Unions may try to wedge government on low pay

AT this time last year, the Australian Fair Pay Commission was facing an unenviable task. Should the federal minimum wage be increased and, along with it, the pay scales of more than one million workers?

To say the economic outlook appeared bleak is an understatement. The government had introduced several stimulatory measures, including two cash handouts, as well as other targeted programs designed to assist the ailing construction industry.

Kevin Rudd described the economic situation as the most dire since the Great Depression of the 1930s. The Reserve Bank of Australia was rapidly reducing the cash rate in response to fears of a quickly deteriorating economy. The number of insolvencies was rising and Treasury forecasted that unemployment would peak at 8.5 per cent.

The news from overseas was even more alarming, with the global financial system close to meltdown. Economic conditions in the US and Britain were approaching catastrophe and several European countries seemed to be catching the bug.

The ACTU argued for an increase of $21 a week in the federal minimum wage; the federal government's submission was ambiguous but called for an unspecified modest rise; and the employer groups put the case for restraint, ranging from zero to a small increase.

In making its decision, the Fair Pay Commission was guided by the criteria set out in the legislation, criteria that are strongly paralleled in the Fair Work Australia Act.

Essentially these criteria boiled down to three sub-headings: the macro-economic, the micro-economic and equity.

The macro-economic criterion - employment and competitiveness across the economy - weighed heavily against any increase. Similarly, the micro-economic criterion - the capacity of the unemployed and low paid to obtain and remain in employment - strongly pointed to freezing minimum wages. Unemployment was rising and hours, in particular, were being cut.

So was there a case for raising minimum wages to maintain the safety net for low-paid workers?

As in previous decisions, the commission opted for a broad view of what made up the safety net for low-paid workers, to include not only wages but government benefits in the form of tax concessions or direct payments. On this basis, the commission was able to conclude that, at that time, the stimulatory hand-outs were doing the heavy lifting on the safety-net front, a desirable outcome.

The alternative of raising minimum wages was an exercise fraught with danger.

In the context of a weakening labour market, higher minimum wages ran the risk of putting workers out of work. Alternatively, there was a possibility that working hours would be cut to offset the higher labour costs - and note that working hours were falling more rapidly than employment at the time - thereby undercutting any safety-net role in terms of raising weekly take-home pay.

Moreover, modelling undertaken for the commission demonstrated that the disemployment effect of higher minimum wages was more pronounced during economic downturns.

We opted to "do no harm", bearing in mind that, should we be proved unduly pessimistic, the decision could be effectively unwound the next year.

This brings us to the intriguing part of the story. To what extent will the new minimum wage panel of Fair Work Australia adjust the federal minimum wage, a change that will become effective in the middle of the year?

The ACTU is arguing for an increase of $27 a week. It is claimed that part of this figure is a catch-up for the zero increase awarded last year. In fact, $27 looks like an extraordinarily low figure, given that the bid last year was for $21 and low-paid workers have not received a pay increase since the end of 2008.

One possible interpretation is that the ACTU is hoping the federal government will break with its recent tradition and explicitly support its figure.

Rather than try to break the code in the government's previous opaque, cryptic and inconsistent submissions, the panel may be faced with clear and direct guidance from the government.

Employer groups argue for continuing restraint, supporting a modest rise. My guess is this will come in at under $10 a week.

This year's case is made more complicated by the splitting of the federal minimum wage - only 100,000 workers receive this sum - from other minimum rates of pay as specified in the new modern awards.

Given adjustments in the latter arising from the award modernisation process, the employer groups are raising some important issues about the extent to which these other rates of pay should be further adjusted.

Do I, as a commissioner of the defunct Fair Pay Commission, regret the decision we made last year, bearing in mind that things have not turned out as badly as feared? Absolutely not. We were able to signal strongly our concern about the state of the economy and the labour market, which in turn led to our assessment that it was not a good time to be increasing minimum wages. That unemployment appears to have peaked below 6 per cent and working hours are rising only confirm the wisdom of our decision.

Judith Sloan was one of the commissioners of the now-defunct Australian Fair Pay Commission.