Review of the Living Wage Case - Speech to the Economic Society of Australia

In this review of the Living Wage decision of the Industrial Relations Commission, ACTU Research Officers Suzie Jones and Tim Harcourt focus on the manner in which the majority decision dealt with equity and economic considerations.

1. Introduction

In this review of the Living Wage decision of the Industrial Relations Commission, I will focus the manner in which the majority decision dealt with equity and economic considerations.

 

I have adopted this focus for two reasons.

 

 

  • first, the majority stated, when referring to the key provision of the Workplace Relations Act s.88B(2) which directs how the Commission must perform its functions under the Act:

 

 

"The key factor governing our consideration here is in our view, fairness." [Print P1997, p.20 and p.69]

 

 

  • second, in an almost apologetic manner the majority stated that because "the factor of greatest concern (to them was) the deterioration which has occurred in the relative position of workers who depend on the award rate" "wage increases should be granted" (p.49). However, in awarding the $10 "they regretted that they could not now go further." (p.50).

 

 

In the ACTU's view, if "fairness" is a key statutory criterion then the majority failed in relation to its statutory obligations. (Attachment B sets out the Objects of the Act and Part VI relating to adjustment of award wages).

 

"Fairness" in relation to award wages, in the context of a system in which enterprise bargaining is the primary means for generating productivity growth and improving wages and where the Act refers to "needs" of low-paid workers, entails, at least in our view:

 

 

  • award wages which have a positive relationship to movements in wages generally (AWOTE);

 

 

 

  • the gap between award wages and wages generally being narrowed significantly;

 

 

 

  • the needs of low-paid workers and the deficiencies of the social welfare system being addressed positively.

 

 

None of these elements were addressed by the majority

 

However, we would go further and state that even if we were to put this central issue - fairness - aside, the majority decision reflects a more cautious and conservative approach than even a strict application of economic considerations warranted.

 

Thus, for example, the Merchant Bank BT Trust, in their April 1997 Bulletin, issued just prior to the date the decision was handed down, stated that the money market would not be unconcerned with an amount between $11 to $14 . In the event the majority of the Living Wage Full Bench awarded $10 per week.

 

What were the considerations which, in the mind of the majority, limited their capacity to address and meet a key statutory requirement. I have identified three broad considerations, each one of which I will deal with in order to argue that in fact the majority of the IRC did not need to have regrets but could have made a courageous and historical decision. These broad considerations were:

 

Costs of the Claim - Direct and Indirect.

 

 

  • Economic Parameters - Unemployment and Inflation, including the weight given to the Reserve Bank of Australia's Monetary Response.

 

 

 

  • Level of wage settlements outside the award safety net and the space available to protect low paid workers.

 

2 Costs of the ACTU Claim: Direct and Indirect

2.1 Direct Effects

 

The Full Bench had before it a range of estimates of the direct costs of the ACTU claim, including 1% by the ACTU, 1.6% estimate by Reserve Bank and 1.84% by the Commonwealth Government, (p.23).

 

The majority concluded two percent addition to AWOTE was its best estimate of the direct cost, (p.25).

 

The reasoning underlying this "best estimate" reveals some significant errors, which likewise affected the majority's conclusions on the cost of other amounts; for example above $11 to $15.

 

First, the majority confused the technique of discounting any calculation of an addition to AWOTE from a particular award increase for what costs are in the system already with a counterfactual approach.

 

At page 25, the majority stated that:

 

"We do not know how the Reserve Bank calculated the discount of 0.4%."

 

An extraordinary statement since a great deal of submission was devoted to explaining that, in estimating the true addition to AWOTE of the claim, the cost of the third $8 safety net adjustment from the 1994 Principles, which still had to flow through the system, must not be included in the estimates of additions to the wages bill if we are focusing on the cost of the claim.

 

Instead, the majority confused it with the counterfactual assuming the Reserve Bank of Australia's (RBA's) discount of 0.4% represented the Commonwealth Government's $8 offer. It stated:

 

"the 2% estimate of the direct cost of the ACTU wage claim represents a comparison with a zero increase, rather than with an increase of the order granted in recent safety net reviews." (p.24)

 

This confusion resulted in an arbitrary estimate of, an addition to AWOTE, of 2% which would include the $5 already awarded under the 1994 Principles. (p.25).

 

Second, the majority's direct costing was an overestimate because it ignored an industrial reality, again dealt with in submissions, that the actual impact of the increase granted could be expected to vary from one year to the next.

 

The minority decision of Vice President Ross is instructive on this point

 

Vice President Ross, commenting on the Commonwealth's estimate of a $10, $12, $15 increase (which the Full Bench, during the case asked them to prepare), said:

 

"Implicit in such an approach is an assumption that the number of employees dependent on award increases has not changed since late 1995. In my view such an assumption is flawed." (p.66)

 

This is because as His Honour pointed out (at p.67):

 

 

  • the spread of enterprise agreements since 1993 resulting in declining numbers dependent on the award rate;

 

 

 

  • the new Workplace Relations Act, which on the Commonwealth Government's rhetoric would revolutionise and accelerate numbers covered by (collective and individual) enterprise agreements.

 

 

Thus, the majority's "best estimate" 2% direct cost is, in our submission, an arbitrary over-estimate, not supported on the evidence.

 

The flaws underlying the majority's direct cost estimates would no doubt have influenced its view of the Commonwealth costing of other flat increases.

 

The Commonwealth (p.76 minority decision) costed a $12 increase at 0.4%, i.e. only a 0.4% addition to AWOTE and this assumes constant numbers receiving the adjustment. Bearing this in mind a $20 adjustment would directly result in a modest addition to AWOTE of something less than 0.8% (if $12 equals 0.4%, then $24 will amount to 0.8%).

 

The extreme and, I suggest, unwarranted caution shown by the Commonwealth is revealed by the Merchant Bank - BT's estimate (p.9, April 1997):

 

$15 - 0.2% wages growth $20 - 0.4% wages growth

 

All these estimates fall within the Reserve Banks comfort zone of a 4.5% addition to AWOTE.

 

(At the time of the Living Wage Case AWOTE was running at 3.9%, thus leaving scope for 0.6% addition to AWOTE).

 

2.2 Indirect Costs

 

The notion of indirect costs and its relevance to costing of nationally granted wage increases formed the basis for the cautious and conservative approach by the Commission.

 

These indirect costs were identified by the majority (at pp.24-25) as:

 

(a) Increases in award rates raising the level of settlements negotiated under enterprise agreements.

 

(b) Both employers and employees agreeing to maintain overaward payments and thus failing to absorb any increase in award payments into overawards.

 

(c) Professionals and Executives salaries being higher because of an award increase.

 

I will deal with each of these in turn in order to demonstrate that the notion of "indirect costs" as defined by the majority, and the limitations they impose on the adjustment of award rates was not supported on the evidence.

 

(a) Impact on Level of Settlements in Bargaining Sector

 

The majority stated (at p.71) that:

 

"increases above $10 per week - say $12 or $15 would represent a significant risk.....that such increases would (1) raise the levels of settlements in future workplace and enterprise bargains, (2) raise the growth rate of AWOTE to a level inconsistent with the Reserve Bank's inflation target; and (3) diminish the incentive for unions and employees to engage in bargaining."

 

This conclusion ignores the industrial reality of enterprise bargaining, the factors which influence bargaining outcomes and the statistical evidence before the Commission on the relevant wages base for enterprise negotiations.

 

As VP Ross stated:

 

"I do not accept the proposition that moderate increases in award rates will impact on enterprise bargaining outcomes. In my experience in facilitating enterprise bargaining, debate between the parties is generally directed to actual rates bargained in comparable enterprises or to the prevailing level of increase in actual rates being achieved at other enterprises at the time. Bargaining is also influenced by the bargainers expectations as to the rate of inflation over the life a prospective agreement. Increases in award rates are seldom a consideration." (p.73)

 

In fact, as outlined by the ACTU and unions in their Living Wage submissions, other factors which are relevant include profitability, productivity improvements as well as executive salaries.

 

His Honour concluded:

 

"Accordingly I do not agree with the submission by the Joint Governments that a safety net increase of $15 would have "a substantial impact on the starting point for many wage negotiations". Given the level of the wages base for enterprise bargaining it is likely that a substantial part of such an increase would have already been factored into the negotiating framework." (p.75).

 

The ACTU, in its submissions, presented evidence on the wage base or actual rates which formed the starting point for enterprise negotiations.

 

As an illustration, in the manufacturing sector the average minimum weekly wage rate in Enterprise Agreements in the June Qtr 1996 was $468.10, whilst the maximum was $678.91. This compares with the (then) Metal Industry Award rate, at the first process worker classification level (C13) of $366.10, and at the Tradesperson level (C10), $441.20.

 

The majority took account of the RBA's views on the alleged indirect effects of award adjustments on enterprise bargaining but did not refer to a Chart contained in the RBA Bulletin, December 1996, which the ACTU submitted as evidence, that the relevant wage base for enterprise negotiations was not percentage adjustments in award wages but actual rates within the bargaining sector.

 

This chart (Attachment A) was reproduced in the minority decision (p.51) and relied on by VP Ross in rejecting the Commonwealth's submission on indirect effects of $15 adjustment.

 

This chart compares the % movements in AWOTE, Awards and Enterprise Bargaining. As can be seen, the Enterprise Bargaining line bears no relationship to movements in awards. Rather it supports the view that the relevant base are enterprise outcomes themselves.

 

(b) Reaction of Employers/Employees to Absorption

 

This was an argument put by employers but never substantiated by evidence. Despite this the majority accepted this argument without critical analysis.

 

The majority had before it a well documented history of wage fixation which showed that:

 

 

  • unions and members had regularly delivered on absorption;

 

 

 

  • employers regularly argued there would be no absorption but never produced evidence during a National Wage Case or after one involving absorption, that non-absorption was a live issue.

 

 

Further, when employers were asked to support their assertions only the BCA responded with limited detail of four disputes, each one of which were resolved by employees accepting absorption. (p.72 of the minority decision).

 

It is worth noting that the majority, nevertheless, have required a commitment to absorption to access the $10 award variation.

 

As to the failure of employers, on their own volition to absorb, as VP Ross points out:

 

"it would be unfair to limit safety net increases directed to the low paid on the basis that employers, of their own initiative, pass on wage increases in a manner contrary to the terms and spirit of a decision of the Commission and notwithstanding union commitments to absorption."

 

(c) Impact on Executive Salaries

 

The ACTU presented evidence as to the movement in Executive Salaries vis-a-vis award rates, the table and chart reproduced in the minority decision (p.51-52).

 

This evidence supports what must surely have been intuitively obvious or common industrial sense, that in negotiating salary packages executives do not have regard to adjustments in award rates.

 

Nevertheless, without referring to any particular evidence or developing a convincing argument, the majority identified the reaction of professional and executive salary settlements to award adjustments as an indirect cost!

 

2.3 Direct/Indirect Costs - Conclusion

 

The theoretical and methodological approach to the calculation of direct and indirect costs lacks consistency and logic, is at odds with industrial reality and was not supported by evidence.

 

The arbitrary overestimates involved acted to unnecessarily limit the capacity of the Commission to address what it identified as a real concern, the gap between those dependent on award rates and those in the bargaining sector.

 

The overestimates of costs resulted in the majority taking a cautious view as to whether the economy could support a wage increase. These overestimates heightened the majority's sensitivity to the RBA's reaction to any award adjustment, a major theme running throughout their decision.

3. Unemployment/Inflation and the Reserve Bank of Australia - A New Monetary Driven Wages Policy for Australia

The RBA response to the impact of any award wage adjustment on AWOTE was a consideration which the majority gave significant weight to in its decision. This is despite the fact that "fairness" was identified by the majority as a key statutory obligation. By comparison, the Reserve Bank's Charter refers only to inflation and unemployment. These economic considerations are also identified in the Workplace Relations Act 1996, but not as the majority wrongly stated (at p.21) for the first time in industrial relations legislation.

 

The Commission has always been required to balance equity, industrial and economic considerations while the RBA's charter is narrower. This fact was recognised by Nugget Coombs (a former Reserve Bank Governor) in his discussions with former President of the Commission, Sir Richard Kirby. (See ACTU Submission in Reply, p.122).

 

In this case, in the absence of a wages policy (such as the Accord), the RBA played an extraordinarily active role (through its Bulletins and its Governor's speeches) in exhorting the Commission to exercise restraint in relation to low-paid workers in the context where the Government has deliberately encouraged a market deregulated system.

 

The RBA stated that any additions to AWOTE that would put it above a 4.5% annual growth rate would push inflation above the crucial 2-3% 'comfort' zone. Any increase in inflation, the Reserve Bank warned, above this level would cause a tightening of monetary policy with a resultant increase in interest rates. The AIRC accepted this warning from the Reserve Bank (p.28-29) and decided that it should help the Bank meet its inflationary target (at the cost of low-paid workers).

 

The majority concluded:

 

"We give weight to the Bank's view in reaching our decision. We do so, of course, because we acknowledge its role in the shaping of macro-economic policy; but also because of our concern that a rise in interest rates would adversely affect employment and unemployment." (p.30).

 

Four criticisms can be made:

 

First, the earlier discussion on the cost overestimates and reference to independent analysis shows that the majority could have awarded significantly more and nevertheless be within Reserve Bank parameters.

 

Second, the AIRC is also assuming that the Living Wage is the key factor affecting wage growth and hence price stability and the level of interest rates. There are clearly other factors affecting interest rates of a domestic and international economic nature.

 

Third, furthermore, the AIRC has accepted the RBA's view of monetary policy being the key determinant of inflation and employment. It does not consider other economic factors or other available economic instruments; in particular the role of Government labour market or industry policy.

 

Fourth, on the evidence presented on the relationship between minimum wages and employment the AIRC accepted the view that "moderate increases in the wages of the low paid, of themselves do little or nothing to diminish their job prospects" (p.28). The ACTU had provided considerable economic evidence on the minimum wages/employment issue from Australia and overseas which cast doubt that wage increases for the low paid would have adverse employment consequences. (The "one workers' pay rise is another's job" belief). This was accepted by the AIRC together with the submissions that there was doubt that leaving relative wage flexibility "to the market" would bring microeconomic gain. (p.28). The AIRC did take note of the ACTU evidence on these aspects of wages and labour market behaviour.

 

Yet the majority failed to translate the change in the economic, intellectual debate into something of substance for low-paid workers. $10 is not a moderate increase - but an extremely modest increase.

 

The conclusion easily reached is that despite a low-inflationary environment, high profit levels, productivity increases and transformation in the terms of trade; in an environment where the Government has eschewed the use of fiscal policy and industry policy to address unemployment, low-paid workers are to carry the burden of wages policy (administered predominantly through the exhortation of the RBA) and of achieving lower unemployment levels.

4. Space to Award Increases

In regretting that it could not award a higher award adjustment the majority held out a prospect that it might be able to be more generous provided bargaining settlements are lower in the future.

 

The majority stated:

 

".....there is a prospect that the progressive recognition of the new, non-inflationary environment will lower the level of settlements so as to leave "space" for a more generous treatment of workers fully or substantially dependent on award wages. Unless this occurs, the Commission may be faced with either accepting the growing disparity between wage levels in the two sectors or seeking to reduce the disparity in a manner which might prove incompatible with national inflation and employment objectives. Neither course commends itself to us." (p.50)

 

I have earlier outlined why the majority could have, on the material available, adopted a more appropriate stance and awarded moderate increases to arrest the growing disparity. Here I wish to focus on the space argument.

 

This concept of "space" is not internally consistent and is at odds with the new supposedly deregulated system of industrial relations.

 

First, as indicated earlier in reference to the RBA Chart (Attachment A) the relationship between movements in enterprise bargaining, AWOTE and award wages is not a simple one; it is certainly a more complicated one than the "space" argument would suggest.

 

Second, in effect the majority is calling for a wages policy (comparable to the Accord where aggregate movements were agreed to by key parties), but in this case aggregate movement targets are being set by an outside institution with responsibility for monetary policy.

 

This attempt to have the trade union movement police bargaining outcomes or face the prospect of low-paid (most often non-union members) missing out on other than extremely modest adjustments is an outrage.

 

The Coalition Government has eschewed an Accord type wages policy, has deliberately embarked on a predominantly deregulated/market based wages system in the conviction that it would lead to greater market productivity. It has set out to deliberately reduce unions role in the system, but has, at the same time, obliged the Commission to maintain a genuine, fair safety net in the new Act.

 

On the basis of the majority judgement, the question must be asked whether the Commission had contracted out its task in relation to the safety net to the Reserve Bank?

 

The majority has, through this concept of space, placed the union movement in an invidious position. In effect they require the union movement to commit to aggregate outcomes (set unilaterally by the RBA) without any guarantee as to a level of safety net adjustment for low-paid or for social wage improvements.

 

In this regard, it should be noted that the ACTU tendered a report prepared by D. Johnson and O. Hellwig entitled "Evaluation of the Distributional Impact of the 1996-97 Budget on Australian Households".

 

This report models the impact on Australian households of measures announced in the 1996-97 Federal Government budget. It provides estimates of the impact on the purchasing power of a range of different household types and income levels of changes to government benefits, taxation and the financing of community services which were announced in last year's budget.

 

The report was referred to by the minority judgement but ignored by the majority (p.40-45 of the minority decision). In summary, it showed that in households with wage and salary earners, there would be a loss of, on average, $2.40 per week.

 

Third, there is no logical consistency as between the "space" concept and the one introduced by the majority in relation to indirect costs; that is, the "raising the floor" argument.

 

As noted earlier, the Commission concluded that any increase above $10 would "raise the floor", underpinning enterprise bargaining. Setting aside our criticism of this concept that award adjustments bear on enterprise bargaining outcomes, this concept is at odds with the "space" view of how the labour market operates.

 

If the Commission believes that raising the safety net will raise bargaining outcomes proportionately, then how can 'leaving space' for a larger award increase not have the same effect in future periods?'. If larger SNAs lead to larger bargaining outcomes then the benefits of 'leaving space' will surely be negated in the future. The assumption is not logical nor has the Commission referred to any evidence on bargaining behaviour (which VP Ross referred to at p.77-78).

5. Conclusion

The President of the ACTU, Jennie George, commenting on the majority Living Wage decision, stated: "In its 93 year history, the Commission has made many important, historic and courageous decisions this is not one of them."

 

What I have argued in this paper is that, not only did the majority's decision lack courage, but that, both in its reasoning and supporting evidence, is simply not sustainable. In this respect the Commission failed to meet its statutory obligation to ensure fairness is secured within the award system.

 

Suzie Jones

Tim Harcourt

ACTU Research Officers