Monday, October 14, 2013

The Effects of the Australian Fair Pay Commission’s ‘Two-Tiered’ Minimum Wage Decisions

In its 2006 and 2007 minimum wage decisions, the Australian Fair Pay Commission decided upon a ‘two-tiered’ increase to minimum rates of pay in Australia’s federal industrial relations system. Workers on minimum rates of pay earning the equivalent of up to $700 per week received a higher increase in their wages than workers on minimum rates of pay earning the equivalent of more than $700 per week.

In the AFPC’s view, such a decision recognised that low-paid workers are less able than higher-paid workers to bargain for a higher wage than the minimum rate, and therefore are more reliant on increases in minimum rates of pay (see its 2006 reasons for its decision). The AFPC believed that higher-paid employees should be encouraged to move off minimum rates of pay bargain for higher rates.

Note that the AFPC’s predecessor, the Australian Industrial Relations Commission, also awarded two-tiered increases on occasion and it had a consistent practice of awarding flat dollar increases, which are less beneficial to higher-paid employees in terms of maintaining their wages after inflation. Its successor in terms of setting minimum wages, Fair Work Australia/Fair Work Commission, has decided upon percentage increases to minimum rates of pay over the past few years, in order to halt the significant downward trend in the relativities between the lower minimum rates of pay (which typically apply to the lowest skilled labour) and the higher minimum rates of pay (which typically apply to higher skilled labour).

But getting back to the AFPC: did its decision ‘work’, in terms of encouraging bargaining? There isn’t really all that much evidence either way in that regard. One point in favour is that data from the Australian Bureau of Statistics’ Employee Earnings and Hours survey showed that the percentage of employees who are reliant on minimum rates of pay continued to decrease from 19.0 per cent in May 2006 to 15.2 per cent in May 2010. It has since increased again to 16.1 per cent in May 2012. Therefore, the AFPC’s ‘two-tiered’ decisions were associated with an increase in the percentage of Australia’s workforce that was receiving more than minimum rates of pay.

Looking through the distributions of earnings for employees on minimum rates of pay* though, there is a bit of further support that the AFPC’s decisions may have encouraged higher-paid employees to move off award rates of pay. The (biannual) Employee Earnings and Hours survey release has the distribution of weekly earnings for full-time adult employees earning minimum rates of pay, from which we can track this distribution over time (see graph below). As time goes on, and minimum rates of pay are raised, a higher percentage of employees should be found at the higher end of the distribution. We certainly see this from 2000 to 2006, and again from 2010 to 2012. But from 2006 to 2010, the percentage of minimum wage employees earning more than $1000 per week did not increase by much at all. Further, although it is not shown in the graph below, the percentage of employees on minimum rates earning more than $1000 per week actually decreased from 2006 to 2008.

One should be cautious about drawing too much from this: the sample sizes would not be that large, and there could be other factors influencing the distribution (maybe higher-paid employees on minimum rates did not bargain for higher rates but withdrew from the workforce completely). Also, we still saw a bit of an increase in the percentage of adult employees on minimum rates earning between $700 and $900 per week.  Note too that a fair chunk of employees on minimum rates are part-time employees, and these are not included in the above graph.

But what we observe — without knowing the full reasons behind this pattern — is broadly consistent with what the AFPC was trying to achieve through its two-tiered wage increases. Though given that FWC looks like it will maintain the relativities between different minimum rates of pay going forward, perhaps that is the last period for which we will observe this type of pattern for some time.

*I was looking at this as part of a larger article I am drafting (not necessarily for this blog) on the effects of recent minimum wage decisions in Australia, which is how this post originated.

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