Submission 167 Australian Council of Trade Unions Workplace Relations Framework Public inquiry

An in work benefit?

Policies such as an Earned Income Tax Credit (EITC) can help to boost living standards. However, we believe policies such as EITCs are complements to minimum wages, rather than substitutes. To accept the reverse would involve a substantial alteration the social contract, with consequences which would appear to be inconsistent with the policy positions of successive Australian governments.

In the absence of a binding minimum wage, the value of an in-work subsidy like an EITC will be partly captured by employers.²⁰² The existence of the subsidy would be expected to increase labour supply. This means that, at any given level of employment demand, wages will be lower than they would otherwise have been. The reduction in wages will be larger if the elasticity of labour demand is relatively low, as we believe it to be. In this way, an EITC without a fair minimum wage can serve as an effective transfer to the employers of low-paid workers, rather than the workers themselves. A fair minimum wage can ensure that the EITC has the intended effect of improving the living standards of low-paid workers, which is why we suggest they are substitutes rather than complements.

This view is shared by many economists. For example, Lee and Saez show that the optimal policy package combines both a minimum wage and transfers to low-wage workers, such as through an EITC, concluding that “the minimum wage and subsidies for low-skilled workers are complementary policies”.²⁰³ Dube describes the debate about the desirability of a higher minimum wage versus an expanded Earned Income Tax Credit as a “false dichotomy.”²⁰⁴

In our view, the PC should be more focussed on first ensuring that the existing minimum wage setting framework is capable of delivering what it appears to promise and what it ought to achieve to give better effect to the distributional purposes of the industrial relations system. It is only once that objective has been fulfilled that one can have some confidence that intended beneficiaries of the in work benefit will experience a net gain in their living standards. Furthermore, and at a more practical level, even without doing the sums it is readily apparent that the costs of implementing an EITC or other in work benefit would be substantial. This factor alone is sufficient to make it unappealing to government based on its present policy positions concerning the budget. The likely electoral response to any announcement of the policy changes required to fund such an initiative would also be a powerful disincentive to proceeding with it.

A more direct response

The current framework for determining minimum wages requires the Expert Panel to have regard to a number of considerations which are contained in the “minimum wages objective”²⁰⁵ and the “modern awards objective”²⁰⁶. At first glance, both of these objectives appear to do no more than list a number of considerations to be weighed in the balance in determining what a “fair” or “fair and relevant” safety net may contain. However, there are minor differences in the language used in the “modern awards objective” which, on closer examination, suggest (we submit unintentionally) an order of importance. This arises from the use of the phrase “the need to…” in relation to some criteria, but not others. For example, whilst the FW Commission is obliged to “take into account”:

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  relative living standards and the needs of the low paid;
  
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  the principle of equal remuneration for work of equal or comparable value;
  
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  the likely impact of any exercise of modern award powers on business, including productivity, employment costs and the regulatory burden;
  
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  the likely impact of any exercise of modern award powers on business, including on productivity, employment costs and the regulatory burden; and
  
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  the likely impact of any exercise of modern award powers on employment growth, inflation and the sustainability, performance and the competitiveness of the national economy.
  

It is also obliged to “take into account”:

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  the need to encourage collective bargaining;
  
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  the need to promote social inclusion through increased workforce participation;
  
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  the need to promote flexible modern work practices and the efficient and productive performance of work;
  
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  the need to provide additional remuneration for:
  
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    employees working overtime; or
    
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    employees working unsocial, irregular or unpredictable hours; or
    
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    employees working on weekends or public holidays; or
    
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    employees working shifts; and
    
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  the need to ensure a simple, easy to understand, stable and sustainable modern award system for Australia that avoids unnecessary overlap of modern awards.
  

We are not suggesting that the FW Commission should or has in practice established any differentiation or order of priority based on the distinctions in language above, however tensions did arise in the Annual Wage Review 2013-2014 wherein the Australian Catholic Council for Employment Relations suggest that the FW Commission had, in the past, placed an insufficient emphasis on “relative living standards and the needs of the low paid” insofar as the FW Commission had stated that “…the low paid need the highest level of wages that is consistent with all other objectives including low unemployment, low inflation and the viability of business enterprises…..”²⁰⁷

In our submission, it is appropriate to return to first principles when considering whether criteria for setting minimum wages are appropriately expressed. The Annual Wage Review is the primary means by which minimum wages are set and adjusted. For national minimum wage-reliant and award-reliant workers this is their only opportunity to receive a wage increase. The matters set out in section 284(1)(c) are clearly fundamental considerations to achieving the over-riding objective of establishing and maintaining a fair and relevant minimum safety net²⁰⁸ and should be given due weight. Indeed, as the FW Commission noted in its first Annual Wage Review decision²⁰⁹:

[14] While it is not useful to make a detailed comparison between the minimum wages objective and the parameters which guided the AFPC, there are some important differences which should be noted. In particular s.284(1) contains a requirement that a safety net be established and maintained. Therefore the principal consideration relates to the safety net rather than the “promotion of economic prosperity”. We discuss in some detail later a number of other important considerations which the AFPC was not specifically required to take into account. They include promoting social inclusion through increased workforce participation and relative living standards and the needs of the low-paid.(emphasis added)

Drawing on Chapter 1 of this submission, it is elementary that the wages/work bargain involves benefits to both the employee and the employer. The employer benefits from employing the worker’s labour, and the worker benefits by receiving wages. Absent regulation (and worker organisation), the power relationship underlying that bargain is inherently unequal; this is the mischief, unfairness or injustice which the legislative policy intervention is directed toward remedying. The FW Act relevantly proscribes that those wages must not be less than a certain amount, determined in accordance with its provisions. It does not proscribe that those wages must not exceed a particular amount. The minimum wage fixation powers contained in the FW Act are a deliberate intervention in what would otherwise be the distribution of market incomes, in favour of employees. Once that is accepted, rising inequality and a continuing deterioration in the position of minimum wage workers relative to market wage workers should be regarded as indicators that the regulatory intervention is not delivering on its aims as well as it should.

In light of this, we are strongly of the view that textually minor but semantically significant amendments are required to the “minimum wages objective” and the “modern awards objective”. Those amendments should retain each of the existing criteria in comparatively neutral terms, however should involve references to “reducing inequality and the incidence of low pay” in the same leading text as are contained the references to “fair minimum wages” and a “fair and relevant safety net”.