Monday, June 3, 2013

Rapid Reaction to the 2013 Annual Wage Review

Today, the Fair Work Commission announced that, as a result of its 2013 Annual Wage Review, minimum wages in awards would increase by 2.6 per cent on the first full pay period after 1 July 2013. Similar to the post-game NBA Rapid Reactions I read over at the ESPN website, here are my first thoughts about the Commission’s decision. Views are obviously my own – while I did work at Fair Work Australia in the past, it has been a year since I left, and so I can say I had absolutely bupkis to do with this Annual Wage Review.

- As it did in 2011 and 2012, the Minimum Wage Panel at FWC increased all minimum wages in awards by the same percentage amount (as opposed to the same dollar amount). This means the ratios of the higher award rates of pay to the lower award rates of pay remain the same. Back in March, I wondered if the Panel would continue this practice, and said it would be interesting to see how the recent research on award-reliant employees on higher rates of pay would affect the Panel’s views.  But as far as I can see that research isn’t mentioned in the latest decision, and contrary to its past two decisions, the Panel doesn’t discuss why it chose one form of adjustment over the other. On that basis, it appears that, while the Panel is charged with adjusting minimum wages, percentage increases to minimum wages have a greater look of permanency.

-The superannuation guarantee rate will increase each year up to 2019. The Panel say at paragraph 360 that ‘the increase in modern award minimum wages and the [national minimum wage] we have awarded in this Review is lower than it otherwise would have been in the absence of the [superannuation guarantee] rate increase’. But it has not applied a ‘direct, quantifiable, discount’ (para. 359), contrary to some parties’ proposals. Nevertheless, one would expect that, even if there was an explicit ‘discount’, it would be no more than 0.25 per cent, which is the increase per year in the superannuation guarantee rate in both 2013 and 2014. That suggests that, even if the Panel had ignored the increase in the SG rate, the minimum wage increase would still be lower than 3 per cent.

- The 2.6 per cent increase is just higher than the consumer price inflation figure over the year to the March quarter 2013 of 2.5 per cent. Over the same period the increase in the living cost index for employee households – which account for changes in interest charges – was 1.7 per cent.  The Reserve Bank of Australia forecasts consumer price inflation over the year to June 2014 of 2-3 per cent. So the increase in minimum wages is broadly in line with both past and expected changes in the cost of living. But as I noted a few months back, if minimum wages just move in line with living costs we would expect that, in the long-run, the gap between minimum wages and wages in the rest of the market will further increase, as long as labour productivity is growing.

- The Panel make note of the growing gap between minimum wages and wages in the rest of the market, saying that it may have implications for the economy and social cohesion (para. 425). That concern for social cohesion may or may not be well-founded – the minimum wage is still above 50 per cent of median earnings – but minimum wage growth has certainly been outpaced by growth in median and average earnings over recent years. The Panel notes that the tax-transfer system can play a role in alleviating the impact of earnings inequality (para. 426), and asks parties to give consideration as to how the tax-transfer system should be taken into account in minimum wage fixation in next year’s review. Nevertheless, even if one saw changes in the tax-transfer system that raise the disposable incomes of low-paid households as a perfect substitute for changes in minimum wages paragraph 395 shows that minimum wage households have still been receiving lower increases in income than other households over the past decade.     

- Something a little weird: in paragraph 40, the Panel says that ‘this Review has not convinced the Panel to alter its position from previous reviews that a modest increase in minimum wages has a very small, or even zero, effect on employment’. But if that is the case, why have a minimum wage increase that is so far below the average increase in wages if the growing gap is possibly a concern? Now I’m not personally saying that minimum wages don’t have a significant effect on employment, but that is what FWC are saying, and therefore by its own logic, it seems a little weird that it is so cautious. Left as it is, it seems like there is some unstated reason why the Panel has gone for a sub-3 per cent increase.

Those are my initial thoughts – the last two points in particular seem to me to indicate that FWC has awarded a lower increase than its own arguments would suggest. Its discussion of a ‘favourable’ economic outlook (paras. 320, 332) lends further weight to this. Perhaps the Panel’s true train of thought was that it had awarded a 2.9 per cent increase in 2012, and economic conditions are generally considered to have deteriorated since then so it had to go lower this year. But that’s purely speculation. Until next year … 

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