Fair Work Act 2009
s.285 - Annual wage review

Contents

Abbreviations

1. Overview and the Decision

Introduction

[1] The Fair Work Act 2009 (Cth) (Act) requires the Expert Panel (Panel) to conduct and complete a review of the national minimum wage (NMW) and of minimum wages in modern awards in each financial year. The Panel must make a national minimum wage order and may set, vary or revoke modern award minimum wages. This decision deals with the Annual Wage Review 2015–16 (Review) and directly affects over 1.86 million employees in Australia who are award reliant. 1

[2] The Act sets out some important procedural fairness requirements for the Review. The Panel must ensure that all persons and bodies (referred to collectively as parties) are given a reasonable opportunity to make and reply to written submissions. In this Review, a number of parties took this opportunity by lodging one or more written submissions and participating in consultations on 10 and 11 May 2016. The timetable for the Review and all of the submissions, transcript, research reports, and some additional economic data were published on the Fair Work Commission’s (Commission) website to ensure that all parties had a reasonable opportunity to participate. The Panel considered all the material received from parties and the published research and data in making its decision.

[3] This Chapter summarises the matters we have considered, our reasoning and the increase we have decided upon. A detailed discussion of these matters is provided in the subsequent Chapters.

The Panel’s approach

[4] The Panel is required to conduct each AWR within the legislative framework of the Act, particularly the object of this Act in s.3, the modern awards objective in s.134(1) and the minimum wages objective in s.284(1). The relevant statutory considerations are discussed in some detail in Chapter 2. The Panel’s task is to consider relevant statutory matters in the context of the prevailing economic and social environment in order to make its decision in the Review. 2

[5] As part of the Review, the Panel considers both the setting of the NMW rate and whether to make any determinations varying modern award minimum wages. These tasks are undertaken by reference to the particular statutory criteria applicable to each function. As part of its decision making process, the Panel first forms a view about the NMW rate it proposes to set in the Review and then takes that proposal into account in exercising its powers to set, vary or revoke modern award minimum rates, as it is required to do by s.285(2).

[6] Chapters 4–8 of this decision deal with the statutory considerations we are required to take into account. We do not repeat all of that material here but the views expressed in this Chapter should be seen in the context of our decision as a whole.

[7] In taking into account available economic and social data, the Panel’s approach is to assess the changes in these data over the past year and to consider longer-term trends in order to determine how they inform the statutory criteria.

[8] In assessing the various economic considerations, the Panel takes into account both actual data and forecasts. The actual indicators are the primary considerations because, by their nature, they are more reliable than forecasts. But it is also appropriate to have regard to future projections that cast some light on the circumstances expected to apply during the period when any adjustment will operate. It is not uncommon for actual outcomes to differ from those forecast. The Annual Wage Review 2012–13 (2012–13 Review) decision set out how the Panel deals with those differences:

“To the extent that the forecast economic indicators do not ultimately reflect the actual performance of the economy, this forms part of our broad assessment and our consideration of the actual indicators in subsequent reviews. Importantly, when considering both actual and forecast indicators, the Panel pays particular attention to trends, because of the volatility in some of the economic indicators.” 3

[9] To the extent that the “broad assessment” includes a comparison of past forecasts with actual economic outcomes, this is not undertaken to enable some sort of quantifiable adjustment to minimum wage outcomes. As the Panel has previously observed, a mechanistic approach such as this would not be consistent with the statutory framework. Rather, the Panel considers all information about the economic and social environment that is available (including forecasts and any divergence from prior forecasts) to inform its decision.

[10] When evaluating developments in the economy, the labour market, relative living standards and the needs of the low paid, collective bargaining and equal remuneration, we routinely look to developments over the medium and long term, as well as to changes over the past year. This is evident in the material that is included in the Statistical Report—Annual Wage Review 2015–16 (Statistical Report) that accompanies the Review. Our capacity to take both a contemporary and a longer-term perspective is determined by the available data. A focus on developments over the past 12 months enables us to see how things have changed since the previous Review decision. The longer-term perspective reduces our reliance on contemporary data that can be volatile and subject to error. It also enables us to see the cumulative effects of the annual changes that we focus on, including our own decisions.

[11] The Productivity Commission (PC), in its Workplace Relations Framework Final Report (PC Report), addressed the Panel’s decision making process:

“… the conceptual approach of the FWC’s [Fair Work Commission’s] Expert Panel is to have a prior view (often established from past reviews) that must be dislodged by a fresh and compelling piece of evidence, and that absent that, the prior holds. Accordingly, in many cases, the FWC indicates that it is ‘not persuaded’ (or some similar kind of words) that some past proposition is untrue—effectively putting the onus of proof on a dissenting party. The requirement for new evidence to overturn a prior is reasonable if the prior has strong empirical and theoretical foundations but, in industrial relations as practiced for decades, this is not likely to be the case. It would often be better if the FWC Expert Panel itself re-investigated its priors, and did so, regardless of whether any party had adduced evidence on the matter.” 4

[12] At the outset we would observe that it is unclear what “priors” the PC is referring to and, further, there is some tension between the above statement and some later observations in the PC Report. In particular, the PC Report also states that the Panel should articulate exactly how its decisions are reached and must see its role as “informing participants how it could be expected to arrive at decisions in the future, in order that they can improve the quality of evidence that the FWC has previously found wanting.” 5

[13] Two points may be made about the latter observation. The first is that informing participants about how the Panel could be expected to arrive at its decisions in the future is inconsistent with the proposition that the Panel should essentially conduct each Review on a “blank canvas” basis by an active process of reviewing “priors”.

[14] The second point is that, contrary to the suggestion in the PC Report, the Panel does inform parties of the deficiencies in the quality of their evidence so that it may be improved. For example, in the 2012–13 Review decision, the Panel provided guidance as to the requirements for survey evidence. 6

[15] Unlike the PC, the Panel is not conducting an inquiry into a particular issue with a view to making recommendations to the Australian Government. The Panel undertakes a regulatory function of which the end result will affect the rights and responsibilities of the employees who are covered by the NMW order or a modern award and their employers. The nature of the function and the powers exercised by the Panel bring with it important procedural fairness requirements and an obligation to deliver substantive justice.

[16] In our view, the observation set out in the PC Report misunderstands the role of precedent in ensuring substantive justice and in informing participants of how they can expect the Panel to arrive at decisions. 7 As the Australian Chamber of Commerce and Industry (ACCI) points out in its submission,8 the approach of the Panel—as outlined at paragraph [7] in the Annual Wage Review 2014–15 (2014–15 Review) decision—reflects the nature of judicial reasoning that underpins the rule of law. Broadly speaking, differently constituted Panels should evaluate the evidence and submissions before them in accordance with a consistent and stable interpretation of the legislative framework.

[17] As the High Court has observed, justice requires consistency in decisions unless a difference can be articulated and applied:

“The law must keep an order and form which admit of practical application, for justice requires both consistency in decisions and discrimination between cases on bases that can be articulated and applied.” 9

[18] These public policy considerations inform the way AWRs are conducted. This does not mean that the Panel’s consideration of the statutory framework is stagnant. As the Panel made clear in the Annual Wage Review 2013–14 (2013–14 Review) decision, 10 there is nothing wrong with a party advancing a submission that a past Panel decision had wrongly construed a statutory provision and advancing an alternate construction. The Panel has reconsidered past decisions regarding the interpretation of particular provisions. For example, in the 2012–13 Review decision, the Panel accepted an ACCI submission that past decisions had wrongly concluded that “social inclusion”, in the context of s.284(1)(b), encompassed both the obtaining of employment and the pay and conditions attaching to the job concerned. The Panel accepted that its consideration of “social inclusion”, in the context of s.284(1)(b) was limited to increased workforce participation.11

[19] The above observation is also apposite to the Panel’s consideration of all of the issues before it. In conducting a Review, the Panel is engaged in a constant process of evaluating past assumptions and findings on the basis of contemporary data and the available evidence. Contrary to the assumption made in the PC Report, 12 the Panel is not a passive observer in this process; it is an active participant. Since the commencement of the Act, the Commission has published 29 internal and commissioned research reports. The research has been both quantitative and qualitative and covers topics such as award reliance, the labour market, business performance, earnings, relative living standards and apprentices, all of which are relevant to the minimum wages and modern awards objectives. A complete list of the published research is set out at Appendix 1.

[20] In addition to these reports, the Commission also publishes the Statistical Report, containing a broad range of economic and social indicators, and a Research reference list, which referred to 91 relevant papers this year.

[21] The Commission’s capacity to undertake internal or commissioned research is, of course, subject to budgetary constraints. Present indications are that such constraints are likely to limit the Commission’s capacity to undertake additional research in the short to medium term.

[22] ACCI also made some observations about the Panel’s decision making process. In its 30 March 2016 submission, ACCI accepted that “simple rules such as real wage maintenance … cannot capture the full range of considerations that the Panel must take into account” 13 and that “the Panel’s judgments about the relative importance of particular considerations are difficult to fully explain”.14 ACCI submitted that transparency required that:

“The Panel should explain in its decision the basis on which it differed from prior decisions and the manner in which the mix of statutory considerations in the current context differed from prior considerations. Continued emphasis on explaining the interplay of the factors that are brought to account is commended.” 15

[23] The above extract neatly encapsulates what the Panel attempts to do in its decision. ACCI goes on to submit as follows:

“Whilst judgments are not always able to be fully explained, that issue should give added impetus to the Panel to disclose the factors which are most relevant, and quantifying how the Panel’s decision would have changed if key variables had been different. Although there is always more than one factor which changes from year to year, this sort of analysis would make the Panel’s decisions more transparent and improve the relevance of submissions in subsequent years.

The Australian Chamber accepts that the range of considerations the Panel must take into account means broad judgment is to be exercised in weighing the relative importance of different considerations, but that does not preclude quantification of the weight given to the most important considerations. Continuation and refinement of that process is commended.” 16

[24] In a further submission, ACCI elaborated on this point, stating that “there is consonance between the view expressed by the Productivity Commission and the intent of the point raised in the 30 March 2016 submission”. 17

[25] The PC Report observation to which ACCI referred is the comment that there was scope for the Panel to enhance its approach to AWRs by: adopting a more targeted approach to assessing and determining award minimum wages; explicitly recognising and measuring trade-offs between the different elements of the minimum wage and modern award objectives; and considering the effect of determinations on all affected parties. 18 In terms of assessing trade-offs, the PC considered the Panel should weigh “the benefits of increased earnings for the low-paid against the potentially slower employment growth from more generous increases in minimum wages”.19 While acknowledging that decisions on minimum wages cannot be reduced to a “simple formulaic approach”, the PC stated that:

“While judgment will always be necessary, scientific methodologies can provide the metrics and processes for assessing the consequences of different minimum wage and award review decisions, and can ensure that decisions are, as much as possible, informed, transparent, logical, substantiated and consistent.” 20

[26] The PC Report provided no detail as to the “scientific methodologies” available to provide “the metrics and processes for assessing the consequences of different minimum wage and award review decisions”. 21 Indeed, as the PC Report also observes:

“The economic literature on the employment effects of minimum wages does not provide a simple and universal answer.” 22

“On top of these theoretical complexities, there are several empirical obstacles that together can bedevil attempts to gauge the effects of minimum wages on employment …” 23

“Estimates of the impact of minimum wages on employment and hours worked vary in direction as well as in size and the conclusions drawn from this body of research can appear contradictory and are often the subject of dispute …” 24

“… while the (Australian) studies provide an indication of the likely direction of change, they provide neither definitive evidence nor clear guidance on the magnitude of any employment effects that would result from future changes in Australia’s minimum wages.” 25

“The Productivity Commission’s examination suggests that it is not currently possible to arrive at a straight-forward and definitive conclusion about the effects of changes in Australian minimum wages on employment levels or hours worked.” 26

[27] The matters raised by ACCI and the PC Report regarding the Panel’s decision making process were put as questions to all parties on 28 April 2016. No other party supported the proposition that the Panel should disclose how its decision would have changed if key variables had been different.

[28] We agree with the proposition (advanced by ACCI) that the Panel should disclose the factors which are most relevant in a particular year, and we have done so in this decision. We also accept that the Panel’s decision-making process should be as transparent as possible. This can be seen as an iterative process. For example, ACCI submitted that the Panel should consider short and medium-term trends when analysing youth unemployment and give greater consideration to this matter in its decisions. 27 We have responded to this suggestion by considering, at paragraphs [281]-[282] the youth unemployment rate, and its relationship to aggregate unemployment over the past decade and the trends in the youth labour market over a five-year period identified in the 2014–15 Review decision.28

[29] However, we do not propose to quantify how the Panel’s decision would have changed if key variables had been different. Such a hypothetical exercise is neither feasible, nor appropriate. The range of considerations the Panel is required to take into account usually vary from year to year and it would be an arid exercise to embark on a hypothetical assessment of what the Panel would do in a different set of circumstances. Such an exercise may also give rise to procedural fairness issues.

[30] Nor do we intend to quantify the weight given to particular considerations, though we will identify the most significant issues which have been impacted on the Panel’s decision in each particular Review.

[31] In past Review decisions, the Panel has addressed submissions calling for specific factors to be quantified. In the 2012–13 Review decision, 29 the Panel addressed submissions from The Australian Industry Group (Ai Group) and the National Farmers’ Federation (NFF) to quantify the discount to be applied to any minimum wage adjustment for that year due to the 0.25 per cent increase in the superannuation guarantee. The Panel stated that the current legislative framework does not support an approach that quantifies each element, rather, minimum wage adjustment involves broad judgment:

“… we have not applied a direct, quantifiable, discount to the minimum wage increase, as proposed by Ai Group and the NFF. As we have noted, the AIRC [Australian Industrial Relations Commission] decisions following the introduction of the SGC [Superannuation Guarantee Charge] Acts provide no support for such an approach. Nor does the current legislative framework support such an approach. In reviewing modern award minimum wages and the NMW the Act requires us to have regard to a range of considerations. As we note in Chapter 2, there is a degree of overlap between the matters specified in the modern awards objective, the minimum wages objective and the objects of the Act. To the extent that these matters are of direct relevance to the Review, they may be grouped into three broad categories: economic; social; and collective bargaining. The range of considerations we are required to take into account calls for the exercise of broad judgment, rather than a mechanistic approach to minimum wage fixation.” 30

[32] The wide range of data and information before the Panel and the often complex interaction between these factors mean that a comparison between AWRs will rarely be straightforward. There is no formulaic relationship between changes in particular indicators or factors over time and the outcome of AWRs. While the Panel seeks to explain its view of the circumstances (including forecasts or projections) prevailing in each AWR in comparison with previous years, it is not feasible to quantify the weight given to particular factors in balancing the various considerations prescribed by the Act. This also explains why proposals premised on a fixed relationship between the rate of inflation and minimum wages directed towards real wage maintenance are not consistent with the statutory framework.

[33] We now turn to the economic, social and collective bargaining considerations which we must take into account.

Economic considerations

[34] Both the minimum wages objective and the modern awards objective require us to take into account various economic considerations. The underlying intention of these provisions is that the Panel takes into account the effect of its decisions on national economic prosperity and in doing so gives particular emphasis to the economic indicators specifically mentioned in the relevant statutory provisions.

[35] Economic growth, while slightly below trend, has continued at a reasonable level, improving over the second half of 2015 and outstripping growth in each of the seven major Organisation for Economic Co-operation and Development (OECD) economies. Real gross domestic product (GDP) grew by 3.0 per cent over the year to the December quarter 2015, compared with 2.2 per cent over the year to the December quarter 2014.

[36] Over the five years to 2014–15, labour productivity growth in the market sector was higher than the five years prior. Over the year to the December quarter 2015, GDP per hour worked fell by 0.4 per cent, following an unusually large increase in hours worked over that year. GDP per hour worked grew over each of the preceding four years. Gross value added (GVA) per hour worked for the market sector grew by 0.9 per cent over the past year.

[37] The shares of wages and profits in total income have barely changed over the past three decades in the non-mining part of the economy. In the mining sector, they have returned to close to their more usual levels in the past two years. After falling sharply in the 2000s, with the peaking of the terms of trade, the wages share started to recover in 2011 and has since been relatively flat. The profits share has fallen back in recent years. Company gross operating profits grew by 2.8 per cent for non-mining industries over the year to the December quarter 2015 which is above the average for the past five years, and fell by 14.9 per cent in the Mining industry.

[38] There is no evidence of particular corporate stress. Business bankruptcy rates and business exit rates were at relatively low levels in 2014–15. Business bankruptcy rates in 2014–15 were at their lowest level for the past decade.

[39] All measures of inflation remain at historically low levels. The headline Consumer Price Index (CPI) rose by 1.3 per cent, underlying inflation increased by 1.5 per cent (average of the trimmed and weighted mean) and the Living Cost Index (LCI) for employee households increased by 1.1 per cent over the year to the March quarter 2016.

[40] Each of the measures of wages reflects continued historically low aggregate wages growth. Over the year to the December quarter 2015, the Wage Price Index (WPI) increased by 2.2 per cent and the average weekly ordinary time earnings (AWOTE) by 1.6 per cent. Bargaining outcomes, reflected in average annual wage increases (AAWI), grew by 3.0 per cent in the December quarter 2015. Over the year to the December quarter 2015, nominal unit labour costs rose by 0.3 per cent seasonally adjusted and real unit labour costs increased by 0.9 per cent.

[41] The increase in employment, the age-adjusted participation rate and the employment to population ratio all point to improvements in the labour market. The absolute levels of these indicators are also quite favourable. The recent falls in unemployment, in long-term unemployment and in unemployment among youth are consistent with the picture of improved labour market conditions over the course of 2015 and into 2016. The award-reliant industries have had a mixed experience, with three of the five having healthy levels of increases in employment while the other two had falls.

[42] In contrast to the generally strong labour market performance over the course of 2015, reflected across a range of labour market indicators and the continuing employment growth in 2016, the reduction in hours worked recorded between December 2015 and April 2016 suggests some weakness in labour market conditions. The reduced hours worked in the first months of 2016 primarily reflects a decline in the average hours worked by full-time employees and, to a lesser degree, a continuing shift from full-time to part-time employment. This suggests that it is caused more by the ongoing changes in the structure of the economy and reduced pressures in the mining sector, rather than by some more general weakness in the demand for labour. Having regard to the reason for the decline in hours worked and the broader information about labour market conditions, we do not think that it seriously undermines the broader information about the labour market. Nonetheless, it is a relevant consideration we have taken into account in assessing labour market conditions and the broader economic circumstances. The significant revisions to the hours worked data in the April 2016 ABS Labour Force Survey reinforce reservations about the reliability of monthly Labour Force data. We will be better informed about the fall in hours worked in the early part of 2016 when further information becomes available.

[43] The transition in the economy from the mining sector to the more labour-intensive service sectors has been evident in the strength and composition of employment growth in recent years, with most of the growth in total employment occurring in the service sectors of the economy, with the Retail trade and Health care and social assistance industries contributing most to aggregate employment growth.

[44] The employment to population ratio for people aged 20–64 years rose over each of the past two years, to 75.4 per cent in March 2016, although it remains below its peak in December 2010. The participation rate of people aged 20–64 years was higher in December 2015 than in any time over the last decade for both men and women and it rose by 0.2 percentage points over the year to March 2016.

[45] The improved labour market over the past year has arrested the persistent increase in unemployment since the global financial crisis (GFC) and brought about a moderate reduction in unemployment. The total number of unemployed persons has fallen by 37 200 (or 4.9 per cent) over the year to April 2016, and the unemployment rate has fallen by 0.4 percentage points, from 6.1 per cent in April 2015 to 5.7 per cent in April 2016.

[46] As employment growth strengthened and overall unemployment fell over the course of 2015 and into 2016, so too did the under-employment rate, long-term unemployment and the youth unemployment rate. Over the past 10 years, under-employment and unemployment have moved together, and the addition of one to the other does not alter the essential interpretation of changes in the state of the labour market.

[47] We accept that small businesses are more award reliant than larger businesses and will be particularly affected by changes in award rates of pay; have less capacity to adjust to adverse changes in business conditions; and have found it harder to bounce back from the GFC than larger businesses. However, the aggregate and sectoral economic data do not suggest that the economic conditions for small business have recently diverged materially from those of businesses generally within the industries in which they operate. Business conditions for small businesses are harder than for large businesses, but this has been true for almost a decade and has not deteriorated recently. The survey results included in the submissions of the Australian Government do not suggest recent circumstances impacting disproportionately on small businesses.

[48] Overall the major indicators in respect of the award-reliant industries performed generally better than the all industries average over the most recent year. Whilst there is diversity in outcomes between the award-reliant industries, the data does not suggest that the most award-reliant industries have faced a relatively difficult economic environment over the past year or that recent minimum wage increases have adversely impacted on the relative economic performance of the award-reliant industries.

[49] The outlook for the Australian economy remains generally positive. All of the official forecasts expect GDP and employment to continue to grow and unemployment to fall. Inflation and wage growth is expected to continue to be below average levels in the coming year or so.

[50] The Australian economy is entering its 26th consecutive year of economic growth and a continuing transition toward broader growth in the Australian economy following the passing of the resource investment boom. The transition to broader-based growth is being supported in the short-term by household consumption, dwelling investment and exports, with non-mining investment remaining weak and falling mining investment detracting from growth.

[51] The decline in the terms of trade since late 2011 has reduced the income available for distribution to labour and capital, with employees experiencing relatively low increases in wages, on all measures, over the past two years. Each measure of wages reflects a continuing fall in aggregate wages growth over the past year, to historically low levels. This is contributing to the process of adjusting to the downturn in the terms of trade, as real net national disposable income (RNNDI) has increased by less than GDP from the second half of 2011, and fell in 2015. The shift in incomes between labour and capital associated with the rapid increase in the terms of trade and its more recent decline was most evident in the mining sector.

[52] The relatively low growth in aggregate wages is a relevant consideration for the Panel because of its bearing on relative living standards and the needs of the low paid. In the past, the Panel has not increased the NMW and modern award minimum wage rates on the basis of the stronger RNNDI movements because such movements are based on short term and volatile factors. 31 We do not propose to alter the NMW and award rates directly on the basis of the subsequent weak RNNDI movements in order to be consistent in our approach. The force of the weak growth in RNNDI on our decision is felt through its consequences for growth in wages more generally.

Social considerations

[53] Both the minimum wages objective and the modern awards objective require us to take into account relative living standards and the needs of the low paid when setting minimum wage rates. Those matters must be considered, within the range of statutory matters in ss.134(1) and 284(1) of the Act, in the context of the evidence relevant to a particular review. They are different, but related, concepts. 32

[54] The assessment of relative living standards requires a comparison of the living standards of workers reliant on the NMW and modern award minimum wage rates with those of other groups that are deemed to be relevant. Relative living standards focus on the comparison between award-reliant workers and other employees, especially non-managerial employees, but does not exclude comparison with other groups.33 For the reasons set out in paragraphs [354] and [357], we do not favour a comparison with pensioners or small business owners for the purpose of assessing the relative living standards of the low paid.

[55] The assessment of the needs of the low paid requires an examination of the extent to which low-paid workers are able to purchase the essentials for a “decent standard of living” and to engage in community life, assessed in the context of contemporary norms.

[56] We accept that adult award-reliant employees who receive a rate of pay that (as a full-time equivalent) is below two-thirds of median (adult) ordinary time earnings provide an appropriate and practical benchmark for identifying who is low paid. Whilst no specific conclusion is available, the information as a whole, suggests that a sizeable proportion—probably a majority—of employees who are award reliant are also low paid by reference to the two-thirds of median weekly earnings benchmark.

[57] The NMW has increased in real terms in most years within the decade. The real value of the NMW increased by a cumulative 4.8 per cent over the past decade to the December quarter 2015, with a 3 per cent real growth over the five years to the December quarter 2015 and a 0.8 per cent real increase over the most recent year to the December quarter 2015. Since the Annual Wage Review 2010–11 (2010–11 Review) decision, the NMW and all modern award rates have increased in real terms and at the same percentage at each classification level.

[58] The C14 (introductory) rate fell relative to measures of median and average earnings over the past decade, with much of that decline occurring between August 2005 and August 2008. The ratio of the C14 rate to median earnings has fallen marginally since the AWR adjustment in 2010—from 54.3 per cent in August 2010 to 53.4 per cent in August 2014, although it has risen from the historically low level of 52.7 per cent in August 2012.

[59] Award rates have grown more slowly over the decade than all other measures of average pay—AWOTE, average weekly earnings (AWE) and the WPI—although growth in the C14 rate has remained close to that of the WPI. Divergence between award rates and average wages has narrowed more recently, reflecting reduced growth in the AWOTE, AWE and the WPI and recent decisions of the Panel.

[60] Real weekly earnings of full-time workers have become progressively less equal in the past decade—for each decile, the lower the earnings, the lower the rate of growth in earnings, reflected in the fanning out of the earnings distribution. However, earnings inequality has stabilised since 2008.

[61] The distribution of low-paid workers across employee households, preferably households for which the principal source of income is wages, provides the best basis for assessing the relative living standards and the needs of the low paid, for the reasons found at paragraphs [400] to [402].

[62] Overall income inequality, as measured by the Gini coefficient, has risen since
1994–95, but appears to have stabilised from at least 2007–08 at relatively high levels compared with the past.

[63] We do not accept the proposition that most low-paid workers are not in low-income households. Many low-paid workers live in households with low or very low disposable incomes. Around two-thirds of low-paid employees are found within the bottom half of the distribution of employee households and have lower living standards than other employees. Single low wage earners are particularly concentrated in the lower deciles of employee household income distribution. Single low wage earners without children receive little help from the transfer system.

[64] Increases in the minimum wage and award classification wages do have a role to play as part of a package of measures to address inequality. Increases in the minimum wage and award classification wages have directly impacted on the relative living standards of the low paid and their capacity to meet relevant needs.

[65] In December 2015, disposable income was less than the 60 per cent of median income poverty lines for single-earner couples, where one partner earns the NMW or C10 rate and the other partner is not in the labour force and therefore not in receipt of Newstart Allowance (NSA), whether or not they have children.

[66] New information from financial stress measures, for 2014, is available from the Household, Income and Labour Dynamics in Australia (HILDA) Survey and General Social Survey (GSS) survey. The 2014 data suggest that a slightly higher proportion of low-paid persons or households reported financial stress in 2014. In 2014, 13.4 per cent of low-paid employee households reported that they were “unable to raise $3000 in a week for something important”: the highest level reported during the past five years.

[67] Our overall assessment is that the relative living standards of NMW and award-reliant employees have improved a little over recent years, although the relative position of low-paid workers has deteriorated over the past decade. Many have low levels of disposable income. Some low paid award-reliant employee households have levels of disposable income which places them below the poverty line. The current environment of low inflation and low wages growth generally provides an opportunity to provide a moderate improvement in the relative living standards of the low paid and to better meet their needs. The requirement to take into account relative living standards and the needs of the low paid supports an increase in the NMW and modern award minimum wages.

[68] The Act requires the Panel to take into account “promoting social inclusion through increased workforce participation” (s.284(1)(b)). Consistent with past AWR decisions, we interpret this to mean increased employment. Higher minimum wages can provide incentives to those not in the labour market to seek paid work, which needs to be balanced against potential negative impacts on the supply of jobs for low-paid workers.

[69] For the purposes of making a determination, we must form a view on the employment impacts of an increase in the NMW and modern award minimum wages. This issue is likely to remain contested, especially for Australia where the application of conclusions from United States (US) and United Kingdom (UK) research is not straightforward. The additional evidence presented to this Review, especially that from the work of the PC, is consistent with our conclusion that an increase in the NMW and award wages of the size that we have determined and in the economic circumstances that we face, will not have a measurable impact on employment.

[70] The impact of the NMW and award wages on promoting social inclusion through increased workforce participation is difficult to discern with any confidence. Jobs must be attractive enough for people with alternative sources of income to be willing to seek them. The evidence is that for most, but not all, family types, there is a substantial financial gain from moving from not employed to a minimum wage job. This financial gain is sensitive to the gap between the level of income support and the level of the NMW and the lower award rates. We must be alert to the possibility that over time the incentives that are provided by this gap may diminish unduly.

[71] Evidence on the duration of employment in low-paid work points to its role as an entry point into the labour market and a stepping stone for many into better paid work. But a substantial number of low-paid workers either remain in low-paid work for a number of years, or move between low-paid work and no work. We cannot be indifferent to the standard of living of low-paid workers just because many do not stay in that situation for long periods. Those employees who are reliant on the NMW and award wages are a relevant concern to the Panel in exercising its statutory obligations.

[72] The possibility that there are greater long-run and cumulative effects on job openings for low-skill workers is a constraint on raising minimum wages to a level that would more fully satisfy the requirement to take into account the relative living standards and needs of the low paid. The modest growth in the NMW and award wages over the past decade gives little basis for a view that these wage adjustments have in fact diminished entry-level and low-skill jobs.

[73] There is general agreement in the submissions that the labour market has strengthened over the past year. The particular indicators of this are presented in Chapter 4 of this decision. This is relevant to the potential impact of changes to the NMW and award wages on the demand for labour, since it is widely agreed, and we accept, that the sensitivity of employer demand for labour, in response to wage rises, will be greater if the overall demand for labour is weak.

[74] In giving effect to both the modern awards objective and the minimum wages objective the Panel must take into account the principle of equal remuneration for work of equal or comparable value (s.134(1)(e) and s.284(1)(d)). From the data before us, we can conclude:

• there is a substantial and persistent gap in the average hourly and weekly pay of men and women, in favour of men;
• women are significantly more likely to be paid at the award rate than are men at all levels of the award structure;
• workers paid at the award rate are much more likely to be low paid than are other workers; and
• at least at the highest rates in the award structure, women are heavily over-represented among those who are paid at the award rate.

[75] An increase in award rates of pay relative to other wages would reduce the gender pay gap in two ways. The first is that it would raise the level of low pay rates relative to median pay rates, and hence particularly benefit women, who disproportionately receive low pay rates. The second is that an increase in the higher levels of award rates will particularly benefit women, because at the higher pay scales, women are substantially more likely to be paid the award rather than the bargained rate than are men.

[76] The principle of equal remuneration is a factor in favour of an increase in the NMW and the minimum wages in modern awards and as such has been considered together with the various other statutory considerations the Panel is required to take into account.

Collective Bargaining

[77] The modern awards objective applies to the setting, varying or revoking of modern award minimum wages in an AWR. One of the matters the Panel is required to take into account in giving effect to the modern awards objective is “the need to encourage collective bargaining” (s.134(1)(b)). In making the NMW order, the Panel must give effect to the minimum wages objective. The minimum wages objective makes no reference to “the need to encourage collective bargaining”. However, as we note in Chapter 2, one of the purposes of the Act is to encourage collective bargaining and, hence, it is appropriate to take that legislative purpose into account in making the NMW order.

[78] The Survey of Employee Earnings and Hours (EEH) provides data on the method of setting pay. This survey is conducted every two years and the 2014 data is the most recent release. For the reasons given in Chapter 7 (at [523] - [524]), the recent increase in award reliance does not support the contention that recent minimum wage increases have acted as a disincentive to collective bargaining. In particular, we note that while most of the award-reliant industries experienced increases in award reliance, it increased only slightly in Other services (0.5 percentage points). The Accommodation and food services industry, which has the highest proportion of “award only” employees 34 of all industries (42.8 per cent in 2014), had a 2 percentage point fall in award reliance between 2012 and 2014. This tells against the proposition that the form or size of recent minimum wage increases have increased award reliance.

[79] As the Panel observed in the 2013–14 Review decision, 35 the available research does not reveal any particular relationship between the incentive to bargain and increases in the NMW and modern award minimum wages. Instead it points to a complex mix of factors that may contribute to employee and employer decision making about whether or not to bargain.

[80] The Panel’s previous conclusions as to the relationship between increases in minimum wages and collective bargaining remain valid, in particular:

• whilst the gap between minimum wages and bargained wages is likely to increase the incentive for employees to bargain, a large gap may be a disincentive for employers to bargain; and
• minimum wages are only one element of the incentive to bargain. 36

[81] In determining the increase in the NMW and modern award minimum wages in this Review we have taken into account the need to encourage collective bargaining. Given the complexity of the factors which may contribute to decision making about whether or not to bargain we are unable to predict the precise impact of our decision on collective bargaining, with any confidence.

The Decision

[82] The Panel received submissions from the Australian Government, several state governments, bodies representing the interests of employees, employers and other groups, and individuals. Many of the submissions did not advance a specific proposal as to the quantum of any increase to the NMW or modern award minimum wages, including all government submissions. Three submissions proposed that there be no increase in minimum wages. The parties’ positions are set out in more detail in Chapter 3.

[83] The Chamber of Commerce and Industry Queensland (CCIQ), Chamber of Commerce and Industry Western Australia (CCIWA) and National Retail Association (NRA) proposed flat dollar increases of varying amounts. CCIQ and CCIWA supported an increase of not more than $7.90 per week to the NMW and modern award minimum wages. NRA supported an increase of not more than $10.70 per week.

[84] A number of business and industry associations proposed percentage increases of differing amounts.

[85] Master Grocers of Australia (MGA) and the NFF proposed an increase of no more than 1.1 per cent to the NMW and modern award minimum wages. An increase of 1.1 per cent amounts to a $7.20 increase to the NMW/C14 rate and $8.40 to the C10 rate.

[86] ACCI submitted that the Panel should adopt a “cautious approach” and award an increase of no greater than 1.2 per cent. Australian Federation of Employers and Industries (AFEI), Australian Retailers Association (ARA), Business SA and the various Motor Traders Associations (MTAs) supported ACCI’s submission. An increase of 1.2 per cent amounts to a $7.90 increase to the NMW/C14 rate and $9.20 to the C10 rate.

[87] Ai Group proposed a 1.6 per cent increase to both the NMW and modern award minimum wages, which represents a $10.50 per week increase to the NMW. Australian Business Industrial and the NSW Business Chamber Ltd (ABI) submitted that any increase should not exceed 2 per cent.

[88] The Australian Council of Trade Unions (ACTU) and Australian Catholic Council for Employment Relations (ACCER) supported a tiered approach to any increase to the NMW and modern award minimum wages. The ACTU proposed a flat dollar increase of $30.00 per week to the NMW and modern award minimum wages up to, and including, the C10 rate and an increase of 3.9 per cent to all modern award minimum wages above the C10 rate. A flat dollar increase of $30.00 per week to the NMW/C14 level is equivalent to an increase of about 4.6 per cent and about 3.9 per cent at the C10 rate.

[89] ACCER proposed tiered, flat dollar increases, with the NMW increasing by $25.10 per week and modern award minimum wages by $19.00 per week. As initially put ACCER’s proposal, if implemented, would have resulted in the NMW exceeding modern award minimum wages at the C14 level. During the course of the final consultations on 10 May 2016, ACCER clarified its position and submitted that the NMW and modern award minimum wages at the C14 level should both be increased by $25.10.

[90] We have taken into account all of the relevant statutory considerations. As mentioned in Chapter 2, the underlying intention of the various economic considerations in ss.3, 134 and 284 is that the Panel is required to take into account the effect of its decisions on national economic prosperity and in doing so give particular emphasis to the economic indicators mentioned in the relevant statutory provisions.

[91] The key changes in the economic environment evident in this Review are:

• The economy has grown at close to trend, improving over the second half of 2015. Real GDP grew by 3.0 per cent over the year to the December quarter 2015, compared to 2.2 per cent over the year to the December quarter 2014. RNNDI fell by 1.1 per cent over the year to December 2015, after remaining essentially unchanged in the previous year.
• Stronger labour market conditions over the past year are evident across all measures apart from the fall in hours worked in early 2016. The unemployment rate fell from 6.1 per cent in April 2015 to 5.7 per cent in April 2016. As overall unemployment fell over the course of 2015 and into 2016, so too did the under-employment rate, long-term unemployment and the youth unemployment rate.
• All measures of inflation and wages growth are at historically low levels.
• Over the five years to 2014–15 labour productivity growth in the market sector was higher than the previous five year period.
• Company gross operating profits grew by 2.8 per cent for non-mining industries over the year to the December quarter 2015, above the average for the past five years and greater than the 1.4 per cent growth over the year to the December quarter 2014. Mining industry profits continued to fall.

[92] Economic data does not suggest that the most award-reliant industries have faced a relatively difficult economic environment over the past year or that recent minimum wage increases have adversely impacted on the relative economic performance of the award-reliant industries.

[93] The Panel has taken into account the circumstances of different regions, industries and sectors as part of its broader consideration of the national economy. These circumstances include that there are economic challenges currently facing certain regions and sectors as a result of the transition taking place in the economy and other factors including natural disasters.

[94] Currently, wages growth is neither a source of inflationary pressure within the economy, nor a source of declining capacity for Australian firms to compete in international markets. The outlook for the Australian economy remains generally positive. Inflation and wage growth is expected to continue to be below average levels in the coming year or so.

[95] Of course these economic considerations are not the only matters which the Act requires us to take into account. We are also required to take into account a range of social and other considerations. In particular, we are required to take into account the “promotion of social inclusion through increased workforce participation”; “relative living standards and the needs of the low paid”, “the principle of equal remuneration for work of equal or comparable value”, and the “need to encourage collective bargaining”. No particular primacy is attached to the various economic, social and other considerations the Panel is required to take into account.

[96] The impact of the NMW and award wages on promoting social inclusion through increased workforce participation is difficult to discern with any confidence.

[97] The additional evidence presented to this Review, especially that from the work of the PC, is consistent with our conclusion that the employment impacts of an increase in the NMW and award wages of the size that we have determined and in the economic circumstances that we face, will not have a measurable impact on employment.

[98] Despite some recent improvement in the relative living standards of NMW and award-reliant employees, the relative position of low-paid workers has deteriorated over the past decade. Many low-paid workers live in households with low or very low disposable incomes. Around two-thirds of low-paid employees are found within the bottom half of the distribution of employee households and have lower living standards than other employees. Some low-paid award-reliant employee households have household incomes which put them below the 60 per cent of median income poverty lines.

[99] Women continue to be over-represented among the award reliant and low paid. Increases in the NMW and modern award wages can provide some assistance in addressing the gender pay gap.

[100] On the available evidence and the experience to date it is likely that the increase we have determined in this Review will impact upon the incentives to bargain in various sectors in different ways, but will not, in aggregate, discourage collective bargaining.

[101] The general economic climate is robust, with some continued improvement in productivity and historically low levels of inflation and wages growth. The prevailing economic circumstances provide an opportunity to improve the relative living standards of the low paid and to enable them to better meet their needs. The level of increase we have decided upon will not lead to inflationary pressure and is highly unlikely to have any measurable negative impact on employment. It will, however, mean a modest improvement in the real wages for those employees who are reliant on the NMW and modern award minimum wages.

[102] We have determined that it is appropriate to increase the NMW. The factors identified above have led us to award an increase of 2.4 per cent. The national minimum wage will be $672.70 per week or $17.70 per hour. The hourly rate has been calculated by dividing the weekly rate by 38, on the basis of the 38-hour week for a full-time employee. This constitutes an increase of $15.80 per week to the weekly rate or 41 cents per hour to the hourly rate.

[103] Having regard to the proposed NMW and the other relevant considerations, we also consider that it is appropriate to adjust modern award minimum wages.

[104] As to the form of the increase, past flat dollar increases in award minimum rates have compressed award relativities and reduced the gains from skill acquisition. The position of the higher award classifications has reduced relative to market rates and to average earnings and has fallen in terms of real purchasing power. A uniform percentage increase will particularly benefit women workers, because at the higher award classification levels women are substantially more likely than men to be paid the minimum award rate rather a bargained rate. These matters have led us to determine a uniform percentage increase. The considerations to which we have referred have led us to increase modern award minimum wages by 2.4 per cent.

[105] The determinations and order giving effect to our decision will come into operation on 1 July 2016. Weekly wages will be rounded to the nearest 10 cents.

[106] In Chapter 2 we deal with submissions directed at an award-by-award review of minimum wages and the deferral of any minimum wage increase for those industry sectors and regions affected by the impacts of natural disasters over the past year. For the reasons given in Chapter 2 we do not propose to grant the relief sought.

[107] As foreshadowed in Chapter 9, although it will be a matter for the Panel constituted to conduct next year’s Review, we propose that a review be undertaken of the transitional instruments that must be dealt with as part of AWRs, as well as a review of the existing arrangements for employees with disability, which we would propose be the subject of a preliminary hearing as part of the Annual Wage Review 2016–17 (2016–17 Review).

[108] It is also convenient to deal here with the submission by United Voice that the Panel take the procedural step of deciding to conduct a preliminary hearing into whether the Panel should adopt a medium-term target for the NMW. United Voice submits that:

“… a separate process should be conducted both to assist procedural convenience to the Panel and those making submissions and to ensure that the merits of the matter are considered aside from the specifics of an annual review. Our proposal involves a significant consideration of the role of the Panel in determining the AWR and is likely to attract views from a range of parties.” 37

[109] The preliminary hearing proposed by United Voice is intended to form part of the 2016–17 Review. During the course of the public consultation on 10 May 2016, United Voice acknowledged that its proposal was really a question for the Panel constituted to deal with the 2016–17 Review, rather than the Panel as presently constituted. We agree.

2. The Statutory Framework

General

[110] As we have mentioned, the Panel is required to conduct and complete a Review in each financial year. In conducting a Review the Panel must review the NMW and modern award minimum wages and make a NMW order. 38 The Panel’s task is set out in s.285(2) of the Act:

“In an annual wage review, the FWC:

(a) must review:

(i) modern award minimum wages; and

(ii) the national minimum wage order; and

(b) may make one or more determinations varying modern awards to set, vary or revoke modern award minimum wages; and

(c) must make a national minimum wage order.”

[111] The Act requires the Panel to take into account a number of considerations in performing these functions.

[112] The minimum wages objective applies to the exercise of functions and powers under Part 2—6 of the Act, which includes the Review. 39 The minimum wages objective is set out in s.284 of the Act:

“284 The minimum wages objective

What is the minimum wages objective?

(1) The FWC must establish and maintain a safety net of fair minimum wages, taking into account:

(a) the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth; and

(b) promoting social inclusion through increased workforce participation; and

(c) relative living standards and the needs of the low paid; and

(d) the principle of equal remuneration for work of equal or comparable value; and

(e) providing a comprehensive range of fair minimum wages to junior employees, employees to whom training arrangements apply and employees with a disability.

This is the minimum wages objective.”

[113] The modern awards objective applies to the performance or exercise of “modern award powers”, which are defined to include the variation of modern award minimum wages. The modern awards objective is set out in s.134 of the Act:

“134 The modern awards objective

What is the modern awards objective?

(1) The FWC must ensure that modern awards, together with the National Employment Standards, provide a fair and relevant minimum safety net of terms and conditions, taking into account:

(a) relative living standards and the needs of the low paid; and

(b) the need to encourage collective bargaining; and

(c) the need to promote social inclusion through increased workforce participation; and

(d) the need to promote flexible modern work practices and the efficient and productive performance of work; and

(da) the need to provide additional remuneration for:

(i) employees working overtime; or

(ii) employees working unsocial, irregular or unpredictable hours; or

(iii) employees working on weekends or public holidays; or

(iv) employees working shifts; and

(e) the principle of equal remuneration for work of equal or comparable value; and

(f) the likely impact of any exercise of modern award powers on business, including on productivity, employment costs and the regulatory burden; and

(g) the need to ensure a simple, easy to understand, stable and sustainable modern award system for Australia that avoids unnecessary overlap of modern awards; and

(h) the likely impact of any exercise of modern award powers on employment growth, inflation and the sustainability, performance and competitiveness of the national economy.

This is the modern awards objective.”

[114] The modern awards objective is that modern awards, together with the National Employment Standards (NES), provide a “fair and relevant minimum safety net of terms and conditions”, taking into account the particular considerations identified in s.134(1)(a)–(h). The modern awards objective is very broadly expressed and no particular primacy is attached to any of the considerations identified in s.134(1)(a)–(h). 40

[115] The above observation can also be applied to the minimum wages objective in s.284 and the considerations in s.284(1)(a)–(e).

[116] There is a substantial degree of overlap in the considerations the Panel is required to take into account under the minimum wages objective and under the modern awards objective, though some of these considerations are not expressed in the same terms. 41

[117] In particular, there are differences in the expression of the economic considerations that the Panel is required to take into account under the modern awards objective and the minimum wages objective. 42 However, the underlying intention of the various economic considerations referred to in ss.134 and 284 is that the Panel takes into account the effect of its decisions on national economic prosperity and in so doing gives particular emphasis to the economic indicators specifically mentioned in the relevant statutory provisions.43

[118] Section 578(a) is also relevant. It provides that the Panel must take into account the object of the Act in performing its functions or exercising its powers in an AWR. 44 The object of the Act is set out in s.3, as follows:

“3 Object of this Act

The object of this Act is to provide a balanced framework for cooperative and productive workplace relations that promotes national economic prosperity and social inclusion for all Australians by:

(a) providing workplace relations laws that are fair to working Australians, are flexible for businesses, promote productivity and economic growth for Australia’s future economic prosperity and take into account Australia’s international labour obligations; and

(b) ensuring a guaranteed safety net of fair, relevant and enforceable minimum terms and conditions through the National Employment Standards, modern awards and national minimum wage orders; and

(c) ensuring that the guaranteed safety net of fair, relevant and enforceable minimum wages and conditions can no longer be undermined by the making of statutory individual employment agreements of any kind given that such agreements can never be part of a fair workplace relations system; and

(d) assisting employees to balance their work and family responsibilities by providing for flexible working arrangements; and

(e) enabling fairness and representation at work and the prevention of discrimination by recognising the right to freedom of association and the right to be represented, protecting against unfair treatment and discrimination, providing accessible and effective procedures to resolve grievances and disputes and providing effective compliance mechanisms; and

(f) achieving productivity and fairness through an emphasis on enterprise-level collective bargaining underpinned by simple good faith bargaining obligations and clear rules governing industrial action; and

(g) acknowledging the special circumstances of small and medium-sized businesses. [emphasis added]”

[119] As noted above, one of the considerations the Panel is required to take into account in giving effect to the minimum wages objective is “promoting social inclusion through increased workforce participation” [emphasis added] (s.284(1)(b)). In the present proceedings the Victorian Government submitted that the Panel should adopt “a broader understanding of the relationship between workforce participation and social inclusion”. 45 In support of this proposition the Victorian Government submitted that:

“… while employment is a key determinant, merely having a job is not always enough to facilitate social inclusion. A job with inadequate pay can create social exclusion if the level of income limits a person’s capacity to engage in the cultural, economic, political and social aspects of life.” 46

[120] The Panel considered this issue in the 2012–13 Review decision and concluded that the consideration of social inclusion in the context of s.284(1)(b) is limited to increased workforce participation, that is, obtaining employment. 47 The Panel noted that:

“This involves a consideration of the increased incentives that higher minimum wages can provide to those not in employment to seek paid work, balanced against potential impacts on the demand for low-paid workers and hence the supply of low-paid jobs, from large increases in minimum wages”. 48

[121] The Panel based its conclusion on the use of the conjunctive “through” in s.284(1)(b). We think the Panel in the 2012–13 Review was correct in its construction of s.284(1)(b). But, importantly, the 2012–13 Review decision also observed that in a review the Panel’s consideration of social inclusion is not limited to s.284(1)(b):

“However, we also accept that modern award rates of pay impact upon an employee’s capacity to engage in community life and the extent of their social participation. These are matters that can be appropriately taken into account in our consideration of the legislative requirement to ‘maintain a safety net of fair minimum wages’ and to take into account ‘the needs of the low paid’ (s.284(1)(c)). Further, the broader notion of promoting social inclusion is also relevant to the fixation of minimum wages, quite apart from the more limited construct reflected in s.284(1)(b). One of the objects of the Act is to promote ‘social inclusion for all Australians by’ (among other things) ‘ensuring a guaranteed safety net of fair, relevant and enforceable minimum terms and conditions through…modern awards and national minimum wage orders’ (s.3(b)).” 49

[122] We endorse the above observation and on that basis we accept the thrust of the Victorian Government’s submission in the quote set out at [119] above, and this forms part of our broader consideration.

National minimum wage order

[123] The NMW order applies to award/agreement free employees. 50 The NMW order is dealt with in Division 4 of Part 2–6 of the Act (ss.293–299). It sets the NMW51 and special national minimum wages which apply to employees who are juniors; to whom training arrangements apply; or who have a disability.52

[124] An award/agreement free employee cannot be paid less than the rate of pay specified in the NMW order. Further, if an enterprise agreement applies to an employee and the employee is not covered by a modern award then the employee’s base rate of pay under the enterprise agreement must not be less than the rate specified in the NMW order (s.206(3)).

[125] The minimum wages objective and the object of the Act apply to the review and making of a NMW order. 53 But the modern awards objective is not relevant to the review and making of a NMW order.54

[126] Unlike the modern awards objective, the minimum wages objective makes no express reference to “the need to encourage collective bargaining” (s.134(1)(b)). However, as the Panel observed in the 2014–15 Review decision, 55 the fact that the minimum wages objective does not require the Panel to take this consideration into account does not make much difference, in practice, to the Panel’s task. This is so because the Panel is required to take into account the object of the Act and one of the stated means by which the object of the Act is given effect is “through an emphasis on enterprise level collective bargaining” (s.3(f)). While not expressed in the same terms as in the modern awards objective, it is plain from s.3(f) and a reading of the Act as a whole that one of the purposes of the Act is to encourage collective bargaining. It is appropriate that we take that legislative purpose into account in setting the NMW rate.

[127] The making of a NMW order and the review and variation of modern award minimum wages are separate but related functions. They are related because s.285(2) provides that in exercising its powers to set, vary or revoke modern award minimum wages, the Panel “must take into account the rate of the national minimum wage that it proposes to set in the Review.”

[128] It follows that as part of the decision making process in an AWR the Panel must first form a view about the rate of the NMW it proposes to set in that AWR (taking into account the statutory considerations relevant to that discrete task) and then take the proposed NMW rate into account (along with the other relevant statutory considerations) in exercising its powers to set, vary or revoke modern award minimum wage rates.

[129] This does not suggest some sort of bifurcated process whereby the Panel first makes a NMW order (which includes setting the NMW), before turning its mind to exercising its review powers to set, vary or revoke modern award minimum wage rates.

[130] As part of the AWR, the Panel considers both the setting of the NMW rate and whether to make any variation determinations in respect of modern award minimum wages. Each of these tasks is undertaken by reference to the particular statutory criteria applicable to each function.

Modern award minimum wages

[131] Modern award minimum wages are the rates of minimum wages in modern awards, including:

(a) wage rates for junior employees, employees to whom training arrangements apply and employees with a disability;
(b) casual loadings; and
(c) piece rates (s.284(3)).

[132] The review and variation of modern award minimum wages is a separate function to that of reviewing and making a NMW order, though, as we have mentioned, the two functions are related. There is no legislative requirement to set the NMW rate at the same level as the lowest modern award minimum wage rate. The setting of the NMW rate is a discretionary decision which takes into account the statutory considerations relevant to that discrete task.

[133] The modern awards objective and the minimum wages objective both apply to the exercise of functions and powers in setting, varying or revoking modern award minimum wages as part of an AWR.

[134] The Act does not compel the variation of modern award minimum wages in all modern awards. The Panel has a discretion to vary some or all modern award minimum wages in the context of a Review. However, in exercising that discretion considerations of fairness and stability tell against an award-by-award approach to minimum wage fixation. As the Panel observed in the 2012–13 Review decision:

“If differential treatment was afforded to particular industries this would distort award relativities and lead to disparate wage outcomes for award-reliant employees with similar or comparable levels of skill ... It is also relevant that in establishing and maintaining the minimum wages safety net, the Panel must take into account the principle of equal remuneration for work of equal or comparable value. Such a principle supports the determination of consistent minimum rates for work of equal or comparable value. The maintenance of consistent minimum wages in modern awards and the need to ensure a stable and sustainable modern award system would be undermined if the Panel too readily acceded to requests for differential treatment.

… Enterprise level collective bargaining is the primary means by which the statutory framework envisages differential treatment based on the circumstances in particular enterprises, which would be influenced by relevant sectoral considerations.” 56

[135] In the present proceedings, the ARA submitted that the Panel “should consider any increase on an award-by-award basis and provide an interim decision or statement prior to handing down a final decision.” 57

[136] The Panel has previously considered submissions to the effect that it should conduct a modern award-by-modern award review of minimum wages and that this should result in a different, lower, increase or no increase at all in specific industries or modern awards. These matters were fully canvassed in the 2011–12, 2012–13, 2013–14 and 2014–15 Review proceedings.

[137] The ARA did not advance a merit argument in favour of an alternative construction of the relevant provisions of the Act. The Panel is not persuaded to depart from the conclusions reached in past review decisions in respect of this issue.

[138] The Panel has also previously dealt with the proposition that it should hand down an interim decision or statement prior to handing down a final decision. We infer from the ARA’s submission in the present proceedings that such an interim decision process is intended to allow individual employers or their representatives to then seek differential treatment on an award, sectoral or some other basis.

[139] The Panel has repeatedly noted the practical difficulties associated with such an approach having regard to the requirements in the Act regarding the time for completion of each AWR, commencement of the minimum wage determinations and the national minimum wage order and publication of any variation to modern award minimum wages. 58 The ARA has made no attempt to address any of these difficulties in its submission.

[140] The Panel is not persuaded to depart from the conclusion reached in the 2013–14 Review decision that an interim decision mechanism is neither necessary nor practical. 59

[141] We now turn to consider the submissions relating to the circumstances pertaining in particular states.

[142] The Western Australian Government submitted that, while the Commission is required to consider the economic circumstances of the nation as a whole, it is appropriate that due consideration is given to the particular conditions in Western Australia, which is currently experiencing weaker conditions in its domestic economy, resulting in a softer labour market and an increased rate of unemployment. 60 Business SA pointed to the economic challenges currently facing South Australia and submitted that because Australia’s economy is undergoing transition, any minimum wage decision will impact some industries and regions more than others.61

[143] The Panel takes into account the circumstances of different regions, industries and sectors as part of its broader consideration of the national economy. In addition, the Panel has scope to consider whether exceptional circumstances should result in delaying or deferring the operation of a variation to a modern award or adjustment of the NMW and has outlined the process for such considerations in previous Reviews. 62

[144] CCIQ again submitted that the Panel should defer the impact of any minimum wage increase for Queensland industry sectors and regions affected by the impacts of natural disasters, such as droughts and cyclones, over the past year. In the 2014–15 Review decision, the Panel rejected a CCIQ submission in the same terms and set out, in detail, the criteria for establishing exceptional circumstances such as to warrant an exemption or deferral from a NMW order and/or modern award wages increase. 63

[145] The CCIQ submission in the present proceedings does not address any of the matters that the Panel has previously identified as being necessary to establish exceptional circumstances. The CCIQ submission is still unclear with respect to whether a deferral or an exemption is sought and how the employers and businesses exempted would be identified.

[146] We are conscious of the hardship inflicted on many businesses, particularly small businesses, by natural disasters. We are also conscious that while deferral of any rise in minimum wages may contribute to easing pressures on businesses, such a deferral will also adversely affect employees who may also be facing financial distress because of the impact of natural disasters on them and their families.

Relevant considerations

[147] Sections 134, 284 and 578 of the Act each direct the Panel to “take into account” certain specified considerations in conducting and completing an AWR. A matter which the Panel is directed to “take into account” is a relevant consideration in the Peko-Wallsend sense; 64 which is those matters which the decision maker is bound to take into account and treat as matters of significance in the decision making process.65

[148] We note that there are some significant differences between the matters we are required to take into account and the statutory parameters which guided wage reviews conducted by the Australian Fair Pay Commission (AFPC) under the Workplace Relations Act 1996 (Cth) (the WR Act), between 2006 and 2009. Section 23 of the WR Act provided that the objective of the AFPC in performing its wage setting function was “to promote the economic prosperity of the people of Australia”, taking into account specific criteria. As was noted in the Annual Wage Review 2009–10 (2009–10 Review) decision there are some important considerations which we are required to take into account but which the AFPC was not specifically required to take into account—including relative living standards and the needs of the low paid.  66

[149] The general matters the Panel must take into account in performing its functions contain some common elements. The matters of direct relevance to an AWR can be conveniently grouped into three broad categories:

• economic; 67



• social; 68 and



• collective bargaining. 69

[151] As the Panel has observed in previous Review decisions, there is often a degree of tension between the economic, social and other considerations which the Panel must take into account. No particular primacy is attached to any of these considerations. 70 For example, a substantial wage increase may better address the needs of the low paid and improve the relative living standards of award-reliant employees, but it may (depending upon the prevailing economic circumstances) also reduce the capacity to employ the marginalised and hence not “promote social inclusion through increased workforce participation”. It is this complexity that has led the Panel to reject a mechanistic or decision rule approach to wage fixation, such as the adoption of real wage maintenance.71 The real wages of award-reliant employees are relevant to our task, but not determinative. The range of considerations we are required to take into account calls for the exercise of broad judgment rather than a mechanistic approach to fixing minimum wages.

[152] The Panel’s approach is supported by the observation of the Full Court of the Federal Court in National Retail Association v Fair Work Commission:

“It is apparent from the terms of s 134(1) that the factors listed in (a)–(h) are broad considerations which the FWC must take into account in considering whether a modern award meets the objective set by s 134(1), that is to say, whether it provides a fair and relevant minimum safety net of terms and conditions. The listed factors do not, in themselves, however, pose any questions or set any standard against which a modern award could be evaluated. Many of them are broad social objectives. What, for example, was the finding called for in relation to the first factor (‘relative living standards and the needs of the low paid’)?” 72

3. The Parties’ Proposals

[153] The Panel received submissions from the Australian Government, several state governments, bodies representing the interests of employees, employers and other groups, and individuals. 73 The proposals advanced varied significantly, in terms of both the quantum and the form of any proposed increase to the NMW and modern award minimum wages.

[154] A number of submissions proposed tiered, flat dollar or percentage increases. Three employer groups submitted that it was not appropriate to award an increase this year. 74 The CCIQ proposed the deferral of any increase arising from this decision for farmers and agribusiness affected by drought and regions in Queensland impacted by cyclones.75 A number of submissions identified issues for consideration without proposing a particular outcome.

[155] A summary of proposed minimum wages adjustments is set out at Appendix 2. This Chapter summarises the parties’ proposals in respect of adjustments to the NMW and modern award minimum wages. The claim by CCIQ for a deferral for employers and regions is addressed in Chapter 2.

Proposals for a tiered increase

[156] The ACTU and ACCER supported a tiered approach to any increase to the NMW and modern award minimum wages. The ACTU proposed a flat dollar increase of $30.00 per week to the NMW and modern award minimum wages up to, and including, the C10 (base trade or equivalent) rate and an increase of 3.9 per cent to all modern award minimum wages above the C10 rate. 76

[157] A flat dollar increase of $30.00 per week to the NMW/C14 (introductory) level is equivalent to an increase of about 4.6 per cent and about 3.9 per cent at the C10 rate.

[158] The ACTU submitted that:

“... a hybrid increase best balances the various considerations that the Panel must take into account. It would ensure that the largest wage rises, in percentage terms, go to the lowest paid workers. At the same time, it would prevent any further erosion of the skill-based wage relativities above the C10 tradespersons’ rate”. 77

[159] ACCER proposed tiered, flat dollar increases, with the NMW increasing by $25.10 per week and modern award minimum wages by $19.00 per week. 78 As initially put, ACCER’s proposal, if implemented, would have resulted in the NMW exceeding modern award minimum wages at the C14 level. During the course of the final consultations on 10 May 2016, ACCER clarified its position and submitted that the NMW and modern award minimum wages at the C14 level should both be increased by $25.10.79

[160] A flat dollar increase of $25.10 per week to the NMW is equivalent to an increase of about 3.8 per cent. A flat dollar increase of $19.00 per week to modern award minimum wages is equivalent to an increase of about 2.5 per cent at the C10 rate and about 1.8 per cent at the C2(b) (senior technical) rate.

[161] ACCER submitted that:

“… the NMW and award rates up to, at least, the C10 award wage rate are insufficient to provide, in the ordinary and expected circumstances, a minimum acceptable standard of living and one that is above poverty levels and do not fulfil their intended function of being a safety net that protects workers who need protection and support”. 80

[162] In the alternative, ACCER submitted that if the Panel did not accept its proposal then priority should be given to adjusting the NMW.

Proposals for a flat dollar increase

[163] CCIQ, the CCIWA and the NRA proposed flat dollar increases of varying amounts. CCIQ and CCIWA supported an increase of not more than $7.90 per week to the NMW and modern award minimum wages. 81

[164] CCIWA contended that a flat dollar increase is appropriate as it “better reflects the focus of the annual wage review in establishing a suitable national minimum wage for low paid workers”. 82 In relation to the proposition that flat dollar increases compress wage relativities, CCIWA submitted that:

“... no evidence has previously been provided to substantiate that this has created any practical difficulties. Furthermore, the previous history of flat dollar increases means a percentage based increase in this or future years won’t restore the relativities within the award ... issues of relativities are best addressed through enterprise bargaining.” 83

[165] NRA supported an increase to the NMW and modern award minimum wages of not more than $10.70 per week, 84 and submitted that “the proposed, modest increase, is fair and reasonable to workers, while also being sustainable for employers, and unlikely to impact the employment prospects of job seekers”.85 In the alternative, NRA submitted that if a percentage increase is applied the average impact of that increase across award levels should be no more than $10.70 per week.86

[166] A flat dollar increase of $7.90 per week is equivalent to a 1.2 per cent increase at the NMW/C14 rate and around 0.8 per cent at the C2(b) rate. If the increase was $10.70 per week, it would be the equivalent of about 1.6 per cent at the NMW/C14 rate and 1.0 per cent at the C2(b) rate.

Proposals for a percentage increase

[167] A number of business and industry associations proposed percentage increases of differing amounts.

[168] MGA and the NFF proposed an increase of no more than 1.1 per cent to the NMW and modern award minimum wages. 87 An increase of 1.1 per cent amounts to a $7.20 increase to the NMW/C14 rate and $8.40 to the C10 rate.

[169] ACCI submitted that the Panel should adopt a “cautious approach” and award an increase of no greater than 1.2 per cent. 88 AFEI, ARA, Business SA and MTAs supported ACCI’s submission.89 An increase of 1.2 per cent amounts to a $7.90 increase to the NMW/C14 rate and $9.20 to the C10 rate.

[170] Ai Group proposed an increase of 1.6 per cent to the NMW and all modern award rates and submitted that: 90

“It is important that the Expert Panel not put the interests of those in secure jobs ahead of the needs of those searching for jobs, or for more work, and the needs of those whose jobs will be threatened (including many low paid workers) if an excessive minimum wage increase is awarded.” 91

[171] An increase of 1.6 per cent amounts to a $10.50 increase to the NMW/C14 rate and $12.20 to the C10 rate.

[172] ABI submitted that any increase should not exceed 2 per cent, 92 and that such an increase “would be capable of delivering an increase in the standard of living of award reliant employees (based on current inflationary trends) while ensuring that minimum wage increases do not cause significant economic harm”.93 An increase of 2 per cent amounts to a $13.10 increase to the NMW/C14 rate and $15.30 to the C10 rate.

Proposals specifying no quantum

[173] Many submissions did not propose a particular level of increase in the NMW or modern award minimum wages, including all government submissions. The Australian Government, New South Wales Government, Western Australian Government and Housing Industry Association (HIA) submitted the Panel should have regard to the effect of any decision on employment outcomes.

[174] The Australian Government submitted that “the Panel should take a cautious approach, taking into account the risks to the economic outlook and the need to boost employment and job creation, as well as maintaining wages for those on the minimum wage and those on award classification wages.” 94 In support of its contention that the Panel should take a cautious approach, the Australian Government cited the potential long-term impacts of successive decisions on employment,95 and the need to help the long-term unemployed to enter the workforce,96 as well as an uncertain economic and labour market environment.97

[175] The New South Wales Government also submitted that the Panel should take a “cautious approach to setting the minimum wage”, 98 arguing that “[a]ny approach to setting minimum wages must be balanced and sensitive to economic and labour market conditions so as to ensure minimum wage increases do not have a negative effect on employment.”99

[176] The Western Australian Government submitted that the Panel should “determine an outcome this year which reflects the transitions presently occurring in the local economy and which supports employers to create and maintain jobs”, 100 and urged the Panel “to have appropriate regard for the potential impact of wage increases upon job creation”.101

[177] HIA submitted that the Panel should take into account forecasts for slowing construction activity and “encourage further investment and employment” by not constraining businesses from “operating in a way that enables them to meet changing market demands.” 102

[178] The Queensland Government, South Australian Government, Victorian Government and the Australian Council of Social Service (ACOSS) each supported an increase in the NMW and modern award minimum wages but did not specify a particular amount.

[179] The Queensland Government recommended “a reasonable increase that rewards productivity gains and maintains the value of real wages as well as the living standards for workers on the … [NMW] and award wage reliant workers.” 103

[180] The South Australian Government submitted that the Panel should consider “increasing national minimum wages taking into account the current economic context … [and] the broader context of ensuring that the real value of minimum wages is maintained.” 104

[181] The Victorian Government also supported an increase and stated that the Panel should “provide an economically responsible increase to low wage earners, by increasing the … [NMW] and modern award wages for the 2015–16 year.” 105 The Victorian Government submitted the “increase must provide a balance between the needs of award-reliant and vulnerable working Victorians and the need to foster employment and business conditions that will support broad economic growth and distribute those benefits across the community”.106

[182] ACOSS proposed that the Panel should “increase real minimum wages in order to significantly reduce the gap between them and median pay levels”. 107 In support of its proposal ACOSS submitted:

“… the Federal Minimum Wage (FMW) should be designed to at least provide a decent living standard, well above poverty levels, for a single adult and that the tax-transfer system should meet the basic costs of raising children in a low income family.” 108

Proposals specifying no increase

[183] The Australian Hotels Association and Tourism Accommodation Australia (AHA & TAA), Restaurant and Catering Australia (R&CA) and the South Australian Wine Industry Association Incorporated submitted that it was not appropriate to award any increase to the NMW or modern award minimum wages.

[184] AHA & TAA claimed that the hotel sector had experienced low growth, poor trading conditions and increased utility and compliance costs over the past year. 109 AHA & TAA also submitted that for a variety of factors the profitability of hotels had deteriorated.110 However, if an increase were to be awarded, the AHA & TAA submitted that it should be no more than 1.2 per cent.111

[185] R&CA urged the Panel to consider Australia’s capacity to compete internationally for tourism, the impact of penalty rates on the level of increase for the restaurant industry, the wage level of working operators and the impact on future employment growth. 112

[186] The South Australian Wine Industry Association Incorporated submitted there should be no increase; however, if the Panel decided to award an increase it should be no greater than the CPI and should be a flat dollar amount rather than a percentage increase. 113

4. The Economy

[187] The minimum wages objective and the modern awards objective require the Panel to take into account the effect of its decisions on national economic prosperity and in doing so to give particular emphasis to the economic indicators specifically mentioned in the relevant statutory provisions.

[188] In this section, we assess recent and projected economic conditions, significant issues arising from that assessment, and the impact of AWR decisions on those economic considerations identified in the Act. In doing so, we have had regard to the submissions made, the economic information provided by the parties, data published in the Commission’s Statistical Report, data from the Commonwealth Treasury (Treasury) and the Reserve Bank of Australia (RBA) and the Research reference list and additional material, which is potentially relevant to the Review, posted on the Commission’s website. 114

[189] In assessing economic indicators we consider data measuring actual outcomes, together with forecasts by Australia’s official economic agencies—the Treasury and the RBA. We have regard to both the longer-term measures of Australia’s actual economic data, over a five- and/or 10-year time period, together with the most recent information available. The longer-term data better reflect trends in economic indicators, is less volatile and is less prone to revision. The short-term data provides more contemporary information.

[190] Future projections cast some light on the economic circumstances that are expected to apply during the period when any adjustment will operate. For reasons outlined in the
2012–13 Review decision, 115 there is generally a primary focus on actual data because, by their nature, they are more reliable than forecasts.

[191] Differences between the forecast economic indicators and the actual performance of the economy forms part of our broad assessment and our consideration of the actual indicators in subsequent reviews.

[192] The official forecasts are estimates, incorporating assumptions and judgments based on the best information available when they were made and are susceptible to risks, both favourable and unfavourable, which the Treasury and the RBA set out when publishing their forecasts. The published forecasts represent a best estimate with a range of likely outcomes at different confidence levels and reflect forecasting assumptions. In the 2016–17 Budget, Treasury provided an assessment of forecasting performance and estimates of uncertainty around its forecasts. 116 The RBA published similar information.117 We have regard to the risks around the forecasts and the extent to which past forecasts have reflected actual outcomes.

[193] A number of studies have sought to evaluate the accuracy of forecasts that are provided by the Treasury, the RBA and by other significant groups such as employer bodies. 118 These studies are helpful in providing guidance on which of the sources and types of forecasts have the best reliability, how great that reliability is and how best to deal with the inaccuracies. Here we provide a brief summary.

[194] Treasury and RBA forecasts vary in their reliability, depending on the subject matter and the time horizon of the forecast. The studies which evaluated the forecasts found that forecasts of inflation were more accurate than forecasts of economic activity, such as GDP. Longer-term forecasts of output and employment tended to be revised downwards over time and near-term forecasts were more accurate. Tulip and Wallace (2012) report that the RBA responds to the uncertainty around its forecasts by placing less emphasis on forecasts and more on current developments. 119 This is also the approach taken by the Panel.

[195] Surveys of business confidence, intentions and consumer sentiment are conducted by various groups. 120 The best of them are used to provide a more contemporary picture than is available from official data sources. Surveys of intentions are also used to look forward. For understandable reasons, these surveys often do not meet rigorous statistical standards, in which case their value must be judged by how well they perform in predicting what is coming. Surveys have been found to be helpful in predicting major turning points in the business cycle, profits, employment (through hiring intentions) and producer prices.121

[196] Outside the major private surveys that are monitored by the RBA, there are a number of surveys that are conducted by employer associations of their members. We have been provided with the results of such surveys, on matters such as the economic conditions being faced by particular industries and the impact of minimum wage increases on employment. This material is only useful where there is evidence of good survey practice and a respectable match between past predictions and actual outcomes. It is only in these circumstances that such surveys provide a reliable representation of the issues at hand. 122 An illustration of why we need to be cautious is provided in the submission of the ARA which reported survey responses of its members seeking the identification of their plans for permanent, part-time and casual employment. The responses in various surveys since 2010 suggest that the ARA’s membership planned to substantially reduce employment, whereas in fact employment in the Retail trade industry rose in almost every year.123

[197] The Australian Government submitted that “[t]he Productivity Commission’s report on the Workplace Relations Framework encouraged the Panel to take more account of the risk of variations in economic performance across the country in the Annual Wage Review.” 124 This is a reference to the recommendation in the PC Report that:

“In undertaking the annual wage review, the wage regulator should broaden its analytical framework to consider systematically the risks of variations in economic circumstances on employment and on the living standards of low-paid employees.” 125

[198] As part of the consultation process in the current Review, we drew the attention of the interested parties to the PC recommendation and the reasoning of the PC and invited comment about the recommendation and, in particular, any practical proposals as to how the further systematic consideration of the risks of variations in economic circumstances on employment and on the living standards of low-paid employees might be undertaken for the purpose of the AWR. Only the Australian Government, 126 the ACTU,127 ACCI128 and The Essential Points129 addressed the question. None of them supported the recommendation or provided any practical proposal for the further systematic consideration of forecasting risks.

[199] The PC Report did not provide any specific suggestions as to how the Panel might broaden its analytical framework to systematically consider risks of variations in economic circumstances, other than to suggest the possible use or publication of fan charts depicting historical forecasting error of the type currently provided by Treasury and the RBA in relation to some key macro-economic variables with their economic forecasts. 130 Fan charts show the confidence interval around forecasts, on the basis of past forecasting error, depicting both the range and quantum of possible error based on historical forecasting outcomes in relation to the relevant economic indicator. Reflecting the nature of forecasts, fan charts depict an increasing error range for forecasts each successive year out from the time the forecasts are made.

[200] Absent any specific proposal in relation to dealing with risks of variations in economic circumstances, other than the consideration of fan charts, it is not apparent what analytical framework was intended by the PC or how the decision making process of the Panel would be enhanced.

[201] It may be, as is intimated by the Australian Government, that the PC recommendation is directed at the Panel amending the minimum wage increases it would otherwise decide on account of risks of variations in economic circumstances. This suggests that the Panel should make an assessment of the most likely economic risks, if any, and adjust the amount it would otherwise award upward or downward to reflect the most likely forecasting error. Such an approach seems to us to add to uncertainty about the level and magnitude of likely forecasting error, to the uncertainty already inherent in the forecasts themselves, and would not enhance the decision-making process. An assessment of the economic circumstances in which an AWR decision is best made, in our view, by the broader assessment the Panel now undertakes, which includes consideration of forecasts and take into account the inherent uncertainty of such forecasts.

[202] If the PC intended that the Panel automatically reduce the AWR outcome, it would have otherwise determined to reflect forecasting risk and the cost of overshooting minimum wage increases. This approach is even more problematic. First, it assumes that forecasting error will materialise in a direction which will impact as adverse employment effects of a minimum wage increase. In fact, history shows us that forecasting error can be positive or negative, as is reflected in the Treasury and RBA analysis of their forecasts and reflected in the fan charts they publish. Second, it would incorporate a built in reduction in the level of increases in the NMW and minimum award wages each year, without regard to the consequences for the relative living standards of the low paid and their capacity to meet their needs. Conceptually, such a reduction in the AWR outcome which proved not to be warranted by actual outcomes could be addressed in subsequent AWRs but any subsequent redress would be constrained by the need for the Panel to determine subsequent increases by reference to the statutory matters relating to the economic circumstances as assessed at that later time.

[203] Further, we see no benefit to be gained for our decision making process by the fan charts suggested by the PC. That suggestion, and the recommendation as a whole, elevates the significance of forecasts in our assessment of the economic circumstances beyond the significance that we currently attach to them. As already noted, our consideration of economic forecasts is one element within a broader assessment of those economic circumstances, directed to making an informed judgment as to prevailing economic circumstances and the economic circumstances in which any adjustment to minimum wages would have effect. In that context, our consideration of forecasts is focussed on the immediate future year. The longer-term forecasts are of very limited relevance to the economic context in which our decision will operate. As fan charts show, forecasting error in respect to the immediate future year is relatively limited. More contemporary forecasts, subject to lower forecasting error, will be available to the Panel for consideration in relation to the later years in subsequent AWRs, which determine minimum wages to apply in those years. A focus on fan charts would result in an unnecessary concentration on the longer term forecasts upon which we place little weight in our decision making.

[204] Absent any practical basis for dealing with risks of variations in economic circumstances which would enhance our decision-making process, beyond the consideration of risks to the economic outlook identified by Treasury and the RBA when they publish their economic assessments and forecasts, we will continue to consider economic forecasts, and the associated risks around them, as we have in the past within the broad range of considerations which inform our assessment of economic conditions.

Recent economic performance

Economic growth

[205] Economic growth, measured by real GDP growth (seasonally adjusted), has remained slightly below trend growth of 3� per cent 131 over the past two years, although improving over the second half of 2015 (Chart 4.1). Real GDP grew by 3.0 per cent over the year to the December quarter 2015, compared with 2.2 per cent over the year to the December quarter 2014.

Chart 4.1: Economic growth, annual and quarterly growth rates

Note: Data are seasonally adjusted.

Source: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2014, Catalogue No. 5206.0.

[206] Australian GDP growth in the second half of 2015 outstripped growth in each of the seven major OECD economies, as shown in Chart 4.2.

Chart 4.2: International comparisons of quarterly GDP growth

Source: OECD (2016), Quarterly GDP (indicator), viewed 6 May 2016, <http://data.oecd.org/gdp/quarterly-gdp.htm>.

[207] The percentage point contribution to aggregate growth by each component of GDP reflects the rate of growth and relative significance of the component. The main contributors to GDP growth over the year to the December quarter 2015 were consumption expenditure, two-thirds of which came from growth in household consumption, and net exports, arising almost wholly from increased exports. Total gross fixed capital formation detracted from aggregate GDP growth, although investment in dwellings contributed positively to growth. 132

[208] Over the year to the December quarter 2015, final household consumption expenditure increased by 2.9 per cent, supported by improved employment and a reduction in the household savings ratio. The household savings ratio has fallen from its historical average of around 10 per cent 133 in the December quarter 2013 to 9.1 per cent in the December quarter 2014 to 7.6 per cent in the December quarter 2015. In trend terms, Australian retail turnover rose 3.6 per cent to March 2016 compared with March 2015.134

[209] General government final consumption increased by 3.6 per cent and private dwellings fixed capital formation increased by 9.8 per cent over the year to the December quarter 2015. Net exports almost doubled over the year. Private gross fixed capital formation fell by 5.5 per cent over the year, with private gross non-dwelling construction, falling by 14.2 per cent and total private business investment falling by 11.3 per cent. Public gross fixed capital formation remained at about the same level in the December quarter 2015, compared to the same quarter a year earlier. 135

[210] GDP measures the volume of goods and services produced. RNNDI measures the purchasing power of the income generated by domestic production. It adjusts national income to include the effect on purchasing power arising from changes in the terms of trade. It also deducts depreciation of the capital stock and net income flowing overseas. 136 RNNDI is a broader measure of change in national economic well-being and a better measure of the incomes available to Australians arising from their productive efforts than is GDP.

[211] ACCI drew attention to a widening gap between RNNDI and GDP 137 (see Chart 4.3). Over the year to the December quarter 2015, GDP grew by 3.0 per cent while RNNDI contracted by 1.1 per cent. ACCI “contends that income growth is far more relevant than output growth to the Panel’s determination”138 and “[b]usinesses are bearing the brunt of weaker income growth”.139

[212] Differences between growth in GDP and RNNDI are most pronounced when significant changes in the terms of trade occur. This is evident in Chart 4.3 which shows RNNDI, real GDP and the terms of trade.

Chart 4.3: Real net national disposable income, real GDP and the terms of trade, indexes—Dec-05 = 100

Note: Data are seasonally adjusted. RNNDI takes into account the impact of changes in prices of exports relative to imports, the real impact of income flows between Australia and the rest of the world, and the consumption of fixed capital. Income flows between Australia and the rest of the world are fairly smooth over time and changes tend to have little impact on short-term movements in RNNDI. The consumption of fixed capital tends to stall growth in RNNDI but, for the most part, the impact on short-term movement is small. See ABS, Real net national disposable income—a new national accounts measure, Feature Article, in ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2001, Catalogue No. 5206.0.

Source: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2015, Catalogue No. 5206.0.

[213] Chart 4.3 shows more rapid growth in RNNDI than real GDP associated with the significant improvement in the terms of trade from early 2008 through to its peak in late 2011 (although interrupted during the period by the GFC from late 2008). From then until mid-2014 the declining terms of trade saw growth in RNNDI slow and then cease. As the terms of trade have fallen further, RNNDI has begun to fall.

[214] The changing relative positions of GDP and RNNDI reflect the minerals boom and our changing terms of trade. The RBA has noted, as shown in Chart 4.4 below, that the shift in incomes between labour and capital associated with the rapid increase in the terms of trade and its more recent decline, was most evident in the mining sector:

“… the wage share of total factor income has been relatively stable in the non-mining sector, despite below-average wage growth … However, there has been an increase in the wage share of income in the mining industry because the decline in commodity prices over recent years has weighed more heavily on profits than wages, just as the earlier increase in commodity prices accrued more to profits than to wages.” 140

Chart 4.4: Wages share of total factor income, mining and non-mining industries

Note: Wages share is the compensation of employees expressed as a proportion of total factor income.

Source: RBA, Statement on Monetary Policy, May 2016, p. 57, Graph B7; ABS, Australian System of National Accounts, 2014–15, Catalogue No. 5204.0.

[215] Contrary to ACCI’s submission that businesses are bearing the brunt of weaker income growth, data for the economy as a whole shows generally higher profit shares of GDP and offsetting lower wages shares from 2005 until late 2013. Since then, wages and profits shares have been closer to historical levels for Australia. The shift in incomes between labour and capital associated with the rapid increase in the terms of trade and its more recent decline was most evident in the mining sector.

[216] While most Australians will have benefited in some way from the terms of trade boom from early 2008 to late 2011, resources-sector businesses benefited most. The decline in the terms of trade since late 2011 has reduced the income available for distribution to labour and capital, reflected in a decline in RNNDI over the past two years. This decline in national income has also affected most Australians. It has had consequences for employee incomes. Employees have experienced relatively low increases in wages, on all measures, over the past two years. The 12-month increase, to the December quarter 2015, of 2.2 per cent and 1.6 per cent, respectively, for the WPI and AWOTE and AAWI of 3 per cent in the December quarter 2015 are the lowest for the past decade and below the unusually low growth seen since 2013. The relatively low growth in aggregate wages is a relevant consideration for the Panel because of its bearing on relative living standards and the needs of the low paid. The Panel had particular regard to the lower growth in aggregate wages in reaching its 2014–15 Review decision. 141

[217] ACCI contended that the Panel should take account of an upward revision by the ABS of the gap between GDP and RNNDI growth compared to the data on this difference that was available to the Panel in the 2014–15 Review. This contention is premised on the erroneous assumption that the magnitude of the gap measured was in itself determinative of the Panel’s 2014–15 Review decision. 142 In the 2014–15 Review decision, the Panel was conscious of the relatively slow growth and more recent decline in RNNDI and its consequences for wages growth. The Panel had regard to the consequent lower growth in aggregate wages, describing it as the most significant change in economic outcomes since the 2014–15 Review.143 But the relevance of the gap to the Panel’s decision in this regard was not its specific size but its consequences for aggregate wages growth.

[218] In the past, the Panel decided not to alter the NMW and modern award rates on the basis of the stronger RNNDI movements as they were judged to be based on factors that were potentially short term and volatile. 144 For the same reasons, we do not propose to alter the NMW and modern award rates directly on the basis of the subsequent weak RNNDI movements. The force of the weak growth in RNNDI on our decision is felt through its consequences for growth in wages more generally.

[219] New capital expenditure, in volume terms (trend), has fallen by 25.8 per cent since the September quarter 2012, reflecting declining Mining investment, which fell by 43.3 per cent over that period. 145 Between the September quarter 2012 and the December quarter 2015, total non-mining investment fell by 0.6 per cent, with Manufacturing falling by 24.3 per cent and investment in Other selected industries146 increasing by 3.9 per cent.

[220] Weaker private investment is also reflected in data over the year to the December quarter 2015, which show:

• total new capital expenditure fell by 17.7 per cent;
• investment in Mining, Manufacturing and Other selected industries fell by 28.0 per cent, 3.6 per cent and 7.2 per cent respectively;
• investment in buildings and structures fell by 19.6 per cent; and
• investment in equipment, plant and machinery rose by 13.8 per cent. 147

[221] Growth in GVA by industry provides information about the sectoral contribution to aggregate growth. Seasonally adjusted data 148 shows variation in growth between industry sectors over the past year: 

•GVA growth over the year to the December quarter 2015 in excess of GDP growth (of 3.0 per cent) in:

•Rental, hiring and real estate services (13.3 per cent);

•Information media and telecommunications (9.7 per cent);

•Financial and insurance services (5.2 per cent);

•Public administration and safety (5.1 per cent);

•Mining (5.6 per cent);

•Other services (4.3 per cent);

•Health care and social assistance (4.2 per cent);

•Retail trade (3.6 per cent); and

•Electricity, gas, water and waste (3.3 per cent).


•GVA grew more slowly than GDP growth, or fell in:
•Arts and recreation services (2.9 per cent);

• Education and training (2.6 per cent);

• Wholesale trade (2.6 per cent);

• Construction (1.9 per cent);

• Accommodation and food services (0.7 per cent);

• Transport, postal and warehousing (1.4 per cent);

• Professional, scientific and technical services (–1.0 per cent);

•Agriculture, forestry and fishing (–1.0 per cent);

• Administrative and support services (–1.5 per cent); and

• Manufacturing (–3.9 per cent).

[222] An RBA research paper by Davis et al. (2016) finds it useful to divide the Australian economy into three sectors: mining (2 per cent of employment), non-mining tradeable (23 per cent) and non-tradeable (72 per cent). These three sectors are affected quite differently by the recent large changes in the terms of trade and the exchange rate. 149 The non-mining tradable sector has been assisted by the fall in the exchange rate and both it and the non-tradable sector have been assisted by the low interest rates. Davis et al (2016) finds:

“Many firms producing tradeable goods and services have also experienced a decline in mining-related demand, but overall they have benefited from the exchange rate depreciation most directly. Australia’s services exports have expanded noticeably in the past couple of years, with tourism, education and business services exports rising. Also, imports of services have declined as Australians appear to have switched some of their expenditure to domestically produced services, including domestic holidays rather than overseas holidays.” 150

Productivity and real unit labour costs

[223] The Panel’s 2012–13 Review decision set out why productivity and related measures require consideration in minimum wage fixation. The decision also included a detailed account of what the key concepts measure and how they are related. 151 Given the short-term volatility in measures of productivity change and the susceptibility to influences which vary across the economic cycle, we routinely consider the full range of measures of productivity, understanding the different basis of each measure. 

[224] Table 4.1 shows annual changes in labour productivity each year over the decade to the December quarter 2015 in seasonally adjusted terms. Productivity data can be volatile and the most recent data are frequently subject to revision. Productivity is defined as GDP per hour worked for “all sectors” and GVA per hour worked for the “market sector”. GDP per capita is also included in the table.

Table 4.1: Productivity measures, indexes and growth over the year

Note: The percentage change is calculated in relation to the corresponding quarter in the previous year.

Source: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2015, Catalogue No. 5206.0.

[225] The short-term volatility is evident in the differences between the growth in GDP per hour worked for the year to the September quarter 2015 (0.9 per cent) and that measured for the year to the December quarter 2015 (–0.4 per cent). A close examination of the components indicates that the decline in productivity recorded over the 12 months to the September and December quarters arose from a significant growth in total hours worked from 1.8 per cent to 3.3 per cent, with GDP growing but more slowly. The significant hours growth over the year to the December quarter 2015 is also reflected in the ABS Labour Force Survey (1.9 per cent to the September quarter 2015 and 2.7 per cent to the December quarter 2015). Growth in the ABS Labour Force Survey measure of hours worked fell back to 1.6 per cent over the year to the March quarter 2016. This suggests the need to treat with caution the significantly higher hours growth reported over the year to the December quarter 2015 and the consequent reduction in productivity growth shown over the year to the December quarter 2015. The relevant data is set out in Table 4.2 below.

Table 4.2: Productivity Growth and its components, percentage change over the year to the quarter shown

Note: Data are seasonally adjusted. n/a = not available.

Sources: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2015, Catalogue No. 5206.0; ABS, Labour Force, Australia, Apr 2016, Catalogue No. 6202.0.

[226] Taking a longer term perspective, the Australian Government submitted that the latest annual data show that over the five years to 2014–15, labour productivity growth in the market sector was higher than the five years prior (2.1 per cent and 1.6 per cent, respectively). 152 The Australian Government submitted that over the five years to 2014–15, Australian whole-of-economy labour productivity has grown at an average annual rate of 1.5 per cent.153 This compares to an average annual rate of 1.5 per cent over the past 15 years and 1.6 per cent over the past 30 years.154

[227] Productivity growth is best measured over the business cycle. For our purposes, however, that is too long to wait and we pay cautious attention to more recent changes. Labour productivity growth in the market sector remains positive, but has slowed to a little below 1 per cent per year over the past two years. For the year to December 2015, this slow growth appears to, in part, be caused by an unusually large growth in hours worked. 155

[228] Referring to OECD estimates of labour productivity (GDP per hour worked), in US dollars converted at purchasing power parity, the ACTU submitted that Australia’s level of labour productivity was 16 per cent higher than the OECD average and 12th highest out of the OECD countries in 2014. 156 The ACTU submitted that on average, Australian labour productivity grew significantly faster than the OECD average of 0.9 per cent.157

[229] Similarly, Research Report 1/2016, 158 which examined labour market outcomes for countries similar to Australia in terms of economic development and institutional arrangements—Australia, France, New Zealand, the UK, Canada and the US—found that over the period from 2003 to 2014, labour productivity grew fastest in the US, Australia and Canada, in that order, and slowest in New Zealand, the UK and France, in that order.159

[230] Data for productivity at the industry level, on a GDP per hour worked basis provided by the ACTU, showed considerable variation in productivity growth between industries around the all industries average of 1.0 per cent in 2014–15. The productivity growth estimates range from 22.3 per cent for Mining to –6.3 per cent for Arts and recreation services.  160

[231] For the industries with the highest density of award-reliant employees, GDP per hour worked increased well in excess of the all industries average of 1.0 per cent in the Other services industry (3.9 per cent), at around the all industries average in the Accommodation and food services and Health care and social assistance industries (0.9 per cent in each case), by 0.1 per cent in the Retail trade industry and fell by 2.7 per cent in the Administrative and support services industry. 161 Whilst the usual caveats about annual productivity statistics and their volatility apply, the data show that there is nothing distinctive in the patterns of productivity growth between the award-reliant and non award-reliant industries in 2014–15.

[232] However, the Australian Government noted that over the decade to 2014–15, labour productivity growth in three of the four most award-reliant industries has been below the market sector average of 1.9 per cent (Other services 0.5 per cent, Accommodation and food services 0.4 per cent and Administrative and support services 0.1 per cent) whereas Retail trade (2.4 per cent) was above the market sector average. 162

[233] We are required by s.134(1)(f) of the Act to have regard to the likely impact of our decision on business, including on productivity.

[234] Evidence of the impact of minimum wage increases on productivity is limited, particularly in relation to increases arising from the AWRs in Australia. In the past, the Panel has noted that research undertaken for the UK’s Low Pay Commission and the OECD suggested that a higher minimum wage was likely to promote productivity improvement. 163

[235] The Expert Panel Report on the Review of the Future of the National Minimum Wage in the UK noted that employers in the UK’s low paying sectors raised productivity in response to the NMW, with a more marked effect in larger firms and evidence suggesting that this increased productivity was the result of capital-deepening in low wage sectors. 164 The UK Expert Panel Report relied on UK research,165 some of which was considered in previous AWR decisions.166 The more recent UK research, by Riley and Rosazza Bondibene (2013), suggested that firms responded to the rise in labour costs that occurred with the introduction of the NMW by raising labour productivity.167

[236] The limited evidence before us continues to support a conclusion that increases in minimum wages are more likely to stimulate productivity measures by some employers directly affected by minimum wage increases, rather than inhibit productivity.

Business competitiveness and viability

[237] The wages share (shown in Chart 4.4) in the non-mining sector has been almost constant for the past 25 years. It has been much more volatile in the Mining sector. The wages share in Mining fell with the commencement of the mining boom in the late 1990s to reach a low point about two-thirds below its earlier level between 2006 and 2009. Since then it has almost returned to its pre-mining boom share of around 28 per cent. For the purposes of setting the NMW and award rates of pay, developments in the Mining sector have little direct relevance. There are almost no award-reliant employees in that sector.

[238] Company gross operating profits shows considerable volatility in quarterly profit growth over time, although less so in the non-mining industries.

[239] Table 4.3 shows annual growth in company gross operating profits over each of the last five years and the five and 10 years to the December quarter 2015. For all industries, including Mining, company gross operating profits (seasonally adjusted) fell by 2.3 per cent over the year to the December quarter 2015. Company gross operating profits grew by 2.8 per cent for non-mining industries over the year and fell by 14.9 per cent in the Mining industry. 168

Table 4.3: Company gross operating profits, total and non-mining industries, December quarter 2010 to December quarter 2015

Note: *Annualised growth rates. Data are seasonally adjusted.

Source: ABS, Business Indicators, Australia, Dec 2015, Catalogue No. 5676.0.

[240] The 2.8 per cent growth in company gross operating profits for the non-mining sector over the year to the December quarter 2015 was higher than each of the preceding two years to the December quarter and the average increase over the five years to the December quarter 2015. Over the five years to the December quarter 2015, growth in company gross operating profits was about half of that experienced over the 10 years to the December quarter 2015.

[241] Of the award-reliant industries, company gross operating profits (seasonally adjusted) increased over the year to the December quarter 2015 by 9.9 per cent in the Accommodation and food services industry, were unchanged in the Retail trade industry, but fell by 16.9 per cent in the Other services industry and by over 40 per cent in the Administrative and support services industry. No data are available for company operating profits in the Health care and social assistance industry.

[242] Business bankruptcy rates, defined as the number of business-related bankruptcies divided by the number of self-employed and employers in the economy (shown in Chart 3.3 of the Statistical Report) fell significantly in 2013–14 and 2014–15 to the lowest level recorded over the past decade. 169

[243] At the economy-wide (all industries) level, the business exit rate was lower in
2014–15 (12.4 per cent) than in 2011–12 (13.1 per cent), whilst the business entry rate was at about the same level in each year. The business entry rate for all industries in 2014–15, at 13.4 per cent, exceeded the business exit rate, at 12.4 per cent. 170 

[244] Of the five most award-reliant industries, four had lower exit rates in 2014–15 compared with 2011–12 (albeit by just 0.1 per cent in the Accommodation and food services industry), whilst the exit rate was 0.1 percentage points higher in the fifth industry—Health care and social assistance. In 2014–15, the entry rate exceeded or equalled the exit rate in 13 of the 19 industries. Of the six industries where the entry rate was lower than the exit rate, only one—Retail trade—is among the five most award-reliant industries. 171

Inflation

[245] Chart 4.5 shows a number of measures of inflation. All measures show continued low growth in inflation. The headline CPI fell by 0.2 per cent in the March quarter 2016 and rose by 1.3 per cent over the year. Underlying inflation, measured as the average of the trimmed mean and weighted median measures, increased by 1.7 per cent and 1.4 per cent over the year, respectively. The LCI for employee households increased by 1.1 per cent over the year to the March quarter 2016.

Chart 4.5: Measures of inflation—CPI, underlying inflation and LCI for employee households, growth rates

Note: CPI measures quarterly changes in the price of a ‘basket’ of goods and services which account for a high proportion of expenditure by the CPI population group (i.e., metropolitan households). The LCI for employee households measures the change in the price of a ‘basket’ of goods and services which is based on the expenditure of employee households whose principal source of income comes from wages and/or salaries. CPI and LCI data are expressed in original terms.

Underlying inflation is calculated as the average of the trimmed mean and weighted median. These measures are calculated by the ABS following the methodology adopted by the RBA. The trimmed mean is calculated by ordering the CPI expenditure class components by their price change in the quarter and taking the expenditure weighted average of the middle 70 per cent of these price changes. The weighted median is the price change of the component in the middle of this ordering.

Source: ABS, Consumer Price Index, Australia, Mar 2016, Catalogue No. 6401.0; ABS, Selected Living Cost Indexes, Australia, Mar 2016, Catalogue No. 6467.0.

Wages

[246] Various measures of wages growth are available. Table 4.4 sets out annual changes in the WPI, AWOTE and AAWI for registered agreements over the past decade, together with increases in the C14 and C10 classification rates over the same period. Each measure reflects a continuing moderation in aggregate wages growth over the past year.

Table 4.4: Measures of nominal wages growth, annual percentage change

Note: The WPI is an index for total hourly rates of pay excluding bonuses in both private and public sectors. It is unaffected by changes in the quality or quantity of work performed. The figures for WPI are seasonally adjusted. AWOTE is calculated by dividing estimates of weekly ordinary time earnings by estimates of the number of employees. Ordinary time earnings refers to earnings attributable to award, standard or agreed hours of work. It is calculated before taxation and other deductions such as superannuation. It also excludes payments which are not related to the reference period such as overtime, leave loading and redundancy payments. AWOTE estimates refer to full-time adult employees. The figures for AWOTE are original. AAWI measures the average percentage increase in the base rates of pay across registered agreements for the year. It does not take into account payments such as allowances, bonuses and increases linked to productivity. The figures for AAWI are agreements approved in the quarter. The C14 and the C10 are minimum award rates set under the Manufacturing and Associated Industries and Occupations Award 2010 (Manufacturing Award) and the former Metal, Engineering and Associated Industries Award 1998 (Metal Industry Award).

Source: ABS, Average Weekly Earnings, Australia, Nov 2015, Catalogue No. 6302.0; ABS, Wage Price Index, Australia, Dec 2015, Catalogue No. 6345.0; Department of Employment, Trends in Federal Enterprise Bargaining, December quarter 2015, <http://employment.gov.au/trends-federal-enterprise-bargaining>; Metals Industry Award; Manufacturing Award (from 1 January 2010).

[247] Over the past year average wages growth has remained relatively low. As shown in Table 4.4, the latest 12-month increase, to the December quarter 2015, of 2.2 per cent and 1.6 per cent respectively for the WPI and AWOTE, is the lowest for the past decade and below the unusually low growth seen since 2013. The RBA observed that wage growth is well below its decade average in all industries, and dispersion across industries, measured by the WPI, is around its lowest level since the late 1990s when the WPI began. 172 The most recent 12-month increase in eight different measures of wages identified by the ACTU is below the 10-year average in each case, markedly so in respect of (adult) AWOTE, AWE (all employees), average compensation per employee and the WPI.173

[248] Bargaining outcomes, reflected in AAWI, at 3.0 per cent in the December quarter 2015, are also below their 10-year average but remain closer to that average and in excess of the growth in the other measures, including award rates.

[249] The ACTU referred the panel to the RBA’s Statement on Monetary Policy of February 2016 which said that “the decline [in wage growth] has been more pronounced than that implied by the historical relationship with the unemployment rate”. 174 A similar observation was noted in the 2014–15 Review decision. The ACTU further observed that real wages have not kept pace with labour productivity growth and GDP growth.

[250] The RBA’s Statement on Monetary Policy of May 2016 included an article on wage developments by industry. The article provided data and a discussion on the dispersion and volatility of wage growth by industry. The article concluded:

“The relationship between wage-setting methods and wage outcomes is unclear. Awards are more prevalent in industries with lower wages as they provide minimum standards. Changes in wage growth and labour market outcomes by industry may reflect differences in wage flexibility or bargaining power, but these are difficult to distinguish from a wide range of other determinants of wages, including variation in industry performance, the balance of demand and supply for different skills, and productivity”. 175

[251] The Panel’s conclusion in the 2014–15 Review decision that wages growth is neither currently a source of inflationary pressure within the economy nor a source of declining capacity of Australian firms to compete in international markets 176 remains true this year.

Unit labour costs

[252] Chart 4.6 presents an index of nominal and real unit labour costs. Nominal unit labour costs bring together wages growth and productivity. Real unit labour costs remove the effect of inflation from the nominal unit labour costs measure.

Chart 4.6: Unit labour costs, indexes—Dec–05 = 100

Source: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2015, Catalogue No. 5206.0.

[253] Over the year to the December quarter 2015, nominal unit labour costs rose by 0.3 per cent seasonally adjusted and real unit labour costs increased by 0.9 per cent, reflecting the continuing relatively weak growth in aggregate wages relative to labour productivity. There is no suggestion in the unit labour cost data of cost pressures from the labour market. In its May 2016 Statement on Monetary Policy, the RBA noted:

“Firms’ unit labour costs have been little changed for around four years, as any growth in average earnings per hour has been broadly matched by growth in labour productivity (output per hour worked). Together with the depreciation of the nominal exchange rate over recent years, low unit labour cost growth is helping to improve the international competiveness of Australia’s labour, following a period of relatively strong growth in unit labour costs”. 177

Labour market

[254] In this section of our decision and in the Statistical Report, we utilise trend, as distinct from seasonally adjusted ABS data, unless otherwise indicated, as recommended by the ABS. 178

[255] Chart 4.7 shows growth in aggregate employment and hours worked in the Australian economy over the past decade. We think it desirable to consider both persons in employment and hours worked, having regard to the practice of employers evident in Chart 4.8 to adjust to weaker labour market conditions by reducing hours of work more so than numbers of persons employed (see, for example, the dips in hours worked in 2008 and 2012).

Chart 4.7: Persons employed and aggregate monthly hours worked, millions

Note: All data are expressed in trend terms.

Source: ABS, Labour Force, Australia, Apr 2016, Catalogue No. 6202.0.

[256] The growth in employment has been greater for women than for men. The nature of the growth is shown in a chart provided by the Australian Government 179 and reproduced below as Chart 4.8.

Chart 4.8 Change in full-time, part-time and total employment by sex, February 2015 to February 2016

Note: Data are seasonally adjusted.

Source: ABS, Labour Force, Australia, Feb 2016, Catalogue No. 6202.0.

[257] In total there were more additional full-time than part-time jobs, two-thirds of which were taken by women over the past year. Men and women shared equally in the additional part-time jobs.

[258] The improvement in the labour market from late 2014 to late 2015 is evident in both employment and in hours worked. The growth of each was strong over the year to December 2015—increasing by 2.6 per cent for employment and 2.7 per cent for hours worked. Growth has moderated slightly in early 2016, with employment growth slowing to 2.0 per cent over the year to April 2016 and hours growth easing to 0.4 per cent. 180

[259] On its face, the slowing of growth in hours worked recorded in the April 2016 ABS Labour Force Survey is a sign of some weakness in labour market conditions, to be considered against the strong labour market performance over the course of 2015, the continuing employment growth in 2016 and the other signs of positive labour market conditions we address later. As noted above, hours worked grew by only 0.4 per cent over the year to April 2016, down from the exceptionally strong growth of around 2.8 per cent over the year to each month in the December quarter 2015. The reduction in growth of hours worked over the year reflects monthly reductions in hours worked in each of first four months in 2016. Limited growth in hours worked in January and very small reductions in hours worked in February and March, as reported in the March 2016 ABS Labour Force Survey, were revised downward by the ABS (by 0.6 per cent in respect to the March figure), with the effect that hours worked reported in the April 2016 ABS Labour Force Survey fell in each month from January to April 2016.

[260] The reduced hours worked in the first months of 2016 primarily reflects a decline in the average hours worked by full-time employees per month (from 168.4 in December 2015 to 166.2 in April 2016) and, to a lesser degree, a continuing shift from full-time to part-time employment. In the latter respect full-time employment fell by 0.1 per cent over the four months to April 2016, whilst part-time employment grew by 1.3 per cent. The reduction in average full-time hours worked is likely to reflect some reduction in overtime and the transition in employment from the resources sector to the service sector. To that extent, it reflects the successful labour market transition from resources sector employment to the service sector and the reduction in hours worked resulting from a lesser average number of hours worked by full-time employees is not a negative development in the labour market. The significant revisions to the hours worked data in the April 2016 ABS Labour Force Survey reinforce reservations about the reliability of monthly Labour Force data. We will be better informed about the fall in hours worked in the early part of 2016 when further information becomes available.

[261] The fall in hours worked in the early part of 2016 detracts from the generally favourable labour market conditions otherwise evident. We do not think that the recent reduction in hours worked seriously undermines the broader information about labour market conditions, having regard to the reason for the decline in hours worked. Nonetheless, it is a relevant consideration we have taken into account in assessing labour market conditions and the broader economic circumstances.

[262] The transition in the economy from the capital-intensive mining sector to the more labour-intensive service sectors has been evident in the strength and composition of employment growth.

• Most of the growth in total employment of over 500 000 jobs since May 2012 has been in the services sector, accounting for 90 per cent of employment growth over the past year.
• Within services, Retail trade and Health care and social assistance have been the largest contributors, each growing by around 60 000 jobs over the past year, with Professional, scientific and technical services also contributing strongly to employment growth.
• Strong growth in labour-intensive service sectors is expected to continue to support employment growth over the Budget forecast period.181

[263] The change in employment and hours worked by industry over the year to the February quarter 2016 is shown in Table 4.5. It shows a considerable diversity between industries around the all industries (trend) employment growth of 2.4 per cent and the all industries (original) hours worked growth of 2.3 per cent. The changes range from –5.4 per cent to 9.7 per cent for employment and –10.5 per cent to 8.0 per cent for hours worked. The diversity of employment outcomes is also evident in respect of the award-reliant industries, with the Administrative and support services, Health care and social assistance and Retail trade industries showing employment and hours growth well above the all industries average, whilst employment and hours worked fell in both the Accommodation and food services and the Other services industries.

Table 4.5: Change in employment and hours worked by industry, February 2015 to February 2016

Note: Employment data are expressed in trend terms and hours worked data are expressed in original terms. Industries are ranked by employment growth rate.

Source: ABS, Labour Force, Australia, Detailed, Quarterly, Feb 2016, Catalogue No. 6291.0.55.003.

[264] Table 4.6 sets out a longer-term perspective of employment growth by industry, showing annual growth to the February quarters 2014, 2015 and 2016 and over the decade to the February quarter 2016. Whilst there is considerable variability in annual employment growth by industry, employment growth in the Health care and social assistance (3.9 per cent per annum), the Accommodation and food services (2.2 per cent per annum) and the Administrative and support services (2.0 per cent per annum) exceeded the all industries average of 1.8 per cent per annum over the past decade. Employment growth in the Other services (1.2 per cent per annum) and the Retail trade industries (1.1 per cent per annum) was less than the all industries average.

Table 4.6: Employment by industry, average annual growth over decade and annual percentage changes for 2014 to 2016

Note: The annual percentage change is calculated in relation to the corresponding quarter in the previous year. All data are expressed in trend terms.

Source: ABS, Labour Force, Detailed, Quarterly, Feb 2016, Catalogue No. 6291.0.55.003.

[265] The employment to population ratio for people of working age (defined here as 20–64 years) controls for changes in the proportion of the adult population that is of working age and summarises the combined effects of changes in their desire and in their ability to find work. Table 4.7 shows how this ratio has changed over the past decade and distinguishes full-time from part-time employment. The employment to population ratio rose over each of the past two years, to 75.4 per cent in March 2016, although it remains slightly below its peak in December 2010. The 76.0 per cent recorded in December 2015 indicates a relatively healthy labour market; it has been exceeded, albeit by a small amount, only twice in the past 10 years.

Table 4.7: Employment to population ratio—by total and employment status, (20–64 year olds)

Note: The employment to population ratio is the number of employed persons expressed as a percentage of the civilian population. Change over year (ppts) calculates the percentage point change from the corresponding month in the previous year. All data are expressed in original terms.

Source: ABS, Labour Force, Australia, Detailed—Electronic Delivery, Mar 2016, Catalogue No. 6291.0.55.001.

[266] The aggregate figures conceal a continuing structural change in the labour market, away from the full-time employment of men and towards the full-time employment of women and the part-time employment of both men and women. Over the decade to December 2015, men’s full-time employment to population ratio fell from 73.7 per cent to 71.3 per cent while their part-time employment to population ratio has grown from 8.8 per cent to 10.9 per cent. 182 The full-time employment to population ratio for women has grown from 38.7 per cent to 40.3 per cent over the same period, and their part-time employment to population ratio rose from 28.1 per cent to 29.6 per cent.183 

[267] A related perspective is provided by the participation rate, which shows not only those who are employed, but also those who are actively looking for work (and thus are in the labour force). Changes in the participation rate are often interpreted to reflect the extent to which people are encouraged (or discouraged) to look for work, as well as changes in unemployment and employment. As with the employment to population ratio, we focus on the participation rate of people aged 20–64 years. This is a short hand way of dealing with the ageing of the population. The participation rate in December 2015 was higher, at 79.8 per cent, than in any other time over the last decade, and rose again to 80.2 per cent in February 2016. The rise in the participation rate is particularly strong for women, being 4 percentage points higher in December 2015 than it was in December 2005, and 0.3 percentage points higher for men. The participation rate has risen by 0.2 percentage points over the year to March 2016. 184 

[268] The Australian Government provided a measure of the participation rate that makes a more complete adjustment for the changing age structure of the adult population. 185 It is reproduced below as Chart 4.9.

Chart 4.9: Age-adjusted participation rates, February 2011 to February 2016

Source: Australian Government submission at p. 25, Chart 4.4; ABS, Labour Force, Australia, Detailed–Electronic Delivery, Feb 2016, Catalogue No. 6291.0.55.001.

[269] The chart shows the importance of making proper allowance for the ageing population when interpreting the participation rate as a measure of strength of the labour market. If the rate is not adjusted for ageing, then the participation rate has fallen a little over the past five years. If it is adjusted, as it should be, then it has risen substantially, especially in the past two years.

[270] The improved levels of employment have been reflected in falling unemployment over the past year. The total number of unemployed persons has fallen by 37 200 over the year to April 2016 (trend data), or 4.9 per cent. The unemployment rate has fallen by 0.4 percentage points, from 6.1 per cent in April 2015 to 5.7 per cent in April 2016. The unemployment rate has fallen for both men and women over the past year.

[271] The unemployment rate remains above its recent lows of around 5 per cent in early 2011 and 4.3 per cent in December 2007. Nonetheless, the improved labour market over the past year has arrested the persistent increase in unemployment since 2010 and brought about a moderate reduction in unemployment.

[272] Under-employment is a measure of the number of people who are employed part time and would like to work more hours, plus the number of people who normally work full time but are working part time in the reference week for economic reasons—about 5 per cent of the total number of under-employed. 186 

[273] The overall under-employment rate has risen consistently since it was first measured in 1978, peaking at 8.5 per cent (trend data) in February 2015. It has since fallen by 0.1 percentage points to 8.4 per cent in February 2016. 187

[274] As a measure essentially of the desire of part-time employees to work more hours, the extent of under-employment is directly related to the rise in part-time work as a proportion of the labour force. Part-time employment has risen from 18.8 per cent of total employment in April 1986 to 31.4 per cent in April 2016 (trend data).

[275] Like unemployment, the under-employment ratio as a proportion of total employment has fallen over the past year: from 9.1 per cent in February 2015 to 8.9 per cent in February 2016. 188 Similarly, the number of part-time workers who would prefer more work has fallen, as a proportion of the total number of part-time workers from 29.6 per cent to 28.6 per cent between February 2015 and February 2016.

[276] Ai Group, in particular, has sought to emphasise the importance of under-employment as a significant component of the extent of under-utilisation of the available workforce, arguing that “the consideration of underemployment is critical to an understanding of the Australian labour market and should feature prominently in any evaluation of its current condition”. 189 Their Chart 5 is reproduced below as Chart 4.10.

Chart 4.10: Under-employment as a share of labour force underutilisation

Source: Ai Group submission in reply at p. 11, Chart 5; ABS, Labour Force, Australia, Mar 2016, Catalogue No. 6202.0.

[277] Chart 4.10 shows the substantial growth in under-employment as a component of total labour force underutilisation, over the 38 years since 1978. Note that this chart is expressed in terms of the number of people who are under-employed as a proportion of the number of people who are under-utilised—i.e., unemployed plus under-employed. On average each under-employed person wants an additional 14 hours of work. 190 The share of the under-employed is greater on this measure than it would be in a measure based on hours under-utilised. The chart shows that the share of under-employment grew progressively from 1986 to 2007. But since then there has been no growth in its share among underutilised persons, although there has been a recent rise among males. Over the past 10 years, under-employment and unemployment have moved together, and the addition of one to the other does not alter the essential interpretation of changes in the state of the labour market.

[278] A recent article (Breunig et al. 2014) makes two pertinent points about the mismatch between the number of hours that people say they wish to work and the number that they actually work. 191 One is that many more people say they want to work fewer hours than say that they want to work more hours. Indeed, the authors calculate that if everyone worked the hours that they say they want, total hours of labour supply would fall by about 5.5 per cent.192 The other point is that for many people, the experience of under-employment is temporary. Just as employment in a low wage job is a temporary stepping stone for many (about half of those who take a low wage job move to a higher wage job within 12 months, according to data provided by the Australian Government193), being under-employed is also temporary for many. Breunig et al. conclude that about half of those part-time workers who wished to work more hours in one year were happy with their hours a year later, while about 35 per cent still wished to work longer hours in the following year.194

[279] We do not have a complete picture of the significance of under-employment in an evaluation of the state of the labour market or of the degree of the extra work that people want. But there is nothing in the evidence that has been put before us to show that a deeper consideration of under-employment would lead us to alter the conclusions that we draw from the other labour market indicators that we use.

Long-term unemployment

[280] Long-term unemployment is a lagging indicator of the state of the labour market, measuring those who have been unemployed for a year or more. A sharp rise in unemployment in one period will show up as a rise in long-term unemployment after a year, which then tends to become persistent. 195 Long-term unemployment fell in the years preceding the GFC, reflecting the strong labour market at that time, but rose persistently since that time reflecting a weaker labour market and increasing unemployment generally. However, as employment growth strengthened and overall unemployment fell over 2015, so too did the long-term unemployment ratio (the number of long-term unemployed persons as a percentage of total unemployed), from 23.9 per cent in March 2015 to 22.6 per cent in December 2015. Between March 2015 and March 2016, the number of long-term unemployed fell by 7.4 per cent.196

Youth unemployment

[281] Over the year to April 2016, employment of youth (aged 15–24 years) has grown by 1.5 per cent and the youth unemployment rate has fallen by 1.4 percentage points to 12.2 per cent, in trend terms. 197 The youth unemployment rate has declined significantly, down 1.7 percentage points since its recent peak of 13.9 per cent in late 2014. It is now at its lowest level since July 2013. As Chart 4.11 shows, the youth unemployment rate is consistently substantially higher than the aggregate unemployment rate: around twice as high. Over the year to April 2016, the youth unemployment rate has fallen faster than the aggregate unemployment rate, so that the ratio of the unemployment rate for 15–24 year olds to the aggregate unemployment rate fell from 2.2 in April 2015 to 2.1 in April 2016.

Chart 4.11: Unemployment rates for 15–24 year olds and lone parents

Note: Unemployment rates for 15–24 year olds and aggregate unemployment data are expressed in trend terms.

Source: ABS, Labour Force, Australia, Apr 2016, Catalogue No. 6202.0.

[282] The current state of the youth labour market in Australia has been affected by longer term changes in the youth labour market—a marked rise in the levels of education of young people and the increased labour force participation amongst the 15–24 year old population in education. 198

[283] The increases in employment, the employment to population ratio and the participation rate all point to improvements in the labour market. The absolute levels of these indicators are also quite favourable. The one negative indicator is the fall in 2016 in the number of hours worked. We discuss this matter at paragraphs [259]–[261]. The award-reliant industries have generally shared in the growth in employment and hours worked—at face value, three of the five have had increases well in excess of the economy as a whole, while two have had decreases. Here our caveat about the unreliability of hours data, especially at the industry level, needs to be borne in mind. The recent falls in unemployment, in long-term unemployment and in unemployment among youth are consistent with the picture of improved labour market conditions over the course of 2015 and into 2016.

The award-reliant industries

[284] We now consider the circumstances of industries in which a relatively high proportion of employees are award-reliant workers. Award reliance is a measure of the proportion of employees whose pay rate is set according to the relevant award rate specified for the classification of the employee and not set above that relevant award rate. Such information is obtained from the EEH, 199 conducted in May every two years. It is a relevant measure in assessing the impact of AWR decisions because they impact directly on the wages paid to award-reliant employees.

[285] For present purposes, we set out in Table 4.8 the extent of award reliance in August 2008, May 2010, May 2012 and May 2014 by industry. In Chapter 5, we further assess the data concerning award-reliant employees and their characteristics.

Table 4.8: Award reliance by industry—2008, 2010, 2012 and 2014

Note: Award reliance is the proportion of employees in an industry that are paid exactly the award rate and are not paid more than that rate of pay. The 2008 survey was conducted in August.

Source: ABS, Employee Earnings and Hours, Australia, various, Catalogue No. 6306.0.

[286] The 2014 data identify the Accommodation and food services (42.8 per cent); Administrative and support services (37.3 per cent); Retail trade (28.5 per cent); Other services (25.1 per cent); and Health care and social assistance (22.3 per cent) industries as the most award reliant, in that they are the industries in which the highest proportion of employees are award reliant. We use this as a measure of the most award-reliant industries. An alternative approach to identifying the award-reliant industries is to select the industries with the highest number of award-reliant employees—Manufacturing would replace Other services in the five most award-reliant industries on that measure. The two approaches are legitimate and show slightly different perspectives. 200

[287] Table 4.9 summarises data for growth in output, profitability, wages and employment in respect of the most award-reliant industries. It includes an all industries average in the final column.

Table 4.9: Economic indicators by award-reliant industries

Note: (a) All industries excludes Agriculture, forestry and fishing; (b) All industries excludes Education and training, Health care and social assistance and some subdivisions of Finance and insurance services.

*indicates data not available. The award-reliant industries selected are the five industries with the highest proportion of employees within the industry who are reliant on award rates of pay according to the EEH 2014 survey. The WPI and actual hours worked data are expressed in original terms. Employment data are expressed in trend terms.

Source: ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2015, Catalogue No. 5206.0; ABS, Business Indicators, Australia, Dec 2015, Catalogue No. 5676.0; ABS, Employee Earnings and Hours, Australia, May 2014, Catalogue No. 6306.0; ABS, Labour Force, Australia, Detailed, Quarterly, Feb 2016, Catalogue No. 6291.0.55.003; ABS, Wage Price Index, Australia, Dec 2015, Catalogue No. 6345.0; Department of Employment, Trends in Federal Enterprise Bargaining, December quarter 2015, <http://employment.gov.au/trends-federal-enterprise-bargaining>.

[288] The Panel has previously noted that the industry-level economic indicators show considerable volatility from year to year, within industries and between the most award-reliant industries—most especially growth in GVA, growth in company gross operating profit and in hours worked. Further, the AAWI in some industries may reflect the small number of agreements. For that reason, the industry sector data should be relied on for the broad picture shown, rather than the specific magnitudes.

[289] Overall the major indicators in respect of the award-reliant industries performed generally better than the all industries average over the most recent year. Whilst there is diversity in outcomes between the award-reliant industries, the data does not suggest that they have faced a relatively difficult economic environment over the past year or that recent minimum wage increases have adversely impacted on their relative economic performance.

Small business

[290] There is no specific reference to small and medium-sized businesses in the minimum wages and modern awards objectives. However, the general object of the Act is directed to providing a balanced framework for cooperative and productive workplace relations, which promote national economic prosperity and social inclusion for all Australians by, amongst other things, acknowledging the special circumstances of small and medium-sized businesses.

[291] A number of employer associations brought to our attention a high level of small businesses within their industry and/or association and/or the relatively high level of award reliance of small businesses which employ labour. 201

[292] ABS data show that in June 2015, 61 per cent of actively trading businesses in Australia had no employees, 28 per cent had 1–4 employees, 9 per cent had 5–19 employees, 2 per cent had 20–199 employees, and less than 1 per cent had 200 or more.202 MGA reported equivalent figures for the retail sector, submitting that “[a]pproximately 95 per cent of all retail businesses are either non-employing or small businesses (1–19 employees)”.203 The share of small businesses in employment and output varies substantially by industry (see Chart 4.12). 204

Chart 4.12: Small business share of private sector output and employment within each industry

Note: Distribution services includes Wholesale trade; Retail trade; Transport, postal and warehousing; and Information median and telecommunications. Business services includes Rental, hiring and real estate services; Professional, scientific and technical services; and Administrative and support services. Social services includes Public administration and safety, Education and training; and Health care and social assistance. Personal services includes Accommodation and food services; Arts and recreation services; and Other services. Utilities includes Electricity, gas, water and waste services.

Source: ABS, Australian Industry, 2013–14, Catalogue No. 8155.0.

[293] The chart shows that in most industries, small business contributes more to employment (including the self-employed) than it does to output. It also shows that they are especially prominent in agriculture and construction (neither of which is highly award reliant) and play only a small role in mining and utilities.

[294] AFEI asserted that small businesses typically have less ability to absorb cost increases and that small business accounts for a large share of national employment—around 43 per cent of the private non-financial sector—but its share of employment has declined over recent years. 205 We note that the small business share of employed persons is greater than its share of employees, since about 60 per cent of small businesses have no employees.

[295] The Australian Government included a Chapter about small business in its submissions “to provide additional information to help inform the Panel on small business developments, in particular to present the evidence that small businesses are finding conditions more difficult than larger businesses”. 206

[296] It submitted that small businesses are a significant part of the Australian economy, accounting for 97 per cent of all businesses and contributing around one-third of non-financial private sector value added and employing around 44 per cent of non-financial private sector employed persons. 207

[297] The Australian Government noted that small businesses are relatively award reliant, with around 32 per cent of employees in a small business paid award classification wages and “[f]or businesses with 20–49 employees, 50–99 employees and 100 or more employees the equivalent percentage is 30, 24 and 11 respectively”. 208

[298] Official statistics on the situation of small business come with a substantial time lag. We accept that in these circumstances, the information provided by business surveys is useful. In particular, we note the assessment by the Australian Government and the RBA that information from the main business surveys (by ACCI, NAB and Sensis) have proved to be quite reliable predictors of output and employment growth.

[299] The Australian Government submitted that conditions for small businesses remain challenging despite some tentative signs of improvement, relying on industry survey results in support of that proposition. 209 They also note that “small business conditions in the Retail industry are around their long-term average”.210 The relevant surveys are summarised below:

• The NAB surveys provide results in respect of the economic conditions of both small and large businesses. The results show business conditions for all businesses are above their long-term average, while conditions for small business have remained below average since the middle of 2014. A similar picture is evident in respect of the NAB Employment Index. 211

• The ACCI Small Business Survey Employment Index shows similar outcomes for small, medium and large employers, with results deteriorating against the longer term average from early 2012, stabilising at 1–2 per cent below average from mid-2012 and improving from mid-2015, with employment outcomes approaching the long-term average by December 2015. 212

• The Sensis Actual Employment Index for the December quarter 2015 also shows a similar outcome as the ACCI survey, with relatively poor reported results from mid-2012 and improvement from mid-2015, with employment outcomes approaching the long-term average by December 2015. Expectations for the year ahead are positive with a net balance of +11 in the December quarter 2015, below the long-term average and down from December 2013 and 2014. 213

“After experiencing a supportive environment prior to the financial crisis, economic conditions for the small business sector have since been quite challenging. While to some extent this is true for all firms, data suggest that conditions for small businesses have been noticeably weaker than for larger businesses since the onset of the global financial crisis in 2008–09. In particular, both business conditions and confidence for the small business sector have remained around one standard deviation below their long-run averages, and there has been little sign of recovery.” 214

[301] As noted above in relation to various survey results provided in the Australian Government submissions, there has been some recovery since 2014.

[302] Nicholls and Orsmond identified in section 4 of their paper issues raised by small businesses in liaison with the RBA as the main economic and operational constraints faced by small businesses:

• demand fluctuations—small businesses appear to be much more susceptible to cyclical fluctuations in demand for their output and, as a consequence, experience much greater swings in revenue growth than larger businesses;
• economies of scale and high fixed costs—many small businesses find it challenging to compete against larger businesses since they generally cannot take advantage of economies of scale to lower their average costs;
• managerial issues—as small businesses grow, their owner-managers often try to stretch their skills over several new areas, and can struggle to deal with the expanding complexity of operating a growing firm; and
• financing relationships—the impediments faced by small businesses also include cash constraints and the cost and access to finance, both for working capital and for investment. 215

[303] We note that the level of wages, including award wages, is not included in this list.

[304] By modeling certain variables with a standard fixed-effects regression model, Nicholls and Orsmond undertook an analysis of whether the behaviour of small businesses varies compared with that of larger businesses, on average, concluding that:

• overall the pricing behaviour of small businesses taken as a group, including responses to wage and non-wage cost pressures is not statistically different from that for larger businesses;
• the sample data provide little indication that small businesses are markedly more or less sensitive to current demand or wages in determining their employment decisions; and
• when examining the correlation of investment activities across firm size, small businesses’ behaviour is not statistically different from larger businesses. 216

[305] Nicholls and Orsmond also concluded that when considering prices, employment and investment intentions, larger businesses (those with employment greater than 100 employees) tend to be more forward looking than firms with fewer employees. This is most noticeable in terms of firms’ employment decisions and to a lesser extent their investment behaviour. 217

[306] Because about 60 per cent of small businesses have no employees (as distinct from their owners), they are in fact not disproportionately large employers of employees in general or of award-reliant workers. However, small employing businesses (with 1–19 employees) do have a relatively high rate of award reliance and employ about 38 per cent of award-reliant workers. 218 They will therefore be particularly affected by changes in award rates of pay. We accept the evidence that they have less capacity to adjust to adverse changes in business conditions, and that they have found it harder to bounce back from the GFC than have large businesses.

[307] The surveys, which compare small business results with those for larger businesses, provide a mixed message. They indicate that business conditions remain less favourable for small businesses than the long-term norm and for larger businesses, although they have stabilised since 2014. In contrast, rates of employment have improved from mid-2015, having reached their long-term average by December 2015 and are expected to improve further in the year ahead. The aggregate and sectoral economic data do not suggest that the economic conditions for small business have recently diverged materially from those of businesses generally within the industries in which they operate: business conditions for small business are harder than for large businesses, but this has been true for almost a decade and has not deteriorated recently. The survey results included in the submissions of the Australian Government do not suggest recent circumstances are abnormally difficult for small business.

Other industry and sector circumstances

[308] There were a number of submissions to the effect that the Panel should consider specific industry and sector circumstances in determining the minimum wage increase arising from the Review. AHA & TAA, R&CA, ARA, MGA, HIA, South Australian Wine Industry Association Incorporated, NFF, MTAs and Business SA all provided submissions that highlighted particular difficulties in the industries that they represented. The common theme in these submissions was that, in undertaking the 2015–16 Review, the Panel should consider the capability of businesses to sustain their employment levels and total hours available in the particular economic environment that is faced by their members, or enterprises in their industries.  219

[309] These industry-specific submissions provide detail that goes behind some of the national aggregates on which we most usually focus (supplemented by our attention to the most award-reliant industries). Naturally, they are inclined to emphasise the negative aspects of developments in the economy and circumstances affecting the industry. For example, while the R&CA submission emphasised the adverse impact of penalty rates 220 and the transitional arrangements in the Award Modernisation process,221 it makes no mention of the fact that Sunday penalty rates in the Restaurant Industry Award 2010 were reduced, effective from 1 July 2014, for casual employees employed on the Introductory, Level 1 and Level 2 classifications.222 In our decision, it is necessary to balance the negative perspectives raised with the more positive outcomes that are reflected in the national aggregates.

[310] Several submissions 223 pointed to a decline in apprentice and/or trainee commencement rates, some associating the decline with the 22 August 2013 Modern Awards Review 2012—Apprentices, Trainees and Juniors decision224 to adjust the rates of pay for first and second year apprentices. No particular action by the Panel was sought. This submission was dealt with in the 2014–15 Review decision.225 The level of apprentice and trainee commencements is affected by a range of influences including economic conditions, both generally and in specific sectors, and structural change in industry and employment.

[311] A number of state governments also drew our attention to the impact of changes in sectors of state economies.

[312] The South Australian and Western Australian Governments pointed to increases in unemployment rates in those states. 226 The Western Australian Government submitted that the State currently faces economic circumstances differing significantly from those which prevailed during the recent rapid expansion of the State’s resources sector.227 While the State’s economy as a whole continues to grow, supported by exports, the domestic economy has contracted and is projected to remain subdued for the foreseeable future.228

[313] The Queensland Government directed our attention to the impact of the completion of liquefied natural gas projects and the move to the production and export stage. 229 The fall in investment resulting from the completion of those projects resulted in economic growth in Queensland falling to a level of 0.5 per cent which was below the national average of 2.3 per cent.230 Since the State Budget in 2015, the Queensland drought has worsened and agricultural investment is likely to be weaker than previously anticipated.231

Economic outlook

[314] In this section, we examine the economic outlook reflected in the Treasury Budget forecasts and RBA forecasts, together with forward looking indicators, including the NAB survey and Ai Group Performance Indices.

[315] The Economic Outlook, reflected in Statement 2 within Budget Paper No 1: Budget Strategy and Outlook Budget 2016–17, can be assessed in the context that the Australian economy is entering its 26th consecutive year of economic growth and is continuing its transition toward broader growth following the passing of the resource investment boom. The transition to broader-based growth is being supported in the short-term by household consumption, dwelling investment and exports, with non-mining investment remaining weak and falling mining investment detracting from growth. Flexibility in the labour market has also been identified, including by the RBA, as a factor assisting the transition.

[316] The Economic Outlook notes that historically low interest rates are supporting growth by lowering borrowing costs for households and businesses, the lower exchange rate over the past year has facilitated the shift of resources to the service sectors and moderate wage growth is underpinning strong employment growth. These factors are expected to continue during the forecast period, with the unemployment rate forecast to fall to around 5� per cent by the June quarter of 2017. 232

[317] The Economic Outlook also notes, as a positive risk, a lower exchange rate which would generate stronger economic growth and provide further impetus to broader-based growth. On the other hand, it identifies as negative risks uncertainty around the global economic outlook which could result in greater than expected caution and more saving and less consumption by Australian households than expected. Growth in non-mining business investment was also identified as a key source of uncertainty as the economy transitions from capital-intensive resource investment to labour-intensive service sectors.233

Global economic conditions

[318] As shown in Table 4.10, the global economy is forecast by Treasury to grow by 3� per cent in 2016 and 3� per cent in 2017, although downside risks are increasing. Overall growth in Australia’s major trading partners is expected to be stronger than global growth at 4 per cent in each year of the forecast period. Growth remains particularly strong in Australia’s faster growing Asian trading partners.

Table 4.10: 2016–17 Budget forecasts, international GDP growth, per cent

Note: World growth rates are calculated using GDP weights based on purchasing power parity, while growth rates for major trading partners are calculated using export trade weights.

Source: Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2016–17, Canberra, p. 2-9.

[319] A number of risks to the outlook for the international economy are identified in the Economic Outlook. These include: lower commodity prices and economic difficulties in a number of commodity exporting countries; moderating growth in China as the Chinese economy transitions from investment-led to consumption-led growth; the risk that low inflation, low wage growth and low productivity growth being experienced in many advanced economies could become embedded in lower potential growth over time; and continuing financial challenges, particularly in the euro area, Japan and a range of emerging market economies. The risk associated with the transition in the Chinese economy is seen as particularly significant for Australia given the exposure of Australia and its major trading partners to China. 234

The Australian economic outlook

[320] The Australian economy is expected to continue transitioning to broader-based growth. This transition has been most evident in the labour market where the shift towards the more labour-intensive service sectors is underpinning strong employment growth, supported by low wage growth.235

[321] Treasury forecasts for the main economic aggregates are summarised in Table 4.11.

Table 4.11: Major economic parameters, 2016–17 Budget

Note: Year average growth unless otherwise stated. Employment, WPI and the CPI are through the year growth to the June quarter. The unemployment rate is the rate for the June quarter.

Source: Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2016–17, Canberra, p. 1-8.

[322] The GDP forecasts in Table 4.11 anticipate economic growth from 2015–16 to
2017–18 and a small fall in employment growth. The CPI is forecast to increase by only 1� per cent in 2015–16, increasing in subsequent years to approach the middle of the RBA’s medium term 2–3 per cent target range by 2017–18. Continuing low wages growth is anticipated over the whole of the forecast period, notwithstanding a small increase from the 2015–16 level.

[323] Treasury forecasts for a broader range of domestic economic aggregates, recorded in the 2016–17 Budget, are shown in Table 4.12 below.

Table 4.12: Domestic economic forecasts, growth rates(a)

Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level—a trade-weighted index of around 64 and a $US exchange rate of around 77 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$43 per barrel.

(a) Percentage change on preceding year unless otherwise indicated.

(b) Calculated using original data unless otherwise indicated.

(c) Excluding second hand asset sales from the public sector to the private sector.

(d) Percentage point contribution to growth in GDP.

(e) Through the year growth rate to the June quarter.

(f) Seasonally adjusted, through the year growth rate to the June quarter.

(g) Seasonally adjusted rate for the June quarter.

(h) The forecasts are underpinned by spot prices of US$55 per tonne (Free on board (FOB)) for iron ore; US$91 per tonne (FOB) for metallurgical coal and US$52 per tonne (FOB) for thermal coal.

Source: Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2016–17, Canberra, p. 2-6.

[324] The picture presented in this table is one of a continuing return to a more usual set of relationships between the major components of the national accounts (such as real and nominal GDP growth), and small improvements in most of these components. They reflect the continuing transition away from the resources investment boom and exceptionally high terms of trade to more normal circumstances.

RBA Statement on Monetary Policy

Table 4.13: RBA economy forecasts, growth rates

Note: Underlying inflation is calculated by taking the average of the weighted median and trimmed mean measures of inflation. Percentage change for the year-ended shown. Technical assumptions include A$ at US$0.75, Trade Weighted Index at 62.5, Brent crude oil price at US$47 per barrel.

Source: RBA, Statement on Monetary Policy, May 2016, p. 61, Table 6.1.

[325] The RBA forecasts slightly higher GDP growth than the 2016–17 Budget (see Table 4.13). It also expects underlying inflation to exceed the very low CPI growth over the year to the June quarter 2016.

[326] Based on data for early 2016, the RBA lowered its forecasts for GDP growth for Australia’s major trading partners. The RBA expects growth of Australia’s major trading partners to be about � percentage point below its decade average over the next two years, with Australia’s terms of trade likely to be a bit higher in the near term than earlier forecast, following the increase in commodity prices over recent months. 236

[327] The RBA notes that leading indicators of labour demand have been mixed of late but, taken together, suggest continuing improvement in labour market conditions, albeit at a slower pace than last year. The unemployment rate is expected to remain around its current rate until mid-2017, before declining gradually. 237

[328] The RBA has revised down its forecasts for inflation and wage growth, having regard to the lower than expected March quarter 2016 underlying inflation outcome, the broad-based nature of the weakness in non-tradables inflation and the fact that wage outcomes were lower than expected over 2015. Underlying inflation is now expected to remain around 1–2 per cent over 2016 and to pick up to 1�–2� per cent at the end of the forecast period. 238

Other indicators

[329] Ai Group provided a useful composite of its three separate business survey performance indices and the NAB comparable index. 239 This is reproduced below as Chart 4.13.

Chart 4.13: NAB business conditions and Ai Group ‘composite’ conditions indexes*

Note: *Weighted composite index of Ai Group Australian Performance of Manufacturing Index (PMI), Performance of Services Index (PSI), Performance of Construction Index (PCI), fitted to same scale as NAB. Values above zero indicate positive conditions in the NAB index and net expansion in the Ai Group index. Values below zero indicate negative conditions in the NAB index and net contraction in the Ai Group index.

Source: Ai Group submission at p. 9, Chart 5.

[330] The two indices track each other quite closely and both show positive business conditions have prevailed since 2014.

[331] Ai Group also referred to information drawn from its annual survey of CEOs. 240 The limited response rate to the survey of about 7 per cent is insufficient to ensure the reliability of the data for the purpose of providing a representative picture at either an industry or an economy-wide level.241 Further, despite the weighting of some data presented for all CEOs to adjust for their characteristics, the respondents were not representative of Australian CEOs as a whole when assessed against ABS data.242 Despite the provision by Ai Group of information comparing the expected and actual outcomes reported by the survey respondents,243 caution must be applied in considering the survey results.

[332] The Ai Group CEO survey indicated that Australia’s CEOs are more optimistic about general business conditions in 2016 than at any time in the past three years. The CEO survey data also show a tendency for the outcomes to be more subdued than their original expectations. Mining and mining services and Construction businesses are the most pessimistic about business conditions in 2016, whilst Services businesses are the most optimistic. 244

[333] The most recent NAB Monthly Business Survey was undertaken in March 2016, with the results published in April 2016. They were summarised as follows:

“This NAB Business Survey revealed a significant improvement in both business conditions and confidence, suggesting the domestic business environment not only remains favourable but appears to be strengthening further. In March, business conditions jumped to +12 points, its equal highest value since early 2008, reflecting above-average conditions in most industries. Service industries remain the best performers, although construction also closed the gap in March, manufacturing is looking more upbeat, and transport appears to be responding positively to lower fuel prices – in contrast, mining conditions remain extremely weak and retail was disappointing. All three components of conditions (trading, profits and employment) improved during the month, with the employment index particularly encouraging (the highest read since mid-2011), and indicative of on going labour market strength.” 245

[334] The Department of Employment’s Monthly Leading Indicator of Employment (Indicator), based on the weighted average of a select number of economic and employment indicators, is shown in Chart 4.14. The Indicator has fallen for the ninth consecutive month in April 2016. It is currently at about its trend level. Cyclical employment fell in April, after rising for 15 consecutive months, and is still above trend.

Chart 4.14: Levels of the Leading Indicator of Employment and Cyclical Employment

Source: Department of Employment, Monthly Leading Indicator of Employment, April 2015, https://docs.employment.gov.au/system/files/doc/other/lioe_0416.pdf

[335] Job vacancies increased by 13.4 per cent over the year to the February quarter 2016, continuing a trend increase in vacancies since the August quarter 2013. 246 Total job advertisements, as measured by the March 2016 ANZ survey247 of internet and newspaper advertisements, increased by 0.2 per cent, seasonally adjusted, in March 2016 and 10 per cent over the year, remaining broadly unchanged since November 2015.

Conclusion

[336] Economic growth, whilst remaining slightly below trend, has continued at a reasonable level, improving over the second half of 2015 and outstripping growth in each of the seven major OECD economies. Real GDP grew by 3.0 per cent over the year to the December quarter 2015, compared with 2.2 per cent over the year to the December quarter 2014. RNNDI fell by 1.1 per cent over the year to the December quarter 2015, reflecting the decline in the terms of trade.

[337] Over the five years to 2014–15, labour productivity growth in the market sector was higher than the five years prior. Over the year to the December quarter 2014, GDP per hour worked fell by 0.4 per cent, following growth over each of the preceding four years, whilst GVA per hour worked for the market sector grew by 0.9 per cent, although caution is required in considering the recent data as noted in paragraph [227]. There was considerable variation in productivity growth between industries around the all industries average of 1.0 per cent in 2014–15.

[338] Company gross operating profits grew by 2.8 per cent for non-mining industries over the year to the December quarter 2015 and fell by 14.9 per cent in the Mining industry.

[339] Business bankruptcy rates and business exit rates were at relatively low levels in 2014–15.

[340] All measures of inflation remain at historically low levels. The headline CPI rose by 1.3 per cent, underlying inflation increased by 1.5 per cent (average of the timed and weighted mean) and the LCI for employee households increased by 1.1 per cent over the year to the March quarter 2016.

[341] Each measure of wages reflects continued historically low aggregate wages growth. Over the year to the December quarter 2015, WPI increased by 2.2 per cent and AWOTE by 1.6 per cent. Bargaining outcomes, reflected in AAWI, grew by 3.0 per cent in the December quarter 2015. Over the year to the December quarter 2015, nominal unit labour costs rose by 0.3 per cent seasonally adjusted and real unit labour costs increased by 0.9 per cent. The Panel’s conclusion in 2014–15 that wages growth is neither currently a source of inflationary pressure within the economy nor a source of declining capacity of Australian firms to compete in international markets remains true this year.

[342] Stronger labour market conditions over the past year are evident across all measures, other than hours worked which fell between December 2015 and April 2016. The growth in both employment and hours worked was strong over the year to December 2015—2.6 per cent in each case—although it has moderated slightly in early 2016, with employment growth, slowing to 2.0 per cent in the year to April 2016 whilst hours growth eased further to 0.4 per cent over the same year and fell in the first months of 2016. Employment and hours worked in the award-reliant industries of Administrative and support services; Health care and social assistance; and Retail trade grew above the all industries average, but fell in both the Accommodation and food services and Other services industries.

[343] The employment to population ratio for people of working age rose over each of the past two years, to 75.4 per cent in March 2016, although it remains below its peak in December 2010. The 76.0 per cent recorded in December 2015 has been exceeded, and then by a small amount, only twice in the past 10 years. The participation rate of people aged
20–64 years was higher in December 2015 than in any time over the last decade for both men and women. The participation rate has risen by 0.2 percentage points over the year to March 2016. 

[344] The improved labour market over the past year has arrested the persistent increase in unemployment since the GFC and brought about a moderate reduction in unemployment. The total number of unemployed persons has fallen by 37 200 (or 4.9 per cent) over the year to April 2016 (trend data), and the unemployment rate has fallen by 0.4 percentage points, from 6.1 per cent in April 2015 to 5.7 per cent in April 2016.

[345] As employment growth strengthened and overall unemployment fell over the course of 2015 and into 2016, so too did the under-employment rate, long-term unemployment and the youth unemployment rate.

[346] Economic data in respect of the award-reliant industries does not suggest that the most award-reliant industries have faced a relatively difficult economic environment over the past year or that recent minimum wage increases have adversely impacted on the relative economic performance of the award-reliant industries.

[347] The transition in the economy from the mining sector to the more labour-intensive service sectors has been evident in the strength and composition of employment growth in recent years, with most of the growth in total employment occurring in the services sectors of the economy, with the Retail trade and Health care and social assistance industries contributing most to aggregate employment growth.

[348] The Australian economy is entering its 26th consecutive year of economic growth and a continuing transition toward broader growth in the Australian economy following the passing of the resource investment boom. The transition to broader-based growth is being supported in the short-term by household consumption, dwelling investment and exports, with non-mining investment remaining weak and falling mining investment detracting from growth.

[349] All the official sources of forecasts expect GDP and employment to continue to grow and unemployment to fall. Inflation and wage growth are expected to continue to be below average levels in the coming year or so. The relatively strong economy and labour market are factors supporting a higher increase to the NMW and award wages.

5. Relative Living Standards and the Needs of the Low Paid

[350] Both the minimum wages objective and the modern awards objective require us to take into account relative living standards and the needs of the low paid when setting minimum rates. Those matters are different, but related, concepts 248 and must be considered, together with the other matters in ss.3, 134(1) and 284(1) of the Act, in the context of available data and research.

[351] The assessment of relative living standards requires a comparison of the living standards of workers reliant on the NMW and minimum award rates determined by the AWR with those of other groups that are deemed to be relevant.

[352] The assessment of the needs of the low paid requires an examination of the extent to which low-paid workers are able to purchase the essentials for a “decent standard of living” and to engage in community life, assessed in the context of contemporary norms.

[353] After considering some preliminary issues, we will examine relative living standards before turning to consider the needs of the low paid, although we recognise that the two concepts overlap.

Relevant comparators

[354] As it has in each year since 2010, ACCER again argued that the age and disability pension rates and the estimated living standards of pensioners are a relevant consideration in assessing the relative living standards of the low paid and pointed out that pensioners have higher living standards than some low-paid wage safety net dependent families. 249 Consistent with our past approach,250 our assessment of relative living standards focusses mainly on the comparison between award-reliant workers and other employed workers, especially non-managerial workers. This focus does not exclude a comparison with other relevant groups, but in our view, a comparison with pensioners for the purpose of assessing the relative living standards of the low paid is of very limited relevance for two reasons.

[355] First, the current pension system has two components: the base pension and the supplement. The base pension is adjusted by reference to a combination of price and wage movements, such that it will increase no less than male total average weekly earnings. The supplement is adjusted by reference to price movements. Given the base pension is adjusted by at least a measure of average wages, it will move broadly in line with average wages. The supplement will move in line with prices. Accordingly, pension movements reflect movements in wages and prices, to which we already have regard in adjusting the NMW and modern award wage rates.

[356] Second, the pension is a reflection of society’s views on the level of comfort that the aged should have in their retirement years and the level of financial support for people who have a physical, intellectual or psychiatric condition that restricts their capacity to work. The judgments and values that underlie these views can properly be quite distinct from an assessment of the minimum standards of living that are fair for those who are still in employment. For the same reasons that we find at paragraphs [400] to [402] that the distribution of low-paid workers across employee households, rather than all households, provides the best basis for assessing the relative living standards and the needs of the low paid, we think that a comparison with the circumstances of pensioners is not appropriate in assessing the relative living standards and needs of the low paid.

[357] As it has in previous reviews, MGA submitted that the income of small business owners who, it asserted, often earn less than employees, should be considered in assessing the relative living standards of the low paid. 251 In the 2012–13 Review decision the Panel rejected the proposition that business owners are low paid for the purpose of assessing the relative living standards and needs of the low paid.252 We maintain that position—the requirement to have regard to the relative living standards and the needs of the low paid is directed to employees subject to award minimum wages or the NMW. The MGA point went to the related issue—whether the income of small business owners is a relevant comparator in assessing the relative living standards of the low paid. In the 2012–13 Review, the Panel also raised questions about the equivalence of these two forms of employment for the purpose of assessing relative living standards.253 Although MGA challenged that finding, it provided no substantive basis for doing so. We maintain the views that small business owners are not  low-paid employees for the purposes of the Act. There is no data of small business owners’ income which permits a meaningful comparison with the income of the low paid and there is no equivalence of these two forms of employment for the purpose of assessing relative living standards.

Award reliance and low pay

[358] No new award reliance information has been published by the ABS since the May 2014 EEH data which was considered in the 2014–15 Review. In May 2014, the pay of 1.86 million employees (18.8 per cent of all employees) was set on the basis of the award only—an applicable classification rate in one of the 122 modern awards. Using May 2014 EEH data, the Australian Government estimated that in May 2014 less than 2 per cent of all employees, or 157 100 employees, were paid the NMW rate. 254

[359] There is broad acceptance of the proposition that the two-thirds of median (adult) ordinary time earnings constitutes a reasonable basis for identifying the low paid. As in past AWRs, we accept that adult award-reliant employees who receive a rate of pay that (as a full-time equivalent) is below two-thirds of median (adult) ordinary time earnings are an appropriate and practical benchmark for identifying who is low paid. Appropriate adjustments must then be made for juniors (who comprise a large proportion of the award reliant and of the low paid).

[360] There is, however, no single accepted measure of two-thirds of median (adult) ordinary time earnings. The surveys that provide the information about the distribution of earnings from which a median is derived vary in their sources, coverage and definitions in ways that affect the absolute values of average and median wages (and two-thirds of these values). 255

[361] Table 5.1 provides estimates of two-thirds of median weekly earnings based on data from the two main ABS surveys of the distribution of earnings; the Employee Earnings, Benefits and Trade Union Membership (EEBTUM)/Characteristics of Employment (COE); and the EEH.

[362] According to the COE, two-thirds of median weekly earnings for full-time employees in their main job was $800.00 in August 2014. Based on the EEH, the equivalent figure was $880.00 in May 2014. EEBTUM/COE data are used for the conventional OECD measure of the wage bite in Australia, 256 shown in Table 5.3.

Table 5.1: Two-thirds of median weekly earnings

Note: Weekly earnings from the EEBTUM and COE are earnings in the main job for full-time employees. The figures are for August of each year. Data from EEBTUM was used for years 2008–13 and data from the COE was used for 2014. Weekly earnings from the EEH are weekly total cash earnings for full-time non-managerial adult employees. The figure for 2008 is for August and for 2010, 2012 and 2014 for May.

Source: ABS, Characteristics of Employment, Aug 2014, Catalogue No. 6333.0; ABS, Employee Earnings, Benefits and Trade Union Membership, Australia, various, Catalogue No. 6310.0; ABS, Employee Earnings and Hours, Australia, various, Catalogue No. 6306.0.

[363] The August 2014 COE estimate of two-thirds of median weekly earnings of $800.00 per week sits between the minimum rate at the C7 and C8 classification levels in the Manufacturing and Associated Industries and Occupations Award 2010 257 (Manufacturing Award) in August 2014. The EEH estimate of $880.00 per week for May 2014 equates most closely to the C4 classification rate in the Manufacturing Award in May 2014.

[364] The submissions in the current case, which reflect those put to the 2014–15 Review given no new EEH data is available, reveal different estimates of two-thirds of the median wage.

[365] In its submission, the Australian Government provided two estimates to identify low-paid workers:

• $18.67 per hour (or about $710.00 per week over a 38-hour week), using the May 2014 EEH data; and
• $18.42 per hour (or about $700.00 per week over a 38-hour week) using the 2014 HILDA survey data. 258

[366] The Australian Government contended that there were about 1.3 million low-paid employees in 2014 (or 13.3 per cent of all employees), with around one-third of award-reliant workers being low paid in the EEH data. 259 Their analysis took explicit account of the number and the level of pay of junior workers.

[367] The ACTU used unpublished ABS EEH data on the distribution of award only workers by hourly earnings to estimate the number of employees at each award classification level. On the basis of the May 2014 data, the ACTU estimated that 43 per cent of award only employees had hourly earnings at or below the C10 rate of pay in May 2014 ($724.50). 260

[368] Research Report 6/2013 261 found that around 75 per cent of adult award-reliant employees in the non-public sector were earning below the C10 rate of $18.60 per hour.262 

[369] Whilst no specific conclusion is available, the information as a whole suggests that a sizeable proportion—probably a majority—of employees who are award reliant are also low paid by reference to the two-thirds of median weekly earnings benchmark.

[370] A number of award-reliant employees are paid at levels that place them above that low pay benchmark and are thus not low paid in the usual sense. The circumstances of these employees are relevant to our assessment for the reasons that we set out in the 2013–14 Review decision. 263 The modern awards objective requires the Panel (in the context of Part 2—6 of the Act) to ensure that modern awards provide a fair and relevant minimum safety net of terms and conditions.

Relative living standards

[371] The Panel is required to take into account the relative living standards of those on the NMW and those on modern award minimum wages. This requirement relates to all modern award minimum rates, not just to those that fall below a threshold of low pay. Our consideration of relative living standards focusses on the comparison between award-reliant workers and other employees, especially non-managerial employees, but does not exclude comparison with other groups. We consider measures of both earnings and disposable incomes.

[372] There is no doubt that the low paid and award reliant have fallen behind wage earners and employee households generally over the past two decades, whether on the basis of wage income or household income. That conclusion arises from the longer-term data relied on by many parties. That picture is conveniently summarised in the submissions of the Australian Government:

•From when it was introduced in 1997 until 2015, the NMW has increased on average by 3.4 per cent a year in nominal terms and 0.7 per cent a year in real terms. This compares with the growth in median full-time earnings, which averaged 4.4 per cent a year in nominal terms and 1.5 per cent a year in real terms to 2014. 264

• The minimum wage bite (the ratio of the minimum wage to median earnings) has declined from 62 per cent in 1997 to 53 per cent over the same period. 265

• Whilst real weekly earnings of full-time adult employees between 1994 and 2014 have grown at all levels in the earnings distribution, more rapidly in the second decade than the first, the growth rates were highest amongst the higher paid. Between 1994 and 2004, real weekly earnings grew by 6.3 per cent at the 10th percentile, 11.1 per cent at the median and 17.9 per cent at the 90th percentile. Over the period 2004 to 2014, the increases were 12.9 per cent, 19.0 per cent and 27.1 per cent, respectively.266 Earnings inequality increased in Australia between the
mid-1980s and mid-2000s, consistent with the position in most OECD countries.267

• There has been lesser growth at the lowest percentile within the distribution of real household disposable income than at the median or the higher percentiles, although gains in equivalised real household disposable income have been more evenly spread than gains in individual earnings over the past two decades.268

•The Gini coefficient, which measures inequality in income distribution, has risen for household disposable income over the last two decades, although it remained more stable from 2007–08 to 2013–14.269

[373] Against that longer-term picture of declining relative living standards of the low paid over the past two decades which emerges consistently from the information before us, we turn now to consider more recent information about the relative living standards of the low paid.

Real earnings

[374] Our assessment of relative living standards commences with an examination of how the wages of award-reliant employees have changed relative to prices.

[375] Although subject to year-to-year variation, the NMW has increased by 4.8 per cent in real terms over the past decade and in real terms in most years within the decade (Table 5.2). The CPI-adjusted real value of the NMW increased by a cumulative 1.7 per cent over the five years to the December quarter 2010 and a further 3 per cent over the five years to the December quarter 2015. The real value of the minimum wage rose by 0.8 per cent over the most recent year, to the December quarter 2015. The increase in the real value of award wages is consistent with the intention of the Panel in the 2013–14 and 2014–15 Review decisions to award an increase which would result in a modest improvement in the real value of modern award minimum wages. 270

Table 5.2: Real national minimum wage and percentage change—2005–2015, December quarter 2015 dollars

Note: Real minimum wage calculated from C14 (NMW) and CPI (original data) from the December quarter of each year.

Source: ABS, Consumer Price Index, Australia, Mar 2016, Catalogue No. 6401.0; Metal Industry Award; Manufacturing Award.

[376] Chart 5.1 shows an index of the real value of selected award classification rates since December 2005. The chart shows real increases in the level of the C14 (and NMW) and C10 rates and real reductions in the higher C4 and C1(b)/L4 classification rates over the decade, notwithstanding real growth in each classification rate since the 2010–11 Review decision. The more pronounced real increases at the lowest classification level (C14) and more pronounced reductions at the C1(b)/L4 level, reflect the adjustment of award wages by “flat dollar” amounts prior to 2011. Since the 2010–11 Review decision, the NMW and all modern award rates have been adjusted by the same percentage and real wages have increased at each classification level at the time of each AWR adjustment.

Chart 5.1: Real value of selected minimum wage rates, December quarter 2005 to March quarter 2016

Note: Up until 27 March 2006 minimum rates of pay are those in the Metals Industry Award; between 27 March 2006 and 30 June 2009 the minimum rates are those in Australian Pay and Classifications Scale (APCS) (and from 1 July 2009, transitional APCS) derived from the Metals Industry Award; post 1 January 2010 minimum rates C14, C10 and C4 are those in the Manufacturing Award and the L4 rate from the Professional Employees Award 2010. For the purpose of the analysis, the L4 rate was calculated by dividing the annual salary for the L4 classification by 365 and multiplying by 7 to get a weekly rate from which a comparable real value could be derived.

Source: ABS, Consumer Price Index, Australia, Mar 2016, Catalogue No. 6401.0; Metals Industry Award; Manufacturing Award; Professional Employees Award 2010.

[377] We now consider broader measures of the wages of award-reliant workers relative to those of the workforce and the community as a whole, with particular focus on the comparison between award-reliant workers and other employees.

[378] The ACTU noted a correlation between the declining minimum wage bite—the NMW relative to median weekly earnings of full-time employees—over the past two decades and earnings inequality measured by the 50:10 ratio—the ratio of median earnings to earnings at the 10th percentile of the distribution. It submitted that the 50:10 ratio among full-time
non-managerial adult workers was 1.49 in 2000, then 1.57 in 2010 and 1.58 in 2012 and did not change between 2012 and 2014, reflecting the declining minimum wages bite to 2012 and its subsequent stabilisation. The ACTU submitted that the “prevailing inequality which has worsened over recent decades still deserves to be ameliorated through increasing the minimum wage.” 271

[379] Table 5.3 compares the C14 rate with median weekly earnings of full-time employees measured by EEBTUM from August 2004 to August 2013, and by the COE for August 2014. The C14 rate has fallen relative to measures of median and average earnings over the past decade, with much of that decline occurring between August 2005 and August 2008. The ratio of the C14 rate to median earnings has fallen marginally since the first AWR in 2010—from 54.3 per cent in August 2010 to 53.4 per cent in August 2014, although it has risen from the historically low level of 52.7 per cent in August 2012. The ratio is likely to have increased over the course of 2015 given the increase in the C14 rate of 2.5 per cent relative to the increase in average earnings as measured by AWOTE of 1.6 per cent over the year to December 2015. 272

Table 5.3: The C14 rate relative to median weekly earnings of full-time employees

Note: Following the amendments to the WR Act taking effect in 2006, the Federal Minimum Wage (FMW) was set at $12.75 per hour, equivalent to $484.50 per week

Source: ABS, Characteristics of Employment, Australia, Aug 2014, Catalogue No. 6333.0; ABS, Employee Earnings, Benefits and Trade Union Membership, Australia, various, Catalogue No. 6310.0; Metals Industry Award; Manufacturing Award (from 1 January 2010).

[380] The minimum wage bite has fallen over the longer term and inequality in the earnings distribution (which extends beyond minimum wage earners) has risen over the longer term. However, Table 5.3 suggests that the decline in the minimum wage bite has moderated since 2012.

International comparisons of minimum wage levels/minimum wage bite

[381] The Australian Government submitted that while Australia’s minimum wage bite has declined from 62 per cent in 1997 to 53 per cent in 2014, it “is still above average for comparable OECD countries”.273 It submitted that in 2015, Australia’s NMW was the third highest in the OECD in purchasing power parity terms.274

[382] The ACTU submitted that, while Australia’s minimum wage bite remains above many other countries’, “the gap has been rapidly closing” due to other countries increasing their minimum wages.275 It submitted that the minimum wage bite (measured as a proportion of the mean, rather than the usual median) in Australia fell 7.2 percentage points between 2004 and 2014, from 50.3 per cent to 43.1 per cent. 276 The ACTU provided the following chart which shows changes in the minimum wage bite in OECD countries over the decade to 2014.

Chart 5.2: Change in minimum wage bite of mean income, 2004 to 2014

Source: ACTU submission at p. 90, Figure 51. ACTU calculations based on OECD.Stat data.

[383] The Victorian Government noted the minimum wage bite in Australia has been declining since 2005, whereas the bite has increased in most other OECD countries, most notably in New Zealand, the UK and Canada.277

[384] The increasing minimum wage bite evident in other OECD countries over the past decade is likely to continue. Germany introduced a statutory national minimum wage for the first time at the level of €8.50 per hour (47.8 per cent of the median wage) from 1 January 2015. 278 The UK introduced a new National Living Wage (over and above the continuing National Minimum Wage) at the rate of �7.20 an hour (or 55 per cent of median earnings) from April 2016 for working people aged 25 and older, with an explicit ambition that the rate will reach �9.00 an hour (or 60 per cent of median earnings) by 2020, subject to sustained economic growth.279

[385] Whilst, the decline in the NMW relative to median earnings provides one piece of information relevant to the relative living standards of the low paid, the Australian minimum wage bite relative to that of other OECD countries is of limited significance in that evaluation.

The national minimum wage relative to measures of wages growth

[386] Chart 5.3 shows the changes in the nominal value of the C14 and C10 award rates, compared with changes in AWOTE, AWE and the WPI, over the 10 years to the December quarter 2015. It shows that award rates have grown more slowly over the decade than the measures of average pay, although growth in the C14 rate has remained close to that of the WPI. More recently the size of the gap between award rates and average wages has grown more slowly or declined, reflecting reduced growth in the AWOTE, AWE and the WPI and decisions of the Panel.

Chart 5.3: Growth in C14 and C10 relative to AWOTE, AWE and WPI, cumulative percentage change

Note: This chart reflects available data for the period December quarter 2005 to December quarter 2015. WPI is the index for total hourly rates of pay excluding bonuses in both private and public sectors. It is unaffected by change in the quality or quantity of work performed. AWOTE is calculated by dividing estimates of weekly ordinary time earnings by estimates of the number of employees. It is calculated before taxation and other deductions such as superannuation. It also excludes payments which are not related to the reference period such as overtime, leave loading and redundancy payments. AWOTE estimates refer to full-time adult employees. AWE is the gross (before tax) earnings of employees (excluding salary sacrifice). The C14 and the C10 are minimum award rates set under the Manufacturing Award and the former Metal Industry Award. AWOTE and AWE data are published half-yearly for May and November, hence, a quarterly series has been derived. AWOTE and AWE data are expressed in original terms.

Source: ABS, Average Weekly Earnings, Australia, Nov 2015, Catalogue No. 6302.0; ABS, Wage Price Index, Australia, Dec 2015, Catalogue No. 6345.0; Metal Industry Award; Manufacturing Award.

[387] As shown in Table 5.4, the NMW has fallen from 44.7 per cent to 43.8 per cent of AWOTE over the five year period from November 2010 to November 2015. Equal proportionate reductions in the ratio of higher classification rates (C5 and C10) to AWOTE occurred over the same period, reflecting the percentage increases applied to each classification rate. The ratio of the minimum classification rates to AWOTE fell in 2011 and 2012, remained steady in 2013 and 2014 and increased slightly in 2015.

Table 5.4: Ratio of C14, C10 and C5 classifications to AWOTE wage measures—November 2010 and November 2015

Note: AWOTE data are expressed in original terms.

Source: ABS, Average Weekly Earnings, Australia, Nov 2015, Catalogue No. 6302.0; Manufacturing Award.

[388] While accepting that low-paid employees are not necessarily paid minimum award rates, it is useful to note the broader changes in overall levels of earnings inequality, by reference to real earnings. Overall levels of earnings inequality have increased over time. Chart 5.4 shows the growth in real weekly earnings by selected percentiles. Real weekly earnings of full-time workers have become progressively less equal over the past decade—for each decile, the lower the earnings, the lower the rate of growth in earnings, reflected in the fanning out of the earnings distribution. The increased levels of earnings inequality over the past decade occurred, notwithstanding growth in real earnings even at the lowest decile. While small relative to other deciles, there has been 15 per cent growth in the real earnings at the lowest decile. The rising earnings inequality over the past decade was concentrated in the period up to 2008 and has stabilised or even reversed since that time.

Chart 5.4: Real weekly total earnings (full-time adult non-managerial employees) by percentile, 2004 to 2014

Note: Earnings figures are slightly inflated from May 2006 due to the inclusion of salary sacrificing. The EEH was not conducted in 2005, 2007, 2009, 2011 and 2013. Results for these years have been obtained through linear interpolation. Earnings data for 2014 are based on full-time non-managerial employees paid at the adult rate.

Source: ABS, Consumer Price Index, Australia, Dec 2015, Catalogue No. 6401.0; ABS, Employee Earnings and Hours, Australia, various, Catalogue No. 6306.0.

[389] Table 5.5 presents the ratio of selected percentiles to the mean and median of real weekly total earnings between 2004 and 2014. The stabilisation of earnings inequality since 2008 is evident in the ratio at the 10th percentile to mean earnings between 2010 and 2014 and the very small fall in the ratio of the 10th and 25th percentiles to median earnings since 2008.

Table 5.5: Ratio of selected percentiles to the mean and median of real weekly total earnings (full-time adult non-managerial employees), 2004 to 2014

Note: Earnings figures are slightly inflated from May 2006 due to the inclusion of salary sacrificing. Earnings data for 2014 are based on full-time non-managerial employees paid at the adult rate.

Source: ABS, Consumer Price Index, Australia, Mar 2016, Catalogue No. 6401.0; ABS, Employee Earnings and Hours, Australia, various, Catalogue No. 6306.0.

Disposable income of award-reliant workers

[390] We next consider submissions and information put to us in relation to the disposable incomes of NMW- and award-reliant workers and households.

[391] The effect of taxes and transfers on disposable incomes of the low paid is relevant to the needs of the low paid and their relative living standards, both in terms of specific changes in the tax-transfer system at the time of a particular AWR and in assessing broader information in relation to measures of the relative income of the low paid, which is affected by tax and transfer payments.

[392] The tax-transfer system affects the disposable income of employees, with taxes reducing income and transfer payments augmenting available income. That effect arises in respect of both individual incomes and household incomes.

[393] The Australian Government submitted that minimum wage workers, including some full-time workers, benefit from the tax-transfer system. It submitted that transfer payments are roughly one-third of disposable income for full-time minimum wage workers in single-income households with children. 280

[394] In addition to tax-transfer benefits, the government also assists households, particularly low-income households, through the provision of in-kind benefits, including social services, such as access to education, health care, public housing and concession cards, which has the effect of reducing differences in material wellbeing among Australian households.

Disposable income of award-reliant employee households

[395] Before considering measures of disposable household income, we make a preliminary observation.

[396] ACCER has again made submissions concerning the “single person benchmark”. 281 The Panel addressed extensive ACCER submissions on this point in the 2014–15 Review decision.282 Within the decision, the Panel made it clear that the single adult household provides the starting point for its assessment of relative living standards and needs, but consideration is also given to the relative living standards and needs of other types of families, including single-income families, in meeting its responsibility to have regard to the relative living standards and the needs of the low paid and balancing the other considerations which it is required to take into account. We are obliged to283 and do284 take into account relative living standards and the needs of the low paid, as prescribed by the Act, without limitation.

Household incomes

[397] The relative living standards of employees on the NMW and award-reliant employees are affected by the level of wages that they earn, the hours they work, tax-transfer payments and the circumstances of the households in which they live.285  The net effect of these factors is summarised in the notion of equivalised household disposable income. It is therefore necessary to have regard to a range of measures of the relative living standards of the low paid and the household circumstances in which they live.

[398] The Australian Government submitted that, in general, household income is a better proxy of economic wellbeing than individual income, contending that low-paid workers live in a diverse range of household types and will thus have a diverse set of living standards. 286 It identified two approaches to assessing the distribution of low-paid workers across household income:

a. the distribution of low-paid workers across households with at least one employee (referred to as employee households); and

b. the distribution of low-paid workers across all households (including jobless households and retiree households). 287

[399] The distribution of low-paid workers across employee households, preferably households for which the principal source of income is wages, provides the best basis for assessing the relative living standards and the needs of the low paid, for two reasons.

[400] First, the Panel’s assessment of relative living standards focuses on the comparison between award-reliant workers and other employed workers, especially non-managerial workers.288 The all-households approach compares the incomes/standard of living of workers with that of households for which government pensions and allowances are the main source of household income. This latter group make up the substantial portion of households in the lower percentiles of the all-households income distribution. 289

[401] Second, about half of all households report expenditure that exceeds their income and this is most pronounced in the lowest decile of the household income distribution. The ABS suggests that some households report extremely low or negative income, which places them well below the safety net of income support provided by government pensions and allowances, raising questions about reliability of the information reported.290 Such households in the bottom income decile and with negative gross incomes tend to have expenditure levels that are comparable to those of households with higher income levels (slightly above the average expenditures recorded for the fifth income decile), suggesting that these households have access to economic resources such as wealth, or that the instance of low or negative income is temporary. Other households in the lowest income decile, with average incomes at about the level of the single pension rate, were predominantly single person households and their main source of income was largely government pensions and allowances. On average, these households also had expenditures above the average of households in the second income decile, which is not inconsistent with the use of assets to maintain a higher standard of living than implied by their incomes alone.

[402] In modelling the beneficiaries from a minimum wage increase, the PC observed that:

“If non-working households are excluded, the distribution of the gains from the minimum wage favour households in the lowest quintile of working households, both in gross and net terms (tables 4.8 and 4.9). Although workers in such households work fewer hours on average than those further up the income scale, a larger share of workers in this quintile are on minimum rates. These households also enjoy a lesser reduction in other transfers as their wage income increases. Overall, the minimum wage increase leads to a higher percentage increase in both the gross and net incomes of households in the lower quintiles of working households, with progressively smaller percentage gains for households in higher quintiles (‘Working households’ columns of table 4.7).”291

[403] Drawing on HILDA data, 292 the Australian Government submitted that, while low-paid workers are scattered across the income distribution on both approaches, when considering employee households only, there is a higher proportion of low-paid employees in the lower deciles than the top deciles—65.3 per cent of low-paid employees are in the bottom five income deciles, with 30.4 per cent in the bottom two deciles.293 Household income was adjusted for household needs, including household size and composition, using the OECD equivalence scale.

[404] The greater concentration at the lower deciles in the household income distribution of the low paid in employee households is shown in Chart 5.5.

Chart 5.5: Distribution of low-paid employees, by equivalised household disposable income, comparing all households and employee households, 2014

Source: Australian Government submission at p. 11, Chart 2.2; HILDA Survey, release 14 (December 2015), wave 14.

[405] The Australian Government also provided information on the distribution of low-paid employees, by equivalised household disposable income and partnered status, for employee households, which is reproduced below. In addition to showing the greater concentration of the low paid in employee households at the lower deciles in the household income distribution, Chart 5.6 shows that single low-wage earners are particularly concentrated in the lowest deciles. Single low wage earners without children receive little help from the transfer system.

Chart 5.6: Distribution of low-paid employees, by equivalised household disposable income and partnered status, employee households only, 2014

Source: Australian Government submission at p. 13, Chart 2.4; HILDA Survey, release 14 (December 2015), wave 14.

[406] Using HILDA data, the PC provides a slightly different perspective by calculating the likelihood of being an employee in each equivalised household income decile.294 The PC concludes that employees in the lowest income groups are more likely to be on the minimum wage than those in higher income groups (and by more than a fivefold factor), referring to their Figure 4.8 which is reproduced below (Chart 5.7). It notes that while most people in the lowest quintile are not in work (and therefore do not receive any wages), almost half of those who are in work are paid at a minimum rate. 295

Chart 5.7: Minimum wage reliance among employees according to household equivalised income deciles, 2013–14

Note: Equivalised household income controls for household size by dividing total household income by a weighted sum of persons in the household. The first adult is allocated a weight of 1, while additional adults are weighted at 0.5 and children weighted at 0.3.

Source: PC Report at p. 209, Figure 4.8.

[407] Based on analysis of gross weekly household income at the top of each decile, ranked according to income and including “households of all sizes and sources of income”, the ACTU concluded that around 20 per cent of the population is dependent on low pay.296 The ACTU further submitted that the Australian Government’s analysis of the HILDA survey in relation to low-paid households across the income distribution actually “provides a compelling argument for the importance of the minimum wage increases in supporting the low paid. It finds that 65.3% of low paid workers are in employee households below the median equivalized employee household income”.297

[408] ACCI submitted that most low-paid workers are not in low-income households 298 and the Australian Government submitted that a substantial proportion of the low paid are members of higher income households.299 The Australian Government submitted that because low-paid workers are scattered across the entire household income distribution “there are better ways to address inequality than increases in the minimum wage and award classification wages”300 and raising minimum and award classification wages is not a particularly well-directed approach to improve the relative living standards of low-paid workers.301

[409] We accept, as we have in the past, that the relative living standards of award-reliant employees are affected by the level of wages that they earn, the hours they work, tax-transfer payments and the circumstances of the households in which they live.302 We also accept that increases in minimum wages are a blunt instrument for addressing the needs of the low paid303 and other instruments are required to assist in the task of ensuring that every employed family, whatever their composition, has sufficient income to meet their material needs.304

[410] However, we do not accept the proposition that most low-paid workers are not in low-income households. Around two-thirds of low-paid employees are found within the bottom half of the distribution of employee households and have lower living standards than other employees. Increases in the minimum wage and award classification wages do have a role to play as part of a package of measures to address the relative living standards and the needs of the low paid. So much is evident from the minimum wages objective and the modern awards objective in the Act. The potential contribution of increases in the minimum wage and award classification wages is made more apparent by the focus on employee households.

[411] As the Panel has previously noted, in relation to the slow relative growth of award wages between the longer period of 2002–2012, “the concentration of award-reliant employees in the lower deciles of the earnings distribution, the relatively slow rate of increase in the value of awards, and the influence of award rate changes on nearby bargained rates all point towards some direct contribution from AWR decisions to rising inequality of earnings”.305

[412] Further, minimum wage increases have contributed to the rise in absolute real disposable incomes of households containing NMW employees. Australian Government modelling of the contribution of taxes and transfers and NMW increases to changes in real disposable household income between 2011 and 2016306 identifies a net positive impact of real NMW increases for all household types, which is most pronounced for single person households and dual income couple households without children.

[413] The PC has also concluded that minimum wage increases have increased the wage rates of low-paid workers:

“The analysis in chapter 7 suggests that the operation of awards (including award minimum wages) over the last century has generally worked to compress wages and lift the relative employment-based incomes of low-paid workers, which accords with the Productivity Commission’s judgment that Australia’s minimum wages generally ‘bind’. This suggests that regulated minimum wages are indeed likely to have directly increased the wage rates of low-paid workers.” 307

[414] Finally, we note that the correlation between inequality, measured by the 50:10 ratio and the minimum wage bite is very strong, both in Australia and across OECD countries.308 This is consistent with the OECD finding that higher minimum wages are associated with lower wage inequality, both within and across countries. 309 The OECD noted a level of agreement with the proposition that “minimum wages on their own are a relatively blunt instrument for reducing poverty”,310 although the OECD also noted a 2013 paper by Dube which suggests that minimum wage increases can reduce poverty for non-elderly individuals.311 Dube stated that totality of evidence from the 12 published studies for which he could obtain or construct minimum wage elasticities point towards some poverty reduction from minimum wage increases.312 Whilst he accepted that the minimum wage is a blunt tool when it comes to fighting poverty, Dube found that the increase in the US federal minimum wage then under consideration can play a modest but important role in reducing poverty and raising family incomes at the bottom.313

[415] Increases in the minimum wage and award classification wages have directly impacted on the relative living standards of the low paid and their capacity to meet relevant needs. They do play a role as part of a package of measures to address inequality.

[416] Table 8.3 of the Statistical Report shows changes in the nominal disposable income of selected minimum wage reliant households between July 2006 and July 2015. It shows that the nominal disposable income of each household type increased more than the CPI over the decade to July 2015. The real disposable income of each household type increased in 2014–15, by between 0.4 and 0.8 per cent. 314

[417] The Australian Government relied on modelling in Table 8.3 of its submission to submit that, as a result of a highly progressive and targeted tax-transfer system, minimum wage increases are not “fully reflected” in disposable income, even assuming no change in hours worked.315 The modelling showed, for example, that a single full-time NMW income couple (with the partner on NSA) without children retained only 16 per cent or $2.53 of the $16.00 NMW increase of 1 July 2015. ACCER316 submitted that the Commonwealth modelling is misleading because it fails to have regard to the indexation of the withdrawal rates for the means testing of the NSA. We agree that the modelling in Table 8.3 of the Australian Government’s submission presents a partial picture of the effect of taxes and transfers on the disposable incomes of the low paid and low-paid households, which is inconsistent with its submission that the tax-transfer system plays a large role in equalising the distribution of income among Australian households.

[418] Applying the approach which reflects the full impact of taxes and transfers, the Australian Government modelled the effect of the transfer payments on the equivalised income for full-time NMW workers with children on 1 January 2016 for a number of hypothetical household types with a NMW earner. 317 The Australian Government submitted that transfer payments helped compensate for the costs of raising children in particular.318 Its modelling indicated that the transfer payments had the effect of increasing disposable income, adjusted for childcare costs, for both a single person working full time at the NMW with one child and dual income couples both working full time at the NMW with one child beyond the income of a single person without children. That was not the case in relation to both a single person working full time at the NMW and dual income couples both working full time at the NMW where there were two children. Nor was it the case in respect of single income couples, with one parent working full time at the NMW and the second parent on Parenting Payment/NSA, where the couple had one or two children, with equalised disposable income, adjusted for childcare costs being 13.9 per cent to 17 per cent below income of a single person without children. Whilst the transfer payments substantially offset the cost of raising children in all cases, they did not fully do so in respect to single person, dual income couple or single income couples with two children or single income couples with one parent working full time at the NMW and the second parent on the Parenting Payment/NSA, where the couple had one child.319

[419] ACCER again provided longer-term data on disposable income for hypothetical single-earner households (couples and sole parents with two children) maintaining a January 2001 start point, but extending the data to January 2016. 320 While they calculated that the families earning AWOTE experienced a 100.6 per cent increase in disposable income over this period, the comparative figures for the NMW-reliant and C10-reliant families were 79.9 per cent and 74.3 per cent, respectively. ACCER submitted that, since 2001, low-paid working families at or near the safety net wage rates have fallen behind middle income families and living standards generally prevailing in Australia and the relative loss for higher-paid safety net workers and their families has been even greater.321

[420] The ACCER calculations also show that whilst the disposable income of single earner NMW-reliant and C10-reliant families have increased more slowly than single earner AWOTE families, taxes and transfers have increased the real purchasing power of disposable incomes at the NMW/C14 and C10 levels, and reduced the difference compared to those with average earnings over the 14 year period shown. For the single earner NMW family, gross income increased by 64.1 per cent over the period whilst disposable income grew by 79.7 per cent (or 9.5 per cent more). For the single earner AWOTE family, gross income increased by 87.7 per cent over the period whilst disposable income grew by 100.6 per cent (or 6.9 per cent more). The long-term decline in the real NMW relative to real AWOTE, either on the basis of gross income or disposable income is consistent with the general picture noted in paragraphs [372] - [373] above.

[421] The ACCER comparison of changes in disposable income for hypothetical single-earner households (couples and sole parents with two children) for the NMW and AWOTE family show changes only between 2001 and 2016 and does not provide changes that occurred over the more recent years. Such information would shed further light on changes in relative living standards over time. To illustrate, we note that whilst ACCER calculations of increases in the gross NMW compared to gross AWOTE and household disposable income 322 show increases of 64.1 per cent, 87.7 per cent and 99.7 per cent respectively over the longer-term period from 2001 to 2016, the increases over the five years to 2016 were 15.3 per cent, 17.7 per cent and 13.5 per cent, respectively, with the NMW growing faster than household disposable income (but more slowly than AWOTE) over the more recent period.

[422] As it has in the past, the Australian Government calculated changes in real disposable income for a number of hypothetical household types with a NMW earner, in this case covering the period 1 January 2011 to 1 January 2016. 323 It showed that for most hypothetical household types the total change in real disposable household income over the period 2011 to 2016 exceeded the impact of real NMW increases over that time, with taxes and transfers contributing to further increases in total real disposable household income. Each exception was a household type without children: single NMW employees; single income couples, with one NMW employee; and dual income couples, both of whom were NMW employees. In each case, taxes and transfers reduced the total change in real household disposable income over the five year period by about 1 per cent.

Needs of the Low Paid

Income inequality

[423] The extent of and changes in income inequality is relevant not only to the relative living standards of the low paid but also for our economy 324 and for the maintenance of social cohesion.325

[424] The Gini coefficient is a measure of inequality, with inequality being greater the higher the value of the Gini coefficient. The ABS provides a Gini coefficient for the distribution of equivalised household disposable income in Australia. 326 New data, for 2013–14, has been published by the ABS since the 2014–15 Review. The ABS data is shown over the past 19 years in Chart 5.8, which reproduces Figure 55 in the ACTU submission.327

Chart 5.8: Gini coefficient for equivalised household disposable income distribution in Australia 1994–95 to 2013–14

Note: Equivalised disposable household income standardizes as if a household’s after tax and transfers income were that of a single individual.

Source: ACTU submission at p. 94, Figure 55; ABS, Household Income and Wealth, Australia, 2013–14, Catalogue No. 6523.0.

[425] The ACTU submitted that the Gini coefficient rose from 0.302 in 1994–95 to 0.333 by 2013–14. The Gini coefficient fell a little over the GFC period and after, between 2007–08 and 2011–12, before rising in the most recent data of 2013–14 almost back to the level of 2007–08 (0.336). Equivalised household disposable incomes remain more unequal in 2013–14 than at any time prior to 2007–08 for which data are available. The ACTU also provided estimates of the Gini coefficient for household types where the main source of household income is wages and salaries over the period 2003–04 to 2013–14. 328 It showed a similar pattern as for all households, although the Gini coefficient rose more for wage and salary households than all households over the 10-year period.

[426] The Australian Government accepted that inequality had risen over the last two decades, although it submitted the rise between 2003–04 and 2007–08 has probably been exaggerated as a result of ABS methodological changes and that Australia’s level of income inequality after taxes and transfers remains well below levels in the UK and US. 329

[427] The ABS data as a whole shows a gradual increase in income inequality over the past two decades. It appears to have stabilised from at least 2007–08 at relatively high levels compared with the past.

Poverty and poverty lines

[428] The NMW and modern award minimum rates of pay impact upon the needs of the low paid insofar as they affect an employee’s capacity to purchase the necessities of life and to engage in community life.

[429] Measures of poverty, or the risk of poverty,    are relevant in assessing the needs of the low paid because poverty entails an inability to buy the material resources required to meet basic needs. 330 If the low paid are forced to live in poverty then their needs are not being met and those in full-time employment can reasonably expect a standard of living that exceeds poverty levels.331 Information about the low paid and award-reliant employees at risk of poverty is also relevant in assessing relative living standards, given poverty measures typically involve benchmarks of community incomes or expenditure standards.

[430] The Act does not direct us to target poverty among those in employment, but it does direct us to consider the needs of the low paid, balanced against the other considerations we are required to take into account.

[431] There are two principal ways in which poverty is measured.

• The first, called a relative poverty line, defines people as poor if they have a low income relative to the rest of the community. Normally, the income measured is household disposable income, made equivalent for different family types, and compared to a level that is a proportion of the community median equivalent household disposable income. The relative poverty line is usually assessed as a fraction—either 50 per cent or 60 per cent—of median equivalent household disposable income. While straightforward, the main drawback of this approach is that it is more a measure of inequality than of whether people have enough income to meet their basic needs and it measures only the incidence of poverty and not the depth of poverty.
• The second, known as a “budget standard”, is to identify what are deemed to be essentials for an adequate standard of living, for families of different types. This basket of essentials is then costed to provide a measure of how much income each family type needs in order to be able to buy the basket of essentials.

[432] A third approach to assessing needs—measuring deprivation—is to observe directly the extent to which people in particular types of households are forced to forgo, because of insufficient money, expenditures which are regarded as essential.

[433] Limited information becomes available between AWRs to enable us to consider how needs and relative living standards have changed over the course of the past year. We consider such evidence as there is, while having regard to the broader trends that can be seen from earlier data.

[434] Table 5.6 sets out a comparison of 60 per cent median income poverty lines with disposable income of selected households earning various wage rates in December 2014 and 2015. 332 Tables 5.6 and 5.7 below reflect the passing of the Tax and Superannuation Laws Amendment (Medicare and Levy Surcharge) Bill 2016, increasing the various low-income and pensioner Medicare levy shade-in thresholds with effect retrospectively from 1 July 2015.

Table 5.6: Disposable income as ratio of 60 per cent median income poverty line—December 2014 and December 2015, for selected family types earning selected award rates and average earnings