rates of pay (19.8% of employees) with award wages representing 15.1% of the small employer total wage bill. Medium sized employers (25 – 100 employees) have 19.2% of workers on award rates of pay, representing 14 percent of the medium size employer total wage bill. Large employers (more than 100 employees) had 8.6% of employees on award rates of pay with award wages representing 4.1 % of the large employer total wage bill. There was great variation amongst sectors in the proportions of employees within firms that are on award rates of pay (Figure 5). The paper, printing and publishing; and chemicals, petrol and coal products sectors had the highest proportions of employees on award rates of pay at 57% and 54% of total sector employment respectively. Figure 5: Award wages as a proportion of total wages, by sector

0% 10% 20% 30% 40% 50% 60%

Services

Food and Beverages

TCF

Wood & Furniture




Basic Metals

Fabricated Metals

Transport Equipment




Other

All

Award wages as a % of total sector wages



Given a $10 minimum rate increase and an average rate of 27% on-costs provided by respondents, the direct impact on award rate employees is $3.6 million equivalent to 0.13% of the reported total wage bill of the respondent companies. Given the greater proportions of award wages within the small and medium sized employer wage bills, it is not unexpected that the impact is greater on these employers. The minimum wage impact on small employers is $366,522 or 0.28% of the small employer wage bill, for medium sized employers the impact is $774,650 or 0.23% of the medium employer wage bill, while for large employers the impact is $2,466,600 or 0.09% of the large employer wage bill. The practice of flowing on minimum wage increases to non-award pay rate employees often occurs to maintain relativities between different groups of employees within the business. When minimum wage rates rise, 20% of respondent firms report that all employees receive the rate rise. An additional 13% of firms indicate that some proportion of their employees will receive the minimum wage rate increase. An indication of the flow on of minimum wage rate increases to non award rate employees is provided in Figure 6. Figure 6: Flow on of minimum wage rate increases to non-award rate employees

0% 10% 20% 30% 40%

100%

80%+

50-79%

20-49%

0-19%

none

% o

f non

aw

ard

rate

empl

oyee

s re

ceiv

ing

min

wag

e in

crea

se

% of firms

Note: The above percentages do not equal to 100% due to non responses Over one third of firms (36%) indicate that minimum wage rate increases are not passed on to any of their non-award rate employees. If it is assumed that non-responses do not pass on rate increases to any of their employees, 68 percent of the respondents do not flow on the rate rise to non-award rate of pay employees.


The flow on of minimum wage rate increases to non-award rate of pay employees are also different by industry sector. Figure 7 shows the proportion of firms within each sector that pass on the minimum wage increase to at least a proportion of their employees. Figure 7: Flow on of minimum wage rate increases to at least a proportion of non-award rate employees, by sector

0% 10% 20% 30% 40% 50% 60%

Services*

Food and Beverages

TCF

Wood & Furniture




Basic Metals

Fabricated Metals

Transport Equipment




Other

All

% of firms flowing on min rates to non award rate employees


Data relating to the impact on the total wage bill of the flow on of the increase to non-award rate employees by firms was incomplete, making analysis of the total impact difficult. However, one in three companies report that the minimum wage rate increase are passed on to a proportion of their non-award rate of pay employees. Based on the proportion of non-award rate employees nominated by firms as receiving a flow on of the minimum wage increase and the estimated $12.70 impact of a $10 per week minimum wage rate rise per week, per employee receiving the increase, an estimation of the flow on impacts is $2.01 million, equivalent to 0.72% of the total wages bill of those flowing on minimum rate increases to non-award employees. This figure should be treated with caution however, as some of the award rate increase may be absorbed. Based on the figures provided by firms, the average increase as a result of a $10 minimum wage rate increase is $9.86. This may be the result of absorption factors.


Assuming a flow on of $2.01 million to non-award wage rate employees, the total impact on the wages bill is estimated to be an increase of $5.61 million or 0.22% of the total wage bill of respondent companies. Implications of minimum wage rate increases for business Survey respondents were asked to identify and quantify the impact of the $17 minimum wage rate increases in 2005 for their business. Overall, the major implications for firms were the need to increase selling prices, and an influence on the competitiveness of the business. Analysis by firm size, location and sector however, shows variations in the experiences of businesses. An analysis by firm location (Figure 8) shows variations in the impact of minimum wage rate increases. Those in metropolitan centres experienced the greatest impact through competitiveness, while a greater proportion of regional city businesses felt the impact through the need to increase selling prices and curtailing in the employment of additional staff. Firms located in regional towns were most likely to experience the impact of minimum wage rate increases through the need to lift selling prices and implement redundancies. Figure 8: Impacts of 2005 minimum wage increase on firms, by location

0% 5% 10% 15% 20% 25% 30% 35% 40%

Redundancies

Increase selling prices

Curtail employment

Labour Hire

Overtime reduction

Reduced competitiveness

% of firms

All Large Medium Small


Differences in the impact of minimum wage rate increases is also evident by different size of firms (Figure 9). Across all areas, the impact of increases was felt more by small firms (less than 25 employees) and least by large firms (more than 100 employees). Figure 9: Impacts of 2005 minimum wage increase on firms, by size

0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50%

Redundancies


Curtail employment

Labour Hire

Overtime reduction


% of firms

All Metro Regional City Regional Town

Impacts also varied across different sectors of Australian industry (Table 1). A greater proportion of firms implemented redundancies in the TCF (22% of firms) and transport equipment (21% of firms) sectors, two of the most globally exposed sectors of the Australian economy. The sectors with the greatest proportions of firms experiencing an influence on competitiveness were those businesses in the wood products and furniture; paper, printing and publishing; basic metals and miscellaneous manufacturing. By contrast the services sector of the economy, those in the ICT, call centre, labour hire and construction service sectors were least likely to report impacts on their business across employment and competitiveness with 30% of these firms passing on wage increases through their selling prices.


Table 1: Impacts on proportion of firms within each sector

Redundancies Selling prices

Curtail Employment

Contract Labour Use

Overtime Reduction

Reduced Competitiveness

Services (ICT, Call Centres, Labour Hire, Construction)

0% 30% 9% 4% 4% 9%

Food and Beverages

0% 26% 21% 11% 21% 32%

TCF

22% 48% 33% 4% 22% 33%

Wood & Furniture

17% 33% 33% 8% 8% 50%


0% 10% 10% 10% 0% 40%


4% 24% 32% 16% 8% 24%


7% 33% 22% 7% 7% 15%

Basic Metals

4% 36% 8% 4% 4% 44%

Fabricated Metals

1% 18% 8% 1% 3% 14%

Transport Equipment

21% 21% 7% 0% 21% 14%


4% 19% 10% 4% 4% 17%


15% 31% 23% 0% 15% 23%


9% 35% 23% 8% 20% 40%

Other

8% 25% 17% 0% 0% 8%

As indicated above, employers engage in the practice of passing on minimum wage rate increases to non-award rate of pay employees. The survey data does not allow an analysis of how many of these flow-ons are mandatory for companies as a result of common law contract arrangements, or enterprise agreements. However, an analysis has been undertaken to determine the impacts on those businesses that are required by awards to flow on minimum wage rate increases.


The analysis shows businesses that pass on minimum wage increases to award wage rate employees but do not pass on minimum wage increases to non-award wage rate employees have significantly less numbers of firms reporting impacts by a minimum wage rate rise than those who do participate in this practice. Of the 212 firms who do not pass on increases to non-award wage rate employees, respondents estimate a total loss of $11,953,000 sales as a result of the 2005 $17 minimum wage rate increases, equivalent to 0.08% of sales. This is lower than the reported 0.16% of sales lost by all firms and the 0.8% loss estimated by firms who pass on minimum wage rate increases to non-award employees. Figure 10: Business impact by companies who pass on minimum wage rate increases to non-award wage rate employees and those who do not

0.0% 10.0% 20.0% 30.0% 40.0% 50.0% 60.0%

Redundancies


Curtail employment

Labour Hire

Overtime reduction


% of firms

All Flow on to non award No flow-ons to non award


Impact on staff redundancies, employment and overtime Of the seven percent of firms indicating that they made staff redundant as a result of the $17 minimum wage rate increases in 2005, the majority of the redundancies were at the lower skill levels of labourers and machine operators (Figure 11). Overall, 134 redundancies were reported from the 433 companies, representing 0.26% of total employment. Almost 60% of these job losses were in the lower skilled labourer and machine operator category. Figure 11: Redundancy impacts by occupational category, by location

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

labourers

sales/ admin

trades

manager/professional

supervisor/ technical

% of redundancies

All Metro Regional City Regional Town

Differences were evident across both size of firms and the location of businesses in metropolitan or regional locations. All redundancies occurred in small or medium sized enterprises with 84% of job losses in small workplaces employing less than 25 employees. While the proportion of firms reporting the need for redundancies were broadly the same in both metropolitan and regional city locations at 7% and 5% respectively, some 14% of firms in regional towns responding to the survey reported the need to make employees redundant following the minimum wage rate increases. There was also a greater concentration of redundancies made at the lower skill levels in both regional towns (95% of redundancies were labourers or machine operators) and regional cities (73%) while in metropolitan areas a little more than half (51%) of redundancies were at the lower skill levels.


When asked to consider the impact of the 2005 $17 minimum award wage increases on the employment of additional staff, some 18% of firms indicated that an additional 230 employees would have been offered positions without the rate increase. While a large proportion of these positions were in the labourer/machine operator occupational category, almost one third (31%) were sales/ administration jobs (31% of positions) and trades positions made up 14% of the jobs that would have been available. An equivalent 4% of additional opportunities would have been available in the manager/professional and technician/supervisory occupational categories. Some 6.5% of firms overall indicated the $17 rate increase last year required them to use contract staff from a labour hire firm. Businesses indicate 178 new contract staff were engaged through labour hire companies to support their business operations. In relation to overtime, some 10% of firms responding to the survey indicated that the award rate rise influenced their decision to reduce overtime levels. Total losses of 17,000 overtime hours were estimated from these businesses as a result of the minimum wage rate increase. Impact on selling prices and competitiveness Around one third of all respondents report selling prices were increased as a result of the 2005 $17 minimum wage rate increases. Of those increasing their prices, the average increase was 4.7%. When asked to consider the impact of the minimum wage increase last year on competitiveness, 27% of all firms responding to the survey indicated that the rise had influenced competitiveness. This varied significantly with firms of different size. Some 17% of large firms (more than 100 employees) believed the increase had an impact on competitiveness while, 26% of medium sized firms (25-100 employees) and 31% of small firms (less than 25 employees) report impacts on competitiveness. The impact on competitiveness has been quantified by firms estimating the sales lost as a result of reduced competitiveness. The estimated sales loss for all respondent companies was $31.5 million or 0.16% of total revenue. However, the impact appears to be most significant for small and medium sized employers. Small employers (less than 25 employees) estimate a total sales loss of $11.7 million, equivalent to 0.7% of their total sales and medium sized businesses (25-100 employees) estimate losses of $16.3 million or 0.9% of sales. This compares with large employers (more than 100 employees) who estimate losses of $3.5 million representing only 0.02% of sales. The impact on sales is also felt more in regional towns (1.7% of sales) compared to the metropolitan centres (0.11% of sales) and regional cities (0.2% of sales).


Annexure B

URGENT PRIORITY REQUEST

Ai Group Survey on the impact of minimum wages on your business

The Australian Fair Pay Commission is currently determining minimum wages for the coming year. To assist Ai Group in representing your business, your assistance is sought in answering the following short survey. The results will be kept strictly confidential. If you have any questions please contact Victoria Perry on (02) 9466 5515.

Q.1 In which industry sector does your company mainly belong? (Please circle)

Food & beverages .…………………… 1

Textiles, clothing and footwear……… 2

Wood products & furniture…………… 3

Paper, printing & publishing …………. 4

Chemicals, petroleum, coal products... 5

Construction materials ……….…. 6

Basic metals …….……………….. 7

Fabricated metals ……….….….. 8

Transport equipment ………...…. 9

Machinery & equipment ……..…. 10

Electrical & electronic products……… 11

Miscellaneous manufacturing ………. 12

ICT……………………………………... 13

Call centre……………………………... 14

Labour hire………………………….… 15

Other (please specify): ___________________________________________

Q.2 Is your company mainly located in capital cities or regional areas?

Capital city……………………….... 1 Regional city…………………….... 2 Regional town …………..……..…... 3

Q.3 Is your company Australian or overseas owned?

Private Australian company ……. 1 Listed Australian company…….… 2 Overseas owned ………………..… 3

Q.4 Do you have any operations offshore?

Yes...................... 1 No………………….. 2

Q.5 How many people does your company currently employ? _____________________ persons

Q.6 What proportion of your employees are in the following categories?

a) Labourers / machine operators….... ____________ %

b) Sales, administrative & clerical…… ____________ %

c) Tradespeople ……………………...... ____________ %

d) Supervisory / technical ………….... ____________ %

e) Management / professional ………. ____________ %

Q.7 What is your annual turnover? $ ________________________ million

Q.8 What is your wage bill, covering direct salaries and on-costs (such as superannuation, payroll tax, WorkCover and other charges)?

Direct salaries: $ ________________________ On-costs $ ________________________

Q.9 What proportion of your workforce is paid award rates of pay? ___________________ %

Q.10 What proportion of your wage bill (including on-costs) does this represent? ___________________ %

Q.11 What proportion of your workforce is paid ABOVE the (minimum) award rates of pay? ____________________ %

Q.12 What proportion of your wage bill (including on-costs) does this represent? ____________________ %

Please return by Friday 23 June to Ai Group

(Attention: Megan Lamond) by FAX on (02) 9955 0907

<<Record No.>> <<Regional Code>>

<<Sector>> <<E’ee No.’s>>

Q.13 When minimum award wages rise, what proportion of your employees NOT on award rates of pay

usually receive the increase? ____________________ %

Q.14 For every $10 per week increase in minimum award wages, by how much does total labour costs per employee on minimum wages rise (covering superannuation, payroll tax, WorkCover & other charges)? $ ___________________

Q.15 When Federal minimum wages rose (by $17 per week) last year, did it necessitate you reducing your staff numbers? Yes ……………….. 1 No ……………….. 2

Q.16 If YES, how many staff were consequently made redundant in the following categories?

a) Labourers / machine operators …… ____________ people

b) Sales, administrative & clerical ……. ____________ people

c) Tradespeople …………………….….. ____________ people

d) Management / professionals ….…... ____________ people

e) Supervisory / technical …………….. ____________ people

Q.17 When Federal minimum wages rose (by $17 per week) last year, did it necessitate you raising selling prices? Yes ……………….. 1 No ……………….. 2

Q.18 If YES, by what percentage did you raise your selling price on average? __________________ %

Q.19 When Federal minimum wages rose (by $17 per week) last year, did it necessitate you curtailing the employment of additional (new) staff? Yes ……………….. 1 No ……………….. 2

Q.20 If YES, how many (new) staff positions were curtailed?

a) Labourers / machine operators …… ____________ positions

b) Sales, administrative & clerical ……. ____________ positions

c) Tradespeople …………………….….. ____________ positions

d) Management / professionals ….…... ____________ positions

e) Supervisory / technical …………….. ____________ positions

Q.21 When Federal minimum wages rose (by $17 per week) last year, did it necessitate you making more use of contract labour from a labour hire firm?

Yes ……………….. 1 No ……………….. 2

Q.22 If YES, how many (new) contract staff were engaged from a labour hire firm?

_____________________ persons

Q.23 When Federal minimum wages rose (by $17 per week) last year, did you reduce the amount of overtime as a result? Yes ……………….. 1 No ……………….. 2

Q.24 If YES, by how many hours was overtime reduced in total?

_____________________ hours

Q.25 When Federal minimum wages rose (by $17 per week) last year, did it result in a reduction in your competitiveness against imported products?

Yes ……………….. 1 No ……………….. 2

Q.26 If YES, what is your estimate of sales lost to imports due to reduced competitiveness?

$ ____________________

Thank you for your cooperation and support

2006 review of minimum wages · recent minimum wage cases and changes to the social safety ......

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