PR002005

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AUSTRALIAN INDUSTRIAL RELATIONS COMMISSION

Workplace Relations Act 1996

s.113 applications for variations

s.108 references to Full Bench

Transport Workers' Union of Australia

TRANSPORT WORKERS AWARD 1998

(ODN C No. 1520 of 1982)

[AW799494CNV  Print Q8693]

(C2004/316)

Construction, Forestry, Mining and Energy Union

TIMBER AND ALLIED INDUSTRIES AWARD 1999

(ODN C No. 31 of 1950)

[AW800937CRV  Print R5055]

(C2004/319)

The Australian Workers' Union

HORSE TRAINING INDUSTRY AWARD 1998

(ODN C No. 3039 of 1975)

[AW783476CRV  Print R5058]

(C2004/322)

Liquor, Hospitality and Miscellaneous Union

BUILDING SERVICES (VICTORIA) AWARD 2003

(ODN C No. 21726 of 1992)

[AW822844CRV  PR929372]

(C2004/4626)

CHILD CARE INDUSTRY (AUSTRALIAN CAPITAL TERRITORY)
AWARD, 1998

(ODN C No. 3697 of 1985)

[AW772250CRA  Print Q2724]

(C2004/4627)

LAUNDRY INDUSTRY (VICTORIA) AWARD 1998

(ODN C No. 21626 of 1992)

[AW787052CRV  Print Q6887]

(C2004/4628)

THE HOSPITALITY INDUSTRY-ACCOMMODATION, HOTELS, RESORTS AND GAMING AWARD 1998

(ODN C No. 389 of 1975)

[AW783479CRV  Print P9138]

(C2004/4629)

Health Services Union of Australia

HEALTH SERVICES UNION OF AUSTRALIA (ABORIGINAL AND TORRES STRAIT ISLANDER HEALTH SERVICES) AWARD 2002

(ODN C No. 32659 of 1990)

[AW819920  PR924564]

(C2004/6248)

National Union of Workers

COMMERCIAL SALES (VICTORIA) AWARD 1999

(ODN C No. 31107 of 1993)

[AW772623CRV  Print R1382]

(C2004/6252)

STORAGE SERVICES-GENERAL-AWARD 1999

(ODN C No. 32518 of 1992)

[AW796791CRV  Print R1040]

(C2004/6253)

GROCERY PRODUCTS MANUFACTURE-MANUFACTURING GROCERS AWARD 2003

(ODN C No. 1152 of 1985)

[AW820730CRV  PR926383]

(C2004/6254)

RUBBER, PLASTIC AND CABLE MAKING INDUSTRY-GENERAL-AWARD 1998

(ODN C No. 1800 of 1982)

[AW794720CRV  Print R4420]

(C2004/6255)

Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union

VEHICLE INDUSTRY AWARD 2000

(ODN C No. 1522 of 1979)

[AW801818CRV  Print T3920]

(C2004/6256)

VEHICLE INDUSTRY-REPAIR, SERVICES AND RETAIL-AWARD 2002

(ODN C No. 1339 of 1974)

[AW824308CAV  PR931545]

(C2004/6257)

METAL, ENGINEERING AND ASSOCIATED INDUSTRIES AWARD 1998

(ODN C No. 2568 of 1984)

[AW789529CRV  Print Q0444]

(C2004/6406)

GRAPHIC ARTS-GENERAL-AWARD 2000

(ODN C No. 22956 of 1995)

[AW782505CR  Print S1716]

(C2004/6407)

Textile, Clothing and Footwear Union of Australia

CLOTHING TRADES AWARD 1999

(ODN C No. 696 of 1980)

[AW772144CAV  Print S1147]

(C2004/6389)

Shop, Distributive and Allied Employees Association

RETAIL AND WHOLESALE INDUSTRY-SHOP EMPLOYEES-AUSTRALIAN CAPITAL TERRITORY-AWARD 2000

(ODN C No. 30030 of 1993)

[AW794740CRA  Print T3309]

(C2004/6395)

Australian Municipal, Administrative, Clerical and Services Union

CLERICAL AND ADMINISTRATIVE EMPLOYEES (VICTORIA) AWARD 1999

(ODN C No. 34749 of 1995)

[AW773032CRV  Print S1367]

(C2004/6402)

VICTORIAN LOCAL AUTHORITIES AWARD 2001

(ODN C No. 36277 of 1989)

[AW811556  PR910776]

(C2004/6403)

Various industries

  
   

JUSTICE GIUDICE, PRESIDENT

  

VICE PRESIDENT ROSS

  

VICE PRESIDENT LAWLER

  

SENIOR DEPUTY PRESIDENT MARSH

  

SENIOR DEPUTY PRESIDENT KAUFMAN

  

COMMISSIONER HINGLEY

  

COMMISSIONER GRAINGER

MELBOURNE, 7 JUNE 2005

CONTENTS

 

Charts

  

1. Contributions to Gross Domestic Product Growth

95

2. Retail Turnover 1999-2005

100

3. New Motor Vehicle Sales 1999-2005

100

4. Growth in New Business Investment

104

5. World Gross Domestic Product Growth

107

6. Growth in Exports

110

7. Terms of Trade

112

8. Current Account Balance

115

9. Labour Price Index-Annual Growth

125

10. Levels of the DEWR Leading Indicator of Employment and Cyclical Employment 1989-2005

127

11. Profits and Wages as a Share of Total Factor Income September quarter 1974-September quarter 2004

136

12. Employment Growth-Most Award-Reliant and Least Award-Reliant Industries

265

13. Annual Change in Employee Hours Worked in the Three Most Award-Reliant Industries, by Safety Net Adjustment at the Federal Minimum Wage Level

268

14. Change in Numbers Employed under Agreements and Awards by Industry May 2000-May 2004

271

15. Percentage Point Change 1999-2000 to 2003-04

312

16. Percentage Point Change 1995-96 to 2003-04

312

17. Award-Reliance by Industry as at May 2004 and Labour Productivity Growth by Industry June 1990-June 2004

316

18. C14 and C10 as a Proportion of Average Weekly Ordinary Full-Time Adult Earnings

406

19. Earliest Operative Dates of 2005 Safety Net Adjustment in Victorian Common Rule Awards

450

   

Tables

  

1. MYEFO Key Economic Forecasts and Projections

30

2. State and Territory Economic Data

45

3. State and Territory Production

46

4. Domestic Economic Forecasts

85

5. Comparison of MYEFO and Budget Forecasts for 2005-06

87

6. Unemployment

121

7. Wage and Profit Share

134

8. Real Unit Labour Costs

139

9. ANZ Summary of Key Economic Forecasts

145

10. State of the Economy: The BRW Survey of Economists

146

11. Australian Academic Research on the Relationship between Wages and Employment

178

12. Differences between Minimum Wages Report and EEH Survey

197

13. Methods of Setting Pay in Award-Reliant Industries

286

14. Proportion of Employees by Employer Size-2002

292

15. Gross Operating Profits, Productivity and Output in Award-Reliant Industries and All Industries June 2003-June 2004

305

16. Productivity Increases in Award-Reliant Industries June 1996-June 2004

306

17. Performance-Related Pay Provision in Federal and State Collective Agreements-Increase Linked to Productivity Improvements

317

18. Average Annual Wages Growth September 1997-September 2004

381

19. Indicators of Annual Average Wage Movements-2004

383

20. Increases in Earnings and Award Rates 1996-2004

400

21. Increases in Wage Price Index and Award Rates 1997-2004

402

22. Minimum Wage and Median Earnings Minimum Wage (C14)/Median Wages Percentage

404

23. Minimum Wage and Earnings

405

24. Increases in Earnings and Award Rates 1996-2004

412

25. Increase in Award Classifications and Average
Weekly Ordinary Time Earnings May 1996-June 2005

426

 

 

LIST OF MAIN ABBREVIATIONS

In this decision the following abbreviations are used:

AACS:

Award and Agreement Coverage Survey 1999

   

AAWI:

Average Annualised Wage Increases

   

ABS:

Australian Bureau of Statistics

   

ACCER:

Australian Catholic Commission for Employment Relations

   

ACCI:

Australian Chamber of Commerce and Industry

   

ACOSS:

Australian Council of Social Service

   

Act:

Workplace Relations Act 1996

   

ACTU:

Australian Council of Trade Unions

   

ADAM:

Agreements Database And Monitor

   

AENA:

Average Earnings on a National Accounts Basis

   

AiG:

The Australian Industry Group and the Engineering Employers Association, South Australia

   

AWA:

Australian workplace agreement

   

AWOTE:

Average Weekly Ordinary Time Earnings

   

BRW:

Business Review Weekly

   

CAD:

current account deficit

   

CAPEX:

Capital Expenditure and Expected Expenditure

   

Commonwealth:

Australian Government

   

CPI:

Consumer Price Index

   

DEAC:

Disability Employment Action Centre

   

DEWR:

Department of Employment and Workplace Relations

   

GDP:

Gross Domestic Product

   

GMI:

Gross Mixed Income

   

GOS:

Gross Operating Surplus

   

GSP:

Gross State Product

   

GST:

Goods and Services Tax

   

HILDA:

Household, Income and Labour Market Dynamics in Australia

   

IMF:

International Monetary Fund

   

LPI:

Labour Price Index

   

May 2000 decision:

Safety Net Review-Wages May 2000 decision
[Print S5000; (2000) 95 IR 64]

   

May 2003 decision:

Safety Net Review-Wages May 2003 decision
[PR002003; (2003) 121 IR 367]

   

May 2004 decision:

Safety Net Review-Wages May 2004 decision
[PR002004; (2003-2004) 129 IR 389]

   

Metal Industries Award:

Metal, Engineering and Associated Industries Award 1998 [AW789529CRV]

   

Minimum Wages Report:

Minimum Wages in Australia: An Analysis of the Impact on Small and Medium Sized Businesses

   

MMRF:

MONASH Multi-Regional Forecasting Model

   

Monash Paper:

The effects on the Australian economy of a sustained increase in award wage rates: results from the MONASH model

   

MYEFO:

Mid-Year Economic and Fiscal Outlook

   

National Motor Industry:

Victorian Automobile Chamber of Commerce, the Motor Traders' Association of New South Wales, the Motor Trades Associations of South Australia, Queensland and Western Australia, the Australian Capital Territory and the Northern Territory

   

NATSEM:

National Centre for Social and Economic Modelling

   

NCID:

National Council on Intellectual Disability

   

NFF:

National Farmers' Federation

   

NMI:

National Motor Industry

   

OECD:

Organisation for Economic Co-operation and Development

   

RBA:

Reserve Bank of Australia

   

States and Territories:

States of New South Wales, Queensland, South Australia, Tasmania, Victoria, Western Australia and the Australian Capital Territory and Northern Territory

   

TRYM:

Treasury Macroeconomic Model

   

WPI:

Wage Price Index

   

WROLA Act:

Workplace Relations and Other Legislation Amendment Act 1996

 

 

DECISION

1. THE ACTU'S CLAIM

[1] The Australian Council of Trade Unions (the ACTU) is seeking a safety net adjustment of $26.60 per week in all award rates with a commensurate adjustment in wage-related allowances. The claim comes to the Commission through a number of union applications pursuant to s.113 of the Workplace Relations Act 1996 (the Act) to increase wage rates in various awards. The applications were filed at the end of 2004.

[2] The ACTU's primary submissions were filed and served before the release of economic data for the December quarter 2004. That data showed a significant slowing in growth. There have also been other negative developments highlighted in the submissions of the Commonwealth and the employer parties.

[3] The ACTU submitted that, notwithstanding these negative developments, its claim is moderate and affordable. It submitted that the economy remains strong, growth continues, unemployment remains at historically low levels, inflation remains at the centre of the Reserve Bank of Australia's target range, productivity, profits and business investment also continue to grow. While the ACTU acknowledged that recent data indicate that growth has moderated, it submitted that the available economic data continue to portray a strong and vibrant economy with forecasts for continued growth. The ACTU submitted that the Commission can be confident that granting its claim will not diminish the continuing trend towards local level agreements. The ACTU submitted that the opponents of its claim are overly pessimistic and that they have grossly overstated their case.

[4] Other grounds advanced in support of the claim are dealt with later in this decision.

2. OUTLINE OF RESPONSES TO THE CLAIM

[5] The Australian Chamber of Commerce and Industry (ACCI) submitted that the Commission should reject the ACTU's claim and grant what it submitted would be a genuinely moderate level of safety net increase of $10 per week in award rates equivalent to classification levels C14 to C10 in the Metal, Engineering and Associated Industries Award 19981 (the Metal Industries Award). It submitted that the key relevant considerations in this case are:

[6] ACCI submitted any increase should be available from a date no earlier than 12 months after the increase provided for in the Safety Net Review-Wages May 2004 decision2 (the May 2004 decision) in any award; commencement of award variations to give effect to any increase arising from this matter should be no earlier than the date on which that award is varied; and allowances should be adjusted consistent with the Furnishing and Glass Industries Allowances decision,3 consistent with the approach of the Commission in recent years.

[7] ACCI further submitted that as a result of the replacement of Schedule 1A of the Act with a system of common rule awards in Victoria, a significant proportion of Victorian businesses sustained very significant increases in their labour costs in January 2005. ACCI therefore submitted that the Commission should provide for a later operative date for any increase arising from this present case to give Victorian businesses breathing space that allows them to accommodate the effect of those earlier wage cost increases.

[8] The Australian Industry Group and the Engineering Employers Association, South Australia (jointly AiG) submitted that the Commission should reject the ACTU's claim. It submitted that a safety net adjustment of $11 per week in all award rates would assist the low paid while not damaging the economy.

[9] It further submitted that:

[10] The National Farmers' Federation (NFF) opposed the applications and submitted that there is significant evidence that the claim cannot be justified. It supported an increase of no more than $10 per week in the federal minimum wage.

[11] It was submitted that while there is improvement from the height of the drought, significant parts of Australia are still experiencing drought conditions. An economic decline is forecast for the industry over the next 12 months predominantly as a consequence of decline in commodity prices across the board while the cost of production increases. This is expected to lead to a downturn in employment.

[12] NFF submitted that increases in wages should be linked to productivity growth at the workplace and therefore increases in the federal minimum wage should not be determined through a centralised wage fixing system that does not take into account issues affecting the agricultural industry, let alone each individual workplace.

[13] The Victorian Automobile Chamber of Commerce, the Motor Traders' Association of New South Wales, the Motor Trades Associations of South Australia, Queensland and Western Australia, the Australian Capital Territory and the Northern Territory (jointly the National Motor Industry) generally supported the submissions of ACCI and other employers. As it has in past years, the National Motor Industry (NMI) submitted that an increase of the magnitude sought by the ACTU must take into account the effect on small business, as the vast majority of businesses in the automotive industry are small. There is a high concentration of businesses in rural and regional Australia where the challenges include declining local economies, the impact of climate variations, staff retention and higher operating costs.

[14] In supporting its claim for what it described as a modest increase of $10 per week up to the C10 level, NMI said that wage pressure is building in the automotive industry, with the safety net adjustment not being the only cost consideration.

[15] The Minister for Employment and Workplace Relations on behalf of the Australian Government (the Commonwealth) also submitted that the Commission should reject the ACTU's claim. It supported an increase of $11 per week to classification levels C14 to C10 in the Metal Industries Award with no increase in award rates above that level.

[16] The Commonwealth opposed the ACTU's claim on the grounds that it:

[17] In particular the Commonwealth stressed the effects on employment of granting the ACTU's claim. It submitted that if granted the claim would jeopardise the employment of the low paid and prejudice people looking for work, particularly the long-term unemployed, the unskilled and inexperienced women seeking to return to the workforce. The Commonwealth submission was critical of the Commission's earlier safety net review decisions, and urged the Commission to give employment issues a greater priority than in the past. It is crucial, it was submitted, that safety net adjustments do not cause employment loss or inhibit the growth of new low-paid jobs. It contended that while the Commission has acknowledged wage increases are a blunt and inefficient instrument for addressing the needs of the low paid, it has not acknowledged the cost of increases for the low paid and the unemployed.

[18] In this context, the Commonwealth drew the Commission's attention to the need for Australia's participation rate to increase in order to address long-term issues associated with an ageing population. Presently there are more than half a million people looking for work, of whom over 100 000 are long-term unemployed. There are more than 430 000 families with dependants where no parent is employed and more than 800 000 dependants live in a jobless household.

[19] The Commonwealth contended that it provides a comprehensive, targeted, social safety net for low-paid Australians. Commonwealth payments provide targeted assistance to low-paid workers without risking their ongoing employment prospects. In addition, many low-paid workers live in medium and higher income families and many are in transition to better paid jobs.

[20] The Commonwealth further submitted that the size of the ACTU's claim shows that it has been encouraged by previous Commission decisions to grant large increases to award wages. Such increases are unfair to low-paid employees and the unemployed. They are of little tangible benefit to most of the low-paid workers who manage to keep their jobs. The Commission's decision must reflect the changed character of the labour market and government assistance. The Commonwealth also relied upon research it commissioned from the Centre of Policy Studies at Monash University.

[21] The States of New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia and the Australian Capital Territory and Northern Territory (jointly the States and Territories) supported an increase of $20 per week in all award rates of pay, submitting that a $20 increase in all award rates of pay is fair and reasonable and is justified in terms of both the current economic context and the immediate economic outlook.

[22] The submission filed on behalf of the States and Territories advanced five broad lines of argument in support of the increase proposed:

[23] The Australian Council of Social Service (ACOSS) did not support an outcome of a particular amount, but made submissions concerning the matters the Commission should consider and the procedures the Commission might adopt to better inform itself on relevant matters. It submitted that there was no evidence before the Commission that recent minimum wage increases have weakened employment growth. Much of the ACOSS submission addressed income distribution based on notions of inequality and advocated reliance on minimum wages rather than transfers to stave off poverty. It asserted that the majority of low-paid workers are found in the bottom half of income distribution and most in that category are women, many of whom rely on award wage increases.

[24] The Australian Catholic Commission for Employment Relations (ACCER) supported an increase of $26.60 in the minimum wage with the adjustment of other award rates of pay, ensuring those in the lower paid classifications are the primary beneficiaries.

[25] ACCER renewed its arguments of past years with respect to what it referred to as the human dimension vital to determining a fair minimum wage. It noted that Catholic and other welfare agencies have day-to-day experience of the unemployed, under-employed and those in low-paid jobs. It submitted that driving down low-paid wages in pursuit of more employment opportunities raises moral and economic questions such as high taxes imposed on low-wage workers. It argued that the federal minimum wage must meet the needs of workers and their families and that currently it is insufficient. ACCER did not support the single person measure of need because government transfers are not sufficient to meet combined worker and dependant needs.

[26] ACCER submitted that wages alone cannot provide a fair and living minimum wage consistent with current economic circumstances without consideration of taxation levels of the low paid, transfer payments and the impact of globalisation, in particular free trade, on employment opportunities and wages.

[27] The Disability Employment Action Centre (DEAC) and the National Council on Intellectual Disability (NCID) submitted that we should grant the ACTU's claim in full.

3. THE ECONOMY

3.1 The ACTU

[28] The ACTU submitted that the economy is characterised by mixed signals. It is unequivocal and without argument that in the last half of 2004 the economy did slow. However, despite the slowing down of the economy, employment grew robustly throughout that period and into this year and unemployment remains at a 28-year low.

[29] The ACTU submitted that the facts on the economy demonstrate that:

[30] As measured by official forecasts, the outlook for the Australian economy remains positive. The ACTU summarised the key Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts as shown in the following table:

Table 1: MYEFO Key Economic Forecasts and Projections(a)

 

Forecasts

Projections

 

2004-05

%

2005-06

%

2006-07

%

2007-08

%

Real GDP

3

3¼

3½

3½

Employment

2

1¾

1½

1½

Wage Price Index

3½

3¾

3¾

3¾

Consumer Price Index

2¼

2¼

2½

2½

Note: (a) Year-average percentage change.

[Source: Treasury, Mid-Year Economic and Fiscal Outlook, December 2004.]

[31] The ACTU submitted in relation to the broad indicators that:

[32] With respect to sub-components of growth, the ACTU submitted:

[33] The ACTU submitted that the recent decision by the Reserve Bank of Australia (RBA) to increase interest rates by 25 basis points was a clear indication it was of the view that the economy needed a "tap on the brake". An increase in interest rates in these circumstances is not necessarily unwelcome.

[34] The ACTU submitted that one area where the signals are reasonably clear is inflation. We remain in a low inflation environment with the CPI at 2.6 per cent for the year to December 2004. This is almost dead centre of the RBA's target range of 2-3 per cent. Increasing oil prices are one of the biggest contributors to inflation. The ACTU shares Treasury's view that high oil prices have a moderately negative impact on the CPI, which may be countered by the fact that Australia is a net energy exporter.

[35] The ACTU submitted there is no evidence before the Commission that widespread wage pressures are building. The Wage Price Index (WPI) grew by 3.6 per cent in the year to December 2004 and 3.3 per cent in the private sector. Average Weekly Ordinary Time Earnings (AWOTE) also rose by 3.6 per cent during the same period. Wages outcomes from federal agreements according to the Department of Employment and Workplace Relations' (DEWR) Average Annualised Wage Increase (AAWI) per employee for agreements in the December quarter are at 4 per cent.

[36] Of the 311 665 new jobs created in the year to March 2005, 197 919 or 63.5 per cent were full-time positions, 113 746 or 36.5 per cent were part-time positions. At the same time employment growth in the award-reliant industries has grown. Unemployment remains at an historically low 5.1 per cent, a level which The Honourable John Howard, MP, Prime Minister of Australia and The Honourable Peter Costello, MP, Treasurer of Australia have described as close to its natural rate.

[37] The ACTU submitted that private business investment, fed by strong growth in profits, is forecast to remain healthy and there is an expectation that Australia's current account deficit will improve with an expected export improvement and a devaluation of the Australian dollar.

[38] The ACTU acknowledged that labour productivity has fallen, but said this was not surprising given the strong growth in employment. Employment grew by 3.2 per cent over the year to March 2005 and in the year to December 2004 hours worked increased by 2.5 per cent. Unit labour costs have been decreasing since 1996. Real labour costs have fallen by 5.1 per cent from June 1996 to June 2004 and by 1.7 per cent over the year to June 2004.

[39] In conclusion, the ACTU submitted that the outlook for the Australian economy is for continued growth, with unemployment to remain around current levels and inflation to stay within the RBA's target range. The risks associated with the increase in the current account deficit as a proportion of GDP have arisen through capacity constraints, which Treasury believes will be mitigated as large investment projects currently underway come online.

3.2 The States and Territories

[40] The States and Territories submitted that the current economic position and the outlook over 2004-05 and 2005-06 remain consistent with the conditions experienced by Australia in the past few years and described by the Full Bench in its May 2004 decision. Some of the threats to growth identified in recent years have either not materialised or so far have not had a significant impact on the economy. Since the May 2004 decision:

[41] The States and Territories relied on RBA statements and MYEFO forecasts to support their outlook for the economy. Arising from these forecasts, it was submitted that for 2004-05 GDP growth will be based on a continuation of robust, though a touch slower, growth in consumer spending and business investment. Household spending will be underpinned by income growth and past gains in household wealth. In 2005-06 growth will be moderate as household wealth grows slowly as a result of relatively high debt servicing payments. Business investment is expected to remain strong with strong profit growth, high capacity utilisation rates and continued demand for global resources.

[42] Growth prospects for Australia's major trading partners remain favourable despite the easing of world growth due to:

[43] Risks to the outlook are:

[44] In summary, the States and Territories submitted that Australia's economy has either met or exceeded the expectations expressed by the Commission in its May 2004 decision. The optimism in the economic performance identified in 2004 is generally consistent with the economic forecast for 2005-06.

[45] The States and Territories' economic outlook for 2004-05 is summarised in the following table:

Table 2: State and Territory Economic Data

 

VIC

NSW

QLD

SA

TAS

NT

ACT

WA

 

%

%

%

%

%

%

%

%

Gross State Product

3.725

3.0

4.25

2.5

3.2

0.4

3.0

4.5

Consumer Price Index

2.5

2.75

2.25

2.5

2.5

1.4

2.0

2.0

Employment Growth

1.5

1.25

4.0

1.25

2.5

  

0.75

2.25

Unemployment Rate

5.75

5.5

5.5

  

6.3

5.2

    

Labour Price Index

3.5

3.75

4.0

    

3.3

3.5

  

[Source: Exhibit S&T 1 at Part 5.]

[46] During submissions, the States and Territories provided the table on the following page:

Table 3: State and Territory Production

 

Annual percentage change in Gross State Product (demand plus net exports)

Trend

Seasonally adjusted

%

%

New South Wales

-0.1

0.4

Victoria

2.3

3.4

Queensland

5.3

1.4

Western Australia

3.1

4.1

South Australia

2.2

2.4

Tasmania

5.1

8.3

Northern Territory

-13.6

-17.0

Australian Capital Territory

3.8

3.0

[Source: ABS Cat. No. 5206 Australian National Accounts.]

3.3 ACCI

[47] ACCI submitted that the economy is slowing and is entering a difficult phase. It contended that there is consensus among economic commentators that Australia has entered a more troubled economic period. It is ACCI's view that the fundamentals of our economy are in flux. It submitted that the ACTU's economic analysis rests on a fundamental flaw-it looks backwards at a time the economy is changing very quickly, by relying on retrospective economic indicators.

[48] ACCI's submission relied on the December quarter 2004 National Accounts data which demonstrated a slowing of the economy. It submitted that:

[49] ACCI identified as the main risks to economic growth:

[50] ACCI relied on a survey undertaken by Business Review Weekly (BRW) to demonstrate fairly pessimistic analyses and growth forecasts for 2004 and 2005. Factors such as employment are putting a strain on future growth with the economy more vulnerable to shocks than it was this time last year.

[51] ACCI also relied upon ANZ economic forecasts of lower growth from 3.2 per cent in 2004 to 2.25 per cent in 2005. The unemployment rate is forecast to be stable in 2005 and to increase in 2006. Inflation is predicted to fall in 2005 and rise in 2006 to the top of the RBA's target range. The current account deficit is forecast to remain at comparatively high levels. The April 2005 ACIL Tasman-ACCI Survey of Investor Confidence also shows that businesses are expecting growth to slow.

[52] The National Australia Bank's National's Monthly Business Survey-January, 2005 shows a slowing in business conditions in the first quarter of 2005, a continuing real slowdown in the economy and a sharp fall in forward orders, rising stocks and erosion of business confidence in the face of weakening activity. In addition, investment may have begun to weaken and exports are weaker. Mining continues to boom but retail, wholesale, manufacturing and transport services record weaker activity. ACCI submitted that the economy is not all going one way-most service sectors continue to report robust business conditions.

[53] The level of Australia's GDP is deteriorating against that of the United States and Australia's unemployment is mid-range amongst OECD countries. ACCI asked the Commission to conclude that Australia's performance is fairly average by the standards of the developed world.

[54] It submitted there is a strong upward trend in the Labour Price Index (LPI) and a wide consensus that wage pressures are emerging. It relied also on the growth in service prices, of which labour costs are the largest component, in order to demonstrate wage pressure. Labour productivity fell in the 2004 calendar year because employment increased while production fell, resulting in an increase in unit labour costs. It disputed the productivity data relied on by the ACTU for the award-reliant industries as outdated and irrelevant to the current economic situation.

[55] ACCI also argued that there is substantial evidence that inflationary pressures are increasing and this was the real reason for the interest rate increase in March. As a consequence, interest rates are forecast to rise. The existence of an interest rate rise is not in itself evidence of a growing economy or of GDP growth.

[56] It was stressed that, notwithstanding Australia's good performance in respect of unemployment, there are 1.1 million people either unemployed or under-employed and there are insufficient employment opportunities. It submitted that labour market improvements have "stopped dead in their tracks" as evidenced by the unemployment rate which has now been maintained at 5.1 per cent over the past four months. Employment growth may have slowed.

[57] ACCI acknowledged that Australia's terms of trade have grown strongly over the past year or two, mainly due to higher prices for energy and materials. However, the benefits of higher terms of trade flow to a small sector of the economy, not to award-reliant industries. On the other hand, it was argued that higher resources prices have a negative impact across all businesses, including award-reliant industries. The benefits arising out of the terms of trade are tenuous and may be temporary. Australia's high current account deficit may make investors more wary of investing in Australia, increasing the risk premium on investment in Australia which may be a factor constraining Australia's future growth prospects.

[58] ACCI argued that the measure of domestic demand is less important than economic growth in determining the ability to pay award wage increases. The essential difference is net exports. Thus whilst domestic demand is increasing, growth is slowing because net exports are falling. In addition, ACCI argued that money spent on imports does not generate capacity in the Australian economy to pay wage increases and there are some indications of weakening domestic demand, particularly in housing and retail sales. While ACCI acknowledged that the slowing of housing investment to a more manageable level is probably a good thing, as is moderation in consumption of imports, it said that there is emerging evidence that consumption has moderated too much, particularly in the retail trade.

[59] ACCI agreed with other parties that business investment is strong and is needed to ensure continuing economic growth. It is important that unaffordable wage increases are not granted which would cut profits and housing investment.

[60] In ACCI's submission, it is not open to the Commission to find that the economy is expected to perform strongly in the immediate future or that a significant increase in award wages is sustainable.

[61] ACCI submitted that labour productivity fell in 2004 on the latest figures available and because the ACTU's claim does not provide for productivity offsets if granted it will jeopardise productivity growth. Both multi-factor and labour productivity have fallen in mining in 2002-03. Over a longer timeframe from 1996-97 to 2003-04 mining, electricity, gas and water and transport and storage multi-factor productivity fell, while in electricity, gas and water, labour productivity also fell.

3.4 AiG

[62] AiG did not challenge the ACTU's economic review, emphasising that it is "what lies ahead" that matters most.

[63] The features of the economy in recent years-strong growth, rising employment and low inflation-have been achieved through solid domestic demand, productivity growing strongly, falling import prices and supply bottlenecks in the economy being largely avoided. In such an environment, wage adjustments have been able to be absorbed without excessive disruption to the economy.

[64] However, as highlighted by the Governor of the RBA, this scenario no longer holds true. Emerging supply and capacity constraints in the economy mean the risk of wages and inflationary pressures are greater, leading the RBA to increase official interest rates by 25 basis points to 5.5 per cent. The granting of the ACTU's claim would exacerbate the current situation. The ACTU's proposed increase:

[65] AiG submitted that it is untenable for the ACTU to persist with its overall positive assessment of the current economy in order to argue for a wage adjustment that will apply for most employees sometime in the third quarter of 2005. The emerging data point to higher inflationary pressures in a period of slowing growth. The inflationary pressure comes from skill shortages, infrastructure bottlenecks, higher fuel costs and rising upstream prices. GDP is starting to slow under the constraints imposed by capacity limitations and the RBA has forecast "growth rates starting with the numbers 2 or 3 rather than 3 or 4".4 This forecast is supported by financial and private sector forecasts and the recently released March records of activity in the manufacturing and services sector, which point to the economy slowing sharply in recent months.

[66] AiG further submitted that the ACTU's claim would be unfair on employers who are struggling to compete in intensely competitive global markets with recent substantial increases in import prices and that the small business sector would be the worst affected. The small business sector is presently experiencing significant cost pressure from the rise in import prices at a time of declining profitability.

[67] AiG argued that many of the factors which have underpinned strong growth in profits and disposable incomes together with low inflation and low interest rates are starting to dissipate:

[68] AiG submitted that there are sound reasons and historical precedents for the co-existence of both weaker economic growth and building inflationary pressures. The rate of non-inflationary growth or GDP growth has moderated more quickly than domestic demand following two years in which excess capacity (especially in the labour market) has been absorbed and productivity has weakened.

[69] AiG submitted that the granting of the ACTU's claim will fuel the argument for further interest rate rises through wages pressure and higher inflation. Increases in wages not backed up by productivity increases will add to employers' costs at a time when skill shortages are putting pressure on wages and costs. In the manufacturing sector alone, there are between 18 000 and 21 000 positions for skilled tradespersons that remain unfilled. This is because:

[70] It was also contended that increases in new material costs and higher unit labour costs (including from a safety net adjustment sending a signal to negotiators seeking to renew enterprise agreements) would directly impact on high profit margins, harming the international competitiveness of Australian companies. A further rise in interest rates could occur if businesses attempt to pass on increased costs, especially in sectors where demand is strong. AiG submitted that the impact, particularly on lower income earners, of an increase in interest rates would wipe out most of the increase proposed by the ACTU.

3.5 NFF

[71] NFF submitted that in overall terms in 2003-04 the agricultural industry has rebounded from the drought in 2002-03. An Abareconomics' "analysis of farm performance since 2002-2003 concludes that overall `the financial performance of Australian Farms has steadily improved in the past two years as drought, that was most severe and widespread in 2002-03 has receded'".5 The drought still impacts on Australian farms, particularly in western New South Wales and a large part of Queensland. The drought has had a more severe longer term impact on irrigated agriculture than previous droughts. In the rice industry, planting has been reduced and employment cut due to the low availability of water.

[72] In 2003-04 farm cash income increased compared with the losses recorded in 2002-03. It is estimated that in 2004-05 farm cash income will fall by 11 per cent to just below the long-term average in real terms. Farm business profit is expected to fall in 2004-05. An agricultural industry survey, the Rabobank Rural Confidence Survey (December 2004), produced the following overall results:

[73] The most recent Westpac NFF Rural Commodity Index figures indicate a relatively steady outlook for the industry with the index in March 2005 remaining largely unchanged over February 2005, up just 0.3 per cent. NFF also relied on research from Econtech which showed that the farm dependent economy contributed an average of 12.1 per cent to national GDP for the six years up to and including 2003-04. It drew the Commission's attention to RBA forecasts that the strong increase in rural export earnings to mid 2004 appears to have run its course, with both the value and volume of rural exports falling in the September quarter 2004 and the value of rural exports falling in the December quarter 2004, implying another substantial fall in rural export volumes.

3.6 NMI

[74] The NMI submitted that not all sectors of the industry have benefited from favourable economic conditions. There are a number of sectors which are experiencing economic pressures. A key issue in addressing economic and other pressures relates to the composition of the industry. The retail trade sector in the automotive industry predominantly comprises small businesses heavily reliant on awards and facing potential difficulties in absorbing the impact of any economic downturn. Some of the pressures facing the automotive industry are universal, such as a severe shortage of available skilled labour. Other economic and business pressures are specific to sectors of the automotive industry.

3.7 The Commonwealth

[75] The Commonwealth submitted that at the time of release of the 2004-05 MYEFO in December 2004, growth was forecast to be 3 per cent in 2004-05 and 3¼ per cent in 2005-06. Employment was forecast to grow at around its long run trend of 2 per cent in 2004-05 and 1¾ per cent in 2005-06 and the unemployment rate was forecast to remain steady at around 5.5 per cent. Inflation and wages growth were expected to remain moderate with the CPI expected to increase by 2¼ per cent in 2004-05 and 2005-06. The main source of inflation was predicted to move from external sources, predominantly oil prices, to domestic sources with wages measured by the WPI to increase by 3½ per cent in 2004-05 and 3¾ per cent in 2005-06. Since the release of MYEFO there have been a number of domestic and international developments, both positive and negative, which may have a significant effect upon the outlook.

[76] The Commonwealth submitted that GDP growth in the December quarter 2004 was weak, following slow growth for the September quarter 2004:

[77] There are domestic and international risks for the Australian economy in the medium-term which may affect the accuracy of MYEFO. Domestically risks include:

[78] Internationally the risks include:

[79] The Commonwealth submitted that:

[80] The Commonwealth relied on recent statements by the Governor of the RBA, who stated that the WPI statistics when considered in conjunction with formal business surveys suggest "there is definitely [wage] pressure in the pipeline, but it has not as yet shown up in the aggregate figures".7 It relied also on a warning from the RBA that higher employment costs "constitute a risk that this forecast [of inflation] will prove to be too low".8 The Commonwealth submitted that this is a particular concern because no productivity offsets are achieved in wage rate increases awarded as safety net adjustments compared with increases achieved through agreement-making.

[81] The Commonwealth also submitted that reliance by the ACTU and the States and Territories on the Gross Operating Surplus (GOS) measure to demonstrate an upward trend in the profit share and a corresponding downward wages share since the mid 1970s is heavily influenced by the large proportion of unincorporated businesses becoming incorporated over time. It is more accurate to include both GOS and Gross Mixed Income (GMI) which takes account of the return to owners because the inclusion of GMI in the profit measure includes returns to the owner's labour in unincorporated enterprises. The Commonwealth submitted that it is all but inconsequential whether the owner of an unincorporated business takes the surplus as wages or profits because the money ends up in the same pocket.

[82] The Commonwealth compared GOS plus GMI with growth in capital stock (from which profits are generated). There is no clear difference in the longer-term growth in GOS and GMI and the growth of capital stock. Profits are increasing broadly in line with the size of the productive capacity of businesses. This does not mean that the capacity to afford the ACTU's claim has increased.

[83] In conclusion, the Commonwealth submitted that with the solid forecasts contained in MYEFO, GDP growth has been slower than expected, but employment growth has been stronger and the terms of trade should strengthen in 2005-06. Significant risks remain to the achievement of the medium-term economic outlook.

4. AN OVERVIEW OF THE STATE OF THE ECONOMY

[84] The parties' economic submissions were made before the federal Budget was presented on 10 May 2005. On 17 May 2005, most of the parties filed additional economic submissions and material dealing with matters arising from the Budget and official statistics and forecasts issued up to that date. We have approached our analysis of the current state of the economy on the basis of all of the submissions and material which have been presented.

[85] The table below sets out the domestic economic forecasts contained in the 2005-06 Budget papers:

Table 4: Domestic Economic Forecasts(a)

 

Outcomes(b)

Estimates

Forecasts

 

2003-04 year average

2004-05 year average

2005-06 year average

Four quarters to June 2006

Panel A-Demand and output(c)

        

Household consumption

5.6

4

3¼

3½

Private investment

        

Dwellings

7.3

-2

-2

1

Total business investment(d)

9.4

8

6

6

Non-dwelling construction(d)

12.5

2

2

2

Machinery and equipment(d)

7.8

11

7

7

Private final demand(d)

6.2

3¾

3½

3¾

Public final demand(d)

3.8

6

3¾

1¼

Total final demand

5.7

4¼

3½

3¼

Change in inventories(e)

        

Private non-farm

0.0

-¼

¼

¼

Farm and public authorities(f)

0.6

-¼

0

0

Gross national expenditure

6.2

3½

3¾

3½

Exports of goods and services

1.6

2

7

7

Imports of goods and services

12.4

10

8

8

Net exports(e)

-2.4

-2

-1

-¾

Gross domestic product

4.1

2

3

3¼

Non-farm product

3.3

2¼

3

2¾

Farm product

35.8

-8

5

17

Panel B-Other selected economic measures

External accounts

        

Terms of trade

7.0

9¾

12¼

6

Current account balance

        

$ billion

-47.4

-56¼

-48

  

Percentage of GDP

-5.8

-6½

-5¼

  

Labour market

        

Employment (labour force survey basis)

1.8

2¾

1¾

1½

Unemployment rate (per cent)(g)

5.8

5¼

5

5

Participation rate (per cent)(g)

63.5

63¾

63¾

63¾

Prices and wages

        

Consumer Price Index

2.4

2½

2¾

2½

Gross non-farm product deflator

3.6

4

4½

3½

Wage Price Index

3.6

3¾

4

4

Notes:

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

(b) Calculated using original data.

(c) Chain volume measures.

(d) Excluding transfers of second-hand asset sales from the public sector to the private sector.

(e) Percentage point contribution to growth in GDP.

(f) For presentation purposes, inventories held by privatised marketing authorities are included with the inventories of the farm sector and public marketing authorities.

(g) The estimate in the final column is the forecast rate in the June quarter 2006.

[Source: ABS Cat. No. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury, Budget Strategy and Outlook 2005-06, Budget Paper No. 1, Part 2: Statement 3 at p. 3-7.]

[86] The table demonstrates the following estimates for 2004-05:

[87] ACCI provided a table which shows a comparison between the 2004-05 MYEFO estimates, which the parties relied upon in their primary submissions, and the 2004-05 Budget estimates and the 2005-06 Budget forecasts.

Table 5: Comparison of MYEFO and Budget Forecasts for 2005-06

 

MYEFO

Budget

 

Estimates 2004-05

Estimates 2004-05

Forecasts 2005-06

Gross Domestic Product

3.0

2.0

3.0

Non-Farm

3.0

2.25

3.0

Farm

-2.0

-8.0

5.0

Private Consumption

4.5

4.0

3.25

Total Business Investment

7.0

8.0

6.0

Total Final Demand

4.5

4.25

3.5

Exports

4.0

2.0

7.0

Imports

10.0

10.0

8.0

Current Account Balance^

-6.0

-6.5

-5.25

Consumer Price Index

2.25

2.5

2.75

Wage Cost Index

3.5

3.75

4.0

Employment

2.0

2.75

1.75

Unemployment Rate*

5.5

5.25

5.0

Notes:

^ Per cent of GDP.

* Average level.

[Source: ACCI Post-Budget Submission at para 2.]

[88] The table demonstrates that:

[89] ACCI also submitted that the Budget assumption of a return to normal seasonal conditions appears to be optimistic at this stage.

[90] The parties generally accepted the Budget estimates but differed in the conclusions they asked the Commission to draw from them.

[91] The ACTU submitted:

[92] ACCI submitted:

[93] AiG submitted:

[94] The Commonwealth submitted:

4.1 Domestic Growth

[95] It was generally acknowledged that the December quarter 2004 National Accounts data showed a slowdown in the GDP growth, with the December quarter recording an increase of 0.1 per cent and a rise of 1.5 per cent for the year.

Chart 1: Contributions to Gross Domestic Product Growth(a) (b)

Notes:

(a) Excluding transfers of second-hand assets from the public sector to the private sector.

(b) All charts in the domestic economy outlook section use seasonally adjusted data unless otherwise specified.

[Source: ABS Cat. No. 5206.0 and Treasury, Budget Strategy and Outlook 2005-06, Budget Paper No. 1, Part 2: Statement 3, Chart 2 at p. 3-14.]

[96] The rebalancing of growth from domestic to external sources that was foreshadowed in the 2004-05 Budget is slowly occurring. It is expected that the economy will continue on this path in the period ahead. Whilst GDP growth slowed in the second half of 2004 when compared with very strong growth rates of recent years, national income is expected to grow strongly, reflecting increased export prices. GDP growth is expected to strengthen to 3 per cent in 2005-06. The reductions in growth of household consumption and dwelling investment is expected to continue with dwelling investment again expected to detract from growth after the high level of construction activity in recent years. This is not an unwelcome development in the economy.

[97] The slower than expected growth in exports has been due to the strength of world economic conditions. This largely reflects a continued high exchange rate and the long lead times required to increase production in the mining sector and to expand export capacity. Despite slow growth in export volumes, high commodity prices provided a substantial boost to domestic income in 2004-05.

4.2 Consumption

[98] Consumption by households is forecast to grow by 4 per cent in 2004-05 followed by a slight moderation to 3¼ per cent in 2005-06 which is below the rapid rates of growth recorded in recent years. Consumer spending will be supported by growth in household income, flowing from solid employment and income tax cuts announced in the 2005-06 Budget. The household savings ratio is expected to increase, albeit by a modest amount.

[99] The ACTU relied on the RBA's May 2005 Statement on Monetary Policy to support its confident picture for the economy.

[100] The most up-to-date data which are before the Commission on the partial indicators of consumption, retail trade and new motor vehicles show:

Chart 2: Retail Turnover 1999-2005

[Source: ABS Cat. No. 8501.0.]

Chart 3: New Motor Vehicle Sales 1999-2005

[Source: ABS Cat. No. 9314.0.55.001.]

4.3 Investment

[101] Dwelling investment, as predicted, moderated in the second half of 2004, after growing by almost 50 per cent in the three years to 2003-04. Dwelling investment is expected to fall by 2 per cent in 2005-06 as the recent increase in official interest rates and a fall in house prices combine to dampen activity, particularly in the investment sector. The current housing downturn is expected to be muted compared with past cycles, with dwelling investment supported by a strong labour market and solid underlying demand for new dwellings.

[102] The ACTU relied on RBA forecasts of a continued high level of residential building activity:

[103] The recent strength in business investment is expected to continue. The forecast for growth in private new investment is 6 per cent in 2005-06. As noted by the ACTU, business investment increased by 40 per cent in the three years to 2003-04. Business investment in non-dwelling construction is expected to grow by 2 per cent in 2005-06, underpinned by favourable business conditions and the continuation of work on a number of large projects. Investment in new machinery and equipment is forecast to grow by 7 per cent during 2005-06.

[104] The Treasury papers indicated that although initial estimates of investment intentions can provide only a broad indication of likely outcomes, Capital Expenditure and Expected Expenditure (CAPEX)15 expectations nevertheless provide support for continued strong growth in 2005-06.

Chart 4: Growth in New Business Investment

[Source: ABS Cat No. 5206.0 and Treasury, Budget Strategy and Outlook 2005-06, Budget Paper No. 1, Part 2: Statement 3, Chart 6 at p. 3-19.]

[105] The ACTU submitted that the most recent CAPEX survey for December 2004 shows business forecast capital expenditure for the 2005-06 financial year to be $45 074 million or 8.1 per cent higher than for the estimate in December 2003. ACCI also relied on the latest CAPEX survey which reported that mining investment has been running above $2 billion a quarter for more than two years compared with a little above $1 billion a quarter at the beginning of the decade. However, ACCI submitted that the mining sector has very low award reliance so investment in the mining sector is of limited relevance to the current case. In ACCI's view, with a moderate rate of growth in investment, significant productivity increases are unlikely over the forecast period.

[106] ACCI submitted that notwithstanding robust rates of growth in investment since the 2002-03 financial year, investment growth has been slowing year by year. Forecast investment growth does not appear above average as demonstrated from the chart above.

4.4 World Growth

[107] The world economy grew by 5.1 per cent in 2004, its fastest rate in close to 30 years and around half a percentage point higher than predicted in MYEFO. Strong growth was recorded across most regions with emerging markets, in particular, benefiting from low world interest rates with strong demand and high prices for their commodity exports. World growth has eased after peaking in the early part of 2004 as the effects of high oil prices and tighter policy, particularly in the United States and China, took hold. World growth is forecast to ease to 4½ per cent in 2005 and 4 per cent in 2006. Growth in Australia's major trading partners is expected to ease from 4.9 per cent in 2004 to around the trend rate of 3¾ per cent in 2005 and 2006.

Chart 5: World Gross Domestic Product Growth(a)

Note: (a) World GDP growth rates are calculated using GDP weights based on purchasing
power parity.

[Source: International Monetary Fund and Treasury, Budget Strategy and Outlook 2005-06, Budget Paper No. 1, Part 2: Statement 3, Chart 1 at p. 3-8.]

[108] A downside risk to world growth stems from the increasingly unbalanced nature of the current expansion which may deepen in the short-term. As ACCI pointed out, the Treasury notes that of more immediate concern are continued high and volatile oil prices. This may lead to a sharp increase in inflation expectations which could be damaging for world growth. However, the current expansion could be more resilient than currently envisaged as world growth over the past years has consistently been stronger than anticipated. The factors that have underpinned this remain in place.

4.5 External Account

4.5.1 Exports

[109] ACCI submitted that Treasury forecasts of GDP growth of around 3 per cent in 2005-06 hinge on a surge in export growth of 7 per cent and favourable terms of trade. The forecast for export growth is an increase of 8 per cent in 2005-06, which Treasury says is lower than would be expected for this point in the economic cycle. The slower than anticipated recovery in exports is in large part explained by the long lead times on investment in the mining sector.

[110] The ACTU submitted that significant investment has been undertaken in an effort to address the current capacity constraints. In 2005-06 significant expansion of capacity in resource areas is expected to be brought into production. A modest strengthening in manufactured export growth is expected in 2005-06.

Chart 6: Growth in Exports

[Source: ABS Cat No. 5206.0 and Treasury, Budget Strategy and Outlook 2005-06,
Budget Paper No. 1, Part 2: Statement 3, Chart 7 at p. 3-20.]

[111] Import growth is expected to ease to 8 per cent in 2005-06 from an estimated 10 per cent in 2004-05 due to the moderation in expenditure.

4.5.2 Terms of Trade

[112] The terms of trade are expected to increase substantially in 2005-06, largely reflecting the convergence of strong world demand for commodities and relatively low growth in commodity supply.

Chart 7: Terms of Trade

[Source: ABS Cat. No. 5302.0 and Treasury, Budget Strategy and Outlook 2005-06,
Budget Paper No. 1, Part 2: Statement 3, Chart A at p. 3-24.]

[113] Both the ACTU and ACCI pointed out that increases in mining commodity prices have been the main driver of the increase in the terms of trade. The ACTU's submission emphasised the 2 per cent contribution which the commodity price increases will add to nominal GDP in 2005-06 and the additional benefits which will flow throughout the economy via profits, capital gain and incentive to import. The ACTU relied on the RBA statement:

[114] On the other hand ACCI, in submitting that the higher terms of trade are largely a mining phenomenon, noted that:

4.5.3 Current Account Deficit

[115] The current account deficit (CAD) is forecast to narrow from 6.5 per cent to 5.25 per cent of GDP. Higher commodity prices will contribute to this improvement. The relatively high level largely reflects an increase in the trade deficit since 2001-02.

Chart 8: Current Account Balance

[Source: ABS Cat. No. 5302.0, 5206.0 and Treasury, Budget Strategy and Outlook 2005-06,
Budget Paper No. 1, Part 2: Statement 3, Chart 8 at p. 3-26.]

[116] Treasury pointed out that an important influence on movements in the CAD over the forecast period will be the boom in commodity export prices. ACCI submitted that despite the forecast decline in CAD as a proportion of GDP, it will remain at historically high levels. There are legitimate concerns that this may cause an increase in the risk premium attached to investment in Australia.

4.6 Labour Market

[117] Employment has continued to grow rapidly through 2004-05 with unemployment falling to a 28-year low of 5.1 per cent in December 2004. Forward indicators of employment, according to Treasury, point to solid employment growth in coming months. Employment growth is expected to moderate to 1¾ per cent in 2005-06 as the effects of recent slower GDP growth feed through to the labour market, in particular, the construction industry is expected to slow. The unemployment rate is forecast to remain near 5 per cent through 2005-06 after averaging 5¼ per cent in 2004-05. Workforce participation is forecast to remain high by historical standards at 63¾ per cent on average in 2005-06. It is recognised that Budget measures to increase workforce participation over the medium term will place upward pressure on measured unemployment as new entrants to the labour market take time to find jobs.

[118] The ACTU submission highlighted the latest labour force data for April 2005 which show:

[119] The ACTU submitted that:

[120] The ACTU drew on the RBA's Monetary Statement to confirm its view on the strong state of the labour market:

[121] ACCI submitted that the estimated growth in employment in the 2005-06 financial year of 1.75 per cent is down substantially on the yearly rate of growth of 2.7 per cent to April 2005. It also submitted that the unemployment rate over 2005 has not improved despite modest rates of employment growth. It relied on the recorded unemployment fall at two decimal places to support its view that the unemployment rate may already be heading upward.

Table 6: Unemployment

 

Seasonally Adjusted Unemployment Rate

%

December 2004

5.11

January 2005

5.12

February 2005

5.13

March 2005

5.14

April 2005

5.15

[Source: ABS Cat. No. 6202.0.]

[122] ACCI submitted that the slower rate of employment growth will also mean that little, if any, improvement is likely in the under-employment rate. AiG also relied on a paper by Mr Fred Argy entitled An Analysis of Joblessness in Australia19 which postulates that the official data on unemployment provide an incomplete picture of the underutilisation of labour. The ACTU agreed that there is a degree of underutilisation but contended there is no agreement on the degree or cause of it.

[123] ACCI asked the Commission to conclude that there is no expectation of significant additional falls in unemployment arising purely from economic growth as may have been the case in some other years. In such changed circumstances, it is imperative that award wage growth is moderated to contribute to an environment which provides the best opportunities for further job creation.

[124] ACCI took issue in its submissions with the Commonwealth's commentary on the impact of estimated wages growth on inflation. It described the wages growth figure as particularly disturbing given that productivity had turned down at the end of 2004. The reduction in productivity growth will mean unit labour costs are rising significantly. The risk that arises from substantial increases in unit labour costs is that these costs will accelerate the current rate of growth in prices.

[125] ACCI also challenged the Budget commentary (which also forms part of the Commonwealth's post-Budget submission) that wages pressures are not generalised. It submitted that the forecast 4 per cent increase in wages is well above the recent increase in the LPI. The LPI (including bonuses) relied on by ACCI is a new index which includes wage and non-wage components.

Chart 9: Labour Price Index-Annual Growth

[Source: ACCI Post-Budget Submission at para 18.]

[126] The ACTU pointed out that Treasury cannot identify any evidence of generalised wages pressure. It relied on Treasury statements to the effect that some localised wage pressure in certain industries and occupations such as the mining sector is indicative of a well functioning economy as wages act as a signalling mechanism in a high employment economy, helping direct workers to the areas of their highest productivity value. It again relied on the RBA's view:

[127] In its primary submission, ACCI relied on the DEWR Leading Indicator of Employment and Cyclical Employment 1989-2005, which is one indicator that a slowdown in jobs growth may be taking place since it has fallen for the seventh consecutive month to February 2005.

Chart 10: Levels of the DEWR Leading Indicator of Employment and Cyclical Employment 1989-2005

[Source: DEWR.]

4.7 Inflation

[128] The Commonwealth submitted:

[129] The ACTU submitted that the inflation forecast is well within the RBA's target range and that the RBA has recognised that, whilst the economy remains strong, upward pressures on prices have eased. The RBA stated:

[130] In contrast to the ACTU's submission on inflation, ACCI argued that:

[131] ACCI submitted that there is a strong implication that the RBA will increase interest rates in the near future to ensure that inflation does not fall outside the RBA's 2-3 per cent target band. Support for this view comes from the RBA's May Statement of Monetary Policy:

[132] ACCI disputed the ACTU's position put in its reply submission that there is no evidence to suggest that there are likely to be further increases in interest rates. Given inflationary pressures arising out of the Budget and RBA forecasts, ACCI submitted that it is critical to keep wage increases in line with productivity if Australia is to avoid a marked slowdown and associated rise in unemployment. ACCI relied on predictions of economic analysts to support its view on future increases in interest rates.

4.8 Productivity

[133] Labour productivity as measured by GDP per hour worked fell by 0.4 per cent and by 0.6 per cent in the market sector in the year to December 2004.

[134] Total factor productivity, which includes the effects of changes in capital input, grew by 2.2 per cent in the 2003-04 financial year. However, the slowing of output since that period, combined with strong investment and employment growth, may imply a slowing of total factor productivity.

4.8.1 Profit share

Table 7: Wage and Profit Share

 

Jun-03

Sep-03

Dec-03

Mar-04

Jun-04

Sep-04

Dec-04

 

%

%

%

%

%

%

%

Wage share

54.2

53.5

52.6

53.3

53.1

53.3

53.4

Profit share

25.7

26.4

26.9

26.4

27.0

26.6

26.6

[Source: ABS Australian National Accounts, Table 19.]

[135] The share of wages and corporate profits in total factor income remains basically unchanged in recent years despite quarterly fluctuations.

[136] The Commonwealth relied on a measure of the profit share which includes GMI. GMI takes account of the return to owners of unincorporated businesses.

Chart 11: Profits and Wages as a Share of Total Factor Income September quarter 1974-September quarter 2004

[Source: ABS, AusStats, Cat. No. 5206.019.]

[137] On the basis of the chart above, which includes GMI and corporate profits, the Commonwealth submitted that there is no discernable increase in the profit share over the past decade and a half. As the Commission said in the May 2004 decision, because GMI includes the return to the owners of unincorporated enterprises it is not a pure measure of profits. If the purpose of the analysis is to measure the relative share of profit and wages then the Commission disagrees with the Commonwealth that it is inconsequential whether the owner of an unincorporated enterprise takes a business surplus of funds as wages or profits. On either measure the share of profits is high and in our view the safety net adjustment we intend to grant will not unduly inhibit the strong investment anticipated in the year ahead.

[138] The ACTU, in its post-Budget submissions, relied on the RBA to support its view that on any measure, profitability remains high:

4.8.2 Real unit labour costs

[139] Real unit labour costs have fallen by 1.7 per cent over the 2003-04 financial year and by 5.1 per cent since 1996-97.

Table 8: Real Unit Labour Costs

 

Real Unit Labour Cost

Percentage Change

 

%

%

1996-97

97.7

0.3

1997-98

96.4

-1.4

1998-99

96.6

0.3

1999-00

96.4

-0.2

2000-01

96.3

-0.2

2001-02

94.9

-1.4

2002-03

94.3

-0.7

2003-04

92.7

-1.7

[Source: Treasury, Unit Labour Costs.]

4.9 Expectations

[140] In weighing the mixture of views on the future of the economy it is instructive to note the official statements of the RBA and the Australian Government. The Governor of the RBA in a speech to the House of Representatives Standing Committee on Economics, Finance and Public Administration on 18 February 2005 said:

[141] The Treasurer, in a press conference at Parliament House, Canberra on 2 March 2005, said:

[142] During an address to the Business Council of Australia in Melbourne in March 2005, the Prime Minister said:

[143] Drawing from the Treasury papers, the Commonwealth submitted that there are a number of risks to the economic outlook. A number of these risks formed part of the ACCI submission as identified earlier in this decision:

4.10 Business Surveys

[144] A number of business surveys which have been released since the December quarter 2004 National Accounts were made available. These preceded the 2005-06 Budget estimates:

[145] ACCI relied on two further survey results which it first presented in its reply submissions and to which ACCI again referred in its post-Budget submission. The first survey is the ANZ forecasts which, although being on a calendar basis, are broadly similar to the Budget forecasts:

Table 9: ANZ Summary of Key Economic Forecasts

 

ANZ Forecast
2006

Budget Forecast
2005-06

Difference in Forecast

Real Gross Domestic Product

3.50

3.00

-0.50

Unemployment

5.75

5.00

-0.75

Consumer Price Index

3.00

2.75

-0.25

[Source: economics@ANZ, March 2005 and Treasury, Budget Strategy and Outlook 2005-06, Budget Paper No. 1, Part 2: Statement 3, Table 1 at p. 3-7.]

[146] ACCI submitted that while the ANZ is more optimistic about growth than Treasury, it is more pessimistic about unemployment and inflation. ACCI submitted that these forecasts are generally consistent with Budget forecasts. The second survey is the BRW forecasts which ACCI submitted are also generally consistent with Budget forecasts.

Table 10: State of the Economy: The BRW Survey of Economists

 

BRW Average Forecast
2005-06

Budget Forecast
2005-06

Difference in Forecast

Real Gross Domestic Product

3.20

3.00

-0.20

Private Consumption

3.10

3.25

0.15

Business Investment

5.60

6.00

0.40

Imports

6.10

8.00

1.90

Exports

7.00

7.00

0.00

[Source: BRW March 17-23, 2005 and Treasury, Budget Strategy and Outlook 2005-06,
Budget Paper No. 1, Part 2: Statement 3, Table 1 at p. 3-7.]

[147] ACCI submitted that the Budget is more pessimistic about economic growth, but is slightly more optimistic about consumption, investment and exports.

4.11 Conclusion on the State of the Economy

[148] The world economy recorded strong growth in 2004 and conditions are expected to remain favourable notwithstanding a slowing of growth in the early part of 2005. The pattern of growth across countries is expected to be more unbalanced than previously anticipated.

[149] The slower growth which the Australian economy experienced in the second half of 2004 and a further slowing anticipated for 2005-06, is a reflection of the rebalancing required due to the previously very high levels of domestic demand, in particular, household consumption and dwelling investment. In the period ahead, solid growth should occur, particularly as business investment unlocks capacity constraints on the supply side leading to the slower than anticipated turnaround in export volumes. However, it may be that turnaround is not as sharp as previously anticipated.

[150] The drought persists, particularly in western New South Wales and Queensland, and this may call into question the Treasury assumption that average seasonal conditions will prevail in 2005-06.

[151] The labour market has recorded solid growth when measured by the number of persons employed, particularly full-time, and the unemployment rate which has been at a 28-year low since December 2004. Whilst employment is forecast to grow at a slower rate in 2005-06, we do not anticipate any real deterioration in the labour market which will remain robust.

[152] The parties opposing the ACTU's claim have warned of the adverse effects of award wages increasing in the absence of productivity growth with potential consequences for lower unemployment and investment and higher inflation. In response, the ACTU has argued that there is no evidence that a pay rise of the order sought by the ACTU will have adverse economic effects. We deal with this issue later in our decision.

[153] Whilst there are indications that the inflation rate will edge up slightly in the forecast period, it is expected to remain within the RBA's target range of 2-3 per cent. There is no evidence before us of a generalised acceleration of wage increases in the economy, notwithstanding that pressure may be exerted in pockets where skill shortages exist. Growth in award wages constitutes a relatively small proportion of earnings growth and so far as we are aware neither the RBA nor the Treasurer has suggested that growth in award wages is linked in a significant way to any potential for inflationary earnings growth. There is no evidence of second-round effects of higher oil prices and as a net exporter of energy Australia stands to benefit if oil prices do rise in the future. The fall back in productivity growth from the high levels reached in the 1990s to negative growth in December 2004 is a basis for concern, especially if productivity continues to fall. Whilst weaker productivity growth would be expected with rising employment growth, some pressure may be exerted on real unit labour costs.

[154] On the material before us, the WPI has shown no material increase beyond that recorded in previous periods, although the Budget forecasts are for an outcome of 4 per cent for 2005-06. On all measures, profits remain strong and expectations are for strong investment in the forecast period.

[155] Economic settings are undergoing change and that as a consequence, growth in GDP will remain at more subdued levels for the remainder of 2004-05 and in 2005-06. These levels are, however, acceptable by historical standards and are not entirely unexpected or unwelcome.

[156] We have had regard to the present uncertainties and risks which might affect the overall performance of the Australian economy. These must be weighed against a number of strong economic indicators. As the Commission has concluded in previous decisions, we think it is inappropriate, in assessing the capacity to meet our statutory obligations of addressing the needs of the low paid, to assess the economic risks on the basis of a worst case outcome but have taken all material into account when determining the present claim.

5. THE EFFECTS OF SAFETY NET ADJUSTMENTs

5.1 Legislative Obligations

[157] The Commission is required by the Act to ensure a safety net of fair minimum wages and conditions is established and maintained, having regard to, amongst other matters, the desirability of attaining a high level of employment. An examination of the statutory provisions indicates that the factors relevant to the maintenance of the award safety net can be conveniently grouped into three categories:

[158] There is no particular priority to be assigned to these factors. The Commission is required to have regard to each of them. The most difficult issue is, of course, the balancing of each factor in circumstances where they conflict. This is a matter of judgment and outcomes will vary with the industrial, economic and social circumstances existing at a particular point of time. We now turn to some of the submissions.

5.2 Employment Effects

[159] The submissions about the likely economic effects of the ACTU's claim were largely directed to the effect on labour market performance.

[160] The Commonwealth stressed the effects of safety net adjustments on employment. It submitted that if granted the ACTU's claim would jeopardise the employment of the low paid and prejudice people looking for work, particularly the long-term unemployed, the unskilled and inexperienced women seeking to return to the workforce. The Commonwealth submission was critical of the Commission's earlier safety net review decisions, and urged the Commission to give employment issues a greater priority than in the past.28 It is crucial, it was submitted, that safety net adjustments do not cause employment loss or inhibit the growth of new low-paid jobs. It contended that while the Commission has acknowledged wage increases are a blunt and inefficient instrument for addressing the needs of the low paid, it has not acknowledged the cost of increases for the low paid and the unemployed.

[161] The States and Territories endorsed the conclusion reached by the Commission in Safety Net Review-Wages May 2003 decision (the May 2003 decision), reaffirmed in the May 2004 decision that:

[162] The States and Territories submitted that there is no evidence that moderate, predictable increases in minimum award wages will adversely impact on employment. The ACTU concurs with this view. It submitted that there has been no new empirical research by academics which sheds further light on the relationship between minimum award increases and employment levels. As Dr Ian Watson concludes in a paper published in The Australian Economic Review: "Proper natural experiments (on the relationship between minimum wages and employment) . . . still remain to be done in Australia".30

[163] As in previous cases of this kind, the Commonwealth referred to and discussed in varying degrees numerous studies concerning the impact of minimum wages on employment. The Commonwealth noted that in previous safety net reviews it had presented the results of approximately 50 overseas studies and 10 Australian studies investigating the impact of increases in minimum wages on employment. It contended that the majority of the overseas studies and all of the Australian studies have shown a significant negative relationship between wage increases and employment levels.

[164] The 50 overseas studies to which the Commonwealth referred have all been considered in previous safety net review decisions. We need not canvass them again in much detail here. As we have noted previously, most of this material is of very limited assistance.31 The research is either largely irrelevant, limited in scope or has serious methodological flaws.

[165] On the question of relevance, we repeat the observation made in the May 2004 decision, that studies based on movements in a single minimum wage are unlikely to shed much light on the economic effects of safety net adjustments. This is because safety net adjustments apply to a range of minimum rates at various levels throughout the award system. In the same way, studies which model a single statutory minimum wage increase for a particular sector of the labour market, such as teenage employment, are of limited relevance in determining the effect of increases in award rates of pay across a range of skill levels. There may well be a range of elasticities of demand for labour throughout the award classification structures and the elasticities may differ at various points in time. We also note that in past safety net review proceedings there has been a significant measure of agreement that much of the research is about the effects of increasing minimum wages in circumstances which are quite different from those which characterise the Australian industrial relations systems. Despite this apparent consensus, we have again been presented this year with material of that kind.

[166] As to the scope of the material, studies which deal with employment effects should be treated with caution unless they also deal with countervailing effects which may also be significant. That proposition is well expressed in this passage from Leigh's paper:

[167] There are also methodological limitations which undermine confidence in much of the material to which the Commonwealth refers. Those limitations have been explored in previous safety net review decisions. It is sufficient to refer to two persistent problems with surveys-unacceptably low response rates and lack of testing for non-response bias.

[168] The international material does not provide direct assistance in an Australian context, particularly given the diversity of research findings. As we have noted in previous safety net review decisions, this diversity of findings is reflected in the commentary of the OECD in its June 1998 Employment Outlook:

[169] The commentary notes that many studies focus on youth. It concludes from the available studies that:

[170] The OECD study importantly notes that minimum wages have both benefits and costs. Potential adverse employment effects arising from statutory minimum wages which are set too high constitute one such cost. Against that, however, the commentary notes the beneficial equity effect of minimum wages in narrowing earnings differentials reflected in most studies. A balancing of the costs and benefits arises squarely in considering claims such as the ACTU's claim in the present case, given the statutory context which requires attention to competing considerations such as employment effects and the needs of the low paid.

[171] The lack of relevant research directed to the effect of safety net adjustments in the Australian context has been recognised by parties to these proceedings. In the 2003 safety net review proceedings AiG noted some methodological limitations in relation to its own survey material and submitted that it was desirable that the Commission conduct a comprehensive independent survey on the impact of Safety Net Review decisions. The Commission responded positively to that suggestion, in the following terms:

[172] The Commonwealth responded to the Commission's concerns about the lack of probative material in relation to the effects of safety net adjustments on employment. It commissioned the research referred to as the Minimum Wages in Australia: An Analysis of the Impact on Small and Medium Sized Businesses (the Minimum Wages Report), although regrettably there was apparently little or no consultation with other parties and no agreement as to the nature and content of the research.

[173] In the May 2004 decision the Commission repeated the observations made in the May 2003 decision, that it would be assisted by high quality research into the employment effects of safety net adjustments.36

[174] This issue was again referred to at the commencement of these proceedings. In the preliminary hearing of this matter, the President raised for the consideration of parties and interveners whether there may be some benefit in extending the opportunity to other groups in the community and members of the community to participate in these proceedings, particularly in relation to the issue of the connection between minimum wages and unemployment. The Commission raised as one possibility a preparedness of the Full Bench to sit in State capitals and advertise hearing times and invite public submissions. No party or intervener responded positively to this invitation.

[175] Further, during the course of oral argument, the Commission sought additional data from the Commonwealth. Some data were provided which were of assistance. However, importantly, the Commonwealth did not provide any data with respect to the following:

[176] The only explanation given was that the Commonwealth was unable to provide the data requested. We also note that the ACTU proposed that the key parties who regularly participate in safety net review cases meet under the auspices of the Commission to discuss the possibility of undertaking a tripartite study on the economic effects of safety net adjustments. We see merit in such a proposal. It may result in broadly supported high quality research which would be directly relevant to the Commission's statutory obligations. It may also facilitate a move away from the adversarial nature of safety net review proceedings. Regrettably the ACTU's proposal received no positive response from any party or intervener opposing its claim.

[177] We now turn to the Australian studies upon which the Commonwealth relies.

[178] Table 11 below, taken from the Commonwealth's submission, outlines the findings of studies on the issue of the impact of Australian wage increases on Australian employment. It was submitted that this is a considerable body of work developed over many years looking at the Australian labour market, that is unanimous in finding that wage rises in Australia cost jobs.

Table 11: Australian Academic Research on the Relationship between Wages and Employment

Author(s)

Year

Elasticity

Methodology

Time period

P Lewis37

1983

-0.6

Used a disequilibrium model to estimate the elasticity of total employment to real wages

1966-1986

C Pissarides38

1987

-0.8

Used Layard-Nickell type model to estimate the employment elasticity with respect to real wages

1967-1987

P Lewis & MG Kirby39

1988

-0.8

Total employment with respect to real wages

1969-1987

B Russell & W Tease40

1991

-0.6

Total male employment elasticity with respect to real wages

1969-1997

G Debelle & J Vickery41

1998

-0.7

(-0.4)

Used Layard-Nickell type model to estimate the employment (hours) elasticity with respect to real wages

1979-1997

M Dungey & J Pitchford42

1998

-0.4

Used a disequilibrium model to estimate the elasticity of total employment to real wages

1984-1997

K Bernie & P Downes43

1999

-0.6

Used the Treasury Macroeconomic Model to estimate the employment (hours) elasticity with respect to real wages

1971-1998

P Lewis & G MacDonald44

2002

-0.8

Re-estimated the aggregate demand for labour, estimating the elasticity of the demand for labour with respect to real wages

1959-1998

A Leigh45

2003

-0.15

Estimated the elasticity of labour demand with respect to the Western Australian statutory minimum wage

1994-2001

D Harding & G Harding46 (The Minimum Wages Report)

2004

-0.21

Based on a survey of small and medium employers, estimated the short run elasticity of employment demand with respect to the minimum award rate

2003

[Source: Exhibit Commonwealth 2 at Table 4.1.]

[179] The material summarised in this table, taken alone, suggests that econometric studies in Australia produce a consistent direction of labour elasticity, but a diversity of specific elasticities, reflecting different methodologies and different periods over which aggregate elasticities are measured. For example, the Debelle and Vickery results show smaller elasticities over the period since 1978 than from 1969.

[180] We think it would be unwise to rely on any specific elasticities reported or to assume that elasticities are fixed over time and independent of other factors, such as the general state of the economy, the level of corporate profitability or the size of real wage increases. It is commonly agreed for example that significant real wage increases in the 1970s had marked adverse employment effects. In contrast, viewed overall, there is no cogent evidence to suggest that recent safety net increases have led to adverse employment effects of the same magnitude, or anything like it.

[181] The difficulty with much of this material is demonstrated by comparing the elasticities found in three of the recent studies upon which the Commonwealth relies. In the Minimum Wages Report, tendered by the Commonwealth in the 2004 safety net review proceedings, the short-term impact of the May 2003 safety net adjustments on employment demand was 14 000 fewer job places than would otherwise have been the case. This represented an elasticity of demand of about -0.2 per cent, that is, for every 1 per cent increase in award wages employment demand for award workers will fall by 0.2 per cent.47

[182] In the same proceedings the Commonwealth relied on a paper by Leigh which sought to estimate the effect of raising the Western Australian statutory minimum wage on employment. Leigh's overall finding was that a 1 per cent rise in the minimum wage leads to a 0.15 percentage fall in employment48-an elasticity of demand of -0.15 per cent.

[183] The findings in these two studies may be contrasted with the results of the Monash Paper, upon which the Commonwealth relied in these proceedings and to which we shall return shortly. The Monash Paper found an overall implied elasticity of labour demand of -0.63 per cent, more than three times higher than that found in the other two studies to which we have referred. No attempt has been made by the Commonwealth to explain these differences. In such circumstances it is appropriate that the results be treated with considerable caution.

[184] We propose to deal in some detail with the paper by Leigh and the Minimum Wages Report which are referred to in the above table.

[185] The paper by Leigh sought to estimate the effect on employment of raising the Western Australian statutory minimum wage. He looked at six statutory minimum wage increases between 1994 and 2001. By comparing employment rates before and after the increases, he sought to test the proposition that increases in minimum wages cost jobs. Leigh made use of a control group (the rest of Australia) to validate his before and after results. The before and after minimum wage increase difference in employment rates for Western Australia was calculated by subtracting the employment rate three months after a minimum wage increase from the employment rate which prevailed three months before. This was done for six occasions when minimum wage increases occurred in Western Australia between 1994 and 2001. The before and after differences were also calculated for the control group, i.e. the rest of Australia. Leigh then calculated the difference between the Western Australian figure and the figure for the rest of Australia.

[186] Leigh's overall finding was that a 1 per cent rise in the minimum wage leads to a 0.15 percentage point fall in employment. Leigh's study has been trenchantly criticised by Professor Junankar and Dr Watson in separate papers. In his March 2004 paper, Dr Watson describes Leigh's study as fundamentally flawed, with major methodological and empirical weaknesses.49

[187] In the May 2004 decision, the Commission identified four particular criticisms which may be made of Leigh's paper:

[188] Having regard to these criticisms, the Commission concluded:

[189] In its written submission the Commonwealth submitted that "Leigh addressed the criticisms of his work in a refereed article that appeared in the Australian Economic Review". The Commonwealth offered no analysis of the article to which it referred. Further, it was not suggested that the criticisms of Leigh's paper identified in the May 2004 decision lacked validity.

[190] In the article in question Leigh responds to the criticism by Watson that his methodology was fundamentally flawed.51 In particular, Leigh:

[191] Leigh concluded that there can be little doubt about the sign of the effect of minimum wages on employment but that "the magnitude is the most important issue . . . As the Western Australian minimum wage experiment has shown, there is an employment cost to raising the Australian minimum wage, but it seems to be smaller than many have argued".52

[192] Despite the fact that Leigh has addressed some of the methodological problems raised in the May 2004 decision, there is nothing in Leigh's reply which would lead us to depart from the overall conclusion reached in 2004. Not only is Leigh's study concerned with changes in the single statutory minimum wage in WA, but that wage applies to non-award industries which may have different characteristics to the award-reliant industries which are subject to the application before us.

[193] The Minimum Wages Report was also considered in the May 2004 decision. As we have noted, in the May 2003 decision the Commission encouraged the parties, and in particular the Commonwealth, to give consideration to facilitating a comprehensive, representative and technically robust survey to provide direct and contemporary information relevant to the Commission's task in adjusting the wages safety net. The Commonwealth responded by commissioning research intended to provide answers to the following questions:

[194] The resultant report entitled Minimum Wages in Australia: an analysis of the impact on small and medium sized businesses was tendered during the course of the 2004 safety net review proceedings. Some of the key findings of the Minimum Wages Report are:

[195] The Commonwealth relied on the Minimum Wages Report in the 2004 safety net review proceedings in support of its contention that a cautious approach should be taken to adjusting minimum wages because of negative employment consequences. In its May 2004 decision the Commission identified a number of methodological limitations with the report.

[196] First, the accuracy of the survey responses is dependent on the extent to which respondents to the survey understood what a safety net adjustment is and there was reason to doubt whether at least some of the survey respondents had a sufficient understanding of the concept.

[197] Secondly, there were significant differences between a number of industry sector estimates extrapolated from the Minimum Wages Report questionnaire and those from established ABS surveys. Some of these differences are summarised below:

Table 12: Differences between Minimum Wages Report and EEH Survey

 

Minimum Wages Report survey

ABS
EEH survey

Difference

 

'000

'000

%

Part-time employment

788.1

561.0

40.5

Award-only employees by industry sector

      

All sectors

1826.2

1456.0

25.4

Accommodation, cafes and restaurants

335.2

247.6

35.3

Retail trade

526.1

369.2

42.5

Cultural and recreational services

158.4

88.4

79.2

Note: EEH Survey-ABS Survey of Employee Earnings and Hours, Australia.s

[198] The third point related to the low response rate. The response rate of the Minimum Wages Report survey was 20 to 22 per cent. The Commission accepted evidence that in the absence of a survey of non-respondents, there could be no certainty that non-response bias would not be present.

[199] Having regard to these methodological limitations the Commission concluded that it would be unwise to place any reliance on the Minimum Wages Report.

[200] The material advanced in past safety net review proceedings has been supplemented in these proceedings by:

[201] We now turn to our consideration of this material.

5.3 The Monash Paper

[202] The Commonwealth commissioned the Centre of Policy Studies at Monash University to model and report on the impact of a $26.60 increase in award wages at a national, state and regional level. The report is entitled The effects on the Australian economy of a sustained increase in award wage rates: results from the MONASH model.53 We refer to this report as the Monash Paper.

[203] Professor Bill Mitchell provided a critique of the Monash Paper54 and the authors of the Monash Paper have provided a written reply to this critique.55 One of the authors of the Monash Paper, Associate Professor Madden, gave evidence during the proceedings.

[204] The Monash Paper uses a national model (MONASH) linked with a regional model (MMRF) to simulate the effects of an increase in award wage rates in 2005. MONASH is a dynamic computable general equilibrium model of the Australian economy. MMRF is a dynamic model of the six Australian states and two territories. It models each region as an economy in its own right. The structure of the sub-model for each region is said to be similar to that of MONASH. The models assume that employers react to increases in real wages by reducing their demands for labour.56 Hence the simulations inevitably show that aggregate employment is reduced by increases in real award wages.

[205] Two simulations were conducted. In the main simulation (referred to as S1) the authors calculate the effects on the economy of granting an across-the-board award wage increase in 2005 of $26.60 a week compared with granting no increase at all. Simulation S1 shows a decrease in aggregate employment in 2005 of 0.77 per cent, a loss of about 74 000 jobs. This result is to be interpreted as meaning that if an award wage increase of $26.60 per week were granted then employment in 2005 would grow by 74 000 jobs less than if no award wage increase were granted at all. Employment losses would occur across all regions and all industries, not just regions and industries in which there are heavy concentrations of award-reliant workers. The region where employment is most vulnerable to award wage increases is New South Wales. The least vulnerable region is the Northern Territory.

[206] The overall implied elasticity of labour demand in the simulations is -0.63 per cent which the Monash Paper claims is reasonable given the estimates of Debelle and Vickery57 who found an elasticity of -0.5 per cent.58

[207] In the second simulation (referred to as S2) the authors calculate the effects on the economy of granting an across-the-board award wage increase of $26.60 a week compared with granting a CPI increase to all award wage earners. The results for this simulation are to a large extent a scaled down version of the results in S1. The employment reduction in S2 is 35 000 jobs rather than 74 000.

[208] MONASH assumes that real increases in award wages induce employers to substitute towards workers who are not award-reliant and workers to substitute away from non-award activities. In other words, there is an increase in demand for workers who are not award-reliant and a decrease in supply. Through the wage adjustment equation non-award wage rates rise. For example it is assumed that if award wages for manufacturing tradespersons rise relative to non-award wages for manufacturing tradespersons, then employers will substitute strongly (elasticity of substitution of 2) in favour of workers who are not award-reliant.

[209] As the authors concede, economic modelling is not an exact science and the use of different parameter estimates can change the results significantly.59 If a lower substitution elasticity is used (0.5 as opposed to 2) the negative effect on employment in simulation S1 is reduced from 74 000 jobs to 51 000 jobs.

[210] Implicit in the substitution assumption is the proposition that higher paid workers who are not award-reliant are more productive than lower paid award-reliant workers. The substitution of award-reliant workers for workers who are not award-reliant results in lower employment, as fewer of the workers who are not award-reliant are required (because such workers are more productive). It is contended that consistent with economic theory, employers have paid the value of the marginal product, hence as they have paid a higher price for labour that is not award-reliant it is reasonable to assume that such labour was more productive.60

[211] Whether substitution occurs, and if so the extent of the substitution, are issues on which reasonable minds might differ. We refer to some of the matters which make these issues controversial. First, we question the implication that workers who are not award-reliant are, per se, more productive than award-reliant workers. There are many reasons why employers enter into non-award arrangements. For example, wage stability and bargaining pressure to name just two. No doubt in some instances employers pursue bargaining at the enterprise level in order to increase productivity, but in others different considerations would operate, a point with which Associate Professor Madden agreed.61 Nor is it clear how such a substitution would take place as a matter of practice.62 It is simply assumed that it does take place.63 True it is that parties at an enterprise level may enter into a certified agreement or an AWA and as a result the employees concerned shift from award to non-award coverage. But the proposition that safety net increases give employers an incentive to pursue such a shift is by no means an obvious one. Furthermore the proposition runs counter to one of the main themes advanced by the employers and the Commonwealth, namely that large safety net adjustments reduce the incentive to bargain.64

[212] It may also be significant that there is no evidence that the shift from award to agreement coverage has been accompanied by a decline in employment. Finally, there is apparently no econometric basis for the elasticity of 2, which was chosen on the basis that it resulted in a level of flow-on which was expected.65 We now turn to consider the flow-on assumption.

[213] In S1, the $26.60 per week increase in award wage rates results in an increase in real wages of 1.22 per cent overall. This is the weighted average of the real increase in average award wages and a real increase of the induced 0.85 per cent in non-award wages. The latter figure is attributable to the flow-on of the safety net adjustment to 30 per cent of employees who are not award-reliant in the first 12 months after the increase came into effect.66 Associate Professor Madden said that he regarded the assumed level of flow-on as reasonable on the basis of the Minimum Wages Report.67

[214] There is reason to doubt the 30 per cent flow-on assumption. It relies heavily on the Minimum Wages Report, which we have expressed reservations about. No independent justification for the figure was advanced. Award and Agreement Coverage Survey 1999 (AACS) data for June 1999 showed that only 3 per cent of employees in the labour force received agreement or overaward payments also benefited from safety net adjustments. In the May 2004 decision, the Commission said:

[215] We see no reason to depart from the above conclusion. The flow-on assumption is an important one because the results of the simulation are quite sensitive to changes in the extent of flow-on. If the flow-on estimate is reduced to 6 per cent then the employment loss under S1 falls from 74 000 to 30 000.69

[216] Three further points about the Monash Paper should be noted. The first point is that even a safety net adjustment of the magnitude of $26.60 may not be inconsistent with employment growth. As the authors say:

[217] The second point to note is that the authors did not perform any historical analysis of safety net review decisions to test the assumptions they have adopted. When asked about this, Associate Professor Madden said:

[218] It may be that back testing of this kind is not feasible. Nevertheless this seems to us to be an area worthy of exploration. If historical testing were possible, it is likely that it could add significantly to our knowledge of the economic effects of safety net adjustments, particularly the employment effects.

[219] Finally, the safety net adjustment we have decided to award is significantly less than the increase modelled in the Monash Paper.

[220] While the simulations undertaken may provide some guidance as to the direction of effects from an increase in award wage rates, for the reasons given, little weight should be attached to the specific magnitude of the effects reported. As the Commission has noted in the past, models such as those utilised in the Monash Paper are the product of technical specifications, which are open to debate and involve a wide range of inputs and the application of judgment. Nevertheless we encourage further research into this important area.

5.4 The IMF and OECD Reports

[221] In preliminary proceedings the Commission raised with the parties the comment made in the May 2003 decision and reiterated in the May 2004 decision that we would be assisted in our deliberations on the employment effect of safety net adjustments by high-quality research into those effects. We drew the parties' attention to a recent international report by the IMF and invited them to provide any empirical data supporting one of the propositions in the report. That proposition was that the role of the award system, in setting the minimum wage, has contributed to a relatively high unemployment rate for low-skilled workers in Australia. The Commission also referred the parties to the OECD Employment Outlook 2004 and observations made in it concerning the employment effects of downward award flexibility where, because of the interaction between the tax system and income tested benefits, the returns to working become very low.

[222] The Commonwealth referred to a number of recommendations from major international bodies for reform of minimum wage-setting in Australia to improve labour market outcomes for low-skilled workers and the unemployed, including reports of the IMF and the OECD.

[223] The IMF in its Staff Report on Australia for the 2004 Article IV Consultation stated there is scope to enhance flexibility in the workplace in Australia. In a section on structural policies, the IMF report noted there needs to be "a diminished role of the award system in setting the minimum wage, which has contributed to a relatively high unemployment rate for low-skilled workers".72

[224] The OECD in its Employment Outlook for 2004 stated "safety net awards continue to restrict employer discretion at the bottom of the wage scale".73 The OECD asked "whether the current minimum safety net approach-where minima are not only set for low-paid workers, but there is a whole ladder of minima, including for higher-paid employees-should not be replaced by a minimum wage".74

[225] The OECD in its Economic Survey of Australia for 2004, commented that one of the remaining problems in industrial relations is that "safety net awards are arguably too high", with the high minimum wage by international standards limiting the employment prospects of the low skilled.75 The OECD encourages further reform of the safety net so that it takes "into account the employability of low-skilled workers".76

[226] The ACTU submitted that no evidence is provided in the IMF's work and its so called findings are of no assistance to the Commission. It asked us to disregard the OECD report because it relied on the Leigh study and the Minimum Wages Report, both of which the Commission criticised in detail in the May 2004 decision.

[227] The States and Territories noted that the IMF and OECD reports share similar methodologies and conclusions. Neither the OECD country review, nor the IMF report, was derived from original empirical research into the relationships between awards, minimum wages and employment. The sources cited by the OECD country review for its claims are the studies by Harding and Leigh which are said to be methodologically flawed.77

[228] The States and Territories pointed out that the OECD's Employment Outlook report notes there is no unanimity amongst economists in identifying the appropriate benchmark for a relative wage structure i.e. what level of wage dispersion is optimal. Consequently the Employment Outlook report concludes:

[229] In response the Commonwealth noted that in the same paragraph of the Employment Outlook the OECD reports that there is evidence "of a trade-off between wage compression and aggregate employment performance . . .".79

[230] The States and Territories drew our attention to the observation in the Employment Outlook that micro-level studies have generally failed to validate theories about the employment-displacing effects of minimum wage increases:

[231] The Commonwealth pointed out that the OECD went on to state that a more recent cross-country study by Puhani81 indicates that wage compression excludes low-skilled workers from employment. Most recently the OECD in its Going for Growth report recommended that changes "to award wages should take better account of the employability of award-wages earners."82

[232] We also note that in its submission to the Irish National Minimum Wage Commission, the OECD said that "whether dis-employment effects are important or not depends on the level of the minimum wage".83 In the same submission the OECD said:

[233] Four broad points may be made about the IMF and OECD material.

[234] First, while the parties have highlighted the particular parts of these reports which support the position for which they contend it is apparent from reading the reports as a whole that any conclusions are often heavily qualified. This point is illustrated by the following extracts:

[235] The second point is that the OECD apparently relied, in part, on the Leigh paper and the Minimum Wages Report to support some of its observations. In relation to the Minimum Wages Report the Commonwealth submitted that the methodological concerns identified by the Commission in its May 2004 decision did not warrant total dismissal of its findings.

[236] Similarly, AiG submitted that it is appropriate that we rely on the OECD report as evidence of the link between higher minimum award wages and fewer employment opportunities. It supported the OECD's use of the Minimum Wages Report and the Leigh paper and submitted:

[237] AiG did not put forward any reason why the Commission should now take the studies into account. The Commission has acknowledged the potential for safety net adjustments to have negative employment effects in industries in which award reliance is high. While the Leigh Report and the Minimum Wages Report advance the state of knowledge of the nature of those effects and the conditions under which they might occur, for reasons we have given now on a number of occasions, the precise findings are not reliable. With respect to those who submit to the contrary, any other conclusion would constitute an abandonment of proper standards of decision-making.

[238] Thirdly, the OECD's Economic Survey of Australia (February 2005) records that unemployment is at its lowest level in about 28 years and close to the OECD estimate of the non-accelerating inflation rate of unemployment. The survey also notes that Australia's unemployment rate has been below the OECD average since late 2001.

[239] Finally, in this context, we propose to address the Commonwealth's contention that the economic impact on employment of increasing the minimum wage is likely to be greater in Australia than that observed in international studies because as a proportion of median earnings the Australian minimum wage is the highest in the OECD. It was contended that a relatively high minimum wage means that the impact of increasing it is likely to be greater because a higher proportion of the workforce will be affected by the increase. This may have serious consequences for employment and inflation. It also emphasised that Australia is unique in having a series of minimum award wage rates up to at least $1014 per week. These represent successively higher floors to bargained wage outcomes and have increased over time through the Commission's decisions.

[240] The OECD's Economic Survey of Australia (February 2005) deals with this issue in the following terms:

[241] We have already commented on the OECD's reliance on the Leigh and Harding studies. We make two additional observations. The first is that we are not aware of any independent validation of the OECD data, although the thrust of them does not appear to be seriously in doubt. Further, OECD data produced by the Commonwealth indicate that for many years the level of the minimum wage relative to median earnings in Australia has been at or near the highest in the OECD. What is not so generally recognised is that in the period since the passage of the Act in 1996, median earnings have been increasing more quickly than the minimum wage in Australia and the gap between the two has been increasing in money and percentage terms. Data are available for the relationship between the minimum wage and AWOTE for full-time adults. The relationship has been in decline since 1996. Whatever the impact on the economy of a given increase in minimum wages in 2005 an increase of the same order would have had a greater effect in 1996. Hence, to the extent that the relationship between minimum wages and earnings is an issue, it is less significant than in past years.

[242] ACCI submitted that the effective minimum wage is much higher than the C14 classification level in the Metal Industries Award because few employees are engaged at that level on an ongoing basis. If the ACCI approach were adopted, the relationship between the minimum wage and median earnings would be even higher. In our view, the approach is fraught with difficulty. First, it is unsupported by cogent data about the size and duration of employment at C14. Secondly, it begs the question as to the basis for the minimum wage calculation in other OECD countries. Thirdly, even if the approach were adopted, in relative terms the pattern of reduction in recent years would not alter, indeed there would be a slightly larger reduction relative to median earnings.

[243] In relation to what the Commonwealth referred to as a series of minimum award wage rates, almost all award rates are arranged in a consistent hierarchy of 14 skill levels. This structure is a consequence of the rationalisation of award classifications which commenced in the late 1980s and the implementation of the award simplification process in the Transitional Provisions of the Workplace Relations and Other Legislation Amendment Act 1996 (WROLA Act).88 While the award structure has undergone compression since 1996 as a result of the form of safety net adjustments, that compression would have been much greater if the Commission had accepted proposals that adjustments be limited to the tradesperson (C10) classification level and below. It is also important to observe that while there has been some compression in the award structure, it is not clear that there has been compression in earnings in the economy generally. The reverse is likely to be the case.

[244] It is not necessary that we deal with the IMF and OECD Reports in any further detail. There are a number of reasons for this. First, none of them addresses the current statutory framework and the Commission's obligations under it. Secondly, to the extent that the recommendations are directed at policy makers, they are of limited relevance to the Commission's task. Thirdly, the recommendations consist mainly of generalised statements of policy unsupported by any specific research of an economic nature or otherwise. Subject to those qualifications, we accept that the views of international bodies such as the IMF and the OECD are always worthy of attention. On this occasion, however, we do not think they materially add to the substantive case put by the Commonwealth and the employers although they add some weight to that case.

5.5 The Yuen Paper

[245] The Commonwealth also submitted that a paper by Yuen on the experience of raising the minimum wage in Canada89 indicates that increases in the minimum wage will have an uneven impact on low-paid workers depending on their levels of productivity and will cause greater unemployment among teenagers and young workers who have low skill levels and low productivity. We agree that to the extent that increases in minimum wages do have negative employment effects, it is likely that the effects would be more severe for employees who are relatively less productive. Because of the significant differences between circumstances in Australia and those in which the study took place, we think the Yuen Paper is of limited relevance.

5.6 Gindling and Terrell

[246] ACCI relied upon a study into the effects of changes in multiple minimum wages in Costa Rica.90 ACCI acknowledged that there were differences between the Australian and Costa Rican systems of regulating wages but argued the findings from the study should be informative to the Commission's deliberations because of important similarities, namely:

[247] ACCI relied on the findings of the study that:

[248] The study was conducted during a period in which significant changes were made in the structure of minimum wages in Costa Rica and in which wages were varied for between 19 and 500 occupations/skill categories. Gindling and Terrell note that approximately one-fifth of the labour market in Costa Rica is not covered by minimum wage legislation. The study used cross-sector/time series data from annual household surveys conducted from 1988-2000. Gindling and Terrell assigned a specific minimum wage to over 350 different occupational/skill categories of workers in each year and estimated the wage, employment and hours worked effects separately for the covered and uncovered sectors. It was found that the legal minimum wages had a significant positive effect on the average wage of workers in the covered sector, but no significant effect on the average wage of workers in the uncovered sector.

[249] During the period under study, the government of Costa Rica implemented a policy of gradually reducing the number of minimum wages from over 500 categories, set by occupation, skill and industry in 1987 to 19 categories set by skill only, in 1997. Over a period of several years, one minimum wage emerged for each broadly defined skill/occupation, irrespective of industry.

[250] We find this study of limited use in our deliberations, for three reasons. First, Costa Rica is a developing economy with different political, economic and social environments to that experienced in Australia. Gindling and Terrell themselves state that "the complex structure of minimum wages in Costa Rica is not uncommon in Latin America . . . Hence, our methodology and results are relevant for many other Latin American countries".91

[251] Secondly, the pay setting policies in Costa Rica are distinguishable from those applying in Australia. For instance, in Costa Rica some 70 per cent of employees are covered by legislative minima and prior to 1997 the classifications were not skill based. In Australia we have a matrix of properly fixed minimum wages based on around 14 skill levels across awards. The rates in Costa Rica were varied twice a year and large increases in real wages were awarded. The result of the exercise was that from 1997 to 2000 the average real minimum wage increased by 23 per cent.

[252] Thirdly, the exercise of shifting employees to skill-based classifications was undertaken in an environment of high inflation.

5.7 The HILDA Data

[253] The States and Territories submitted that the Household, Income and Labour Market Dynamics in Australia (HILDA) data show that the proportion of minimum rates employees who become unemployed is about the same or lower than above-minimum rates employees across all industries, within the award-reliant sectors and low-skill occupations. It was contended that whether one looks at aggregate industry or occupational labour flows into or out of paid employment, there is no evidence to support the proposition that safety net increases have adverse employment effects for low-skilled employees or employees on minimum award rates. Consequently, it was submitted that labour flow data support the conclusions about the relationship between safety net increases and employment reached previously by the Commission and the OECD Employment Outlook report. The data do not support general claims to the contrary such as those made by the IMF.

[254] The States and Territories also relied on calculations by the National Centre for Social and Economic Modelling (NATSEM) in support of its argument. NATSEM found the increase in employment within the bottom income quintile moved in line with the national average:

[255] Unemployed household heads in the bottom income quintile moved primarily into part-time rather than full-time employment-consistent with other data showing a recomposition of low-wage, low-skilled jobs from full-time to part-time and casual employment-and there was a higher proportion of household heads not in the labour force (which NATSEM consider primarily reflects the large number of sole parents in the bottom income quintile). It was submitted that the fact that the increase in employment amongst the bottom income quintile has moved in step with higher income quintiles, supports the proposition that there is no evidence that safety net increases are discouraging the employment of the low-skilled.

[256] The Commonwealth made two points in respect of this analysis of the HILDA data. First, it submitted that the States and Territories' own analysis only serves to demonstrate the precarious position of the low paid in the labour market, as they have poorer labour market outcomes than workers who are not award-reliant. For example, Table 7.1 in the States and Territories submissions shows that 7.1 per cent of those earning the federal minimum wage in 2001 were not in the labour force in 2002, this is higher than the equivalent figure for workers who are not award reliant, which is 5.2 per cent.

[257] Secondly, the Commonwealth contended that the States and Territories analysis is seriously flawed. It submitted that the findings say nothing about award employment because the majority of the sample of supposed award-reliant employees earn $10.00 an hour or less, that is, less than the federal minimum wage. As the data refer to adults, those with an hourly rate below the federal minimum wage are unlikely to be award-reliant workers.

[258] ACCI pointed to a number of methodological limitations in the HILDA analysis including the absence of tests of statistical significance and the failure to acknowledge that most employees affected by the changes in award wage rates will not be on the federal minimum wage.

[259] The States and Territories acknowledged that there is no measure of award or industrial instrument coverage in the HILDA data. It was also conceded that it is possible that the broad definition used to estimate the level of low-paid employees encompasses more than just award-reliant employees. With respect to those employees being paid less than the federal minimum wage, the States and Territories asserted that it is reasonable to assume that the working of unpaid overtime and non-compliance would have the effect of lowering the hourly wage for some award-reliant workers. No evidence was offered to support these contentions.

[260] The States and Territories acknowledged that taken as a whole, the HILDA data on labour flows do not of course definitively prove that safety net adjustments do not impact on employment. There are a multiplicity of influences on employment and it is logically possible that the gap between minimum wage and non-minimum wage employees entering or exiting employment reflects other factors.

[261] In view of the limitations in the HILDA data, we have placed little weight on the analysis of that data by the States and Territories.

5.8 Economic Performance of Award-Reliant Industries

[262] The ACTU contended that the economic performance of the most award-reliant sectors of industry has been strong and in some key respects exceeds the average for all industries. In particular it was argued that the data show that:

[263] ACCI submitted that the Commission should place no weight on the ACTU's submissions about the performance of award-reliant industries because there is very little that can conclusively be said about the performance of those industries. AiG contended that proportionally more award-reliant employees are employed by small businesses and they are paid less than award-reliant employees employed by larger businesses.

[264] We accept that businesses employing up to 100 employees employ a larger proportion of award-reliant employees than larger businesses. We have had regard to the impact on small business of the safety net adjustment we propose to award. Other than the questions of employment growth and productivity, we do not propose to deal with these contentions in detail. Similar submissions were advanced in the 2004 safety net review proceedings. In the May 2004 decision, we concluded that given the limitations in the data used by both the ACTU and the Commonwealth, the submissions made in relation to profit levels in the award-reliant sector are of little assistance. We have not been persuaded to alter our conclusion in that regard.

[265] The ACTU contended that previous safety net adjustments have not had a negative impact on employment at the microeconomic level. It relied on the following chart to support this view.93

Chart 12: Employment Growth-Most Award-Reliant and Least Award-Reliant Industries

[Source: ABS Cat. No. 6291.0.55.001.]

[266] Chart 12 compares employment growth between the three most award-reliant and the three least award-reliant industries from May 1996 using a common index base and including the all industries series.

[267] The ACTU contended that employment growth has continued in the award-reliant sectors. Employment growth in the retail industry was said to be consistent with the steady growth in all industries, whereas employment growth in health and community services and accommodation, cafes and restaurants were said to be well in excess of the all industries series.

[268] In reply, the Commonwealth submitted that it is readily apparent from Chart 12 that employment growth in the three most award-reliant industries has been far from uniform since the first safety net review. The Commonwealth plotted safety net adjustments against the aggregate change in employee hours over the 12 months following the adjustment for the three most award-reliant industries. On the basis of this material, it was argued that there is a strong negative relationship between employment growth and the size of safety net adjustments since 1997 in these three industries.

Chart 13: Annual Change in Employee Hours Worked in the Three Most Award-Reliant Industries, by Safety Net Adjustment at the Federal Minimum Wage Level

[Source: ABS Supertables, Table E06.]

[269] Referring to the chart above, the Commonwealth said that the impact of safety net adjustments on award employment growth is likely to be even more marked than shown, as award-reliant workers account for only 35.1 per cent of all employees in these industries.

[270] The Commonwealth also submitted that the ACTU's analysis fails to take into account the changes in employment for award-reliant and agreement-based workers within an industry sector.

[271] The Commonwealth also provided a chart showing the change in employment levels for workers on agreements and awards by industry from May 2000 to May 2004. Award employment fell in seven of the 16 industries, with a net decline of 94 000 jobs. Non-award employment increased in all but four industries with a net increase of 820 000 jobs. The chart is reproduced below:

Chart 14: Change in Numbers Employed under Agreements and Awards by Industry

May 2000-May 2004

[Source: ABS Cat. Nos 6306.0 and 6305.0.55.001.]

[272] In the three most award-reliant industries combined-accommodation, cafes and restaurants, retail trade, and health and community services-workers covered by agreements accounted for all of the employment growth over the period.

[273] The Commonwealth submitted that most new employees are engaged under agreements, not awards. It argued that the majority of employment growth is occurring in the agreement-covered sectors of the economy and that excessive increases in the safety net of award wages have acted to discourage employment growth in the award stream. In our view, while the data are consistent with these contentions, they are also consistent with a shift from award to agreement coverage among existing employees. In addition, they provide a strong indication that in the award-reliant industries the proportion of the workforce who are award-reliant is in decline, despite the safety net adjustments since 1996.

[274] We do not propose to place much weight on the ACTU's material relating to employment growth in award-reliant industries. A range of factors affect the rate of employment growth in an industry sector including productivity, changes in consumer preferences and industry output. It may be too simplistic to conclude that because employment growth in the award-reliant industries is consistent with total employment growth, previous safety net adjustments have had no impact on employment.

[275] We do not propose to place any weight on the Commonwealth's submission based on the data in Chart 14 above. The analysis undertaken by the Commonwealth relies on only a small number of observations. In the May 2004 decision, the Commission referred to the evidence of Professor Mitchell in which he raised a number of limitations in the methodology applied in regression analyses undertaken by the Commonwealth in those proceedings. The limitations identified by Professor Mitchell included:

[276] It seems to us that at least the first two limitations identified apply with equal force to the Commonwealth's analyses in these proceedings. Given the technical limitations of the exercise, the material does not allow us to reach any conclusions as to the impact of safety net adjustments on employee hours worked in the three most award-reliant industries.

[277] As to the Commonwealth's proposition that most new employees are engaged under agreements, not awards, this could be so. It could also be the case that award-reliant employees are increasingly being covered by agreements. Such a conclusion would be consistent with the decline in the proportion of employees covered by awards. It would follow that increases in the safety net are not inhibiting the movement away from award coverage to agreement coverage.

[278] Based on the material before us, we are not persuaded that there is any necessary association between award coverage, safety net adjustments and employment growth.

5.9 Conclusion on the Effects of Safety Net Adjustments

[279] The material to which we have been referred does not undermine the conclusion expressed by the Commission in the May 2003 decision that there is a continuing controversy amongst academics and researchers about the employment effects of minimum wage improvements.95 There is nothing before the Commission to indicate that the controversy has been resolved. Substantial safety net adjustments may have some negative effects on employment in those sectors of the economy in which a high proportion of the workers are award-reliant.

[280] The material brought to the Commission's attention does not establish an empirical basis for affording greater importance to concerns about employment effects than to other considerations to which we must have regard. Having considered the material, our assessment is that, under current economic conditions, the adjustment we have decided on of itself, will do little or nothing to diminish job prospects.

6. SAFETY NET ADJUSTMENTS AND BARGAINING

6.1 The Parties' Submissions

[281] A number of the submissions addressed the impact of safety net adjustments on bargaining. Several of the employer groups and the Commonwealth submitted that to grant the ACTU's claim would be a disincentive to the further development of enterprise bargaining. In the Commonwealth's view, the more recent safety net adjustment decisions of the Commission have not given full effect to the objects of the Act. It submitted the ACTU's approach is negative because it looks at the command in s.3(a) of the Act, for example, as requiring the Commission not to detract from growth or not to discourage employment. The Commonwealth's approach is positive because it requires the Commission to act in a way which encourages the pursuit of high employment.

[282] The Commonwealth also contended that the objects of Part VI of the Act require the Commission, when varying awards, to exercise its power in a way that encourages the making of agreements between employers and employees at the workplace. It argued that it would not be consistent with the Act for the Commission to adopt the approach urged on it by the ACTU, namely to assume that agreements will continue to be made. In the Commonwealth's view, the Commission must be satisfied that the outcome will encourage bargaining and agreements. It cannot be assumed, as broadly asserted by the ACTU, that bargaining cannot be achieved for all employees who are affected by the minimum wage.

[283] The Commonwealth conceded that there is a balancing element in carrying out the Commission's function under s.88B(2), but argued that a positive weighting must be given to the particular matters because the objects of the Act impose themselves on that exercise. It submitted that the ACTU's submissions do not provide any evidentiary basis to permit a conclusion that the granting of its claim will further the objects of the Act.

[284] The Commonwealth makes a number of points with respect to the assessment to be made by the Commission as to whether granting the ACTU's claim would encourage agreement-making:

[285] Contrary to the submissions advanced on behalf of the Commonwealth, the States and Territories contended that there is no evidence to sustain assertions that safety net adjustments act as a disincentive to enterprise bargaining. The ACTU generally supported these submissions. The States and Territories made three points in this regard.

[286] First, the proportion of employees covered by enterprise agreements has continued to grow in spite of safety net adjustments. Recent ABS data on methods of setting pay has illustrated a consistent decline in the proportion of employees on minimum award rates. These data are in Table 13. The States and Territories submitted that there is no evidence from trends in methods of pay-setting that safety net adjustments are preventing or discouraging agreement-making.

Table 13: Methods of Setting Pay in Award-Reliant Industries

 

Accommodation, Cafes & Restaurants

Retail Trade

Health & Community Services

Total

 

%

%

%

%

2000

64.7

34.9

37.4

23.2

2002

61.2

34.2

30.3

20.5

2004

60.1

31.0

26.6

20.0

[Source: 2000 & 2002, ABS Cat. No. 6306; 2004, ABS Cat. No. 6305.0.55.001.]

[287] Secondly, it was submitted that the gap between award rates and rates in certified agreements, taken with the demographic characteristics of the minimum rates workforce, indicates that award-reliant employees rely on safety net adjustments for wage increases because they lack the bargaining power or capacity to negotiate agreements. Proponents of the argument that minimum wage increases are a disincentive to bargaining are effectively asking the Commission to accept the proposition that employees choose to be paid the lowest rate possible.

[288] Across all industries, employees under certified agreements were paid on average $335.50 more a week than employees on award rates. In the three award-reliant industries, certified agreement rates exceeded award rates in health and community services and retail trade but were inferior in accommodation, cafes and restaurants.

[289] The gap between pay rates under awards and certified agreements provides sufficient incentive for employees to negotiate an agreement. There is no evidence in safety net review proceedings of employees on award rates resisting offers from their employers to negotiate an agreement.

[290] The characteristics of the minimum rates workforce reinforce the point that award-reliant employees lack the capacity or bargaining power to negotiate an enterprise agreement. Data from wave 1 of HILDA illustrate that in 2001 employees earning the minimum wage or less were disproportionately likely to be female, from a non-English speaking background, live in a regional area and/or work in a low-skilled occupation.

[291] Thirdly, the persistence of award-reliant employees (and employees who are not covered by a certified agreement) typically reflects the preferences of employers, especially small business owners, who prefer their employees to be covered either by common law employment contracts or awards. Small businesses, which have a very low propensity to negotiate enterprise agreements, are growing faster than large or middle-sized businesses. To the extent that safety net adjustments increase the cost of employing labour on award rates, it might be argued that far from creating a disincentive for agreement-making, safety net increases give employers an incentive to bargain.

[292] The making of certified agreements is highly concentrated amongst large and medium-sized businesses and extremely low amongst small businesses. The table below presents ABS data on the proportion of employees under different instruments of employment regulation by business size.

Table 14: Proportion of Employees by Employer Size-2002

 

Awards Only

Collective Agreements

Individual Agreements

< 20

26.1

4.2

69.6

20-49

32.4

13.9

53.7

50-99

27.2

27.9

43.0

100-499

22.2

42.8

35.0

500-999

19.8

52.3

27.9

1000+

5.2

84.8

9.9

Total

20.5

38.2

41.3

[Source: ABS Cat. No. 6306.]

[293] The data show that just 4 per cent of employees of small businesses were covered by a certified agreement in 2002. The majority of employees of small businesses were employed under common law contracts of employment. Around one-quarter of employees of small businesses were award-reliant.

[294] The States and Territories reiterated submissions made in last year's proceedings regarding the reasons for the low incidence of agreements in the small business sector:

[295] In oral submissions on behalf of NMI, it was submitted that the high degree of award reliance in the motor industry is attributable to the high proportion of small businesses in the industry. It was submitted that many small business employers find it far simpler to make overaward payments rather than undertake the procedural requirements associated with entering into certified agreements or AWAs.

[296] Reliance was also placed by the States and Territories on previous surveys which have consistently found that management usually initiates bargaining and that small businesses express high levels of support for the award system. In this context, it was submitted that it might well be concluded that if safety net adjustments discourage enterprise bargaining, it is because they are too low to provide adequate incentive for employers to bargain.

[297] However, in reply the Commonwealth made the valid point that workplace bargaining refers not only to agreements between employers and employees that are formally certified but also to informal agreements. Further the Commonwealth submitted that, contrary to the contention of the States and Territories, the data in Table 14 show that businesses with less than 20 employees have a higher proportion of workers on workplace agreements than businesses with 20-49 employees and 50-99 employees. The Commonwealth rejected the proposition that there is no evidence from trends in methods of pay setting that safety net adjustments are preventing or discouraging agreement making. In this context it is said that the increase in private sector award coverage from 24.6 per cent in May 2002 to 24.9 per cent in May 2004 is of concern.

[298] ACCI also disputed the States and Territories' contention that safety net adjustments do not act as a disincentive to bargain. A number of points were advanced in this regard, including that:

[299] The primacy to be afforded to agreements at the workplace or enterprise level is referred to in the objects of the Act, particularly ss.3(b), (c) and (d)(i). Additionally, the award-making powers of the Commission in Part VI of the Act are to be exercised in accordance with the objects of that part of the Act which are in s.88A. Section 88A(d)(i) provides that:

[300] We are conscious that increases in the award safety net have the potential to influence the pace at which bargaining, either formal or informal, is taken up at the enterprise level. The material presented supports the conclusion that since 1997 the number of employees covered by agreements has shown relatively steady growth, though this may have plateaued somewhat in recent years. On the evidence presented, we do not think the adjustment provided for in this decision is likely to prejudice that growth.

[301] The Commonwealth's submissions give rise to some interesting questions about the relationship between safety net adjustments and bargaining. The Commonwealth submitted that in the award-reliant industries employment growth has been in the agreement area rather than the award area. For the three most award-reliant industries, between 2000 and 2004 the number of award workers reduced by about 73 000 and the number of agreement workers increased by around 240 000.97 This change associates safety net adjustments with the spread of bargaining. This is the reverse of the Commonwealth's proposition, that safety net adjustments above the level it proposes tend to remove the incentive to bargain. Based on the Commonwealth's figures, this does not appear to have happened so far.

[302] The Commonwealth also drew attention to the fact that in the last decade increases in the minimum wage through safety net adjustments have exceeded increases for the lowest quintile in federal agreements. It submitted that this constitutes a disincentive to bargain for many employees. It also relied on data showing that the differential between award and agreement wages is not all that large in some industries. To support its position the Commonwealth pointed out that in the private sector, award reliance has increased marginally over the two years to May 2004 and at that date was just under 25 per cent of the private sector workforce.

[303] There is a contrast between these submissions and the evidence given by Associate Professor Madden. He testified that the MONASH model was constructed on the hypothesis that increases in award rates lead to a substitution of non-award labour for award labour at a certain rate, apparently because non-award labour would be more productive than award labour. On that hypothesis, higher safety net adjustments lead to an increase in bargaining and a decrease in award reliance. While there appears to be some inconsistency in the Commonwealth's case, it is nevertheless likely that there is some truth in both theories. If award wages are high relative to non-award earnings, employees may have less incentive to bargain but employers may have more incentive to bargain to achieve productivity gains. Where award wages are low in relative terms the positions may well be reversed, with employees having an incentive to bargain and employers being less likely to seek to substitute non-award workers for award workers.

[304] The submissions directed at the impact of safety net adjustments on bargaining also raise a related issue, namely the relationship between workplace bargaining and productivity. The Commonwealth and ACCI submitted that there is a negative relationship between award reliance and productivity growth and a strong positive relationship between workplace bargaining and productivity growth. Both submitted that the Commission can facilitate further productivity growth by awarding a safety net increase that is moderate and capped and encourages the continued spread of workplace bargaining consistent with the objects of the Act. Both also noted that the debate about whether bargaining leads to productivity growth is of limited relevance as the Act requires that the Commission promote bargaining, regardless of whether or not such bargaining promotes productivity.

[305] The ACTU and the States and Territories submitted that there is no evidence before the Commission which establishes a negative link between productivity and award reliance. The ACTU submitted that its claim is economically responsible and that there is no evidence to suggest that previous safety net adjustments have had other than a negligible impact at the microeconomic level. The following table is said to summarise the economic impact on the three most award-reliant industries:

Table 15: Gross Operating Profits, Productivity and Output in Award-Reliant Industries and All Industries June 2003-June 2004

 

Gross Operating Profits

Productivity

Output

Retail trade

5.3

6.9

7.4

Accommodation, cafes & restaurants

-6.8

3.4

6.5

Health and community services

-

1.3

3.3

All industries

3.0

2.1

3.8

[Source: ABS Cat. Nos 5204.0; 5676.0 including unpublished data, 6291.0.55.001 and Metal Industries Award.]

[306] The ACTU also submitted that real labour costs continue to fall in the most award-reliant industries as the increase in productivity, in most cases, significantly outpaced the increase in real wages. The ACTU submitted that it does not attempt to demonstrate causality between award dependency and economic outcomes. It presented its data to show that award-reliant industries have been performing well when compared with the industry average and the real rate of growth of the minimum wage.

Table 16: Productivity Increases in Award-Reliant Industries June 1996-June 2004

 

Increase in Productivity

 

%

Retail trade

26.1

Accommodation, cafes and restaurants

19.3

Health and community services

21.0

[Source: ABS Cat. No. 5204.0.]

[307] The States and Territories also relied on comparative studies of labour productivity trends in Australia and New Zealand to challenge claims about the productivity benefits of eliminating awards. New Zealand abolished awards and the industrial tribunals through the Employment Contracts Act 1991.98 It was argued that a comparative analysis of labour productivity performance between Australia and New Zealand since the dismantling of the New Zealand award system illustrates the potential pitfalls of fully decentralised bargaining systems.

[308] ACCI conducted regression analyses to demonstrate that there is very little that can be concluded, one way or the other, about the performance of award-reliant industries-except that profits in these industries are lower in the short-term. It used econometric methodology by measuring R² or goodness of fit measure and the regression coefficient to show that award reliance is basically unrelated to:

[309] ACCI undertook what it described as a more careful analysis than that conducted by the ACTU of the relationship between productivity changes and award reliance by using total factor productivity or multi-factor productivity which controls for capital as an input. The periods measured were 2002-03 to 2003-04 and 1996-97 to 2003-04. ACCI's analysis showed no clear trend in either period.99 It also demonstrated that there is no trend evident when industry labour productivity is plotted against award reliance and regression carried out in either the short or the longer term.100

[310] ACCI also undertook an Analysis of Variance Test on all its regression analyses to ensure there was no bias in the results and concluded that none of the relationships is significant, although award reliance may have a negative relationship with employment.

[311] In response to the ACCI regression analyses, the ACTU tendered a paper by Professor Peter Brain of the National Institute of Economic and Industry Research in which Professor Brain asserted that:

[312] Professor Brain compiled two graphs which measure the percentage point change in wage share of industry value added and density of award-reliant workers in 2004 for the periods 1995-96 and 2003-04, respectively.

[313] Professor Brain found that from Chart 15 it can be concluded that all industries (other than the accommodation, cafes and restaurants industry) where the award reliance is 10 per cent or greater, have experienced either a fall in the wage share or there has been no significant change in the wage share. The rise in the share of wages in industry value added in the accommodation, cafes and restaurants industry was less than the fall in the wages share of industry value added between 1995-96 and the end of the 1990s (Chart 16). Moreover, the wages share of the accommodation, cafes and restaurants industry value added in 2003-04 is less than the long-term average for 1990-2004 of 67.6 per cent.

[314] Professor Brain stated that a market efficient outcome should be one of constant wage share in the context of a growing low inflation market efficient environment. He found that after appropriate weighting of the results, the overall change for the time period in Chart 15 is -0.4 percentage points and 0.06 percentage points for the Chart 16 time period. This suggests that the Commission has struck exactly the right balance between the two competing views.101 Professor Brain's views were not challenged.

[315] The ACTU made further criticisms of ACCI's regression analyses including:

[316] The Commonwealth challenged the ACTU's reliance on the three most award-reliant industries as poor proxies for examining the productivity of award-reliant workers because only 35.1 per cent of all employees in these three industries are award reliant. Only the accommodation, cafes and restaurants industry has an award-reliant workforce of more than 50 per cent. It submitted that productivity growth of award-reliant workers cannot be isolated from that of workers on agreements and that industries with relatively low levels of award reliance are more likely to have higher productivity growth as set out in the following chart:

Chart 17: Award-Reliance by Industry as at May 2004 and Labour Productivity Growth by Industry June 1990-June 2004

[Source: ABS Cat. No. 6305.0.55.001, Table 5; ABS AusStats, National Accounts Cat. No. 5204.025.]

[317] The ACTU also noted that the Agreements Database And Monitor (ADAM) Report shows a similar story for increases linked to key performance indicators, individual performance appraisal or performance. The data show a steady decline in the incidence of these productivity provisions within agreements since the commencement of data collection in 1994.103

Table 17: Performance-Related Pay Provision in Federal and State Collective Agreements-Increase Linked to Productivity Improvements

Survey Year

Incidence

s

 

%

%

1994

19.6

0

1997

12.0

-38.8

2000

2.7

-77.5

2003

0.8

-70.4

[Source: ACIRRT ADAM Report 42 September 2004 Table 2.]

[318] The States and Territories also relied on the paper by Mitchell and Fetter which concluded from a study of two batches of AWAs supplied by the Office of the Employment Advocate, that the overwhelming proportion were focused on short-term cost-cutting rather than productivity enhancement:

[319] The Commonwealth submitted that there is a large volume of material, much of which is uncontested, to support the proposition that workplace bargaining encourages productivity growth following the widespread adoption of workplace bargaining in the early 1990s. It relied on research by the Productivity Commission into the stevedoring, black coal mining and meat processing industries which found that inefficient work practices often reflected perverse incentives built into awards. The Commonwealth asked the Commission to disregard the ACTU's criticism that much of the material related to a period prior to the commencement of the Act because the relevant period is the adoption of workplace bargaining since the early 1990s.

[320] The Commonwealth relied also, in particular, on the paper of Connolly, Herd, Chowdhury and Kompo-Harms.105 It found a positive relationship between workplace agreements and labour productivity for the Australian economy. The ACTU submitted that it does not endorse or seek to criticise the findings of Connolly et al. The ACTU did not challenge the contention that enterprise bargaining can result in changes at the workplace that improve productivity.

6.2 Conclusion on Safety Net Adjustments and Bargaining

[321] There is general acceptance of the fact that Australia's productivity has increased significantly since the early 1990s. However, the parties are not in agreement over the extent to which the shift to widespread enterprise bargaining has generated productivity growth or the extent to which award reliance inhibits productivity growth.

[322] Clearly the move to enterprise bargaining has contributed to productivity growth but it is not the sole factor given the extent of structural change and microeconomic reform since the early 1990s. The contribution of enterprise bargaining outcomes to productivity growth will vary between industries and workplaces. In this context we note the comments of Professor Wooden that the available evidence from workplace and enterprise-level studies does not enable any strong conclusions to be reached about possible links between enterprise bargaining and productivity.106

[323] We also note that in the proceedings before the Commission there was no criticism of the work of Connolly et al which presents estimates of a set of econometric equations for labour productivity which are based on an aggregate production function. The authors found that labour productivity in Australia responded positively in the long-term to enterprise and individual agreements. The paper also found that labour productivity was estimated to respond significantly and positively to an expanded measure of non-financial capital stocks (including intangible and research and development fixed assets), the share of information communication technology and research and development fixed assets in the non financial capital stock and the share of skilled workers in total employment. Financial capital and financial conditions were estimated to be important determinants of labour productivity in Australia.

[324] The findings confirm the view that in Australia labour productivity has increased throughout the 1990s for a variety of reasons, one of which is the move to enterprise bargaining. They also demonstrate that it is simplistic to conclude that a correlation between an increase in labour productivity and enterprise bargaining is evidence of causality:

[325] We are cautious about the ADAM data, particularly the data for 2003, but reach a tentative view that there is some emerging evidence of bargaining fatigue with respect both to enterprise collective bargaining and AWAs. Moreover, Connolly et al refer to the possibility that the labour productivity response to federal enterprise agreements and AWAs in future may not be as strong as it has been.108

[326] We agree with the Commonwealth that it is not possible to measure the differences between the award-reliant components and the enterprise agreement components of a particular industry. We also accept that whilst productivity has grown in award-reliant industries, this has been associated with a reduction in award reliance in each of these industries between 2000 and 2004.

[327] There is no cogent evidence before us that award coverage per se inhibits productivity growth. The increase in productivity in the award-reliant sectors relied on by the ACTU and welcomed by the Commonwealth tells us nothing about causation. Nor is there any measure of the extent to which productivity has increased as a result of the shift to enterprise bargaining.

[328] This view is reinforced in the Commonwealth's publication, Agreement Making in Australia Under the Workplace Relations Act-2002 and 2003, in which the observation is made:

[329] We note the reliance by the Commonwealth on Productivity Commission reports as evidence that enterprise bargaining is related to higher productivity because of restrictive award provisions. However, the reports relied upon are dated 1998 and do not comprehend the effect of the award simplification process which was conducted under the WROLA Act and which commenced in 1998. For example, in the coal industry awards retrenchment is no longer based on retrenchment lists and seniority-based recruitment, and the tally system in the meat industry is not an allowable matter (s.89A(2)(d) of the Act). The reports, however, are consistent with the proposition that enterprise bargaining can improve productivity. They also demonstrate that a range of factors outside of the award provisions impact on the efficiency of an industry.

[330] In determining the appropriate safety net adjustment to be granted, we are satisfied that we have not exercised our award variation powers in a way which fails to encourage enterprise bargaining. We agree with the States and Territories that the claim by the Commonwealth that safety net adjustments discourage productivity pivots on assertions that such adjustments act as a disincentive to bargaining. If safety net adjustments do not discourage bargaining, there is really no case to be answered in relation to productivity. We see no sound basis to depart from the conclusion in the May 2004 decision that "There is no necessary association between award coverage, safety net adjustments and productivity growth".110

7. THE NEEDS OF THE LOW PAID

[331] The needs of the low paid and living standards generally prevailing in the Australian community are among a range of prescribed considerations to which the Commission must have regard. It ought now be regarded as well established that the expression "low paid" in s.88B(2)(c) refers to the low paid in employment and does not extend to include the low paid who are not employed;111 though the Commission is also required (by s.88B(2)(b)) to have regard to the desirability of obtaining a high level of employment.

[332] We agree with ACCI that there is no statutory pre-eminence accorded to the needs of the low paid in connection with the discharge of the Commission's functions pursuant to s.88B(2) of the Act. The Commission's primary obligation-indicated by the word "must"-is to "ensure that a safety net of fair minimum wages and conditions of employment is . . . maintained". In discharging that obligation the Commission has always had regard to each of the matters specified in ss.88B(2)(a), (b) and (c). The weight to be accorded to each of those matters will depend upon the evidence and the prevailing circumstances.

[333] The States and Territories argued that the low paid should be defined not only by absolute measures, but also by relative income measures (i.e. inequality), as required by s.88B(2)(a), which directs that the safety net be adjusted in the context of living standards generally prevailing in the Australian community. Further, NATSEM suggests that a relative benchmark for poverty definition is generally more appropriate, due to the diversity of consumer habits amongst Australians.112

[334] While acknowledging that defining a poverty line is an arbitrary exercise, the States and Territories submitted that it serves the purpose of illustrating that there are a large number of employees who live in poverty. Measuring income poverty and setting the poverty line at half of median income, in line with OECD countries, NATSEM has found that 10.7 per cent of wage and salary earners are beneath the poverty line.113

[335] The ACTU broadly concurred with this assessment and submitted that award-reliant employees have the following characteristics:

[336] The States and Territories rejected those submissions which questioned the effectiveness of safety net adjustments in meeting the needs of the low paid. In particular, they responded to the argument that safety net adjustments represent poor value for employers and employees as the tax-transfer system takes away much of the wage increase. They also refuted the related argument that the safety net adjustments are poorly targeted and benefit low wage-earners in middle and high-income households whereas the tax-transfer system is more effective and can target the truly needy.

[337] The States and Territories countered the criticism that safety net adjustments are an ineffective means of meeting the needs of the low paid by noting that recent adjustments have been highly effective in ameliorating the growth in earnings inequality, maintaining the living standards of the low paid and ensuring, at least in recent times, that low-paid employees have shared in wealth creation after missing out for most of the 1990s. It was submitted that the combined effect of minimum wage increases and government transfer payments have held the share of the low-paid constant.

[338] The States and Territories submitted that while real median earnings of the bottom three deciles for men declined between 1989 and 1997, the position was reversed between 1997 and 2001. In the case of women, trends were more varied between these three deciles but real median earnings generally grew between 1997 and 2001 after decline or stagnation between 1989 and 1997. Earnings amongst the bottom decile have stabilised in relation to median earnings though not in relation to earners in the top decile.

[339] To the extent that safety net increases have been denuded by the tax-transfer system, this is said to be a consequence of the Commonwealth Government's tax reforms. In this context the States and Territories noted that tax cuts announced in the 2004-05 Budget were limited to those earning $52 000 per annum or more. The Commonwealth chose to exclude the low paid from income tax relief and focus on family tax benefits. Consequently, low and middle-income singles and couples without children who earn less than $52 000 received no tax relief. NATSEM estimated, using ABS data, that 20.8 per cent of all single people and 18.4 per cent of single adults of prime working age (25-64 years) lived beneath the poverty line (defined as half of median income) in 2001.114 Low-paid singles are falling behind the rest of the community and would do so even further without safety net increases.

[340] The combined effect of government transfers and safety net adjustments have added up to modest real increases in average income for families in the bottom quintile. NATSEM researchers found the average real incomes of families in the bottom quintile increased by $87 between 1997-98 and 2004-05 whilst the median income for all families increased by $145. The increase for families in the bottom quintile was just sufficient for them to keep up with increases in median family income.

[341] In relation to the Commission's statutory obligation to consider the needs of the low paid, the Commonwealth submitted that the Commission should take into account the fact that many low-paid employees reside in middle and high-income households. The benefit of safety net adjustments for the low paid is muted by the fact that less than a quarter of low-paid employees are in the lowest quintile of household incomes. On the other hand, 42.8 per cent of low-paid employees were in households with above median gross household income. While HILDA data show that 19.8 per cent of employees aged 21 and over were low paid in 2003, analysis of the HILDA data and other research show there is considerable income and earnings upward mobility for low-paid workers. The ACTU's submissions based on Budget standards and NATSEM research overstate the impact of poverty because they ignore earnings and, it was submitted, income upward mobility.

[342] The Commonwealth went on to contend that while there are difficulties with the accuracy of the estimates, based on HILDA around 10 per cent of full-time workers receive less than the minimum wage and would therefore not benefit from safety net adjustments. The implication is that those workers are unlikely to be adult employees. The majority of the 4 per cent of full-time workers deemed by NATSEM to be in poverty are likely to be self-employed, non-award adult employees or junior employees.

[343] In our view the most significant results of the HILDA and NATSEM research are that:

[344] The ACTU did not dispute these findings, but argued that the significant figure is the proportion of those in poverty who are award-reliant. We find this difficult to accept. A finding that the proportion of full-time workers in poverty who are adult award employees is very small is to be welcomed. It may also be an indication that to a large extent past safety net adjustments have taken the needs of the low paid into account. Nevertheless it would be wrong to regard the proportion of low-paid employees who are in the bottom quintile of household income as insignificant.

[345] The Commonwealth submitted that the ACTU is wrong in claiming that the General Social Survey confirms the Budget standards. Financial stress is highly likely to be inversely related to income level, but income levels are not the only cause of stress. Large increases in award wages will increase the income of many affluent households but may do little to materially add to the future incomes of many low-paid workers who keep their jobs. Such increases will severely reduce the incomes of those who lose their jobs. ACCI submitted, on the other hand, that financial stress is not well predicted by income.

[346] The Commonwealth criticised the ACTU's reliance on Saunders,115 on the basis that the article is based on flawed ABS data. The findings are also dated (2000-01) but are consistent in some respects with the Commonwealth's position that the benefits from getting people into jobs far outweigh any benefits from large safety net adjustments, which cost jobs. Unemployment is a major cause of inequality.

[347] AiG made submissions directed at the interaction between wages, taxation and income support. Two broad lines of argument were advanced. First, it was submitted that the needs of the low paid are better addressed through the broader social safety net than through adjustments in minimum wages. Two points are made in this regard:

[348] Secondly, AiG submitted that in contemplating adjustments to wages in 2005 the relevant consideration is how income support entitlements and income tax liabilities have changed since the May 2004 decision. Low-income households with dependant children have benefited substantially from recent changes in the social safety net. With respect to low-income households without dependant children, AiG argued that the 50 per cent increase in the superannuation co-contribution payment has been an important addition to the Australian social safety net. AiG relied on what it said were changes in income taxation and income support arrangements in the 2005-06 Budget:

[349] AiG proposed that the Commission take these changes into account and discount the safety net adjustment it would otherwise grant. It was submitted that an increase in minimum wages of $11 per week would be an appropriate increase after the changes in the social safety net are taken into account.

[350] ACCI contended in its post-Budget submission that the tax cuts provide further support for a more moderate level of wage increase in 2005 than in recent years. The ACTU submitted that there is no statutory directive to discount wages for social wage factors but acknowledged that increases in the real value of income support system payments have an impact on the disposable income of low-paid employees (albeit only those eligible to receive such payments). The ACTU contended that safety net adjustments and transfer payments are complementary, not substitutes.

[351] ACCER disagreed with this part of the ACTU's submission. It submitted that the Act requires the Commission to take into account the needs of the low paid. If workers needs are partly met by transfer payments to which they are entitled, then their needs are met to that extent. In principle, there is no difference between the treatment of transfer payments and the treatment of taxation. The taxation that workers are bound to pay should also be taken into account when fixing rates of pay, i.e. the Commission should have regard to the after-tax position of the worker. ACCER contended that consistency requires that the Commission take the transfer payments into account.

[352] We agree with ACCER. As a matter of logic if the tax transfer system is enhanced to the benefit of low-paid employees then it assists in meeting their needs. It would follow that such enhancements would be a factor to which we would have regard when considering the needs of the low paid pursuant to s.88B(2)(c). The converse also applies. If the tax transfer system operated to reduce the disposable income of low-paid employees then their needs would be greater.

[353] We also acknowledge that some of the changes to the income tax and tax transfer system identified by AiG have had a beneficial impact on the disposable income of some low-paid employees. We have taken these changes into account in deciding the amount of the safety net adjustment. In doing so we note that neither the employer parties nor the Commonwealth revised their preferred outcome to the case i.e. $10 and $11 respectively, in their post-Budget submission. Consistent with AiG's submission we have not taken a mechanistic approach to this issue. Rather, the social safety net changes have formed part of the broad exercise of judgment we have undertaken to determine the quantum of the safety net adjustment. In this regard a number of points may be made about the changes upon which AiG relied.

[354] The first is that the social safety net changes identified have overwhelmingly benefited families with dependant children, as opposed to families without dependant children. Moreover, some of the changes relied on simply represent the indexation of existing benefits. While indexation maintains the real value of an existing benefit, in a practical sense it does not mean that the recipient is better off as the price of expenditure has increased by the same amount.

[355] We acknowledge that family support payments provide a significant source of income for low-income households. The proportion of total family income derived from such payments has increased. In a paper titled The Case for Increased Taxation, Dr Michael Keating notes:

[356] It is generally acknowledged that these Budget measures assist award wage earner households with dependant children who are eligible for and are claiming Family Tax Benefit.

[357] The second point we wish to make relates to AiG's reliance on the 50 per cent increase in the superannuation co-contribution payment. We have not placed much weight on this change for the following reasons:

[358] In relation to the last point, it is relevant to note that while low income is a requirement of participation that is not necessarily the same as being low paid. Rather it may be a function of the number of hours worked. Further it seems more likely that low-income employees living in high-income households have benefited from participation in the scheme, as opposed to low-paid employees in low-income households.

[359] As we have observed in past decisions, it is generally acknowledged that many low-paid employees experience difficulties in making ends meet and are unable to afford what are regarded as necessities by the broader Australian community. Many live week-to-week and struggle to make ends meet. It is inherently unlikely that employees in such circumstances are in a position to take advantage of the superannuation co-contribution arrangements.

[360] The next point we wish to make relates to the changes in taxation rates and thresholds announced in the 2005-06 federal Budget. For low-paid employees these changes increase disposable income by $6 per week.

[361] In its submission ACCER contended that the effect of bracket creep has been such that a tax cut of $8.45 per week would be required to put a federal minimum wage employee on the same average taxation rate that they were on in July 2000. The Commonwealth did not challenge this contention in its reply submission.

[362] Finally, it is not only the enhancements in the social safety net to which we have had regard. Changes which impact negatively on low-paid employees are relevant in considering the needs of the low paid. The recent changes in the Medicare safety net and the changes to the Pharmaceutical Benefits Scheme announced in the Budget are relevant in this regard.

[363] Another aspect of the debate concerning the needs of the low paid is the Commonwealth's contention that for a large number of Australians low-paid jobs are stepping stones to higher paid employment. On this basis it was argued that safety net adjustments should be set at a moderate and responsible level that does not cause major employment loss or inhibit growth of new low-paid jobs.

[364] We deal elsewhere with the employment effects of safety net adjustments. In relation to the stepping stones argument, the Commonwealth relied on the HILDA survey results for 2001, 2002 and 2003. Based on HILDA data, 19.8 per cent of employees aged 21 and over were low paid in 2003. However, the data show that a proportion of low-paid employees move to higher paying jobs over time:

[365] It should be noted that the Yuen paper117 which was also relied on in this context does not provide unqualified support for the Commonwealth's contentions. Yuen found that there is considerable heterogeneity within the group of individuals included in his sample. For transitory low-wage workers who have less than three-quarters of low-wage employment, the effects of the minimum wage are virtually zero. This contrasts with workers who have remained in low-wage employment for more than three-quarters who experienced a significant disemployment effect. We accept that for some employees low-paid employment is a short transitory state on the pathway to higher paid employment. But the HILDA data confirm that for a substantial proportion low-paid employment is an enduring reality.

[366] In our view the weight which should be given to this submission is questionable. It may be a matter of degrees. It is not clear that the increases in the award safety net in recent years have operated to discourage upward mobility of low-paid employees and the HILDA data tend to indicate that the opposite is the case. And while it is true there has been some compression in the award wage structure resulting from the safety net adjustments over the last 15 years, over that period growth in award wages generally has not kept pace with earnings growth. We accept, nevertheless, that all things being equal excessive increases in minimum award rates are likely to reduce the incentive for low-paid employees to progress. This is a factor to be taken into account in considering the adjustment to be awarded.

8. THE COST OF THE ACTU'S CLAIM

[367] The ACTU used the same methodology as in previous years to estimate the impact of its claim on aggregate wages growth.

[368] The Commonwealth did not attempt to estimate the aggregate impact of the claim. It relied upon its extensive critique of the costing methodology used by the ACTU, particularly in its submissions in the 2003 safety net review.118 It complained that the ACTU "persists in discussing the aggregate impact of the claim on a net rather than gross basis and continues to ignore costing the flow-on impact of the claim."119 The ACTU replied by noting that the Commonwealth last attempted to cost the ACTU's claim in 2003 using the Treasury Macroecnomic Model (TRYM) and produced what the ACTU described as the table of zeros. The ACTU nevertheless noted that results obtained by the Commonwealth using the TRYM model were not dissimilar to the result yielded by the ACTU's methodology.

[369] The States and Territories accepted the general reasoning adopted by the Commission in the May 2004 decision with respect to the cost of the ACTU's claim. The likelihood of significant flow-on is said to be minimal. In relation to the impact on gross and aggregate earnings, the States and Territories contended that the level of the claim and the settings within which it will be implemented are not much different from a year ago.

[370] ACCI mounted a substantial attack on the ACTU's costing. It submitted that the weightings in the ACTU's costing do not include overtime and led to the ACTU excluding overtime in the numerator but including it in the denominator. The ACTU appears to have accepted the validity of ACCI's criticism in this regard. It tendered a reworked costing of its claim assuming a 4.9 per cent overtime weighting for all full-time employees.120 That costing increases the ACTU's estimate of the addition to economy-wide earnings to 0.42 per cent with a maximum addition of 0.51 per cent with an estimated net impact of 0.12 per cent and a maximum net impact of 0.14 per cent.

[371] ACCI further submitted that the ACTU's costing was flawed because it:

[372] The ACTU conceded that its costing does not take account of the first two of these matters. There is substance in ACCI's submission that the omission of those two matters results in the ACTU underestimating the aggregate cost. The ACTU also conceded that its costing does not estimate the impact of its claim on growth, productivity and employment but noted, correctly, that these are matters which were debated elsewhere.

[373] A major part of ACCI's criticism proceeded on the assumption that what the ACTU is attempting to measure with its net costing is the difference between the likely increase in aggregate wage costs if no safety net adjustment were awarded and the likely increase in aggregate wage costs if its claim were allowed in full. We can well understand how some of the language used in the ACTU's submissions could lead to ACCI making this assumption. However, the net cost estimate given by the ACTU is in fact an estimate of the change in the contribution of the safety net adjustment (assuming its claim is allowed in full) to the rate at which aggregate wage costs increase when compared with that contribution in the previous year.

[374] ACCI presented its own calculation of the gross aggregate wage cost effect of the ACTU's claim for the private sector. Its calculation suggests a 0.78 per cent addition to private sector earnings assuming that 100 per cent of private sector award-reliant employees and 7 per cent of other private sector employees received the increase. A revised calculation put the figure at 0.88 per cent. ACCI also calculated the cost effect of a flat $10 increase to all awards using the same methodology yielding an addition to private sector earnings of 0.29 per cent.

[375] The ACTU submitted that there are four significant problems with ACCI's methodology. First, the ACTU noted that ACCI's costing is for the private sector only. Secondly, it submitted that ACCI's costing is gross and not net and is consequently an overestimate. Thirdly, ACCI assumes that 100 per cent of employees receive the safety net adjustment. The ACTU submitted that this assumption was untenable in light of the AACS data. Fourthly, the ACTU submitted that ACCI has incorrectly weighted its calculations to include flow-on costs because it has derived those weightings from an ACCI survey in 2003 which was shown to be flawed.

[376] ACCI defended limiting its costing to the private sector. It argued that the Commission should not look only at the largest aggregation of the economy and that it is proper to consider disaggregated costings as well. While this submission is correct, the fact remains that the two costings are not comparable. In its reply submission, the ACTU included a costing for the private sector only. It yielded an estimated increase in ordinary time earnings of 0.51 per cent with a maximum of 0.62 per cent.

[377] ACCI also defended providing only gross costings. It submitted that changes from one year to the next are not at issue, at issue is the cost of this year's increase.

[378] The ACTU's third criticism is problematic. The assumption by ACCI was not that 100 per cent of all employees receive the safety net adjustment. Rather it was an assumption that 100 per cent of private sector award-reliant employees receive the safety net adjustment. Given the definition used by the ABS, that assumption is not unreasonable. On the other hand, the ACTU pointed in its oral submissions to the AACS survey which suggests that not all award-reliant employees in fact receive safety net adjustments. This is particularly so in the public sector where the conversion of paid rates awards has resulted in safety net increases being absorbed against the residual wages amount.

[379] ACCI accepted that there are difficulties in attempting to quantify flow-on effects and that the estimate it used may not be the correct figure. It argued that the figure allows for a discussion and presentation of a more complete picture. In the May 2004 decision the Commission stated:

We adhere to those findings. There is no basis in the evidence to depart from them. However, while ACCI's assumption as to flow-on may be an overestimate, the fact remains that some flow-on is likely, even if limited, and the ACTU's costing is an underestimate to the extent that it takes no account of flow-on.

[380] The true gross impact of the ACTU's claim on aggregate wage costs is likely to be more than the amount yielded by the ACTU's costing and less than the amount estimated by ACCI for the private sector. It is difficult to be precise. The impact will be higher in the private sector than for the economy as a whole. The amount we have decided to award is substantially less than the amount claimed by the ACTU. Necessarily, the gross aggregate wage cost impact of the amount we have decided to award will be substantially smaller than if the ACTU's claim had been allowed in full.

9. OTHER ISSUES

9.1 The Award Environment

[381] The ACTU referred to a number of measures of wage movements. It submitted that those measures supported its claim. The measures included Average Weekly Total Earnings, Average Weekly Ordinary Time Earnings (AWOTE), Average Compensation per Non-Farm Employee (AENA) and the Wage Price Index (WPI). Reliance was also placed on data measuring the increases provided for in certified agreements (AAWI). Various increases were relied upon over a range of different periods. The following table gives an indication:

Table 18: Average Annual Wages Growth September 1997-September 2004

 

%

Average Weekly Ordinary Time Earnings

4.6

Average Compensation per Non-Farm Employee

3.4

Average Annualised Wage Increases

3.8

Wage Price Index

3.3

[Source: Exhibit ACTU 2 at para 4.38.]

[382] The ACTU also relied upon increases in the incomes of chief executive officers, managers and executives and drew the Commission's attention to increases in salaries for judicial officers, public executive officers and members of Parliament through determinations of the Remuneration Tribunal. It submitted that wages growth had moderated slightly over the last 12 months, although the WPI was slightly above its long-term average. It asked us to conclude that there is no evidence that the safety net adjustment provided for in the May 2004 decision or high employment levels have resulted in large aggregate wage movements in the general community and that there is no evidence of systemic wage pressure in the economy.

[383] The States and Territories submitted that little has changed in terms of underlying rates of wage growth. It argued that there is nothing in any of the various measures of wage growth to indicate a threat to macroeconomic balance and relied on the following table of wage movements. It submitted that the Labour Cost Index, which has subsumed the Wage Cost Index, is the preferred measure as it controls for compositional effects.

Table 19: Indicators of Annual Average Wage Movements-2004

Indicator

Data as reported in SNA 2004 Latest estimate of

Latest estimate of annual average wage increase for comparable period 12 months on

 

%

%

Average Weekly Earnings (ABS Cat. No. 6302.0)

6.1

3.33

Average Weekly Ordinary Time Earnings (ABS Cat. No. 6302.0)

5.7

3.23

Average Earnings National Accounts Basis (ABS Cat. No. 5206.0)

3.6

3.44

Wage Cost/Labour Price Index (ABS Cat. No. 6345.0)

3.6

3.55

ADAM

4.1

4.36

Workplace Agreements Data-base (federal agreements only)

    

Agreements registered in year to September

4.0

4.057

All current agreements

3.8

3.97

Consumer Price Index (RBA)

2.68

2.38

[Source: Exhibit S&T 1 at Table 6.1.]

[384] The Commonwealth rejected the ACTU's submission that there should be an appropriate nexus between average award movements and average movements in the WPI. It reiterated the position it has put in other safety net reviews that market rates and movements in earnings should not be the basis for safety net adjustments. In the alternative it submitted that if movements in market rates are to be taken into account, comparison should be limited to the WPI.

[385] In relation to these submissions we accept that the statutory concept of an award safety net requires that there be a separation between minimum rates and agreement rates and that bargained wage outcomes should not be transmitted through the award system. The Commission has also previously accepted, as the Commonwealth also pointed out, that the WPI is the most useful indicator for our purposes. Other measures, such as AWOTE and AAWI, are not adjusted for compositional change and, relevantly, do not take account of upward mobility in the workforce. On the other hand, these measures are not irrelevant. The rate of increase in income levels generally is something that should be taken into account, along with other matters, in deciding what adjustment is necessary to ensure that the safety net is maintained. In particular, growth in earnings measures can be a useful indicator of living standards generally prevailing. In one respect the differences between the ACTU and the Commonwealth are of reduced significance in this case because in the year to December 2004 earnings (as measured by AWOTE) and the WPI both increased by 3.6 per cent, although the WPI increased by only 3.3 per cent in the private sector. Over the long-term, however, the difference in growth rates is more pronounced.

[386] As noted earlier, the ACTU relied on measures of growth in earnings for executives and those covered by the income determinations of the Remuneration Tribunal. The Commonwealth submitted that such measures were not helpful. While that information is not entirely irrelevant generally speaking, and so far as growth in earnings is to be taken into account, more comprehensive measures of income growth are to be preferred.

9.2 DEAC and NCID

[387] It was submitted in writing that both DEAC and NCID supported the ACTU's claim. They further sought that all awards be varied to include the Supported Wage System model clause and all agreements to also include the model clause, all alternative pro rata wage adjustments to reflect no less than the supported wage, contain equivalent principles and safeguards, and pro rata award wage systems be the subject of review and order by the Full Bench of the Commission.

[388] DEAC and NCID further submitted that the Commission in determining applications for workplace agreements with congregate groups of workers with a disability should ensure that there is evidence of genuine understanding of the content and its effect on workers subject to the agreement.

[389] ACCI submitted that DEAC and NCID participation in this matter is unjustified and opposed to the extent that it is not directly and expressly relevant to the consideration before the Commission. In particular, ACCI submitted that DEAC has no proper interest in this matter as this case is about open and not sheltered employment and DEAC is pursing alternative relief. ACCI submitted that the only two matters relevant to these present proceedings raised by DEAC and NCID are their support for the ACTU's claim and their submissions on the supported wage.

[390] The Commonwealth in response submitted that DEAC and NCID raised a similar submission in 2004. The Commonwealth for its part acknowledged the concerns and noted that they are being addressed by the Disability Sector National Industry Consultative Council following the May 2003 decision.

[391] The Commonwealth also noted that the Commission is currently considering an application by the Liquor, Hospitality and Miscellaneous Union (LHMU) to increase wages for workers with disabilities covered by the only federal award applying to this category of workers in business services which the LHMU has publicly stated it intends to have treated as a test case.122 Therefore, this case has the potential to influence wages across the disability employment sector.

[392] The Commonwealth supported the Commission's statement with regard to this issue in its May 2004 decision, that the issues and concerns raised are more appropriately dealt with by the Disability Sector National Industry Consultative Council.

[393] We agree in general with the Commonwealth's submissions and note that the Disability Sector National Industry Consultative Council continues to keep these issues under review and additionally that the Commission on 26 July 2004 varied the Victorian Minimum Wage Orders and inserted a Supported Wage System clause by consent, operative from 1 August 2004.123

10. CONCLUSIONS ON THE ACTU'S CLAIM

[394] In reaching a decision on the ACTU's claim it is important to bear in mind that the Commission is not at large to decide on whatever outcome it thinks fit. While the Commission does have a discretion, the discretion must be exercised within the requirements of the Act. The principal object of the Act, set out in s.3, specifies a number of matters which might be described as policy objectives. The opening words of the section set the scene. They are:

Then follows a list of 11 matters most of which, it may be argued, are in some way relevant to a review of award wage rates.

[395] For present purposes we shall mention only the matters which are directly relevant. Each of them is repeated in one form or another in Part VI of the Act, to which we refer later. Section 3(a) encourages the pursuit of high employment, improved living standards, low inflation and international competitiveness through higher productivity and a flexible and fair labour market. Section (aa) is directed to the advancement of youth employment. Section (b) seeks to ensure that primary responsibility for determining employment matters rests with the parties at the workplace or enterprise level. Section (d) is a clear articulation of the fundamental concepts which underpin the scheme of the Act, that wages and conditions of employment be determined as far as possible by agreement at the workplace or enterprise level upon a foundation of minimum standards and that an effective award safety net of fair and enforceable wages and conditions be maintained.

[396] The objects of Part VI, found in s.88A, reaffirm the importance of these matters. They are as follows:

[397] While s.88B(1) requires the Commission to perform its award-making functions in a way which furthers the objects of the Act and the objects of Part VI, s.88B(2) provides even clearer guidance. In unequivocal terms it requires the Commission to ensure that a safety net of fair minimum wages and conditions of employment is established and maintained. Sections 88B(1) and (2) read:

[398] The opening words of section 88B(2) refer to a safety net of wages, not to a single minimum wage, which is maintained by the Commission. The statutory concept of the safety net is not, therefore, confined to a single minimum wage. And the idea of maintenance has at its heart the requirement to ensure that the safety net of award rates is kept in good repair. In order to get an historical perspective on the maintenance of the safety net we shall look in some detail at statistical data which show changes in relevant indicators since 1996, the year in which the Act commenced.

[399] Before doing so, however, it is important to mention that s.90 of the Act requires the Commission to take the public interest into account and, for that purpose, to have regard to the objects of the Act, and in particular the objects of Part VI, the state of the national economy and the likely effects on the national economy of any award or order that the Commission is proposing to make with special reference to likely effects on the level of employment and on inflation. Section 90 gives an added dimension to the Commission's task, requiring a careful consideration of the effects of its decision on the national economy.

[400] In dealing with an application to keep the safety net of minimum rates in good repair, the Commission is required by s.88B(2)(a) to have regard to living standards generally prevailing in the Australian community. This requirement invites a comparison between the rates of pay in the Commission's awards and rates of pay generally. Between May 1996 and May 2004 average weekly earnings of full-time adults increased by $277.10 per week or 41 per cent. In the same period the minimum wage, the rate for the C14 classification level, increased by $118 per week or 34 per cent. The award wage for a tradesperson, the rate for the C10 classification, increased by $120 per week or 27 per cent. Wages at the higher classification levels have increased by proportionately lesser amounts. Table 20 shows the increase in AWOTE and the increase in a representative range of award classification levels.

Table 20: Increases in Earnings and Award Rates 1996-2004

AWOTE

C14

C12

C10

C8

C6

$277.10

$118.00

$118.00

$120.00

$120.00

$118.00

41.2%

33.8%

30.4%

27.2%

24.8%

21.6%

[Source: ABS Cat No. 6302, Average Weekly Ordinary Time Earnings Full-Time Adults, May 1996-May 2004 and Metal Industries Award May 1996-May 2004.]

[401] Other measures of growth in earnings are also relevant-for example, average annual wage increases in federally registered certified agreements. Since 1996 this measure has increased by, on average, just under 4 per cent per year. The minimum wage has been increasing on average at a slightly lower rate over the same period. In other words, the minimum wage has been losing its relativity with bargained wages and the gap between the minimum wage and bargained wages has increased significantly in money terms. The gap is even greater at levels above the minimum wage.

[402] A widely accepted measure of growth in rates of pay is the Wage Price Index. The WPI is available from September 1997. The aggregate change in hourly rates of pay excluding bonuses from September 1997 to the December quarter 2004 was 27.3 per cent. This increase is less than the increase in the minimum wage (C14) over that period but more than the increase in the rate for a tradesperson (C10) which presently stands at $542.20 per week.

Table 21: Increases in Wage Price Index and Award Rates 1997-2004

WPI

C14

C12

C10

C8

C6

%

%

%

%

%

%

27.3

30.1

27.1

24.4

22.3

19.4

[Source: ABS Cat. No. 6345.0, September 1997-December 2004 and Metal Industries Award, September 1997-December 2004.]

[403] As it is not affected by compositional change the WPI is a more accurate measure of growth in labour costs than AWOTE. It is the most relevant measure of change in the cost of employment, being based on information collected from a representative sample of employee jobs.124 While the WPI is a better indicator of changes in remuneration for a particular job than AWOTE is, it is not a good indicator of changes in earnings in the Australian community.

[404] Some parties relied on international material relating to comparisons between the minimum wage and earnings. In particular it was submitted by the Commonwealth that "Australia now has the highest minimum wage compared with median earnings . . . in the OECD". The Commonwealth produced OECD comparative data for the period since 1985. While we have not seen any objective validation of the OECD comparisons, they show that for most of the 19-year period Australia has had the highest minimum wage compared with median earnings in the OECD. The suggestion that this is a recent development, on the data provided, is wrong. More importantly, according to those data, shown in Table 22, the relationship between the minimum wage and median earnings has been in decline since 1996.

Table 22: Minimum Wage and Median Earnings Minimum Wage (C14)/Median Wages Percentage

 

%

1996

60.6

1997

59.9

1998

60.7

1999

59.1

2000

57.9

2001

58.1

2002

57.5

2003

58.2

2004

58.4

[Source: Australian Government OECD data prior to 2001, Metal Industries Award and ABS Cat. No. 6310.0, Table 3.]

[405] A comparison between the minimum wage and AWOTE for full-time adults since 1996 shows a similar picture (Table 23). In other words, despite the size of the safety net adjustments since 1996, the growth in the minimum wage has not kept pace with the growth in average weekly earnings for full-time adults.

Table 23: Minimum Wage and Earnings

 

Minimum Wage C14

AWOTE

Full-Time Adults

Minimum Wage Compared with AWOTE

 

$

$

%

1996

349.40

672.60

51.9

1997

359.40

695.50

51.7

1998

373.40

726.90

51.4

1999

385.40

751.40

51.3

2000

400.40

784.60

51.0

2001

413.40

825.00

50.1

2002

431.40

868.40

49.7

2003

448.40

921.20

48.7

2004

467.40

949.70

49.2

[Source: ABS Cat. No. 6302.0 and Metal Industries Award, May of each year.]

[406] Chart 18 shows the relationship between the minimum wage (C14) and the tradesperson's rate (C10) and ordinary full-time adult earnings. The chart was tendered by the ACTU and not challenged. It shows a continuing decline in both rates over the past 20 years. Since 1996, the relative reduction we have already noted in the minimum wage has been even more pronounced in the tradesperson's rate.

Chart 18: C14 and C10 as a Proportion of Average Weekly Ordinary Full-Time Adult Earnings

[Source: Exhibit ACTU 2 Figure 3.1.]

[407] Section 88B(2)(b) requires the Commission to have regard to economic factors including levels of productivity and inflation and the desirability of attaining a high level of employment. Turning first to the level of productivity, between the June quarter 1996 and the December quarter 2004, GDP per hour worked in the market sector increased by 24.3 per cent. In other words, productivity grew by nearly 25 per cent over that 8½-year period, which is remarkable, particularly during a period of strong employment growth. In the last two-quarters, however, annual productivity growth has been weaker. Despite the fact that the productivity figures show some volatility and are subject to revision, the lack of growth in the last 12 months is cause for concern. With regard to inflation, leaving aside one-off effects related to the introduction of the GST, the economy has performed well. The CPI increased by 23.1 per cent between June 1996 and March 2005 and was within the RBA's target range of 2 to 3 per cent per year for all but a few quarters.

[408] The desirability of attaining a high level of employment is the criterion which the employers and the Commonwealth emphasised the most. Between June 1996 and March 2005 employment increased by 19 per cent. In the same period the number of unemployed decreased by 26 per cent. In December 1996 unemployment was 8.6 per cent. In December 2004 it was 5.1 per cent, at what has been described as the lowest level in 28 years.

[409] The Commonwealth and ACCI submitted that the Commission has not placed enough emphasis on the employment effects when deciding on the level of safety net adjustments. Elsewhere in this decision we once again review the literature and studies purporting to show the effect of increases in minimum wages on employment. To illustrate the problems with the research it is only necessary to mention that in the 2004 proceedings the Commonwealth relied upon a study which showed an elasticity of demand for labour of -0.21 per cent.125 This year it urged us to accept a study which showed an elasticity of -0.63 per cent.126 On the Commonwealth's submission this year we would have been wrong to accept its submission in last year's safety net review. We do not draw attention to this inconsistency to be critical of the Commonwealth but to underline the need for a cautious approach to estimates of the employment effects. This is an area in which theory and philosophy play a large part in the submissions, tending to obscure what facts there are rather than to elucidate them, and in which useful and robust research is all too rare.

[410] In light of the growth in employment over the last eight years and the fact that employment has declined to its lowest level in 28 years, it would be difficult to accept that the Commission's safety net adjustments have been excessive even if employment was the only matter the Commission had to take into account in maintaining the safety net. Of course employment is not the only matter we are required to consider. While it has been pointed out in previous decisions that there is a likelihood of some negative employment effects from safety net adjustments, this risk must be balanced against other factors such as the potential benefit to award-reliant employees, estimated by some to number 1.6 million, in the context of the Commission's obligation to ensure that a safety net of fair minimum wages and conditions is maintained. Acknowledgment of the need to balance these matters does not mean that the Commission prefers the interests of those in employment to those who are unemployed or under-employed. On the case advanced by the opponents of the ACTU's claim, any increase in the safety net, including of course the increase they advanced, will have negative employment effects. It must be accepted that their proposals involve a balance of considerations, just as the ACTU's claim does. The Commission's task is to find the right balance.

[411] As we have noted, s.88B(2)(b) also requires the Commission to give consideration to economic factors generally. Economic growth, as measured by increases in GDP, has been strong in recent years. Between June 1996 and December 2004 GDP increased by 35.2 per cent in real terms. In the same period shares of total factor income have altered. The profit share of the corporate sector has increased from 34.4 per cent in June 1996 to 37.4 per cent in June 2004-around 10 per cent. When Gross Mixed Income is added to the profits of the corporate sector the share has not increased as much-from 45.5 per cent to 46.9 per cent. The share going to wages, however, has decreased in the same period from 54.5 to 53.1 per cent. The shift in shares from wages to profits since 1996 is undeniable and significant. On the other hand, no party has submitted that there is an imbalance in the shares which poses a threat to economic stability.

[412] Section 88B(2)(c) of the Act requires the Commission to have regard to the needs of the low paid. The measurement of needs is problematic and many of the parties' submissions tend to be impressionistic rather than scientific. We deal first with the relationship between prices, wages and earnings. There have been significant increases in award rates at the lower classification levels since 1996 and employees who have been dependent on safety net adjustments at those levels have also had increases in real wages. From the June quarter 1996 to the March quarter 2004 the CPI increased by 21.1 per cent. During the same period the minimum wage (C14) increased by 33.8 per cent. Higher award rates increased relatively less. Wages for classifications above C6 have not increased as much as the CPI since 1996. Even at the lower levels, real increases in award rates have been lower than real increases in AWOTE which has grown by nearly 17 per cent in real terms over the period. The data are shown in Table 24.

Table 24: Increases in Earnings and Award Rates
1996-2004

 

Nominal

Real

 

%

%

AWOTE (full-time adults)

41.2

16.6

Minimum wage (C14)

33.8

10.5

C12

30.4

7.7

Tradesperson (C10)

27.2

5.0

C8

24.8

3.1

C6

21.6

0.4

[Source: ABS Cat. Nos 6302 and 6401 and Metal Industries Award, May of each year.]

[413] We turn now to some of the research into the needs of the low paid. As we indicated earlier, we agree with the Commonwealth that HILDA and NATSEM research indicates that less than a quarter of low-paid employees are in the lowest quintile of household incomes. While this research suggests that there is a less than perfect correlation between low pay and needs, it cannot be assumed that low-paid employees who are not in low-income households are therefore not in need. No party submitted that only those low-paid employees who are in low-income households have unmet needs. We also agree with the Commonwealth that the research shows that the proportion of full-time workers in poverty who are adult award-reliant employees is likely to be very small, perhaps insignificant, and that only 2 per cent of those whose main source of income is wages and salaries are in poverty. While it is clear that low-paid employees who are not in poverty may nevertheless have needs which we should take into account, the research tends to indicate that the safety net is, by and large, an effective one so far as the low paid are concerned. On the limited data available, it might be concluded that without the adjustments of recent years the number of full-time award-reliant employees in poverty would be significantly greater.

[414] Some submissions were directed to the fact that the application for a safety net adjustment might not result in an actual increase in pay in particular cases. This was said to result from reductions in means tested payments and changes in marginal tax rates or both. The interaction between increases in wages, tax scales and social welfare payments is a structural issue which potentially affects all increases in wages, regardless of their source. It is also important to note that these effects do not occur evenly and depend upon the circumstances of the wage earner. Furthermore, we think that all other things being equal it is preferable that income be sourced from earnings rather than welfare.

[415] The Commission has commented in past safety net review decisions on the lack of reliable data on the needs of the low paid and the desirability of parties bringing forward empirical studies, rather than individual cases which purport to illustrate the general position but in fact may not. The Commission has also indicated a willingness to conduct a broader inquiry into needs should there be significant support for such a course.127 This lack of data was forcefully brought home again in this case. We requested the Commonwealth to provide data concerning the proportion of the workforce to which the safety net adjustments applied in 1997 and in 2004. The Commonwealth was unable to do so. We also asked the Commonwealth to provide data concerning the proportion of the workforce to which the minimum wage adjustment applied in 1997 and 2004. Again, the Commonwealth was unable to supply the information. It is a matter of significance that while the Commonwealth has criticised the Commission's past decisions because of their employment effects, the most basic of information about safety net adjustments and the minimum wage-how many people are affected by them-is apparently not available to the Commonwealth. In the present context, consideration of the needs of the low paid, information about the proportion of the workforce who receive the minimum wage at various times is likely to be highly relevant.

[416] The Commission is required to exercise its award-making functions and powers in a way that encourages the making of agreements between employees and employers at the workplace or enterprise level. Data from the Australian Workplace Industrial Relations Survey indicated that in 1995, 24 per cent of employees received safety net adjustments.128 In May 2004, 20 per cent of employees were classified as award-reliant workers.129

[417] The employers and the Commonwealth submitted that if safety net adjustments are too high they remove or detract from the incentive to bargain. While there is some force in this submission, as the Commission has found in previous cases, it cannot be accepted without reservation. Many award-reliant employees have low bargaining power, particularly those at the lower skill and pay levels. Due to their circumstances low-paid employees are unlikely to be able to demand above-award pay and conditions. Furthermore the empirical evidence does not support the submission. It appears that the reduction in the number of award-reliant workers in the economy has slowed and almost stopped in the last few years. On the other hand, this has not been the case in the industries which employ the largest proportion of award-reliant workers, the retail trade, accommodation, cafes and restaurants, and health and community services industries. On figures supplied by the Commonwealth, between 2000 and 2004 the number of award-reliant workers in those industries reduced by 73 000 and the number of agreement workers increased by 240 000. While we accept that excessive increases in minimum wages can discourage bargaining, the evidence suggests that the safety net adjustments over recent years have not been inconsistent with the continued growth of bargaining in the industries in which award reliance is relatively high.

[418] Turning to the state of the economy and immediate economic prospects, we shall not repeat the detailed summary of the parties' submissions and our conclusions which we have set out earlier. In December 2004 it was estimated that GDP would grow in 2004-05 by 3 per cent. This was revised downwards to 2 per cent in the recent Budget statement. Despite growth being below expectations in 2004-05 Treasury expects a rebound in growth in 2005-06, with strong growth in national income supported by strong world demand for commodities and higher terms of trade. The Budget forecast for GDP growth in 2005-06 is 3 per cent. Employment growth is forecast to continue at a satisfactory rate and unemployment is expected to ease slightly to 5 per cent in 2005-06. The CPI is expected to increase within the range of 2 to 3 per cent per year.

[419] The Commonwealth drew our attention to a number of potential risks to the forecasts. These risks included a likely increase in the terms of trade to levels not experienced since the early 1950s caused by significant rises in export prices, high commodity prices, particularly high oil prices, the possibility that the tight employment market might lead to wage increases greater than productivity growth putting upward pressure on costs and inflation and, finally, the risks to farm production which is dependent on weather conditions. While those risks are to be borne in mind, there is no basis for us to depart from the official forecasts in reaching our decision. While the forecast for GDP growth in the current year has been revised downwards we think it would be wrong to regard the revised growth forecast as indicative of a fundamental economic problem.

[420] Turning to a review of economic indicators in the last year, growth in GDP in 2003-04 was 4 per cent. Since the May 2004 decision incomes and wages have increased significantly. AWOTE increased by 3.6 per cent in the year to November 2004. In the year to December 2004 the WPI increased by the same amount. Average annual wage increases per employee under certified agreements were 4.1 per cent. Employment grew by 2.6 per cent in 2004 and unemployment decreased by 10.2 per cent. In December 2003 unemployment was 5.8 per cent. In December 2004 it was 5.1 per cent. Prices as measured by the CPI increased by 2.6 per cent over the 12 months to December 2004. Productivity growth has been negative for the last 12 months.

[421] We consider that to grant the ACTU's claim for an increase of $26.60 per week in all award rates would be inconsistent with our statutory responsibilities. We agree with those who submitted that the claim is excessive. It is clear that there has been a slowing of GDP growth in 2004-05 and that in recent quarters productivity growth has been disappointing. Persistent drought conditions and the threat they pose to growth are also matters for concern. While the economic fundamentals appear solid, in our view a lower increase is appropriate this year than last. In reaching that conclusion we have also taken into account the benefits to low-paid employees of changes in the tax and government transfer regimes which occurred during 2004 and which have been foreshadowed in the Budget for 2005-06. We note, however, that while tax reductions will undoubtedly assist low-paid employees in absolute terms, their living standards may not increase greatly in relative terms when all of the changes in taxation and government benefits are taken into account.

[422] The Commonwealth submitted that the increase it supports-$11 in the minimum wage and other classifications up to and including the tradesperson's rate (level C14 to level C10)-will maintain the spending power of the low paid. It also submitted that the Commission must maintain some stability in the level of the minimum wage in real terms to ensure the already high minimum wage is not increased further as a percentage of average earnings.

[423] The submission that an increase of $11 would maintain spending power was related to the MYEFO forecast of inflation. While the forecast for inflation may be relevant, we cannot ignore the fact that prices have increased in the 12 months since the last safety net adjustment. In the year to December 2004 the CPI increased by 2.6 per cent. Applying an increase of that percentage would yield an increase of more than $12 in the minimum wage. In relation to the Commonwealth's submission about the level of the minimum wage relative to earnings, we note that the level of the minimum wage could be increased by significantly more than the $11 proposed by the Commonwealth without reducing the gap between the minimum wage and average earnings. In the 12 months to November 2004 average weekly ordinary time earnings of full-time adults increased by 4.1 per cent. In order to increase the minimum wage proportionately an adjustment of around $19 would be required. Contrary to its submission, therefore, the implementation of the Commonwealth's proposal would result in a reduction in spending power for all award-reliant employees and a significant further reduction in the minimum wage relative to average weekly earnings.

[424] In all of the circumstances we consider that an adjustment to the safety net of $17 per week is appropriate. The adjustment is an increase of 3.6 per cent in the minimum wage and an increase of 3 per cent for employees classified at the tradesperson level. The adjustment will operate from the first pay period to commence on or after the date of this decision, subject to the requirements of the Statement of Principles.

[425] A number of those opposing the claim submitted that any safety net adjustment we award should be confined to the low paid, as defined those at the C10 classification level and below. As the tables above show, since 1996 safety net adjustments for employees at the higher award levels have not kept pace with growth in AWOTE or the WPI. Employees classified at those levels who are dependent on safety net adjustments for increases in wages have suffered a significant loss of relativity whatever measure is adopted. It would be inconsistent with our obligation to maintain the safety net to withhold or reduce the amount of the adjustment at the higher classification levels. The adjustment will apply to all award rates and allowances on the same basis as in previous years.

[426] Table 25 illustrates the increases in a representative range of award classification rates since 1996, in nominal terms and after inflation, and compares them with the increases in AWOTE for full-time adults over the same period. The table includes the safety net adjustment provided for in this decision.

Table 25: Increase in Award Classifications and Average Weekly Ordinary Time Earnings May 1996-June 2005

 

Current

Increase

Real Increase

 

$

$

%

%

AWOTE

993.10

320.50

47.7

20.0

Minimum Wage (C14)

484.40

135.00

38.6

12.6

C12

523.60

135.00

34.7

9.4

Tradesperson (C10)

578.20

137.00

31.1

6.5

C8

619.90

137.00

28.4

4.3

C6

680.50

135.00

24.8

1.4

[Source: ABS Cat No. 6302 Table 2, to February 2005; ABS Cat. No. 6401, to March 2005;
Commission decisions.]

[427] Implementation of the adjustment will be subject to the following conditions:

[428] Consistent with our decision the federal minimum wage will be increased by $17 to $484.40 per week.

11. STATEMENT OF PRINCIPLES

[429] This part of our decision deals with the submissions concerning the Statement of Principles.

[430] Only one change to the principles was proposed. ACCI submitted that the Statement of Principles should be amended to provide a later date of operation of any safety net wage increase for Victorian employers who have previously operated under Schedule 1A of the Act and are now covered by federal awards. A new paragraph is proposed, Principle 8A, in the following terms:

[431] It is intended that the proposed transitional arrangements only operate with respect to the safety net adjustment awarded in these proceedings and that they not be an ongoing feature of the award system.

[432] The essence of the argument in support of the proposed change is that Victorian employers who were previously covered by Schedule 1A of the Act and who are now regulated by federal awards which operate on a common rule basis in Victoria, have faced significant increases in labour costs in recent times, namely:

[433] We return later to the proposition that any adjustment from these proceedings would operate from no earlier than 1 August 2005 in respect of employers covered by Victorian common rule awards.

[434] Two witness statements were provided in support of ACCI's proposal. The first is a statement by Ms Wendy Jones, the Chief Executive Officer at the Restaurant and Catering Association of Victoria. Ms Jones' evidence is general in character and asserts that the introduction of common rule coverage has had a major impact on the restaurant and catering sector in Victoria. No details were provided as to the identity of enterprises said to be impacted upon by these changes.

[435] Due to the operation of the "12-month rule" the Liquor and Accommodation Industry-Restaurants-Victoria-Award 1998132 (the Restaurants Award) and the Catering-Victoria-Award 1998133 will not be varied for any safety net adjustment arising from these proceedings before the first pay period on or after 11 June 2005 and 3 July 2005 respectively. The relevant Victorian Minimum Wage Orders are not due to be varied, by agreement between the employer and union parties, before the first pay period on or after 1 August 2005.

[436] Ms Jones concluded her statement by supporting ACCI's proposal and stating:

[437] ACCI also relied on a witness statement by Mr Rick Munday, a director of the Munday Group which owns seven Victorian hotels. The majority of the employees of the Munday Group have not been directly affected by the commencement of the common rule arrangements in Victoria. The minimum wages and conditions of these employees have been regulated by The Hospitality Industry-Accommodation, Hotels, Resorts and Gaming Award 1998.134 However Mr Munday says that his business has been indirectly affected:

[438] The primary source of such increased costs has been from independent security contractors. The hotels in the Munday Group have implemented various measures to minimise the impact of these increased costs. As a result the number of security personnel and the hours during which they are required to work have been reduced.

[439] ACCI's proposed principle is supported by some of the other employer organisations.136 The Commonwealth made no submissions in respect of the proposal. The proposed amendment to the principles is opposed by the ACTU and the States and Territories.

[440] The primary argument advanced against ACCI's proposal is that the evidence provided falls well short of that which would be necessary for the Commission to defer the operation of the safety net adjustment pursuant to the incapacity to pay principle. The State and Territories advance three additional arguments:

[441] Before turning to consider the submissions it is necessary to briefly set out the factual matrix surrounding the determination of ACCI's proposal.

[442] Schedule 1A of the Act prescribes certain minimum entitlements for Victorian employees whose employment is not governed by a federal award, certified agreement or AWA. The minimum terms and conditions of employment are (in broad terms):

[443] In 2000 it was estimated that some 356 000 employees (about 21 per cent of the Victorian workforce) relied almost entirely on Schedule 1A for conditions of employment.138

[444] As submitted by the States and Territories, not all of the former Schedule 1A employers were providing only the bare minimum Schedule 1A wages and conditions prior to being bound by a common rule award. In this context the Independent Report of the Victorian Industrial Relations Taskforce-Part 2: Statistical Research on the Victorian Labour Market (the Victorian Taskforce Report)139 found that, with the exception of agriculture and infrastructure, the median minimum hourly rates for workplaces with Schedule 1A coverage was higher than for those with federal award coverage.140

[445] However the Victorian Taskforce Report also noted employees working under Schedule 1A coverage did not generally enjoy the same conditions which are standard in federal awards. For example, across all industries only 41 per cent of Schedule 1A workplaces paid a higher rate of pay for overtime. The lowest proportion was found in hospitality, recreation and personal services (12 per cent) and the highest was in wholesale/retail (65 per cent). Less than one-quarter of Schedule 1A workplaces, and only 8 per cent or workplaces in hospitality, recreation and personal services, paid penalty rates for working on weekends.

[446] The Minimum Wage Orders applicable to Schedule 1A employees (i.e. Victorian employees not covered by an award, certified agreement or AWA) are adjusted by the Commission from time to time pursuant to s.501 of the Act. In past s.501 matters the Commission has granted some relief from the application of the 12-month rule. The Victorian Minimum Wage Orders decision141 provided for an operative date of 1 August 2004.

[447] The Workplace Relations Amendment (Improved Protection for Victorian Workers) Act 2003 (the Improved Protection Act) came into effect on 1 January 2004. The Improved Protection Act provides that the Commission may make common rule awards for Victorian employees consistent with the existing power that the Commission exercises with respect to the territories. The amendments to the Act which provide for awards to be declared common rule with an operative date no earlier than 1 January 2005 are set out in s.141 of the Act. The Improved Protection Act includes a new object, s.493A, in the following terms:

[448] The Victorian Common Rule decision142 established principles to guide the determination of applications for awards to be declared to operate as a common rule in Victoria. The Full Bench also adopted an agreed template format to provide consistency in the way in which common rule declarations are formatted. To date some 182 awards have declared to operate as a common rule in Victoria. The declarations have overwhelmingly been made by consent. While there is some diversity amongst the declarations the overwhelming majority commenced operation in January 2005.

[449] The common rule awards have been varied to insert the safety net adjustment provided for in the May 2004 decision. There is no consistent operative date for such variations.

[450] Assuming that the safety net adjustment arising from this decision is inserted into these awards 12 months after the date on which they were varied for the 2004 adjustment, the operative dates for the 2005 adjustment will vary significantly, as shown by Chart 19 below.

Chart 19: Earliest Operative Dates of 2005 Safety Net Adjustment in Victorian Common Rule Awards

[Source: Australian Industrial Registry.]

[451] ACCI's submissions proceeded on the assumption that any safety net adjustment arising out of these proceedings would not apply to employers subject to these awards by virtue of them being declared common rules, until after 1 August 2005. The basis for this assumption appears to be that this date is 12 months after the Schedule 1A minimum wage orders were last adjusted.

[452] We doubt that ACCI's assumption is correct. In the normal course an increase in award wages would operate from a common operative date. For example, if in say March 2005 an employer was roped-in to a federal award and incurred an increase in labour costs as a result and the award was subsequently varied to give effect to this decision, with effect from July 2005, then in the normal course that variation would apply to the roped-in employer from the same operative date as it applies to all other award respondents.

[453] The following considerations bear on determination of ACCI's claim:

[454] Having regard to these matters and the submissions of the parties we propose to amend the principles to insert a new principle, 8A-Transitional Arrangements for Victoria, to provide that in respect of all former Schedule 1A employers the 2005 safety net adjustment and any consequent adjustment of work-related allowances will operate from no earlier than 1 August 2005. The variation we propose will provide some relief to those Victorian employers affected by the introduction of the common rule system in Victoria. Further, relief may be sought by individual employers or groups of employers pursuant to the economic incapacity principle.

[455] Consistent with ACCI's proposal it is intended that the proposed transitional arrangements only operate with respect to the safety net adjustment awarded in these proceedings.

12. ORDERS

[456] The orders necessary to give effect to this decision in the awards before us should be drawn and filed by the applicants. Commissioner Hingley will settle the orders with recourse to the Full Bench.

 

 

 

ATTACHMENT A - STATEMENT OF PRINCIPLES

1. ROLE OF ARBITRATION AND THE AWARD SAFETY NET

Existing wages and conditions in the relevant awards of the Commission constitute the safety net which protects employees who may be unable to reach an enterprise or workplace agreement. The award safety net also provides the benchmark for the no-disadvantage test that the Workplace Relations Act 1996 (the Act) requires be applied before agreements are certified.

As a result of the award simplification process, awards will, where necessary, be varied so that they:

This evolving award system will remain the safety net referred to in the Act. It will, and is intended by the legislature to, change in response to economic, social and industrial circumstances.

2. WHEN AN AWARD MAY BE VARIED OR ANOTHER AWARD MADE WITHOUT THE CLAIM BEING REGARDED AS ABOVE OR BELOW THE SAFETY NET

In the following circumstances an award may, on application, be varied or another award made without the application being regarded as a claim for wages and/or conditions above or below the award safety net to:

3. PREVIOUS NATIONAL WAGE CASE INCREASES

Increases available under previous National Wage Case decisions such as structural efficiency adjustments, minimum rates adjustments and previous arbitrated safety net adjustments will, on application, still be accessible.

4. TEST CASE STANDARDS

Test case standards involving allowable award matters (s.89A(2)) established and/or revised by the Commission may be incorporated in an award. Where disagreement exists as to whether a claim involves a test case standard or a non-allowable award matter, a party asserting that it does must make and justify an application pursuant to s.107. It will then be a matter for the President to decide whether the claim should be dealt with by a Full Bench.

5. ADJUSTMENT OF ALLOWANCES AND SERVICE INCREMENTS

6. WORK VALUE CHANGES

7. STANDARD HOURS

In approving any application to reduce the standard hours to 38 per week, the Commission will satisfy itself that the cost impact is minimised.

8. ARBITRATED SAFETY NET ADJUSTMENTS

In accordance with the June 2005 decision awards may, on application, be varied to include an arbitrated safety net adjustment in this decision subject to the following:

The above clause will replace the offsetting clause inserted into awards pursuant to paragraph 8(e) of the Statement of Principles determined in the May 2004 decision.

8A. TRANSITIONAL ARRANGEMENTS FOR VICTORIA

The application of an arbitrated safety net adjustment under Principle 8 in the state of Victoria will be subject to the following transitional arrangement:

To avoid confusion, these transitional rates of pay and allowances shall be deleted when they cease to have effect and in any event by no later than 12 months from the date of effect of the arbitrated safety net adjustment payable under the June 2005 decision.

This principle has no application to a federal award which does not apply to the state of Victoria or has not been subject to a common rule declaration under s.141 of the Act in respect of the state of Victoria.

9. FEDERAL MINIMUM WAGE

In accordance with the June 2005 decision awards may, on application, be varied to provide for the federal minimum wage for full-time adult employees of $484.40 per week and, for junior, part-time and casual employees, proportionate amounts subject to the following:

Note: In determining whether an increase is payable because of the introduction of the federal minimum wage, the arbitrated safety net adjustment in this decision and all previous safety net and national wage adjustments are first to be taken into account.

10. MAKING AND VARYING AN AWARD ABOVE OR BELOW THE SAFETY NET

Any application to make or vary an award for wages or conditions above or below the safety net or for a date of operation of a safety net adjustment earlier than the date of the award may be dealt with by:

11. FIRST AWARD AND EXTENSION TO AN EXISTING AWARD

Any first award or an extension to an existing award must be consistent with the Commission's obligations under Part VI of the Act.

In determining the content of a first award the Commission will have particular regard to:

12. ECONOMIC INCAPACITY

Any respondent or group of respondents to an award may apply to, temporarily or otherwise, reduce, postpone and/or phase-in the application of any increase in labour costs determined under this Statement of Principles on the ground of very serious or extreme economic adversity. The merit of such application will be determined in the light of the particular circumstances of each case and any material relating thereto shall be rigorously tested. The impact on employment at the enterprise level of the increase in labour costs is a significant factor to be taken into account in assessing the merit of any application. A party making such an application must make and justify an application pursuant to s.107. It will then be a matter for the President to decide whether it should be dealt with by a Full Bench.

Any decision to temporarily reduce or postpone an increase will be subject to a further review, the date of which will be determined by the Commission at the time it decides any application under this Principle.

13. DURATION

This Statement of Principles will operate until reviewed.

 

 

 

Appearances:

R Watts for all applicant unions with G Combet, M Gaynor and D Hristodoulidis for the Australian Council of Trade Unions and all applicant unions.

P Anderson with S Barklamb, C Harris and M Potter for the Australian Chamber of Commerce and Industry and The Australian Retailers Association, the Victorian Employers' Chamber of Commerce and Industry, the Agribusiness Employers' Federation, Australian Business Industrial, the Confederation of ACT Industry, the Printing Industries Association of Australia, the Australian Hotels Association, The Restaurant and Catering Association of Victoria, the Metal Industries Association Tasmania, the Chamber of Commerce Northern Territory and with M Weldon for The Australian Retailers Association-Victoria.

B Pendlebury, S Calder and P Byrne for The Australian Industry Group and the Engineering Employers Association, South Australia.

D Harris for the National Farmers' Federation.

H Dixon SC with B Bennett, L McDonough, L Andrews and M Quinn for the Minister of Employment and Workplace Relations on behalf of the Australian Government.

G Martin SC with R Bancroft for the States of New South Wales, Queensland, South Australia, Tasmania, Victoria and Western Australia and the Australian Capital Territory and Northern Territory.

WJ Chesterman for the Victorian Automobile Chamber of Commerce and for the Motor Traders' Association of New South Wales, the Motor Trades Associations of South Australia, Queensland and Western Australia and the Australian Capital Territory and the Northern Territory.

C Harnath for The Master Plumbers' and Mechanical Services Association of Australia.

K Wilson with M Hand for the Disability Employment Action Centre, the National Council on Intellectual Disability and the Association of Workers With Disability.

B Lawrence with P O'Grady for the Australian Catholic Commission for Employment Relations.

Hearings details:

2004.

Melbourne:

December 3.

2005.

Melbourne:

April 12-15.

1 AW789529CRV.

2 PR002004; (2003-2004) 129 IR 389.

3 Print M9675; (1996) 40 AILR 3-399.

4 Exhibit AiG 1, Annexure 1 at p. 3.

5 Exhibit NFF 1 at para 28.

6 Exhibit Commonwealth 2 at para 3.20.

7 House of Representatives-Standing Committee on Economics, Finance and Public Administration, 18 February 2005, RBA annual report 2004 at page EFPA 7 (parenthesis added).

8 Mr Ian Macfarlane, 2 March 2005, Media Release: Statement by the Governor, Mr Ian Macfarlane-Monetary Policy (parenthesis added).

9 ACTU Post-Budget Submission at para 1.

10 ACCI Post-Budget Submission at para 3.

11 AiG Post-Budget Submission at p. 1.

12 Commonwealth Post-Budget Submission at para 1.5.

13 See ABS Media Release of 18 May 2005 referring to a correction to the Retail Trade figures for the period July 2004-March 2005.

14 ACTU Post-Budget Submission at para 38.

15 Data from the ABS Survey of New Capital Expenditure and Expected Expenditure.

16 Statement on Monetary Policy, 2 March 2005, Reserve Bank of Australia at p. 3.

17 ACTU Post-Budget Submission at para 59.

18 Statement on Monetary Policy, 6 May 2005, Reserve Bank of Australia at p. 33.

19 Economic Papers, Vol. 24, No. 1, March 2005.

20 ibid. at p. 61.

21 Commonwealth Post-Budget Submission at para 1.19.

22 Statement on Monetary Policy, 6 May 2005 at p. 64.

23 ACCI Post-Budget Submission at para 21.

24 ibid. at para 23.

25 Statement on Monetary Policy, 6 May 2005 at pp. 32-3 and 54.

26 Exhibit AiG 1 at Annexure 1.

27 Exhibit AiG 2 at para R.11.

28 Exhibit Commonwealth 2 at para 2.13.

29 PR002003; (2003) 121 IR 367; see also the May 2004 decision at para 236.

30 Watson, Ian, 2004, `Minimum Wages and Employment: Comment', The Australian Economic Review, Vol. 37, No. 2 at p. 170.

31 For example, see the May 2004 decision at paras 229-36.

32 Leigh, Andrew, December 2003, `Employment Effects of Minimum Wages: Evidence from a Quasi-Experiment', The Australian Economic Review, Vol. 36, No. 4 at pp. 361-73.

33 OECD, June 1998, `Making the Most of the Minimum: Statutory Minimum Wages, Employment and Poverty', OECD Employment Outlook at p. 31.

34 ibid. at p. 45.

35 May 2003 decision at paras 176-7.

36 May 2004 decision at para 235.

37 Lewis, P, 2003, `Disequilibrium in the Australian Aggregate Labour Market', Economics Letters, Vol. 11 at pp. 185-9.

38 Pissarides, C, 1987, Real Wages and Unemployment in Australia, Centre for Labour Economics, London School of Economics, Discussion Paper No. 286.

39 Lewis, P & Kirby, MG, 1998, `A New Approach to Modelling the Effects of Incomes Policies', Economics Letters, Vol. 28 at pp. 81-95.

40 Russell, B & Tease, W, 1991, `Employment, Output and Real Wages', Economic Record, Vol. 67, No. 196 at pp. 34-45.

41 Debelle, G & Vickery, J, 1998, The Macroeconomics of Australian Unemployment, Reserve Bank of Australia Annual Conference, Volume 1998-15.

42 Dungey, M & Pitchford, J, 1998, Prospects for Output and Employment Growth with Steady Inflation, Reserve Bank of Australia Annual Conference, Volume 1998-15.

43 Bernie, K & Downes, P, 1999, The macroeconomics of unemployment in the Treasury Macroeconomic (TRYM) model, Reserve Bank of Australia Seminar Series.

44 Lewis, P & MacDonald, G, 2002, The Elasticity of Demand for Labour in Australia, Economic Record, Vol. 78, No. 240 at pp. 18-30.

45 Leigh, Andrew, December 2003, `Employment Effects of Minimum Wages: Evidence from a Quasi-Experiment', The Australian Economic Review, Vol. 36, No. 4 at pp. 361-73.

46 Harding, D & Harding, G, 2004, Minimum wages in Australia: an analysis of the impact on small and medium sized businesses-A report to the Department of Employment and Workplace Relations, Turning Point Research Pty Ltd.

47 Minimum Wages Report, Section 3.3, Table 3.3 at p. 49; and Exhibit Commonwealth 5 of the 2004 Safety Net Review proceedings at para R5.10. We note that the estimate of 14 000 jobs was subsequently revised to a figure of "almost 13 000" in Dr Harding's supplementary statement of 15 April 2004.

48 This figure comes from Leigh's erratum in The Australian Economic Review, Vol. 37, No. 1 at pp. 102-5.

49 Watson, I, March 2004, A Needle in a Haystack. Do increases in the minimum wage cause employment losses?, ACIRRT Working Paper 90, University of Sydney.

50 May 2004 decision at para 215.

51 Leigh, A, 2004, `Minimum Wages and Employment: Reply', The Australian Economic Review, Vol. 37, No. 2, at pp. 173-9.

52 ibid. at p. 178.

53 Dixon, PB, Madden, JR & Rimmer, MT, March 2005, A Report to the Department of Employment and Workplace Relations.

54 Safety Net Review of Wages, Critique of Dixon, Madden and Rimmer, April 2005, see Exhibit ACTU 5 at p. 11.

55 See Exhibit Commonwealth 6 at Attachment B.

56 Monash Paper at p. 16.

57 Debelle & Vickery, op. cit. at pp. 235-65.

58 Monash Paper, op. cit. at p. 7.

59 Exhibit Commonwealth 6 at p. 35.

60 Transcript at paras 2359, 2386, 2395 and 2534.

61 Transcript at para 2396.

62 ibid. at paras 2507-8.

63 ibid. at para 2517.

64 See for example Exhibit Commonwealth 2 at para 6.48; and Exhibit Commonwealth 6 at paras R5.22-R5.227.

65 Transcript at paras 2347, 2520-1.

66 ibid. at paras 2521-3.

67 ibid. at para 2521; see also paras 2511-3.

68 May 2004 decision at para 123. See also Print S5000; (2000) 95 IR 64 at paras 62 and 65; May 2003 decision at paras 138-9.

69 Transcript at para 2523.

70 Monash Paper, op. cit. at p. 16.

71 Transcript at para 2568.

72 International Monetary Fund, Australia, November 2004, Staff Report for the 2004 Article IV Consultation at p. 13.

73 OECD Employment Outlook 2004 at p. 153.

74 ibid.

75 OECD, February 2005, Economic Survey of Australia at p. 189.

76 ibid. at p. 193.

77 May 2004 decision at paras 196 and 215.

78 OECD, Employment Outlook 2004 at p. 140.

79 ibid. at p. 140.

80 ibid. at p. 142.

81 Puhani, P, A text of the Krugman Hypothesis for the United States, Britain and Western Germany, IZA Discussion Paper No. 764.

82 OECD, March 2005, Economic Policy Reforms: Going for Growth at p. 58.

83 OECD, 1997, OECD Submission to the Irish National Minimum Wage Commission, Economics Department Working Papers No. 186, p. 15.

84 ibid.

85 OECD Employment Outlook 2004 at pp. 132-3 and 141-2.

86 Exhibit AiG 1.

87 At p. 157.

88 See the Paid Rates Review decision, Print Q7661; (1998) 123 IR 240.

89 Yuen, T, 2003, `The Effects of Minimum Wages on Youth Employment in Canada: A panel study', The Journal of Human Resources, Vol. 38, No. 3 at pp. 647-72.

90 Gindling, TH & Terrell, K, May 2004, The Effects of Multiple Minimum Wages Throughout the Labour Market, IZA Discussion Paper No. 1159.

91 ibid. at p. 2.

92 McNamara, J, Lloyd, R, Toohey, M & Harding, A, 14 October 2004, Prosperity for all? How Low Income Families Have Fared in the Boom Times, NATSEM Paper at p. 8.

93 Exhibit ACTU 2 at paras 6.15-6.17 and Figure 6.1.

94 May 2004 decision at para 163.

95 See May 2003 decision at paras 180 and 182.

96 Exhibit S&T 1 at para 7.2.10.

97 Exhibit Commonwealth 10.

98 Dalziel, P, 2002, `New Zealand's Economic Reforms: An Assessment', Review of Political Economy, Vol. 14, No. 1 at p. 41.

99 Exhibit ACCI 2 at para. 4.46.

100 ibid. at Charts 4.11 and 4.12.

101 Professor Brain's conclusion.

102 Exhibit ACTU 4 at para R5.22.

103 Exhibit ACTU 4 at paras R2.144-5.

104 Mitchell, R & Fetter, J, 2003, The Individualisation of Employment Relationships and the Adoption of High Performance Work Practices, Report prepared for the Workplace Innovation Unit, Industrial Relations Victoria.

105 Enterprise Agreements and Other Determinants of Labour Productivity, Paper presented at the Australian Labour Market Research Workshop 2004, University of Western Australia, Perth, 6-7 December 2004.

106 Wooden, M, Loundes, J & Tseng, Y, 2001, Industrial Relations Reform and Business Performance: an Introduction, Melbourne Institute Working Paper, No.2/02.

107 May 2004 decision at para 165.

108 Connolly et al, op. cit. at p. 37.

109 A Report prepared by the Department of Workplace Relations and the Office of the Employment Advocate, Commonwealth of Australia, 2004 at pp. 14-5.

110 May 2004 decision at para 166.

111 See, for example, May 2003 decision at para 220.

112 NATSEM also suggest a relative benchmark for poverty definitions is "generally more appropriate, due to the diversity of consumer habits amongst Australians". See Lloyd & Payne, 27-30 September 2004, Australians in Poverty in the 21st Century, Paper Prepared for 33rd Conference of Economists at p. 4.

113 ibid. at p. 13.

114 ibid. at p. 11.

115 Saunders, P, February 2005, Reviewing Recent Trends in Wage Income Inequality in Australia, Social Policy Research Centre, University of New South Wales.

116 Keating, M, 2004, The Case for Increased Taxation, Academy of Social Sciences, Occasional Paper Series No. 1 at p. 9.

117 Yuen, T, 2003, `The effects of minimum wages on youth employment in Canada: A panel study', The Journal of Human Resources, Vol. 38, No. 3.

118 Safety Net Review 2003 proceedings, Exhibit Commonwealth 1 at paras 6.15-6.

119 Exhibit Commonwealth 2 at para 4.4.

120 Exhibit ACTU 10.

121 May 2004 decision at para 123.

122 C2004/4617.

123 Victorian Minimum Wage Orders decision, PR949450, July 2004.

124 ABS Cat. No. 6345.0, Labour Price Index Australia, Explanatory Notes.

125 Minimum Wages Report.

126 Monash Paper.

127 May 2003 decision at para 222; May 2004 decision at para 286.

128 Safety Net Review 1997-98 proceedings, Joint Governments Submissions at p. 143.

129 ABS Cat. No. 6306.0.

130 Print M9675; (1996) 40 AILR 3-399.

131 Exhibit ACC1 2 at para 7.30.

132 AW787213CRV.

133 AW772681CRV.

134 AW783479CRV.

135 Exhibit ACCI 4, Attachment 7.4 at para 5.

136 See Exhibit NMI 1 at paras 6.6-9.

137 See generally submissions of Mr G Martin SC, Transcript at paras 661-89.

138 See the Victorian Common Rule decision, PR950653, August 2004 at para 30.

139 Exhibit S&T 3.

140 Exhibit S&T 3, Table 23 at p. 17.

141 PR949450, July 2004.

142 PR950653, August 2004.

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