Setting Australia’s minimum wages: 2007 and beyond Professor Ian Harper Chair Australian Fair Pay Commission 23 July 2007.

Setting Australia’s minimum wages:2007 and beyond

Professor Ian HarperChairAustralian Fair Pay Commission

23 July 2007

A new approach to setting minimum wages

• AFPC — a new economic institution

• From an adversarial system to a consultative one, supplemented by independent research and analysis

• For the first time, those affected by the Commission’s decisions can have a direct say in what minimum wages should be

• Minimum wage-setting added to mix of policy instruments focussed on the national economy

A focus on jobs

Like interest rates, minimum wages influence important decisions in our economy

• they can affect employment (especially for the low paid), the rate of inflation and competitiveness of

the Australian economy• minimum wages can affect labour supply as well as labour demand

Workforce participation — one of the key drivers of our future economic prosperity

Having a job is widely recognised as a guard against poverty and disadvantage

Remit

The Commission exercises its wage-setting powers by:

• adjusting the standard Federal Minimum Wage

(FMW)

• determining or adjusting special FMWs (e.g., for workers with a disability)

• determining or adjusting basic periodic rates of pay in the Australian Pay and Classification Scales (the “Pay Scales”)

• determining or adjusting basic piece rates of pay

• determining or adjusting casual loadings

Objective and constraints

The Commission’s objective specified in legislation is to promote the economic prosperity of the people of Australia

In exercising its powers, the Commission must have regard to:

• the capacity for the unemployed and low paid to obtain and remain in employment;

• employment and competitiveness across the economy;

• providing a safety net for the low paid; and

• providing minimum wages for junior employees, employees to whom training arrangements apply and employees with a disability that ensure those employees are competitive in the labour market

2007 Minimum Wage Decision

• Submissions called 1 December 2006

• Submissions closed 30 March 2007

• Decision announced 5 July 2007

• Implementation 1 October 2007 (first pay date on or after)

The 2007 Minimum Wage Decision

An increase of:

$10.26 per week for people earning up to $700 per week

• covers 850,000 Australian workers - about 8% of the workforce

$5.32 per week for people earning $700 per week and above

• represents another 350,000 workers or a further 3% of the workforce

Increases flow on to junior employees, employees to whom training arrangements apply and employees with a disability

Key considerations

• Establishes mid-year timetable for reviews going forward

• A second real wage increase for Australia’s lowest paid

• Commission concerned about impacts on inflation, jobs and interest rates

• Maintains social safety net and incentives to seek and remain in employment

• Recognises impact of most severe drought in more than a century

Deferral granted for farm businessesFarm businesses must be in receipt of Exceptional Circumstances Interest Rate Subsidy (ECIRS)

Farm business in receipt of an ECIRS are:

• those most severely affected by drought• most likely to suffer detriment from increases in labour costs at this time, resulting in job losses

Deferral for a maximum of 12 months or until a farm business ceases to qualify for ECIRS, whichever comes first

Not applicable to FMW or special FMWs

 Minimum wage increases

2006 decision

2007 decision

Both decisions

CPI Inflation 4.8 1.6* 6.5

C14 5.65 2.00 7.76

C13 5.48 1.94 7.53

C12 5.23 1.86 7.19

C11 5.03 1.79 6.92

C10 4.76 1.69 6.53

C9 4.59 1.64 6.31

C8 4.39 1.59 6.05

Real wage increases across two decisions

Both the 2006 and 2007 decisions provide real wage increases to Australia’s lowest paid

* Forecast from December 2006 to October 2007

Lower EMTRsLow-paid Australians face lower EMTRs following the 2007/8 Budget. On average, they retain 74% of any increase compared to 70% in 2006.

Disposable income

Disposable income for those ‘Out of work’ and at 100% and 150% of the standard FMW, July 2007

Henderson Poverty Line (HPLs)

Income unit typeDisposable income as

% of HPL

50% 100% 150%

FMW FMW FMW

Single adult, no children 1.06 1.30 1.78

Single parent, one child 1.19 1.46 1.81

Single parent, two children 1.13 1.36 1.65

Single earner couple, no children 1.16 1.30 1.40

Single earner couple, one child 1.19 1.34 1.45

Single earner couple, two children 1.14 1.27 1.37

Dual earner couple, no children nm 1.22 1.36

Dual earner couple, one child nm 1.21 1.37

Dual earner couple, two children nm 1.17 1.31

Standard FMW well above HPL for all household types

A balancing act

The Commission took into account:

• 10-month period since the last pay increase • the sensitivity of low-paid employment to changes in wage levels• incentives for individuals to seek and remain in paid employment• continued strong performance of the economy and labour market (albeit not uniform)• movements in consumer prices• requirement to provide a safety net for the low paid

Who are the low-paid?

Lower-paid workers as a group (both FT and PT) are relatively concentrated in lower-income households

But 20 per cent of low-paid employees live in households in the top three deciles of the income distribution

Many low-paid workers are either:

• partnered to people earning above minimum wages; or

• single people living with other employed people(e.g., young people living at home with their

parents)

Characteristics of low-paid workers

Low-paid adult workers are more likely than the general workforce to have the following characteristics …

• employed in relatively low-skilled occupations

• lower levels of education

• relatively young (21 to 24)

• female

• not married

• low equivalent household disposable income

• employed on a casual basis

• migrants from a non-English speaking background

Award- or Pay Scale-reliant industries

• Accommodation, cafes & restaurants (37.6%)

• Retail Trade (19.1%)

• Property and Business Services (18.2%)

• Health and Community Services (12.8%)

• Personal and Other Services (12.3%)

Source: ABS Employee Earnings and Hours Survey, unpublished data

Consultation (1) – 2007

The Commission has:

• established a Business Consultative Group

• implemented a Research Consultative Group

• formed specialist Roundtables (e.g., for workers with a disability)

• commissioned research into stakeholder responses to the Commission’s procedures and 2006 Decision

• conducted face-to-face meetings with key stakeholder representatives

Consultation (2) – 2007

• Program of targeted focus groups in metropolitan and regional areas across Australia speaking to:

Low paid Employers

Juniors Unemployed

Indigenous Culturally and Linguistically Diverse

• Internet ‘bulletin boards’ national facilitated discussion groups

• Site visits

Submissions (1) – 2007

National submissions campaign implemented:

• posters and brochures encouraging community submissions distributed to more than 7000 community locations across Australia including:

• local libraries• local Councils• community centres• neighbourhood houses • job network providers and• community legal services

Online submission form developed and available at www.fairpay.gov.au

Submissions (2) – 2007

Commission received 62 submissions:

• employer organisations 23• employee organisations 6• community organisations 11• individuals 10• businesses 3• professional/education 3• government agencies 6

Commissioned research

2006:• minimum wages and employment• characteristics of low-paid employees• characteristics of employers of the low paid• interactions between minimum wages and the tax/transfer system

2007:• monitoring strategy to determine impact of 2006 Decision• economic and social circumstances of young people aged 15-20

Monitoring strategy

Two research projects commissioned:

• identify relevant existing data and how these should be used to monitor wage decisions

• analyse the impact of our decisions at an aggregate as well as an industry, regional and (in some cases) workplace level

• provide tools to identify emerging trends in employment and wages

Pay scales

• pre-Work Choices awards contained all minimum rates of pay and conditions of employment and ratified and published by AIRC

• currently 3,286 awards and approx 105,000 Pay Scales

• many awards and Pay Scales are redundant

• government has been publishing Pay Scale summaries since Commission’s first decision

• process to create and publish new Pay Scales agreed and commenced

Process to create and publish new pay scales

Priority Pay Scale list established

Relevant pre-reform wage instrument selected

Key stakeholders contacted. Website notification of commencement of process

Draft agreed between the parties

Key stakeholders invited to participate in round table.

Options for Pay Scale drafting identified:Union/employer organisation, AFPC Secretariat, suitably

qualified/experienced bodies

Draft prepared and circulated to key stakeholders

Draft not agreed between the parties

New Pay Scale published on website and Workplace Authority advised

Commission determines new Pay Scale, informed by submissions and further discussion with stakeholders if required

Legal opinion sought on compliance of the draft Pay Scale with legislation

Commission to make preliminary decision on outstanding issues of difference, informed by the parties’ views, legal opinion, consultation, further submissions and legal advice

Draft circulated and posted on website. Call for submissions

Pay scales - rationalisation • Commission to look into rationalisation of pay scales• Discussion paper released in September• incorporate review of wages for juniors and

trainees • follows Award Review Taskforce report

What principles should guide the AFPC?• How important are pay scales in securing

economic prosperity for the Australian people? • What role should rationalised pay scales play in a

modern, flexible labour market?

What type of organisation?• a focus on unemployed and low-paid Australians and their employers

• decisions are evidence-based, informed and

balanced

• procedures are open, transparent and

independent

• emphasis on research and analysis

• a respected authority on the link between employment and minimum wages in an Australian context

• to earn public respect and professional standing equivalent to the Reserve Bank of Australia