Back to the future in wage regulation

Guidice

UNIONS say it is not enough, businesses are worried that the rise is too much because of the pressures that many companies are facing.

The Fair Work Australia minimum wage decision is the usual long-winded summary of what the parties wanted, an undergraduate and backward-looking description of the macro-economy and an arcanely worded decision. It was back to the future in every respect.

Apart from the brief interlude when the now defunct Australian Fair Pay Commission was responsible for the rulings, the pattern of establishing minimum wages has -- depressingly -- reverted to the good ol' days.

In fact, the decision has reverted not to a recent norm but to the more distant past, when maintaining rigid award wage relativities was also part of the tribunal's bag of tricks. By awarding a 3.4 per cent increase in award wages across the board, rather than a flat dollar amount, the decision favours those higher up the wage distribution, rather than focusing on the lowest paid.

In the words of Fair Work, the nature of increases to award rates in annual reviews over the past 20 years has compressed award relativities in the classification structures and reduced gains from skill acquisition. The position of the higher award classifications has been reduced relative to market rates and to average earnings. For this reason, it was resolved that this decision should not further compress award relativities.

The core conflict in this decision is obvious. Is the role of the tribunal to protect the lowest-paid workers, or is it to revive the inflexible maze of award wage relativities, even though only 15 per cent of workers are paid exactly the award rate?

This is where the Australian set-up differs markedly from the arrangements that apply in other countries. In most developed economies, a single minimum wage applies, although some countries also specify a lower wage for young people.

When comparisons are made between minimum wages in Australia and those that apply overseas, only part of the story is being told. This is because Australia has regulated wages well above the national minimum wage, although to a declining degree as enterprise bargaining has taken hold.

Considering only the national minimum wage -- the lowest wage legally payable -- Australia sits close to the top of the international pack. At about 54.4 per cent of full-time adult median earnings, Australia has one of the highest minimum wages in the world before any account is taken of other (higher) wages that are also regulated.

One of the unintended consequences of the latest decision may be to dissuade employers from negotiating enterprise agreements, as the increase in award wages dictated by Fair Work sets a benchmark for which no productivity offsets are required -- from which bargaining will occur. Given the generosity of the decision, employers may simply leave it at that and revert to the award.

The Fair Work decision, unsurprisingly, does not dwell on the patchy nature of economic developments. It has only one lever -- adjusting minimum award wages -- and there is very little scope to take such unevenness into account. That calls to consider the damaging economic impact of natural disasters were quickly dismissed by Fair Work should come as no surprise. Centralised wage fixing does not work that way.

Sadly, previous attempts to distribute the benefits of productivity generated in one part of the economy to others have ended badly. (Right now, there are even serious questions as to whether there are any economy-wide productivity gains to share around.)

Wage pressure leads to inflationary pressure and, as night follows day, interest rates rise. The economy slows and the most vulnerable workers, many of them low-paid, work shorter hours. Some lose their jobs.

The only sustainable alternative is to decentralise wage fixing so wages are set according to the circumstances of the enterprises where the workers are employed, taking account of the demand for and supply of those workers as well as providing for productivity offsets in exchange for pay rises.

Union claims are becoming more ambitious and the number of orders for protected industrial action has doubled. Meanwhile, many non-resources companies are feeling the pinch of weak demand and a high dollar. Into this mix comes the Fair Work decision, which raises the bar for bargaining and reinstates the tribunal as wage regulator.

Judith Sloan is a former commissioner of the Productivity Commission and a professor at the Melbourne Institute of Applied Economic and Social Research, University of Melbourne