Submission to the Fair Work Australia Annual Wage Review
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Submission to the Fair Work Australia Annual Wage Review 2010 19 March 2010 Australian Government Submission Table of Contents Chapter 1: Introduction ..............................................................................................5 Introduction................................................................................................................5 A new, fair workplace relations system.....................................................................6 Establishment of Fair Work Australia and the Minimum Wage Panel .................7 The National Minimum Wage (NMW) order........................................................7 Balancing economic factors and fairness - new legislative parameters.................8 The coverage of the Panel’s decision.......................................................................10 Award coverage .......................................................................................................11 Changes in award coverage over time .................................................................14 Government Position ...............................................................................................15 Chapter 2: Economic environment ..........................................................................17 Introduction..............................................................................................................17 Economy ..................................................................................................................17 Domestic outlook .................................................................................................17 International outlook............................................................................................19 Employment.........................................................................................................20 Wages and inflation .............................................................................................21 The Government’s response to the global financial crisis .......................................23 The Government’s medium term fiscal strategy and the design of its fiscal stimulus ................................................................................................................23 Impacts of the fiscal stimulus ..............................................................................24 Conclusion ...............................................................................................................25 Chapter 3: Labour market developments ..............................................................27 Introduction..............................................................................................................27 Overview..................................................................................................................27 Employment.............................................................................................................28 Unemployment.........................................................................................................31 Participation rate ......................................................................................................31 Key groups in the labour market..............................................................................33 Youth (15-24 years) .............................................................................................33 The long-term unemployed..................................................................................34 Lone parents.........................................................................................................35 Less skilled group ................................................................................................36 Discouraged jobseekers .......................................................................................37 State labour market differences ...............................................................................37 Regional labour market developments.....................................................................38 Regional disparity and disadvantage ...................................................................39 Conclusion ...............................................................................................................40 Chapter 4: Social inclusion and workforce participation ......................................43 Introduction..............................................................................................................43 The Australian Government’s social inclusion agenda ...........................................44 Social inclusion and workforce participation ..........................................................46 The extent of social exclusion in Australia..........................................................48 Minimum wages and social inclusion..................................................................48 The importance of low paid work to unemployed persons and persons not in the labour force ..............................................................................................................49 Labour market outcomes of non-employed persons............................................50 Low paid transitions.............................................................................................52 Wage transitions of casual and non-casual low paid workers .............................54 Australian Government Submission International research conducted into earnings mobility .........................................54 The impact of minimum wage increases on employment .......................................55 Transfer payments, earnings and incentives to work...............................................56 Single earner families ..........................................................................................57 Second earner households....................................................................................61 Conclusion ...............................................................................................................64 Chapter 5: Relative living standards and the needs of the low paid .....................65 Introduction..............................................................................................................65 What does this parameter mean in relation to setting minimum wages?.................65 Recent trends in relative living standards ................................................................66 Prices – Consumer Price Index and Analytical Living Cost Indices ...................66 Minimum wage outcomes....................................................................................69 Inequality .................................................................................................................73 Earnings inequality ..............................................................................................74 Income inequality.................................................................................................76 Who are the low paid? .............................................................................................78 Characteristics of low paid workers.....................................................................79 Incidence of low paid employment......................................................................82 Household income distribution ................................................................................82 Means to address relative living standards and needs of low paid ..........................83 Welfare improving potential of minimum wage increases ..................................84 The tax-transfer system........................................................................................85 Conclusion ...............................................................................................................89 Chapter 6: Equal remuneration ...............................................................................91 Introduction..............................................................................................................91 Equal remuneration provisions under the Fair Work Act 2009 ...............................91 Principles relating to the safety net of minimum wages and conditions..............92 The expansion of the equal remuneration principle to include equal remuneration for work of equal or comparable value ....................................................................93 Latest gender pay gap data.......................................................................................95 Pay gap trends ......................................................................................................95 Average Hours .....................................................................................................96 Method of setting pay ..........................................................................................97 State/Territory ......................................................................................................98 Occupation ...........................................................................................................99 Industry ..............................................................................................................100 Age.....................................................................................................................101 Conclusion .............................................................................................................101 Chapter 7: Sub-minimum wages ............................................................................103 Introduction............................................................................................................103 FWA’s obligations under the FW Act ...................................................................103 Review of apprentice and trainee award wages and conditions ............................105 Australian Government Submission 5 Chapter 1: Introduction Introduction 1.1 The 2010 Annual Wage Review marks the first minimum wage review conducted under the Australian Government’s new workplace relations system. The Fair Work Act 2009 (FW Act) provides the Minimum Wage Panel (the Panel) with new, balanced legislative parameters to have regard to when setting minimum wages. The information contained in this submission is structured according to those parameters. 1.2 Further, this review follows the Australian Fair Pay Commission’s (AFPC’s) 2009 decision not to increase minimum wages. While the AFPC was faced with the most challenging economic environment to confront a minimum wage-setting body for decades, the Government considers the AFPC’s decision did not strike the right balance. 1.3 In its post-Budget submission to the 2009 review, the Government argued for a considered rise in the low income safety net and against a reduction in the real minimum wage. The Government is concerned that the pay of low income working Australians has now gone backwards in real terms. 1.4 As explained in Chapter 5 of this submission, recent federal minimum wage decisions mean that federal minimum wages have declined in real terms over the last two years. The real value of the Federal Minimum Wage (FMW) fell by 2.0 per cent following the last two decisions. For those on minimum wages above the FMW, real wages have fallen by even more. 1.5 The Government believes that the approach to minimum wage setting must be both economically responsible and fair. As noted in Chapter 4, considered increases in minimum wages can allow low income working Australians to share in the benefits of economic growth while ensuring employment growth can continue. 1.6 The Government notes that low paid jobs are an important entry point into the labour market and for many a stepping stone into higher paid and more stable forms of employment. A significant number of low paid 6 Australian Government Submission workers, however, remain in low paid jobs over time. These individuals have a right to a fair wage that delivers a decent standard of living. 1.7 Chapters 2 and 3 of this submission present the Panel with the most up- to-date economic and labour market information and forecasts. The Government submits that during periods of recovery and growth those at the lower end of the income scale should also receive a share of the benefits of the economic recovery. This did not occur under the previous Government. Over the last 10 years, the FMW has only increased by 2.3 per cent in real terms. 1.8 Moreover, Household, Income and Labour Dynamics in Australia (HILDA) data reveal that the incidence of low paid employment increased between 2003 and 2007 (see chapter 5), despite strong economic growth during this period, with 14.6 per cent of all employees classified as low paid in 2007 compared with 10.6 per cent in 2006. 1.9 The Government will update the Panel on the latest economic information and forecasts and budget measures following the 2010-2011 Budget. 1.10 In light of the recent decline in the real and relative value of minimum wages and after considering the legislative parameters and evidence base, on balance, the Government urges the Panel to grant a considered real increase in minimum wages that at a minimum reflects the cost of living increases since the last minimum wage rise in 2008. A new, fair workplace relations system 1.11 The new Fair Work system commenced in full on 1 January 2010. This marks an important step in Australia’s workplace relations laws. The Fair Work system brings fairness to Australia’s workplace relations system. 1.12 The following section provides an overview of the new Fair Work system protections for minimum wages, including a brief outline of Fair Work Australia’s and the Panel’s minimum wage obligations. Australian Government Submission 7 Establishment of Fair Work Australia and the Minimum Wage Panel 1.13 Fair Work Australia (FWA) was established under the FW Act and began operation on 1 July 2009. FWA replaces the Australian Industrial Relations Commission (AIRC), the Australian Industrial Registry, the AFPC and assumes some of the responsibilities of the former Workplace Authority. 1.14 The Panel within FWA replaces the AFPC as the new specialist body responsible for annually reviewing and setting minimum wages in Australia. The National Minimum Wage (NMW) order 1.15 The NMW order sets minimum wages for employees who are award/agreement free. An employee is award/agreement free if the employee is not covered by a modern award, enterprise agreement, transitional instrument or Division 2B State instrument.1 1.16 The NMW order must be set in each annual wage review.2 Each order must set: 3 • the NMW for all award/agreement free employees (other than junior employees, employees to whom training arrangements apply and employees with a disability4); • special NMWs for all award/agreement free junior employees, employees to whom training arrangements apply and employees with a disability; • the casual loading for award/agreement free employees who are casual employees. 1.17 There is an exception to the usual requirement that the NMW order set special NMWs for all award/agreement free junior employees, employees to whom training arrangements apply and employees with a 1 Section 12 of the FW Act, item 32 of Schedule 3 and item 47 of Schedule 3A to the Fair Work (Transitional Provisions and Consequential Amendments) Act 2009 (T&C Act). 2 Section 285 of the FW Act. 3 Subsection 294(1) of the FW Act. 4 Subsection 294(3) of the FW Act. 8 Australian Government Submission disability for the first annual wage review.5 In the first annual wage review, FWA is only required to set a special NMW for a class (or sub- class) of employees if there is already a special NMW for those employees in the transitional NMW order.6 1.18 The transitional NMW order sets two special NMWs: • for employees with a disability (other than employees with a disability who are junior employees or employees to whom training arrangements apply) where the effects of their disability do not impact on their productive capacity. • for employees with a disability in open employment (other than employees with a disability who are junior employees or employees to whom training arrangements apply) who are unable to perform the range of duties to the competence level required because of the effects of disability on their productive capacity. 1.19 The transitional NMW order does not set special NMWs for junior employees and employees to whom training arrangements apply. 1.20 In the first annual wage review, therefore, FWA is only required to set a special NMW for employees with a disability (other than employees with a disability who are junior employees or employees to whom training arrangements apply) – although the FW Act does not preclude FWA also setting special NMWs for the other classes as well. If FWA does not set a full range of special NMWs for all classes in this review, the FW Act requires the President to establish a process for setting special NMWs for the other classes in the second annual wage review to occur in 2011.7 Balancing economic factors and fairness - new legislative parameters 1.21 When setting and varying minimum wages in annual wage reviews, the Panel must have regard to the minimum wages objective.8 The minimum wages objective forms a set of legislative parameters that the 5 Subitem 4(1) of Schedule 9 to the T&C Act. 6 Subitem 4(2) of Schedule 9 to the T&C Act. 7 Subitem 4(3) of Schedule 9 to the T&C Act. 8 Section 284 of the FW Act. Australian Government Submission 9 Panel must take into account. Specifically, the Panel is required to ‘establish and maintain a safety net of fair minimum wages’ taking into account: (a) the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth; (b) promoting social inclusion through increased workforce participation; (c) relative living standards and the needs of the low paid; (d) the principle of equal remuneration for work of equal or comparable value; and (e) providing a comprehensive range of fair minimum wages to junior employees, employees to whom training arrangements apply and employees with a disability. 1.22 These new legislative parameters differ from the previous parameters of the AFPC in that they provide a more balanced set of criteria for the Panel to consider that take account of the economic environment but also the key concepts of fairness, social inclusion and relativities with respect to living standards. 1.23 In contrast, the previous parameters in place for minimum wage reviews conducted by the AFPC were not balanced and fair. 1.24 The factors that the AFPC were required to take into account placed particular emphasis on the consideration of employment impacts if minimum wages are increased. The AFPC’s remit did not focus on fairness or relative living standards of the low paid in comparison with the rest of the nation. It is not surprising therefore that minimum wages during the period of the AFPC fell in real terms. 1.25 The Government believes that the new Fair Work parameters provide a balance which rightfully emphasises fairness as a key principle in minimum wage setting. 1.26 The new system gets the balance right between economic factors – employment growth, productivity and inflation – and considerations of 10 Australian Government Submission fairness - social inclusion, relative living standards and needs of the low paid. 1.27 Given that this will be the first minimum wage setting decision of a new body with new legislative parameters, it is important that each parameter is considered carefully and fully. The outcome of the 2010 Annual Wage Review will likely provide the basis for and influence decisions of future wage reviews. The coverage of the Panel’s decision 1.28 The latest ABS data show that approximately 1.45 million (or 16.5 per cent) Australian employees were award-reliant as at August 2008. The Panel’s decision directly affects the wages of the vast majority of these employees, most of whom are under federal jurisdiction following the creation of the national workplace relations system. 1.29 A small number of award-reliant employees will continue to receive minimum wage increases granted independently within state workplace relations jurisdictions (namely award-reliant employees in unincorporated enterprises in Western Australia, state and local government award-reliant employees in New South Wales, Queensland, South Australia and Western Australia and state government award- reliant employees in Tasmania). 1.30 The NMW and modern award minimum wages act as an actual floor for wage rates under a range of industrial instruments including enterprise agreements, transitional instruments and Division 2B State instruments. 1.31 The Panel’s decision, however, also affects wages indirectly through ‘flow-ons’ to other employees and by acting as a floor for wage increases (as well as being a floor for actual rates). 1.32 According to the Department of Education, Employment and Workplace Relations’ (DEEWR) Workplace Agreements Database, around 23 per cent of current federal enterprise collective agreements (CAs) covering 20 per cent of employees employed under such agreements, link terms and conditions in some form to annual wage review outcomes. It is important to note, however, that only 13 per cent of Australian Government Submission 11 federal CAs, covering six per cent of employees employed under such agreements, automatically ‘flow on’ annual wage review decisions. For the remainder, conditions and/or qualifications of some type apply. 1.33 Minimum wage increases can also act as a floor for workplace bargaining. A higher minimum wage increase may encourage higher wage claims and outcomes in workplace bargaining negotiations. 1.34 The outcomes of negotiations of the larger federal CAs are also a major factor in overall federal agreement outcomes. There are 133 large CAs, each of which covers 500 or more employees, which reach their nominal expiry data and are likely to be renegotiated in 2010. These include negotiations in the manufacturing industry (Hawker de Havilland, Fairfax Printers, Amcor and Visy), transport (Qantas, TNT and Toll), retail (Myers, Woolworths, Best & Less, Harris Scarfe, Coles Liquor, Suzanne Grae, and Freedom) and fast food (Red Rooster and Hungry Jacks). 1.35 Of the 5 256 federally registered CAs expiring in 2010, there are 2 859 (or 54 per cent) in the manufacturing and construction industries. The expiring manufacturing agreements in 2010 represent over 30 per cent of current agreements in that industry. Award coverage 1.36 To assist the Panel in determining which industries and occupations award-reliant employees predominantly lie, the Government presents the following data from the most recent (2008) ABS Employee Earnings and Hours (EEH) survey. 1.37 Overall, EEH data show that only 16.5 per cent of non-farm employees (1 454 000 employees) were paid the rate specified in an award9 in August 2008, down from 19.0 per cent in May 2006. This will reduce the direct impact that increases in minimum wages will have on aggregate employment and inflation. 9 This also includes those covered by Australian Pay and Classification Scales under the previous system. As the majority of these instruments have now been replaced by modern awards, for ease of expression all employees in this category will be referred to as award-reliant. 12 Australian Government Submission 1.38 Women were more likely to be award-reliant in August 2008 (19.9 per cent compared with 13.3 per cent for men). Award-reliance has declined for both women and men over the period May 2006 to August 2008 (down from 23.4 per cent and 14.7 per cent respectively). 1.39 Part-time employees were also more likely to be award-reliant in August 2008 (29.0 per cent compared with 9.8 per cent for full-time employees). Once again, award-reliance is down for both part-time and full-time employees over the period May 2006 to August 2008 (from 32.8 per cent and 11.8 per cent respectively). 1.40 Private sector award-reliance at 20.4 per cent was significantly higher than that for public sector employees (0.4 per cent10) in August 2008. Award-reliance is down for both private and public sector employees over the period May 2006 to August 2008 (from 23.1 per cent and 2.4 per cent11 respectively). 1.41 The three industries with the highest concentration of award-reliant employees in August 2008 were Accommodation and food services (50.3 per cent), Administrative and support services (33.9 per cent) and Retail trade (28.9 per cent) (see Table 1.1). 10 Estimate has a relative standard error of 25 per cent to 50 per cent and should be used with caution. 11 Estimate has a relative standard error of 25 per cent to 50 per cent and should be used with caution. Australian Government Submission 13 Table 1.1 Award-reliance by industry, August 2008 Award-reliance Proportion of employees within each industry on Industry awards (%) Accommodation and food services 50.3 Administrative and support services 33.9 Retail trade 28.9 Other services 25.4 Rental, hiring and real estate services 20.2 Health care and social assistance 17.2 Arts and recreation services 14.2 Manufacturing 12.2 Construction 9.1 Wholesale trade 9.0 Education and training *8.4 Transport, postal and warehousing 8.3 Information media and telecommunications 5.6 Professional, scientific and technical services 5.4 Electricity, gas, water and waste services *5.4 Public administration and safety **3.6 Financial and insurance services *2.2 Mining *1.2 All industries 16.5 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, Table 15. * Estimate has a relative standard error of 25 per cent to 50 per cent and should be used with caution. ** Estimate has a relative standard error greater than 50 per cent and is considered too unreliable for general use. 1.42 The three occupations with the highest concentration of award-reliant employees in August 2008 were Community and personal service workers (31.7 per cent), Sales workers (30.5 per cent) and Labourers (29.8 per cent) (see Table 1.2). 14 Australian Government Submission Table 1.2 Award-reliance by occupation, August 2008 Award-reliance Proportion of employees within Occupation each industry on awards (%) Community and personal service workers 31.7 Sales workers 30.5 Labourers 29.8 Technicians and trades workers 18.4 Machinery operators and drivers 12.7 Clerical and administrative workers 10.7 Professionals 4.2 Managers 2.3 All occupations 16.5 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, Table 16. Changes in award coverage over time 1.43 The decline in the incidence of award-reliance between May 2006 and August 2008 is a continuation of the longer term trend. The 2010 FWA research report titled ‘An overview of compositional change in the Australian labour market and award reliance’ (Research Report 01/2010) looks at award coverage since 2000 and concludes that “award reliance is more likely to be found among employees who are female, part-time, casual and are employed in certain industries or occupations”.12 1.44 In addition, Research Report 01/2010 investigated the effect of compositional change in the labour market on award-reliance. Labour market composition can affect award-reliance when the proportion of a particular group that has a relatively high (low) reliance on awards increases and consequently total award-reliance increases (decreases). Instead, the report finds that: Within the context of decreasing award-reliance and increasing agreement making, industry, gender, part-time and casual employment indicators showed increases in labour market segments that had a relatively higher proportion of award reliant employees, in opposition to the general trend.13 12 D Rozenbes, ‘An overview of compositional change in the Australian labour market and award reliance’, Fair Work Australia Research Report 1/2010, February 2010, page 64. 13 Ibid, page 6. Australian Government Submission 15 1.45 Research Report 1/2010 finds that the general decline in award-reliance over time was more to do with changes in the demand for higher skills: The analysis in this paper also showed another effect of compositional change in the labour market on award reliance that came from the demand for skills. An increase in the demand for higher-skills was shown to have occurred across all segments of the labour market. This was also the case for the decrease in award reliance. Employed persons who are less-skilled are more likely to be employed in lower paid occupations and be more reliant on awards. The proportion of employment comprised of occupation groups with relatively high award reliance mostly fell over the period 2000 to 2008… The effect of an increase in demand for people with higher skill levels is more pronounced using educational attainment data. As employed persons reliant on awards are more likely to be less-skilled and have lower educational attainment levels, a decline in the proportion of employed persons without nonschool qualifications, all other things being equal, is likely to have contributed to a fall in award reliance.14 Government Position 1.46 The introduction of the new Fair Work system brings fairness to Australia’s workplace relations laws. Importantly, the system and the new set of legislative parameters for setting minimum wages achieves the right balance between supporting the economy and employment growth, while also providing consideration of the relative living standards and needs of Australia’s lowest paid employees. 1.47 The Government’s submission is broadly structured according to the new legislative parameters and presents what the Government believes to be the most important considerations for each. 1.48 The Government believes that it is possible to be both economically responsible and fair. Considered rises in minimum wages can exist along side employment growth, when economic circumstances permit. 14 Ibid, page 65. 16 Australian Government Submission 1.49 The Government urges the Panel to grant a considered real increase in minimum wages that, at a minimum, reflects the cost of living increases since the last minimum wage rise. 1.50 The Government’s view is that a considered rise in minimum wages is one that would allow low income working Australians to share fairly in the benefits of the economic recovery. Australian Government Submission 17 Chapter 2: Economic environment Introduction 2.1 This chapter provides the latest information on the outlook for the Australian economy to assist the Panel in considering the impact of minimum wages on employment and competitiveness across the economy. The updated economic outlook and impact of Budget measures will be provided in the Government’s post-Budget submission. 2.2 The Australian economy has demonstrated resilience against a background of still challenging global conditions. The economy has performed better than expected this year, with forecasts now expecting growth during 2009-10 of 1½ per cent compared to the -½ per cent predicted in the 2009-10 Budget. Unemployment has also decreased from its October 2009 peak of 5.8 per cent to 5.3 per cent in February 2010. 2.3 There remain, however, some downside risks to the economic outlook over the next year. In terms of the labour market, hours worked have fallen by more than 2 per cent in trend terms from the peak in June 2009. In broader terms, the economy is also expected to continue operating below capacity for some time. Economy Domestic outlook 2.4 The December quarter 2009 National Accounts show that the Australian economy continued to grow against a background of still challenging global conditions. 2.5 As shown in Chart 2.1, real Gross Domestic Product (GDP) grew by 0.9 per cent in the December quarter 2009 to be 2.7 per cent higher over the year. These results compare with GDP growth of 1.0 per cent over the year to the December quarter 2008. 2.6 The National Accounts show household consumption grew by 0.7 per cent to be 2.8 per cent higher than a year ago. These increases 18 Australian Government Submission compare with household consumption growth of 1.5 per cent over the year to the December quarter 2008. 2.7 Increasing business profits were reflected in a 4.8 per cent rise in gross operating surplus for private non-financial corporations in the December quarter 2009. This is the first quarterly increase since the September quarter 2008. Over the year to the December quarter 2009, business profits contracted by 6.2 per cent. 2.8 New private business investment increased by 4.7 per cent in the December quarter 2009 to be 0.6 per cent lower over the year. These compare with an increase of 11.0 per cent over the year to the December quarter 2008. 2.9 Exports increased by 1.7 per cent in the December quarter 2009, driven by non-rural exports. Net exports detracted 1.3 percentage points from GDP growth in the quarter reflecting a strong rise in imports. Partially offsetting this, inventories added 0.1 of a percentage point to GDP growth in the quarter. Chart 2.1: Quarterly and annual growth rates in GDP (chain volume measure), December quarter 2000 to December quarter 2009 Per cent change Per cent change 3 6 2 5 quarterly grow th (LHS) 1 4 0 3 -1 2 through-the-year grow th (RHS) -2 1 -3 0 Dec-2000 Dec-2001 Dec-2002 Dec-2003 Dec-2004 Dec-2005 Dec-2006 Dec-2007 Dec-2008 Dec-2009 Source: ABS Australian National Accounts: National Income, Expenditure and Product (Cat. No. 5206.0), December quarter 2009. 2.10 Growth forecasts for the Australian economy have been significantly upgraded. Forecast growth over 2009-10 has been revised up from Australian Government Submission 19 -½ per cent in the 2009-10 Budget to 1½ per cent in the 2009-10 Mid-Year Economic and Fiscal Outlook (MYEFO). 2.11 Household consumption is expected to grow by ¾ of a per cent for 2009-10 in MYEFO, compared with a contraction of a ¼ of a per cent in the 2009-10 Budget. The improvement largely reflects a strong rebound in consumer confidence supported by stimulus and the recent rise in asset values. 2.12 Despite the improved outlook, the economy is expected to be operating below capacity for some time. Although global financial conditions have stabilised and the world economy is growing again, the global recovery remains fragile and a sustained recovery in the major advanced economies is not yet assured. International outlook 2.13 The global economic recovery is proceeding faster than previously expected, backed by substantial macroeconomic stimulus and financial sector support. Both the IMF and the World Bank have recently upgraded their forecasts. After contracting by 0.8 per cent in 2009, the IMF is now forecasting global GDP growth of 3.9 per cent in 2010. Nonetheless, the recovery is proceeding at different speeds in various regions and remains fragile in many parts of the world, given the weakness in private demand. 2.14 The economies of the United States, Euro area and Japan suffered deep contractions last year and face the prospect of a slow and bumpy recovery. 2.15 US GDP contracted by 2.4 per cent in 2009, the sharpest annual contraction in the post-War era. In the two years following the onset of recession in December 2007, more than 8.4 million jobs were shed, with the unemployment rate reaching a 26-year high of 10.1 per cent in October 2009. Conditions have improved since mid-2009, however growth in 2010 is expected to be moderate relative to past recoveries with the IMF currently forecasting growth of 2.7 per cent. Unemployment is expected to remain high averaging around 10 per cent this year. 2.16 The IMF is projecting the Japanese economy to grow by 1.7 per cent in 2010 after contracting by 5.0 per cent in 2009 – the largest annual fall in 20 Australian Government Submission the post-War era. Unemployment was 4.9 per cent in January 2010, down from a peak of 5.6 per cent in July 2009. 2.17 China’s economy has recovered strongly from the global downturn, with GDP growth accelerating to 10.7 per cent through the year to the December quarter 2009 on the back of significant fiscal and monetary policy stimulus. However, the stronger-than-expected pick-up in economic activity has triggered concerns about overheating, asset price bubbles and the sustainability of growth. The IMF forecasts that GDP will grow by 10 per cent in 2010. 2.18 Following the first contraction in global trade volumes since 1982 and the sharpest in the post-war period, the IMF expects trade to grow by 6 per cent in 2010 while strong growth in China is expected to underpin demand for commodities. Employment 2.19 The Australian labour market has proven to be particularly resilient in the face of the global economic downturn. In the MYEFO (the latest official forecasts), the unemployment rate was forecast to peak at 6¾ per cent in the June quarter 2010. However, recent strong labour market outcomes suggest that the unemployment rate has peaked lower than this forecast. The better-than-expected growth in employment presents upside risks to the outlook for wages in 2010-11. 2.20 After rising in early 2009, the unemployment rate hovered around 5¾ per cent until October 2009. Since October, the unemployment rate has declined by 0.4 percentage points to currently stand at 5.3 per cent in February 2010. The February unemployment rate is one of the lowest unemployment rates of all the major advanced economies. 2.21 The recent decline in the unemployment rate has occurred in spite of strong labour force growth, with the creation of new jobs outpacing new entrants to the labour force. Since August 2009, employment has increased by almost 200 000, more than offsetting the 150 000 entrants into the labour force during the period. 2.22 This has been driven by strong increases in both full-time and part-time employment. However, during the downturn, many employers appear to have reduced staff working hours in preference to job shedding with Australian Government Submission 21 average hours falling by more than 2 per cent in trend terms from the peak in June 2009. 2.23 Other positive indicators include ANZ Job Advertisements which, in trend terms, grew by 2.3 per cent in February 2010. This is the seventh consecutive monthly increase, following 16 months of consecutive declines. However, trend total job advertisements remain 9.2 per cent lower through the year. 2.24 There is further detailed discussion of labour market trends and the employment outlook in Chapter 3 of this submission. Wages and inflation 2.25 The Wage Price Index (WPI) is the Australian Bureau of Statistics’ (ABS) headline measure of wages movements as it excludes changes in the quality of labour and compositional shifts in the labour market. The stability of the WPI relative to other measures, such as Average Weekly Earnings, makes it the preferred indicator of wage trends for the ABS and the Reserve Bank of Australia (RBA). 2.26 Below average outcomes in wage growth over the first three quarters of 2009 continued into the December quarter 2009. The Wage Price Index (WPI) grew at its slowest pace in just under 10 years in the December quarter 2009, up by 2.9 per cent through the year (seasonally adjusted). 2.27 The continued moderation has been driven by slower growth in private sector wages, which has eased significantly to 2.5 per cent over the year to December quarter 2009. This represents the lowest private sector wage growth since the inception of the WPI series in 1997. 2.28 By contrast, wage growth in the public sector has also slowed, but remains at 4.1 per cent through the year to December quarter 2009. 2.29 Wage outcomes across industries were broadly in line with divergent public and private sector wage growth. ‘Civil sector’ industries such as Transport, postal and warehousing, Electricity, gas, water and waste services, Education and training, Health care and social assistance and Public administration and safety recorded the strongest increases through the year to December quarter 2009 while the weakest wage growth was experienced in the Accommodation and food services, 22 Australian Government Submission Rental, hiring and real estate services and Administrative and support services industries. 2.30 Wages in the Mining and Construction industries also eased significantly throughout 2009, both falling to below 4 per cent (3.5 per cent and 3.4 per cent respectively). This is the first time in five years that the Mining industry has seen wages growth below 4 per cent, suggesting easing of labour constraints in this sector. 2.31 Wage growth moderation has been broad-based across the states. Tasmania and the Australian Capital Territory recorded the strongest through-the-year growth of 3.7 per cent. Through the year wage growth in Western Australia at 3.0 per cent was the lowest result since the June quarter 2004. South Australia and Victoria recorded the lowest growth with 2.4 per cent and 2.7 per cent, respectively. 2.32 The most recent data about wage outcomes in collective agreements, including those made under the FW Act, show that on average they provide for a 3.5 per cent per annum pay increase. This is the lowest average pay increase recorded in collective agreements for more than five years. This demonstrates that, in general terms, employers, employees and unions are exercising restraint when negotiating wages in collective agreements. 2.33 The latest official forecasts suggest WPI growth of 3¼ per cent through the year to the June quarter 2010 and 3½ per cent through the year to the June quarter 2011, although weaker-than-expected outcomes in the second half of 2009 present a downside risk to the near-term outlook. Conversely, continuing strong outcomes in the labour market, in line with the ongoing economic recovery, provide the upside risk to the outlook for wages beyond the near-term. 2.34 Wage indicators in private sector business surveys indicate a likely increase in the rate of growth of labour costs in coming quarters, albeit from low levels. However, there is little to suggest that firms are having difficulty obtaining suitable labour.15 2.35 Inflationary pressures have eased since last year’s minimum wage decision. Inflation, which peaked in 2008, eased over the course of 15 NAB Monthly Business Survey and Economic Outlook; ACCI-Westpac Survey of Industrial Trends. Australian Government Submission 23 2009. Headline inflation was 2.1 per cent through the year to the December quarter 2009. Underlying inflation has been declining gradually in year-ended terms for the past year but, at around 3.4 per cent through the year to the December quarter 2009, is still above the RBA’s 2 to 3 per cent target band. 2.36 The outlook is for continued moderate inflation reflecting the easing in capacity pressures over the past year and moderating labour costs. The MYEFO forecasts underlying and headline inflation to be 2¼ per cent through the year to the June quarters 2010 and 2011. The Government’s response to the global financial crisis 2.37 This section outlines the Government’s fiscal strategy that guided the design of its fiscal stimulus measures for mitigating the impact of the global financial crisis. It then briefly provides some estimates of the impacts of the fiscal stimulus on the economy and jobs. The Government’s medium term fiscal strategy and the design of its fiscal stimulus 2.38 The Government’s medium-term fiscal strategy16 guided the design of the fiscal stimulus during the global financial crisis. 2.39 Consistent with the medium-term fiscal strategy, the Government announced in February 2009 a two-stage fiscal strategy of supporting growth during the downturn and returning the budget to surplus once the economy recovers. 2.40 Stage 1 aims to support the economy during the global financial crisis through the use of automatic stabilisers and stimulus spending. 2.41 Stage 2 is the deficit exit strategy, which states that as the economy recovers and grows above trend, the Government will take action to return the budget to surplus by banking tax receipts and by holding real growth in spending to 2 per cent a year until the budget returns to surplus. 16 The medium term fiscal strategy is aimed at achieving: budget surpluses, on average, over the economic cycle; keeping taxation as a share of GDP on average below the level for 2007-08; and improving the Government’s net financial worth over the medium term. 24 Australian Government Submission 2.42 The Government’s economic stimulus was designed to be timely, temporary and targeted. Timely action allowed the stimulus to support the economy when it was needed most. The stimulus measures were also designed to ensure that they did not lock in higher baseline government spending. 2.43 In addition, the stimulus measures were carefully targeted to ensure their effectiveness in boosting demand, in turn supporting jobs and economic activity. The large investment component of the stimulus addressed long-term needs for economic and social infrastructure. Impacts of the fiscal stimulus 2.44 The Government’s fiscal stimulus has provided support to the economy and jobs during the global financial crisis. 2.45 While not immune to the effects of the global financial and economic crisis, the Australian economy has performed better than initially expected. Growth was stronger than expected at 1.3 per cent in 2008-09, and is forecast to be 1½ per cent in 2009-10. The latest official forecasts suggest a peak in the unemployment rate of 6¾ per cent in the June quarter 2010. However, recent strong labour market outcomes suggest that the unemployment rate may be lower than this forecast. 2.46 In year-average terms, advanced economies as a group contracted by a record 3.2 per cent in 2009 and the global economy contracted for the first time in the post war period. In contrast, the Australian economy grew by 1.4 per cent in 2009. This means Australia had the strongest growth of all the world’s advanced economies in 2009. Without the fiscal stimulus, in year-average terms, the economy would have contracted by 0.7 per cent in 2009. 2.47 The impact of fiscal stimulus on growth peaked in the June quarter 2009 and is already diminishing. The gradual wind down of fiscal stimulus will subtract one percentage point from economic growth through 2010, making room for the anticipated expansion in private sector activity. Australian Government Submission 25 Conclusion 2.48 The Australian economy has performed better than expected since the update provided in MYEFO but will continue to face challenges in the short-term. 2.49 While recent data show upswings in household consumption and employment, this was balanced against falls in business profit and investment and net exports. Headline and underlying inflation remains subdued. Wages growth has also slowed (particularly in the private sector) to its lowest growth rate in almost ten years. 2.50 While signs of recovery are clearly evident, it is important the Panel takes into account the fact that some level of volatility is anticipated to remain in the Australian economy in the short-term. 2.51 The Government’s fiscal stimulus measures have helped keep economic growth positive over the past 18 months. Further, they are estimated to reduce the expected peak in the unemployment rate by 1½ percentage points. 2.52 The Government’s stimulus measures were specifically designed to have their greatest impact in the first half of 2009, when the economy was expected to be at its weakest. As economic conditions improved, the impact of the stimulus has been gradually winding down, starting from the second half of 2009. 2.53 The withdrawal of the fiscal stimulus has also been designed so that it occurs in an orderly fashion to allow the economy to shift as smoothly as possible from being driven by public demand to being driven by private demand. 2.54 The Government anticipates the Panel will take into account the temporary nature of some of the fiscal stimulus measures, as well as the relative and absolute impact of on-going tax and transfer measures in place and their impacts on the incomes of low paid workers, in its review of minimum wages. 26 Australian Government Submission Australian Government Submission 27 Chapter 3: Labour market developments Introduction 3.1 The Panel is required to have regard to the performance and competitiveness of the national economy, including productivity, business competitiveness and viability, inflation and employment growth. The Government submits that of these economic considerations, employment growth is always the most important. 3.2 For example, it would be inconsistent with the objectives of the new system if minimum wage increases were rejected, both during periods of economic weakness (due to potential impact on employment growth) and during periods of economic strength (due to potential impact on inflation). 3.3 Any decision made by the Panel should consider the impact that an increase in the minimum wage would have on employment given the need to support employment growth as Australia’s economy strengthens, balanced against consideration of relative living standards and the needs of the low paid. 3.4 To assist the Panel, this chapter outlines recent trends in the labour market, with some focus given to the groups most vulnerable to unemployment, including teenagers, lone parents, the low skilled and those in specific disadvantaged regions. Overview 3.5 Up until around September 2008, economic and labour market conditions in Australia had been reasonably strong, notwithstanding the fact that the unemployment rate had already troughed at 3.9 per cent in February 2008 and the pace of employment growth had begun to ease. 3.6 At the onset of the global economic downturn in September 2008, economic and labour market conditions in Australia deteriorated sharply. As a result, there are now 128 400 (or 26.3 per cent) more 28 Australian Government Submission Australians out of work today than there were at the commencement of the downturn. 3.7 The Australian labour market, however, has held up much better than expected and has displayed remarkable resilience over the last year. In particular, there has been a cumulative rise in employment totalling 197 800 recorded over the last six months alone. 3.8 Importantly, however, despite some welcome recent increases in aggregate hours worked, average hours worked remain well below their trend peak. Accordingly, businesses are likely to continue to rebuild employee hours of work over the coming months before hiring new workers on any significant scale. Moreover, the unwinding of the effects of the fiscal stimulus package from here-on-in and the prospect of higher interest rates may also temper the pace of the current jobs upswing, at least to some extent. 3.9 That said, trend employment is currently growing at a healthy pace of 26 700 jobs per month as at February 2010, although this has eased back from its stellar rate of 34 500 jobs per month in November 2009, when interest rates were lower and when the impetus from the fiscal stimulus package was greater. 3.10 Nonetheless, the near-term outlook is for a continued expansion in employment, although at a somewhat less robust pace than the remarkable rate recorded in late 2009. 3.11 Beyond the short-term, however, a likely strong pick-up in business investment in the resources sector, in particular, may result in some acceleration in labour market activity during the second half of 2010, although this will be contingent upon the RBA’s interest rate stance over the course of the year. All this aside, further significant inroads into the unemployment rate, particularly against the backdrop of strong population growth and potentially higher labour force participation, may be difficult to achieve. Employment 3.12 Over the year to February 2010, total employment has increased by 175 200 (or 1.6 per cent). Over the last six months, the pace of Australian Government Submission 29 employment growth has been particularly strong, increasing by 197 800 (or 1.8 per cent). 3.13 While full-time employment has increased by just 4600 (or 0.1 per cent) over the year to February 2010, this modest rise has been offset by strong growth in part-time employment, up by 170 500 (or 5.4 per cent). This strong rise in part-time employment, in part, reflects the fact that employers, at least in the first instance, cut back on employee hours during the global economic downturn in an attempt to avoid redundancies and retain staff. 3.14 Further, the RBA, in its latest quarterly Bulletin, note that due to the tightness in the labour market prior to the economic downturn, firms were ‘overutilising’ their existing staff. As economic activity slowed it took some time for this overutilisation to unwind by, for example, reducing working hours. Firms may have also been reluctant to let go of skilled workers as activity slowed, because labour had been so difficult to source prior to the downturn. 17 Chart 3.1 Change in full-time, part-time and total employment (’000s), February 2009 to February 2010 250 200 170.5 175.2 Employment growth ('000s) 150 131.0 100 89.0 81.5 41.9 44.2 50 4.6 0 -50 -37.3 -100 Males Females Persons Full-time Part-time Total Source: ABS Labour Force, Australia, February 2010 (Cat No: 6202.0), seasonally adjusted. 3.15 In terms of gender breakdown, over the year to February 2010, male employment (up by 131 000 or 2.2 per cent) has grown more strongly 17 Reserve Bank of Australia ‘The Labour Market during the 2008-2009 Downturn’, RBA Bulletin, March quarter 2010. 30 Australian Government Submission than female employment (up by 44 200 or 0.9 per cent) and has accounted for around three-quarters (74.8 per cent) of total employment growth over the past year. This clearly reflects, at least to some extent, the paring back in hours from full-time to part-time. 3.16 From an industry perspective (see chart 3.2 overleaf), certain sectors have been more exposed to the effects of the economic downturn than others. For instance, Retail trade has been particularly hard-hit, with the level of employment in this industry declining by 34 700 (or 2.9 per cent) over the past year, reflecting the downturn in consumer spending. Clearly, however, the Government’s fiscal stimulus package and in particular the cash payments to households, has provided considerable support to this sector. 3.17 Employment in the Manufacturing industry, which is closely linked to the business cycle, has also been hard-hit. The level of employment in this industry has fallen by 12 700 (or 1.3 per cent) over the past year. 3.18 It is also not surprising that the employment in Rental, hiring and real estate services (down by 12 100 or 6.8 per cent) has contracted over the year to February 2010. This is in line with the softening property and financial markets during late 2008 and the earlier part of 2009. Australian Government Submission 31 Chart 3.2 Change in employment (’000s) by industry, February 2009 to February 2010 Transport, Postal and Warehousing Retail Trade Electricity, Gas, Water and Waste Services Information Media and Telecommunications Arts and Recreation Services Manufacturing Rental, Hiring and Real Estate Services Agriculture, Forestry and Fishing Construction Mining Public Administration and Safety Financial and Insurance Services Accommodation and Food Services Education and Training Health Care and Social Assistance Administrative and Support Services Wholesale Trade Professional, Scientific and Technical Services ‐60 ‐40 ‐20 0 20 40 60 80 100 Change in employment ('000) Source: ABS Labour Force, Australia, Detailed, Quarterly, February 2010 (Cat No: 6291.0.55.003), seasonally adjusted. Unemployment 3.19 Unemployment has risen by 7300 (or 1.2 per cent) over the year to February 2010 and by 128 400 since the onset of the global economic downturn in September 2008. 3.20 That said, the level of unemployment has recently fallen, by 43 500 (or 6.6 per cent) over the six months to February 2010, in line with the stronger pace of employment growth during that period. 3.21 At 5.3 per cent, February’s unemployment rate was the same as a year ago (see Chart 3.3). This, however, is down from its recent peak of 5.8 per cent recorded in October 2009. Participation rate 3.22 Over the last year, the participation rate has decreased by 0.3 percentage points to 65.2 per cent in February 2010 (see chart 3.3). Over this period, the male participation rate fell by 0.1 percentage points, while 32 Australian Government Submission the female participation rate declined by 0.7 percentage points to 58.3 per cent in February 2010. 3.23 Unlike previous downturns, the participation rate has not experienced the decline normally associated with the discouraged worker effect18. This is likely to have been due, partly at least, to the less severe than expected nature of the current slowdown. 3.24 It is also worth noting that many prospective retirees were hard-hit by the declining value of their share portfolios during the global economic downturn, with shrinking nest eggs resulting in many older workers staying in the labour market longer. Further, the participation rate of married women continued to trend upwards in the earlier stages of the downturn possibly as a result of previously non-working spouses entering the labour force in an attempt to diversify household income, due to expectations of rising unemployment.19 3.25 The continuing ageing of the population will also mean that in the coming years, it will be increasingly difficult to maintain the current levels of participation in the labour force. The Government’s Intergenerational Report Australia to 2050: future challenges predicts that the ‘total labour force participation rate is projected to fall from around 65 per cent today, to less than 61 per cent by 2049–50, reflecting a combination of the projected fall in the proportion of people aged 15 and over in the labour force, and falling hours worked by those in employment.’ 18 The discouraged worker effect refers to when workers withdraw from the labour market because of failed searches for employment. 19 Reserve Bank of Australia ‘The Labour Market during the 2008-2009 Downturn’, RBA Bulletin, March quarter 2010. Australian Government Submission 33 Chart 3.3 Unemployment rate and participation rate, February 2005 to February 2010 6.0 66.0 Unemployment Rate (LHS) 65.5 5.5 65.0 Unemployment rate (%) Participation rate (%) 5.0 Participation Rate (RHS) 64.5 4.5 64.0 4.0 63.5 3.5 63.0 Feb-05 Feb-06 Feb-07 Feb-08 Feb-09 Feb-10 Source: ABS Labour Force, Australia, February 2010 (Cat No: 6202.0), trend data. Key groups in the labour market 3.26 The slowdown in labour market conditions that stemmed from the global economic downturn has not been evenly experienced across Australia. In particular, a number of vulnerable groups in the labour market, including youth, the long-term unemployed, lone parents, lower skilled workers and those with low levels of educational attainment have been more highly affected than others. These cohorts are also more likely to continue to experience some disadvantage as labour market conditions begin to recover. Youth (15-24 years) 3.27 Young people have been more adversely affected by the economic downturn, as they generally have less experience and/or training and are more likely to be employed in lower skilled jobs, which are often more precarious. 3.28 Over the last year, unemployment for 15-24 year olds has increased disproportionally compared with other cohorts, up by 10 400 (or 4.5 per cent), while their unemployment rate has increased from 11.0 per cent in February 2009 to 11.4 per cent in February 2010. 34 Australian Government Submission 3.29 Some younger cohorts have been affected more heavily than others. For instance, the number of 2008 school leavers (latest available data) who were still unemployed by the end of 2009 was 86 per cent higher than the number of 2007 school leavers unemployed in September 2008. 3.30 Of particular note, unemployment for 20-24 year old males increased by 66 per cent, compared with a 38 per cent increase for the population as a whole. School leavers and males aged 20-24 years have accounted for three-quarters of the growth in youth unemployment numbers. 3.31 Generally speaking, as more young people begin to encounter difficulties securing employment in the face of an economic shock (in this case, the global economic downturn), the proportion of youth participating in full-time education tends to rise. This is also borne out in recent data which shows that the proportion of youth in full-time education has increased by 0.7 percentage points over the year, to stand at 48.0 per cent in February 2010. However, this pick-up in education is less pronounced than those seen in previous downturns. 3.32 In response to the economic downturn, the Council of Australian Governments (COAG) agreed to establish a Compact with Young Australians. This Compact will ensure that as the economy recovers from the global recession, young Australians will have the skills required to realise their potential. 3.33 Under the terms of the Compact every Australian under the age of 25 has a guaranteed education or training place. The Government anticipates that the Compact with Young Australians will provide up to 135 000 young people with higher qualifications. 3.34 Further, the Compact with Young Australians will be the foundation of a new National Partnership on Youth Attainment and Transitions that will drive longer-term reform to ensure that young people stay engaged in education and training and attain a year 12 or equivalent qualification. The long-term unemployed 3.35 The significant increase in the short-term unemployment numbers that has occurred since early to mid-2009 is now beginning to flow through into higher levels of long-term unemployment. Australian Government Submission 35 3.36 Over the year to February 2010, the level of long-term unemployment has risen by 24 600 (or 30.2 per cent) to stand at 105 900. Over the same period, the number of very long-term unemployed (those unemployed for 104 weeks or over) has increased by 4000 (or 9.7 per cent) to 45 600. 3.37 Of particular concern is that when a person is unemployed for a significant length of time, it becomes more difficult to find subsequent work due to skill depreciation, the discouraged worker effect and marginalisation from the workforce. Experience from previous downturns shows that it takes a considerable period of time before long- term unemployment returns to its pre-downturn level. 3.38 In order to reduce the risk of employees retrenched during the economic downturn becoming long-term unemployed, the Government introduced the Structural Adjustment element of its Productivity Places Program in October 2008. This program provides funding for training places for Certificate II and above qualifications for retrenched or stood down workers. These places can be accessed on behalf of groups of employees in possession of separation documentation or notices of redundancy, by employers’ or employees’ representatives. 3.39 Further, on 2 July 2009, the Australian Government agreed with state and territory governments to deliver the Compact with Retrenched Workers. This Compact allows retrenched workers to receive prioritised access to state and territory delivered government subsidised Vocational Education and Training qualifications. To be eligible for the Compact, participants must be over 25 years of age and in possession of a separation certificate or notice of redundancy dated on or after 1 January 2009. Lone parents 3.40 In June 2009 (latest available data), there were 2 282 600 families20 with dependent children aged under 15 in Australia, 318 000 (or 13.9 per cent) of whom were jobless families. The majority of jobless families (214 800 or 67.6 per cent) were headed by a lone parent. 20 Excluding those families with a parent whose labour force status was ‘Not determined, other’. 36 Australian Government Submission 3.41 Over the year to June 2009, the number of employed lone parents with dependent children fell by 15 500 (or 5.7 per cent) to 254 300. This decline occurred in conjunction with a rise in the number of lone parents over the year, up by 11 200 or 2.4 per cent. Employment for couple families with dependent children decreased by 9000 (or 0.3 per cent) over the period. 3.42 The number of dependent children in jobless families rose significantly over the year to June 2009, up by 114 500 (or 22.7 per cent) to stand at 618 900. This is in line with more subdued labour market conditions over the period, with almost 65 per cent of dependent children in jobless families now living in lone parent families. 3.43 Lone parents often possess characteristics that predispose them to labour market disadvantage, such as lower educational attainment levels.21 This is reflected in their high unemployment rate of 9.6 per cent in June 2009, compared with an unemployment rate of 4.2 per cent for parents in a couple family with dependent children. 3.44 Accordingly, lone parents are significantly more likely to experience labour market disadvantage as a result of the economic downturn than their coupled counterparts. Less skilled group 3.45 Reflecting the impact of the global economic downturn on trades employment and low skilled workers, employment fell sharply for Technicians and Trade Workers (down by 57 400), Clerical and Administrative Workers (down by 51 300) and Machinery Operators and Drivers (down by 22 600) over the year to the February quarter 2010.22 3.46 Against the backdrop of a softening labour market, higher educational attainment levels (which are strongly linked with better employment prospects) become a significant predictor of how well a person might fare in a more difficult labour market environment. For example, upon retrenchment, those with lower educational attainment (all else being equal) will find it more difficult to find subsequent employment 21 ABS Education and work, May 2008 (Cat. No. 6227.0), unpublished data. 22 Occupation data are trended by DEEWR. Australian Government Submission 37 compared with their more highly skilled counterparts. Similarly, new labour market entrants will encounter greater difficulty securing an initial foothold in the jobs market. 3.47 Although many highly skilled workers have also encountered retrenchment during 2009 (for instance, in the early stages of the global economic downturn, many in Finance and Insurance were made redundant), they nonetheless will encounter fewer barriers in finding subsequent employment. Discouraged jobseekers 3.48 In September 2008 (latest available data) there were 73 900 discouraged jobseekers (people with marginal attachment to the labour force who wanted and were available to work but did not think they would find a job), a fall of 2700 (or 3.5 per cent) from a year earlier. 23 While it is not possible to examine changes in the number of discouraged job seekers during previous economic downturns (due to lack of data comparability), it could be expected that their numbers rose over 2009-10 as a result of the slowing in labour market conditions. State labour market differences 3.49 Labour market conditions have varied considerably across Australia over the last year. Employment increased in the majority of states/territories over the year to February 2010, with the largest increases (in percentage terms) recorded in Victoria (up by 3.3 per cent), the Northern Territory (up by 3.0 per cent) and South Australia (up by 1.8 per cent). Employment in Tasmania decreased by 3.1 per cent over this period. 3.50 Over the year to February 2010, the resource-rich states of Queensland (up 1.0 percentage points to 5.7 per cent) and Western Australia (up 0.8 percentage points to 5.0 per cent) recorded large increases in their unemployment rates. This reflects the impact of the temporary downturn in the Mining sector (and flow-on effects from that industry to other sectors, in particular, Construction) during 2009. Tasmania also recorded a significant increase in its unemployment rate (up by 2.0 23 ABS Persons Not in the Labour Force, September 2008 (Cat. No. 6220.0). 38 Australian Government Submission percentage points to 6.4 per cent over the period), the highest of any State or Territory. 3.51 The Queensland and Western Australian economies were adversely affected by a sharp decline in demand for commodity exports as a result of the global economic downturn, particularly during the first half of 2009. However, commodity prices have recovered considerable ground since and the level of demand has accelerated (particularly from China), improving the outlook for our terms of trade and the two resource-rich states. In particular, both states will be supported by longer-term mining projects including the $12 billion Pluto LNG development (WA), the $43 billion Gorgon LNG plant (WA) and the $60 billion deal to export coal from Galilee Basin (QLD) to China. Chart 3.4 Change in employment and the unemployment rate by state and territory, over the year to February 2010 4.0 3.0 2.0 1.0 0.0 -1.0 -2.0 Employment (per cent) Unemployment rate (percentage points) -3.0 -4.0 NSW Vic Qld SA WA Tas ACT NT Source: ABS Labour Force, Australia, February 2010 (Cat No: 6202.0), data for the States are seasonally adjusted, while data for the Territories are trend. Regional labour market developments 3.1 Despite softer labour market conditions throughout Australia, considerable disparity in labour market performance continues to exist between metropolitan and non-metropolitan areas. For instance, over the year to February 2010, employment rose by 131 000 (or Australian Government Submission 39 1.9 per cent) in metropolitan areas, while employment in non- metropolitan Australia increased by a much more subdued 19 800 (or 0.5 per cent). 3.52 Moreover, metropolitan areas have traditionally recorded a significantly lower unemployment rate than non-metropolitan areas. Indeed, as at February 2010, the unemployment rate in metropolitan areas stood at 5.5 per cent, 0.4 percentage points below the 5.9 per cent recorded in non-metropolitan areas. Regional disparity and disadvantage 3.53 While the economic and labour market slowdown stemming from the global economic downturn has had an impact on most regions across Australia, some areas have been more adversely affected than others. 3.54 Differences in regional performance can be ascribed to a range of factors including, population size and growth, the natural attributes of a region and its level of infrastructure, access to major transport networks, a region’s demographic profile and the skill level of its population. 3.55 Clearly, too, those regions with a higher proportion of their population employed in industries hard-hit by the downturn, for example Manufacturing, Construction and Finance and Insurance, are likely to encounter greater difficulties than areas which are not so reliant on these industries. 3.56 Moreover, areas that were already displaying entrenched disadvantage are more likely to continue to experience poor labour market outcomes than their more dynamic counterparts. 3.57 In recognition of this and of the fact that some regions are likely to experience ongoing disadvantage, the Government established 20 Priority Employment Areas (PEAs) (see table 3.1 for further detail). 3.58 Each area has been the focus of a range of Government activities designed to respond rapidly to the needs of workers who were made redundant due to the global economic downturn and to ensure maximum effectiveness of Government, community and business efforts to stimulate the local economy and generate new jobs. 40 Australian Government Submission 3.59 A number of PEAs are likely to continue to experience further rises in their unemployment rate and/or labour market disadvantage for some time to come, despite the recent improvements in labour market conditions at the national level. Conclusion 3.60 As is always the case after any economic downturn, even one that is less severe than expected, unemployment in regions can remain stubbornly high for many months or years, even after an economic recovery has taken hold. 3.61 This is likely to be particularly evident in regions which have a high industry exposure to sectors that were hard-hit by the global economic downturn. There is clear evidence for this in many of the PEAs with high exposure to the Manufacturing industry, to cite just one example. 3.62 The current downturn is also having a disproportionate impact on the employment prospects of a number of other industries (e.g. Construction and Retail trade) and demographic groups, like youth and the long-term unemployed, in particular. The Panel’s decision has the potential to have an even greater impact on these cohorts. 3.63 It is against this background that the Government submits that the Panel should have particular regard for the employment prospects of the most vulnerable groups in the Australian labour market, referred to above, while at the same time balancing that with the need for a fair and minimum safety net. Australian Government Submission 41 Table 3.1 Selected labour market indicators for 20 Priority Employment Areas, January 2010 Selected Labour Market Indicators for the 20 Priority Employment Areas that were announced in July 2009 Proportion of working Proportion of working Increase in Proportion of working Unemployment Rate Participation Rate Youth Proportion of total Indigenous age population (aged 15- age population (aged 15- unemployment age population (aged 15- January 2010 (%)3 January 2010 (%)3 Unemployment Rate employment in Unemployment Rate 64) who completed Year 64) who have attained a beneficiaries 64) in receipt of Income January 2010 (%)3 Manufacturing (%), (%) 12 or equivalent (%), Bachelor degree or September 2008 to Support Payments, August 20061 August 20061 August 20061 higher, August 20061 January 2010 (%)2 January 2010 (%)2 Canterbury-Bankstown and South Western Sydney 44.1 11.4 35.2 16.5 7.6 60.0 16.8 15.0 16.4 Illawarra 36.4 12.8 27.1 16.7 7.2 53.0 15.0 11.1 23.4 Richmond-Tweed and Clarence Valley 34.0 11.4 34.2 23.0 6.5 50.9 13.5 7.4 21.9 Mid-North Coast 29.1 9.4 23.6 23.0 6.5 50.9 13.5 8.1 26.5 South Eastern Melbourne 43.7 12.1 50.2 13.8 6.7 65.8 12.9 19.2 14.8 Ipswich-Logan 39.9 8.4 82.6 15.4 6.6 69.3 13.2 16.6 15.5 Northern and Western Adelaide 41.3 12.2 31.2 18.2 6.1 62.2 14.3 15.5 18.8 South West Perth 36.5 8.7 77.0 9.6 5.2 69.3 9.4 14.1 15.8 North West/Northern Tasmania 27.9 10.3 30.2 19.1 6.5 60.1 10.3 13.1 15.7 Port Augusta-Whyalla-Port Pirie 26.9 7.1 19.1 20.4 5.0 59.8 11.3 15.5 20.3 Southern Wide Bay-Burnett 29.2 6.9 48.6 23.6 6.6 54.3 13.2 12.2 15.4 Bundaberg-Hervey Bay 30.5 8.0 49.0 23.6 6.6 54.3 13.2 8.9 19.5 North Western Melbourne 45.0 12.8 42.5 14.6 6.9 64.6 15.5 16.4 13.2 Ballarat-Bendigo 37.7 13.6 33.6 17.0 6.5 63.0 13.5 12.6 19.5 Sydney West and Blue Mountains 45.7 15.8 40.4 13.9 6.5 65.2 14.4 12.5 16.8 Cairns 40.8 11.0 73.7 17.8 11.0 69.8 15.5 6.4 15.1 Caboolture-Sunshine Coast 40.1 10.9 78.9 13.8 6.0 62.7 12.2 9.0 14.3 Central Coast-Hunter 35.3 11.9 28.8 16.8 6.5 60.2 13.7 10.5 18.9 Townsville-Thuringowa 42.4 12.2 74.1 13.5 5.1 75.2 7.8 8.9 17.4 North Eastern Victoria 34.1 11.0 30.1 16.1 5.4 61.7 13.1 14.6 19.0 Australia 46.5 17.4 44.0 12.9 5.4* 65.2* 11.7** 10.5 15.6 1 Source: ABS Census of Population and Housing, August 2006. 2 Source: DEEWR administrative databases (Bluebook Database). 3 Source: ABS Labour Force, Australia, Detailed - Electronic Delivery, January 2010 (Cat.no. 6291.0.55.001), three month averages of original estimates. Labour market indicators are based on the ABS Labour Force Region (LFR), or combination of LFRs, that best approximate the Priority Employment Areas. *Please note that the seasonally adjusted unemployment rate for Australia stood at 5.3 per cent in January 2010 and the seasonally adjusted participation rate for Australia stood at 65.3 per cent in January 2010. The national unemployment rate of 5.4 per cent and the national participation rate of 65.2 per cent, provided above, are in three-month average original terms to enable valid comparisons to be made with the data at the regional level. **Please note that while the seasonally adjusted youth unemployment rate for Australia stood at 11.4 per cent in January 2010, the national figure of 11.7 per cent provided above is in 12-month average original terms to enable valid comparisons to be made with the data at the regional level. 42 Australian Government Submission Australian Government Submission 43 Chapter 4: Social inclusion and workforce participation Introduction 4.1 As noted in Chapter 1, the new set of legislative parameters provide a more balanced set of considerations that the Panel must take into account when setting minimum wages. In particular, the new legislative criteria highlight the importance of social inclusion objectives in relation to setting minimum wages. 4.2 Social inclusion is central to the Government’s vision of building a stronger and fairer nation. Achieving this vision means tackling the most entrenched forms of disadvantage in Australia by expanding the range of opportunities available and helping the disadvantaged build the skills and capabilities that encourage self-reliance. 4.3 Workforce participation is among the most important steps in assisting the disadvantaged into mainstream society by enabling them to contribute to the economy and community and connect with others. 4.4 It is important that the Panel, in its deliberations, considers the increased incentives that higher minimum wages can provide to those not in employment to seek paid work, balanced against potential impacts on the demand for low paid workers and hence the supply of low paid jobs, from delivering large minimum wages increases. 4.5 Promoting social inclusion through increased workforce participation is about: ensuring that there are adequate employment opportunities for people to engage in work, particularly those who are currently unemployed; increasing the incentive for employment where possible; and once employed, ensuring that low paid work provides a decent standard of living. 4.6 To this end, it is important to note that low paid jobs can be an important entry point for the poor and vulnerable into the workforce and can provide a stepping stone to higher paid and more stable forms of employment. At the same time, however, there are a significant number 44 Australian Government Submission who remain in low paid employment for some time. These individuals should be able to expect a fair level of remuneration for their work. 4.7 This chapter starts by outlining the Government’s social inclusion agenda, followed by a discussion of the links between social inclusion, workforce participation and minimum wages. The chapter then examines the importance of low paid jobs in terms of providing both an entry point into the workforce and as a stepping stone to higher paid employment. A brief discussion of the evidence relating to the impact of minimum wages on employment follows. Finally, an analysis is presented of the incentives that minimum wage and low paid jobs provide to those not in the workforce to seek paid employment. The Australian Government’s social inclusion agenda 4.8 Despite high levels of economic growth recorded in Australia in the last decade, many Australians are still excluded from the opportunities necessary for them to realise their potential and participate in Australia’s economic and social life. 4.9 The cost to individuals, communities and the nation of failing to address the issue of social disadvantage and exclusion is high. Inaction has serious implications for Australia’s economic future, including rising costs in health care, welfare and justice, lower workforce participation and productivity and higher rates of crime. The impact of disadvantage on individuals and families is similarly significant and may take the form of financial hardship, social and physical isolation, chronic health problems, family breakdown and unrealised opportunities. 4.10 The Government is committed to addressing the problem of persistent social disadvantage - disadvantage should not be ongoing for current or future generations. 4.11 The Government’s Social Inclusion Agenda aims to equip Australians with the opportunities, resources, capabilities and responsibilities to learn, work, engage with others and have a voice in their community. 4.12 In the long-term, with the ageing of our population, the impact of the global economic downturn and emerging skills shortages across the economy, increasing participation presents an important economic Australian Government Submission 45 challenge for Australia. It is important to ensure that all Australians, including young people (particularly early school-leavers), the unskilled and marginalised, mature age Australians and parents seeking to return to work are given the opportunity to participate in all aspects of Australian life and share in our economic prosperity. 4.13 The Government believes that Australia’s long-term growth and social development depends on securing the full social and economic participation of these groups and is working towards increasing the engagement of the most highly disadvantaged through the Social Inclusion Agenda. 4.14 The Social Inclusion Agenda is built on five pillars which provide a framework for building a stronger and fairer Australia: • Maintaining a strong and internationally competitive economy to secure jobs for the future and create opportunity; • Creating the opportunities and resources that every Australian needs to participate in the economy and community life through more equitable social policies; • Ensuring that services which are provided to all Australians meet high standards in such areas as education, training, health, housing and social support; • Supporting families and building strong and cohesive communities; and • Building new and innovative partnerships with all sectors of the economy, such as government agencies, businesses and not-for- profit organisations. 4.15 Based on evidence about the causes and consequences of social and economic disadvantage in Australia, the Government is focusing on six specific priorities: • Targeting jobless families with children to increase work opportunities, improve parenting and build capacity; • Improving the life chances of children at greatest risk of long term disadvantage; 46 Australian Government Submission • Reducing the incidence of homelessness; • Improving outcomes for people living with disability or mental illness and their carers; • Closing the Gap for Indigenous Australians; and • Breaking the cycle of entrenched and multiple disadvantage in particular neighbourhoods and communities. 4.16 So far, the Government has taken a number of actions to tackle social exclusion by: creating fairer workplaces; reforming age pensions; investing in early childhood education and schools; responding to the global economic downturn with employment, training and stimulus measures to limit the impact on vulnerable people and our economy; reforming higher education to help more low socio-economic status students go to university; and working to strengthen third sector organisations. 4.17 The challenge for the Government is to now ensure that the aims of the Social Inclusion Agenda remain a central component of the planning and implementation of all future policy initiatives. 4.18 This means coordinating policies across national, state and local governments and working in partnership with the community sector, to ensure no Australian is excluded from meaningful participation in education and the mainstream economic and social life of our country. Social inclusion and workforce participation 4.19 Employment provides the resources and social connection that sustains and strengthens families and communities. It is also the first and most important plank towards economic participation and social inclusion. 4.20 Unemployment, on the other hand, places significant financial and social burdens on individuals, families and communities and can lead to or compound other forms of disadvantage. Therefore, helping people to find and retain employment is critically linked with health and well-being. Australian Government Submission 47 4.21 Research suggests that any employment, even low paid employment, reduces future income support dependency and serves as a bridge to higher paid employment.24 To this end, minimum wage jobs play an important role in creating pathways to sustainable and meaningful employment for the low paid. Evidence suggest that after three years, 53.9 per cent of low paid workers move on to higher paid employment, 23.1 per cent remain in low paid employment and 17.8 per cent become unemployed or drop out of the labour force.25 4.22 Importantly, workforce participation for the low paid facilitates greater social inclusion opportunities by enabling them to participate in education and training and influence decisions that affect them. 4.23 Living in jobless households, on the other hand, can have many adverse consequences for families. Household unemployment has been linked to increased incidence of family break up, truancy and non-completion of schooling, spouse abuse, substance abuse, incarceration, illness and even premature death.26 Each of these consequences, in addition to the actual fact of joblessness, has a negative impact on the national economy. 4.24 More importantly, the loss of social and professional contacts caused by unemployment ultimately leads to greater social exclusion. 24 From National Social Inclusion Statement – P Whiteford and W Adema (2007) “What Works Best in Reducing Child Poverty: Benefit or Work Strategy?”, Paris, OECD Social, Employment and Migration Working Papers, 51, March 2007. 25 H Buddelmeyer, W-S Lee, M Wooden and H Vu, (2007) ‘Low Pay Dynamics: Do Low Paid Jobs Lead to Increased Earnings and Lower Welfare Dependency Over Time?’ Project 2/2006, Melbourne Institute of Applied Economic and Social Research, University of Melbourne. 26 T Vinson, ‘Jobless Families in Australia: their prevalence, personal and societal costs, and possible policy responses’, January 2009, Fourth commissioned paper on social inclusion/exclusion. A report prepared for DEEWR. 48 Australian Government Submission The extent of social exclusion in Australia 4.25 Using HILDA data, Kostenko, Scutella and Wilkins27 show that between 20-30 per cent of people aged 15 years and over experienced marginal exclusion or worse at any given point in time over the 2001-2007 time period. Moreover, 4 to 6 per cent of people were deeply excluded while less than one per cent were very deeply excluded.28 4.26 In general, groups found to be most prone to exclusion included: females, the young and old, single parents, persons in regional areas, Indigenous Australians, persons born in non-English speaking countries, persons in private rental accommodation, persons with a long term health condition and persons who have not completed secondary school (or its equivalent). 4.27 Importantly, the authors found that gains in employment were particularly important in lowering measured social exclusion for all observed demographic groups, be it marginal exclusion or deep exclusion. 4.28 In addition, the authors found that groups with typically low employment rates, in particular, the older age groups and single parents, experienced less dramatic declines in social exclusion compared with others. Minimum wages and social inclusion 4.29 The Government is not aware of any research that directly focuses on the links between minimum wages and social inclusion. However, there have been studies which have focussed on the relationship between minimum wages and the various dimensions of social inclusion. 27 W Kostenko, R Scutella and R Wilkins, ‘Estimates of Poverty and Social Exclusion in Australia: A Multidimensional Approach’, November 2009. 28 A measure of social exclusion that recognises multidimensionality was constructed for each individual. Seven dimensions or domains were identified, they include: material resources; employment; education and skills; health and disability; social; community; and personal safety. For each of these seven domains, indicators of social exclusion were produced after which a simple ‘sum-score’ method was used to estimate the extent or depth of exclusion. The proportion of individuals with a sum-score greater than or equal to 1 were considered to be experiencing marginal exclusion or worse, while those individuals with a sum-score greater than or equal to 2 or 3 were viewed as experiencing deep and very deep exclusion respectively. Australian Government Submission 49 4.30 Fair Work Australia has compiled a useful scoping paper that canvasses much of the available research on this issue. The section below provides some discussion on this material. 4.31 An important way in which minimum wages can promote social inclusion is through the provision of a safety net. Research shows that minimum wage workers tend to be those with low levels of education, older part-time workers, migrants from non-English speaking backgrounds working full-time and those working on a casual basis.29 4.32 Minimum wages, therefore, can provide these vulnerable groups with a much needed safety net. 4.33 Moreover, as discussed earlier, entry into the workforce promotes social inclusion by providing benefits from working such as increased resources, improved access to social networks and support and better physical and mental health. 4.34 Higher minimum wages, holding all else constant, also raise the incentives for people who are unemployed or not in the labour force to find work. The willingness of a person to work also depends upon the interaction between wages and the tax-transfer system. DEEWR modelling on the interaction between wages and the tax-transfer system (presented later in this chapter) shows that minimum wage jobs and low paid jobs do make people financially better off and, therefore, provide real incentives to seek work. The importance of low paid work to unemployed persons and persons not in the labour force 4.35 While attaining employment does not automatically satisfy all the criteria for social inclusion, the Government believes that employment is still a key component of social inclusion since it provides the socially excluded with their initial contact and engagement with society. 4.36 Accordingly, the Government urges the Panel in its deliberations to have regard to the impact that an increase in minimum wages would have on employment growth given the Government’s actions to support 29 L Nelms and K Tsingas, ‘Literature review on social inclusion and its relationship to minimum wages and workforce participation, Fair Work Australia, Research report, January 2010. 50 Australian Government Submission employment as Australia’s economy strengthens, balanced against the consideration of relative living standards and supporting the needs of the low paid. 4.37 The following section of this chapter provides an analysis of the importance of low paid jobs using data from the HILDA survey. In particular, it shows that low paid jobs can act as an important entry point into the workforce as well as provide a stepping stone to higher paying jobs. It also shows that some low paid workers stay in low paid work for an extended period. Both of these findings should be considered carefully by the Panel. Labour market outcomes of non-employed persons 4.38 Low paid work is an important entry point into the workforce for people who are unemployed and not in the labour force.30 Importantly, it serves as a plank for those that are on the fringes of society and are socially excluded. 4.39 Examination of data from the HILDA survey show that an average of 22.2 per cent of unemployed people and 4.7 per cent of persons who were not in the labour force31 in one year were in paid employment in the following year over the period between 2003 and 2007. This excludes those persons who may have transitioned in and out of employment within the year (see Table 4.1). 30 The following analysis refers to outcomes for unemployed persons and persons not in the labour force who were aged 21 years and above and does not include full-time students. Analysis was restricted to those respondents who offered sufficient information to allow hourly wage rates to be calculated. Consistent with the OECD’s definition, low paid workers were defined as those employees earning between the Federal Minimum Wage and up to two- thirds of the median hourly earnings for full-time employees. The median earnings for full-time employees are sourced from the ABS Employee Earnings, Benefits and Trade Union Membership (Cat. No. 6310.0). The threshold for casual employees was adjusted by up rating the standard low paid bound by 20 per cent. The hourly wage rate thresholds were rounded to the nearest 50 cents. 31 Those persons listed as unemployed and not in the labour force are defined as ‘non-employed.’ Australian Government Submission 51 Table 4.1 Percentage of unemployed and not in the labour force persons who found paid employment in the following year Unemployed in t and Not in the Labour Force at t Employed at t+1 (%) and Employed at t+1 (%) 2003 to 2004 21.0 4.5 2004 to 2005 22.3 5.2 2005 to 2006 23.8 4.4 2006 to 2007 21.5 4.6 Average for 4 periods 22.2 4.7 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. 4.40 Table 4.2 below shows the results of persons who were either unemployed or not in the labour force in one year (t) and found a job in the following year (t+1). In particular, of this group: • an average of around 32.4 per cent of people who were unemployed in one year found a low paid job the following year; and • an average of around 26.2 per cent of people who were not in the labour force in one year found a low paid job the following year. Table 4.2 Wage outcomes of persons who were unemployed or not in the labour force in one year and employed in the following year (%) Unemployed at t and Not in the Labour Force Employed at t+1 (%) at t and Employed at t+1 (%) Low Paid Higher Low Paid Higher t+1 Paid t+1 t+1 Paid t+1 2003 to 2004 29.1 70.9 23.2 76.8 2004 to 2005 35.3 64.7 28.4 71.6 2005 to 2006 36.4 63.6 21.7 78.3 2006 to 2007 29.1 70.9 31.5 68.5 Average for 4 periods 32.4 67.6 26.2 73.8 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. 4.41 Importantly, transitional analysis shows that 72.0 per cent of low paid employees (in 2006) who were previously unemployed in 2005 continued to be employed in 2007. Of these employees, 48.0 per cent 52 Australian Government Submission were in higher paying32 jobs while 52.0 per cent continued to be low paid (Table 4.3). 4.42 In addition, 56.0 per cent of low paid employees (in 2006) who were previously not in the labour force in 2005 continued to be employed in 2007. Of these employees, 40.0 per cent were in higher paying jobs while 60.0 per cent continued to be low paid. Table 4.3 Wage outcomes of low paid employees who were unemployed or not in the labour force in 2005 (were low paid in 2006) and still employed in 2007 (%) Unemployed (%) Not in the Labour Force (%) Higher Pay 47.8 Higher Pay 40.0 Low Pay 52.2 Low Pay 60.0 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. 4.43 The above analysis illustrates that low paid work is not just an important entry point for persons who are unemployed and not in the labour force, but can also act as a stepping stone to higher paying jobs in the future. The analysis, however, also illustrates that a proportion of low paid workers who are still in employment continue in low paid employment over time. Low paid transitions 4.44 The above analysis is supported by research undertaken by the Melbourne Institute into the transitions of low paid workers which shows favourable employment and wage outcomes.33 4.45 Using four waves of HILDA data, the Melbourne Institute found that 53.9 per cent of workers earning up to two-thirds of median weekly earnings in 2001 progressed to higher paying jobs by 2004. In contrast, 23.1 per cent of workers remained in a low paid job (see Table 4.4 32 Higher paying jobs are defined as jobs paying more than two-thirds of median income. 33 H Buddelmeyer, W-S Lee, M Wooden and H Vu, ‘Low Pay Dynamics: Do Low Paid Jobs Lead to Increased Earnings and Lower Welfare Dependency Over Time?’. For the purposes of the study, the Melbourne Institute defined low paid workers as those earning up to two-thirds of median income, which is just in excess of the hourly rate of pay of those on the FMW. The data excluded those persons aged under 21 years, full-time students, and persons who were either self employed or employees of their own business. The Melbourne Institute included all employees recording positive hourly wage rates which they determined using weekly earnings in main job and hours worked in main job. A discount of 20 per cent was applied to calculated wage rates to account for the loading paid to casual employees in lieu of leave entitlements. Low paid workers were defined as moving to a higher paid job if they earned in excess of two-thirds of median weekly earnings in the following year. Australian Government Submission 53 below). For these individuals, it is important that minimum wages provide a fair living wage. Table 4.4 Labour Force Status of Adult Low Paid Workers in 2001 in Subsequent Years Labour Market State Employed UE NILF Total < 2/3 2/3 to 3/4 3/4 to > median Total Employed median median median Higher No WR (still low Paid paid) 2002 31.0 14.0 21.8 14.1 49.9 5.0 3.2 11.0 100.0 2003 26.8 11.6 25.3 13.2 50.1 7.3 3.5 12.3 100.0 2004 23.1 10.3 28.5 15.1 53.9 5.3 4.2 13.6 100.0 Source: H Buddelmeyer, W-S Lee, M Wooden and H Vu, ‘Low Pay Dynamics: Do Low Paid Jobs Lead to Increased Earnings and Lower Welfare Dependency Over Time?’. Note: Employed No WR are those who were employed but no wage rate could be calculated due to insufficient information, UE are unemployed, and NILF are not in the labour force. 4.46 In addition, research into the extent of wage movements beyond the low pay threshold showed that around 10.3 per cent of workers earning less than two-thirds median earnings in 2001 earned between two-thirds median and three-quarters median earnings in 2004. A further 28.5 per cent earned between three-quarters median earnings and median earnings, while 15.1 per cent earned in excess of median earnings. In other words, 43.6 per cent of low paid workers in 2001 were earning in excess of three quarters of median earnings by 2004.34 4.47 Overall, the Melbourne Institute’s results showed that over half of all low paid workers made the transition from low to higher pay within one to two years, while less than a quarter were in low paid jobs three years later. Importantly, more than 80 per cent of low paid workers were still in employment three years later. 34 A further 5.3 per cent were employed. However, a wage rate could not be calculated due to incomplete information on earnings and/or hours worked. 54 Australian Government Submission Wage transitions of casual and non-casual low paid workers 4.48 Research also shows that casual workers have good prospects of moving to higher paid and non-casual jobs. 4.49 A study conducted by Buddelmeyer, Wooden and Ghantous estimated that around 32 per cent of casual workers found a non-casual job within a year and just over 49 per cent found a non-casual job within three years.35 International research conducted into earnings mobility 4.50 International research also illustrates that a significant proportion of low paid workers made the transition to higher paid work, while others remain in low paid employment. 4.51 A United Kingdom study found that 55.6 per cent of individuals that were paid at or below the National Minimum Wage (NMW) at their initial interview moved to employment paid above the NMW one year later.36 A further 32.3 per cent remained in employment where they were paid at or below the NMW, 2.9 per cent exited to unemployment, and 9.2 per cent became inactive (or not in the labour force). 4.52 The study also found that the wage adjustment was substantial for many people moving to positions that paid above the NMW, particularly given that the data only covered a 12 month period. Men were more likely to move out of minimum wage payment into higher pay than women, while the size of the upward adjustment was also typically greater for men than for women. 4.53 The characteristics most closely associated with an individual remaining at or below the NMW were employment in a small firm, working part- time, or private sector employment. 4.54 Individuals with post-school qualifications were significantly less likely to remain at or below the NMW and more likely to exit to employment 35 H Buddelmeyer, M Wooden and S Ghantous, (2006) ‘Transitions from Casual Employment in Australia’, Project 09/05, Melbourne Institute of Applied Economic and Social Research, University of Melbourne, pages 28- 29. Around 37.1 per cent found permanent jobs, 6.5 per cent found positions where employees are on fixed-term contracts, and 5.7 per cent were self employed. 36 M K Jones, R J Jones, P D Murphy and P J Sloane, ‘The Dynamics of the National Minimum Wage: Transitions Between Labour Market States’, Institute for the Study of Labor (IZA), Discussion Paper No. 1690, July 2005. Australian Government Submission 55 above the NMW than individuals without formal academic qualifications. 4.55 The above analysis and research, both in Australia and internationally, show the importance of low paid jobs, particularly in relation to providing opportunities to the unemployed and those not in the labour force to enter the workforce and become more socially included. 4.56 Low paid employment, however, is not necessarily a long-term phenomenon for many workers. A large number of low paid employees transition to higher paying and more stable jobs within one to three years. For these employees low paid jobs are an important stepping stone. 4.57 There are, however, a still significant number of employees who are persistently low paid. For these employees, minimum wages provide an important safety net and must provide a fair living wage. 4.58 It is for this reason that the Government urges the Panel to balance its considerations around the impact of any minimum wage increase on three important factors, namely: • Employment growth and thereby the availability of low paid jobs (discussed further in the next section); • The incentives for the unemployed and those not in the labour force to seek employment, as well as the quality of low paid jobs (in terms of remuneration) (discussed later in this chapter); and • The relative living standards and needs of the low paid, particularly for those who are persistently low paid (discussed in Chapter 5). 4.59 These three important considerations are all relevant to the Panel’s obligation to promote social inclusion through increased workforce participation. The impact of minimum wage increases on employment 4.60 The impact of minimum wages on employment growth needs to be considered relative to other factors, particularly broader economic 56 Australian Government Submission conditions. In the Australian context, in the years proceeding the recent economic downturn, moderate increases in minimum wages were accompanied by strong employment growth. This suggests that in periods of strength the demand for labour is such that any impact of minimum wage increases on employment levels is tempered, if not, in fact, neutralised. 4.61 The majority of academic studies analysing the relationship between minimum wages and employment have found that increases in minimum wages have a negative relationship with employment, but there is no consensus about the strength of the relationship. There are however a number of studies that did not find a statistically significant relationship, and a small number that found positive employment effects. 4.62 As noted in Chapters 2 and 3, however, even though both the economy and labour market have shown positive signs of recovery to date, there remain some downside risks to the economic outlook over the next year and a number of vulnerable groups and regions still face labour market disadvantage. As such, the Panel must give consideration to the impact that its decision may have on employment given the importance of supporting employment growth throughout the economic recovery. Transfer payments, earnings and incentives to work 4.63 The previous section illustrated the important role that low paid jobs play in assisting non-employed individuals into the workforce and employed individuals into higher paid employment. This section will show that the interaction of the tax-transfer and wages systems provides the unemployed with incentives to pursue employment opportunities. 4.64 DEEWR modelled the interaction between the tax-transfer system and the wages system to establish the potential rewards to households from a member finding a job at the FMW (referred to from here on as a ‘minimum wage job’) or a low paid job paying $628 per week.37 37 This amount is consistent with the amount used elsewhere in this submission in relation to low pay and is close to the current C10 (Tradespersons) classification in the Manufacturing and Associated Industries and Occupations Award 2010 [MA000010]. Australian Government Submission 57 4.65 DEEWR assessed a broad range of hypothetical households including lone persons, couples with no children, and lone parents and couples with dependent children of various ages. 4.66 More specifically, the analysis considered the potential impact of earnings from a minimum wage and low paid job on combined household income from sources such as income support (Newstart Allowance), other transfer payments (such as Parenting Payment and Family Tax Benefits) and other earnings (if other members of the household were already receiving earned income from employment). Note that the resulting incentive results do not take into account any potential additional costs stemming from employment, such as child care or travel costs. Single earner families 4.67 Table 4.5 below shows the incentives for the various family types when a single earner takes on a minimum wage job. 4.68 Of all the household scenarios analysed, incentives to take on a minimum wage job were highest for single adults. Single adults were 118 per cent (or $270) per week better off financially in net terms by taking on a job paying the FMW of $543.78 per week. 4.69 Financial incentives to take on a minimum wage job were lower for couples and lone parent households with dependents but are still substantial. The reason the incentives were lower for these groups is due to the part or full withdrawal of some transfer payments as earnings rise. Further, as these households receive larger transfer payments than single adults, any increase in earnings will automatically be less proportionately. 4.70 Despite the lower level of incentives, these households were still better off financially with one member working compared with their previous state of joblessness. 58 Australian Government Submission Table 4.5 Single earner households – one member formerly unemployed accepts a job paying the FMW $543.78 per week Household Transfer Transfer Tax & Disposable Improvement Type payments payments after Medicare income after in relative before member finding job finding job financial finds low paid position (%) job (A) (B) (C) (D) (E) (=$543.78+B– (=(D-A)/A) C) Single Adult 228.00 (NSA) 0 46.45 497.33 118% (UE on Newstart) Couple with no children – neither working – both on 411.50 (NSA) 113.48 (NSA) 28.46 628.80 53% Newstart – one gets a minimum wage job Couple with 1 411.50 (NSA) 113.48 (NSA) child aged 7 – 122.20 (FTB) 140.61 (FTB) neither working 533.70 (total) 254.09 (total) – both on 39.28 758.59 42% Newstart – one gets a minimum wage job Couple with 2 205.75 (NSA) 0 children, aged 4 205.75 (PP) 113.48 (PP) and 7 years – 234.55 (FTB) 252.96 (FTB) neither working 646.05 (total) 366.44 (total) – one on 38.30 871.92 35% Newstart, one on Parenting Payment – one gets a minimum wage job Couple with 2 411.50 (NSA) 113.48 (NSA) children aged 9 214.32 (FTB) 232.73 (FTB) and 11 – 625.82 (total) 346.21 (total) neither working 38.30 851.69 36% – both on Newstart – one gets a minimum wage job Source: DEEWR Modelling using various sources. Note: NSA refers to NewStart Allowance, FTB is Family Tax Benefit, PP is Parenting Payment, and YA is Youth Allowance. Australian Government Submission 59 Table 4.5(cont.) Single earner households – one member formerly unemployed accepts a job paying the FMW $543.78 per week Household Transfer Transfer Tax & Disposable Improvement Type payments payments after Medicare income after in relative before member finding job finding job financial finds low paid position (%) job (A) (B) (C) (D) (E) (=$543.78+B– (=(D-A)/A) C) Lone parent 290.25 (PP) 106.06 (PP) with 1 child 165.55 (FTB) 165.55 (FTB) aged 4 years, 455.80 (total) 271.61 (total) receiving PP – 34.83 780.56 71% one gets a minimum wage job Lone parent 249.65 (NSA) 0 with 1 child 145.32 (FTB) 145.32 (FTB) aged 9 years, 394.97 (total) 145.32 (total) receiving NSA 38.30 650.80 65% – one gets a minimum wage job Lone Parent 290.25 (PP) 110.98 (PP) with 2 children 257.67 (FTB) 257.67 (FTB) aged 4 and 6 547.92 (total) 368.65 (total) years, receiving 34.74 877.69 60% PP –one gets a minimum wage job Lone Parent 249.65 (PP) 0 with 2 children 237.44 (FTB) 237.44 (FTB) aged 9 and 11 487.09 (total) 237.44 (total) years, receiving 38.30 742.92 53% NSA –one gets a minimum wage job Source: DEEWR Modelling using various sources. Note: NSA refers to NewStart Allowance, FTB is Family Tax Benefit, PP is Parenting Payment, and YA is Youth Allowance. 4.71 Table 4.6 below repeats the above analysis by showing the incentives for the various family types when a single earner instead accepted a low paid job paying $628 per week. 4.72 Again incentives to take on low paid work were highest for single adults. Single adults were 148 per cent (or $338) per week better off financially in net terms by taking on a low paid job. 4.73 At the other end of the scale, incentives to take on a low paid job were lower for couples and lone parent households with dependents. All 60 Australian Government Submission household types, however, are substantially better off taking a low paid job compared with being jobless. Table 4.6 Single earner households – one member formerly unemployed accepts a low paid job paying $628 per week Household Type Transfer Transfer Tax & Disposable Improvement payments payments after Medicare income in relative before member finding job after financial finds low paid finding job position (%) job (A) (B) (C) (D) (E) (=$628+B– (=(D-A)/A) C) Single Adult (UE 228.00 (NSA) 0 62.39 565.61 148% on Newstart) Couple with no children – neither working – both on 411.50 (NSA) 62.95 (NSA) 33.64 657.31 60% Newstart – one gets a low paid job Couple with 1 411.50 (NSA) 62.95 (NSA) child aged 7 – 122.20 (FTB) 145.32 (FTB) neither working – 533.70 (total) 208.27 (total) 58.08 778.19 46% both on Newstart – one gets a low paid job Couple with 2 205.75 (NSA) 0 children, aged 4 205.75 (PP) 62.95 (PP) and 7 years – 234.55 (FTB) 257.67 (FTB) neither working – 646.05 (total) 320.62 (total) one on Newstart, 52.97 895.65 39% one on Parenting Payment – one gets a low paid job Couple with 2 411.50 (NSA) 62.95 (NSA) children aged 9 214.32 (FTB) 237.44 (FTB) and 11 – neither 625.82 (total) 300.39 (total) working – both on 52.97 875.42 40% Newstart – one gets a low paid job Source: DEEWR Modelling using various sources. Note: NSA refers to NewStart Allowance, FTB is Family Tax Benefit, PP is Parenting Payment, and YA is Youth Allowance. Australian Government Submission 61 Table 4.6 (cont.) Single earner households – one member formerly unemployed accepts a low paid job paying $628 per week Household Type Transfer Transfer Tax & Disposable Improvement payments payments after Medicare income in relative before member finding job after financial finds low paid finding job position (%) job (A) (B) (C) (D) (E) (=$628+B– (=(D-A)/A) C) Lone parent with 290.25 (PP) 72.37 (PP) 1 child aged 4 165.55 (FTB) 165.55 (FTB) years, receiving 455.80 (total) 237.92 (total) 59.44 806.48 77% PP – gets a low paid job Lone parent with 249.65 (NSA) 0 1 child aged 9 145.32 (FTB) 145.32 (FTB) years, receiving 394.97 (total) 145.32 (total) 52.97 720.35 82% NSA – gets a low paid job Lone Parent with 290.25 (PP) 77.29 (PP) 2 children aged 4 257.67 (FTB) 257.67 (FTB) and 6 years, 547.92 (total) 334.96 (total) 56.92 906.04 65% receiving PP –gets a low paid job Lone Parent with 249.65 (PP) 0 2 children aged 9 237.44 (FTB) 237.44 (FTB) and 11 years, 487.09 (total) 237.44 (total) 52.97 812.47 67% receiving NSA – gets a low paid job Source: DEEWR Modelling using various sources. Note: NSA refers to NewStart Allowance, FTB is Family Tax Benefit, PP is Parenting Payment, and YA is Youth Allowance. Second earner households 4.74 DEEWR also modelled the incentives for various family types when the second potential earner in the household also took on a minimum wage job (see Table 4.7 below). 4.75 The modelling shows that households were better off financially when a second member of the household secured a minimum wage job. A household headed by a couple with no children was 58 per cent (or $366) better off with both partners working, while a couple with one child aged seven was 37 per cent (or $281) better off. 62 Australian Government Submission Table 4.7 Second earner in household one partner is already working in low paid job ($543.78 per week) while the other partner formerly unemployed finds a minimum wage jobs per week ($543.78) Household Type Disposable Transfer Tax & Disposable Improvement income - P1 payments Medicare income with in relative working (see after P2 finds both working financial column D job in low paid position (%) above) jobs (A) (B) (C) (D) (E) (=$1087.56+B– (=(D-A)/A) C) Couple with no children - one person working, other on NSA - 628.80 (total) 0 92.91 994.65 58% unemployed partner (P2) gets a minimum wage job Couple with 1 child age 7 - one person working, other on NSA - 758.59 (total) 44.60 (FTB) 92.91 1039.25 37% unemployed partner (P2) get a minimum wage job Source: DEEWR Modelling using various sources. Note: P1 refers to person already in low paid job, P2 is second person finding low paid job and FTB is Family Tax Benefit 4.76 Similarly, Table 4.8 below shows that households were also substantially better off financially when a second member of the household secured a low paid job. Households comprising a couple with no children were 72 per cent (or $474) better off when both partners were working. In addition, a household comprising a couple with a child aged seven was 50 per cent (or $392) better off with both partners working. Australian Government Submission 63 Table 4.8 Second earner in household – one partner is already working in low paid job ($628 per week) while the other partner formerly unemployed finds a low paid job paying $628 per week Household Type Disposable Transfer Tax & Disposable Improvement income - P1 payments Medicare income in relative working (see after P2 finds with both financial column D job working in position (%) above) low paid jobs (A) (B) (C) (D) (E) (=$1256+B– (=(D-A)/A) C) Couple with no children - one person working, 657.31 (total) 0 124.79 1131.21 72% other on NSA - unemployed partner (P2) get low paid job Couple with 1 child age 7 - one person working, other on 778.19 (total) 38.71 (FTB) 124.79 1169.92 50% NSA - unemployed partner (P2) get low paid job Source: DEEWR Modelling using various sources. Note: P1 refers to person already in low paid job, P2 is second person finding low paid job and FTB is Family Tax Benefit 4.77 The above DEEWR modelling illustrates that there are financial benefits for both single earner families and second earner households when an individual takes up a minimum wage job. The improvement in relative financial position is higher for those who find a job paying above the minimum wage. 4.78 Accordingly, the Panel can be confident that any real increase granted to minimum wages will have a positive impact on the incentives to find paid employment.38 4.79 The balance which needs to be achieved by the Panel in its consideration is between the need for any additional incentive and the impact minimum wage increases may have on employment growth. 38 It is important to note that the Newstart Allowance is indexed to growth in the Consumer Price Index. Not increasing the minimum wage by at least this amount will therefore reduce employment incentives. 64 Australian Government Submission Conclusion 4.80 This chapter has argued that employment is a key factor in achieving social inclusion and plays an important role in assisting non-employed individuals becoming socially included. Specifically, the research and analysis presented shows that: • Jobs with low pay are an important entry point to employment for non-employed individuals seeking to join the workforce and can be a stepping stone to higher paid and more stable forms of work for many workers. • The interaction of the tax-transfer system and the minimum wages system must provide those who are not working with real incentives to seek and accept employment. 4.81 It is important that the Panel balances these considerations in arriving at its decision. Promoting social inclusion through increased workforce participation is about both providing the opportunity for employment and, once employed, enhancing the quality of employment. Minimum wages have a role to play in both. Australian Government Submission 65 Chapter 5: Relative living standards and the needs of the low paid Introduction 5.1 In reviewing and determining minimum wages, the Australian Government notes the requirement of the Panel to have regard to the relative living standards and the needs of the low paid. 5.2 There is little up-to-date data currently available that enables in-depth analysis of the adequacy of minimum wages in providing for the needs of the low paid. In this regard, the Government supports the research currently being undertaken by FWA for the 2010-11 Annual Wage Review looking at approaches to defining and measuring relative living standards and the needs of the low paid. 5.3 In submissions to future FWA wage reviews the Government will provide a more detailed analysis of the needs of the low paid. The Government will also investigate whether there is a need to undertake further research in this area to compliment the work of FWA. 5.4 This chapter presents information on recent trends in relative living standards. Additional analysis of the incidence of low pay and the characteristics of low paid employees based on the first seven waves of the HILDA survey is also included. 5.5 The chapter then examines means of addressing relative living standards and needs of the low paid in relation to both minimum wages and through the tax-transfer system. What does this parameter mean in relation to setting minimum wages? 5.6 As noted in Chapter 1, the relative living standards and needs of the low paid wage setting parameter is one of a more balanced set of legislative criteria that take account not only of the economic environment but also considerations for a broader safety net of fair minimum wages. 66 Australian Government Submission 5.7 The Government recognises that minimum wage increases have an important role to play in ensuring relative living standards and the needs of the low paid are provided for. For minimum wage employees in low- income households who do not transition to higher paying jobs, minimum wages provide an important safety net. In relation to the cost of living, there is a community expectation that wage increases, especially for the low paid, are sufficient to cover general cost of living increases. 5.8 The Government submits that the tax-transfer system and access to training and education can also be efficient means of assisting low income earners, complementing a fair minimum wage. 5.9 As noted in Chapter 2, the Australian economy has performed remarkably well against its international peers and better than expected during a period of global economic turmoil. While growth is still expected to be subdued in the near term, the Government is of the view that workers paid minimum wages should share in the benefits of any economic recovery. Recent trends in relative living standards Prices – Consumer Price Index and Analytical Living Cost Indices 5.10 As noted above, cost of living increases have a bearing on the ability to maintain relative living standards and the needs of the low paid. As such, the minimum wage freeze in last year’s decision should be considered in line with the various cost of living data shown below. While the cost of living has been increasing, the wages of the lowest paid Australians have been standing still. 5.11 The Government does not believe this is a fair or just outcome. That is why the Government urges the Panel to grant a considered real increase in minimum wages that, at a minimum, reflects the cost of living increases since the last minimum wage rise. 5.12 To assist the Panel, the section below re-presents information on the available cost of living measures and their recent and expected future movements. Australian Government Submission 67 5.13 To take into account the effect of increases in prices, the common practice is to adjust nominal wages for the effect of inflation using ABS Consumer Price Index (CPI) data or other measures of price increases to produce estimates of ‘real’ wages. The CPI measures changes in prices of a typical basket of goods acquired by the average household. 5.14 The most recent data show that headline CPI increased by 0.5 per cent in the December quarter 2009 and by 2.1 per cent over the year to the December quarter 2009. Underlying inflation (average of the RBA's Weighted median and Trimmed mean measures), increased by 0.6 per cent in the December quarter 2009 and by 3.4 per cent over the year to the December quarter 2009. 5.15 The annual headline inflation rate (2.1 per cent) for the December quarter 2009 is now at the lower end of the RBA’s target band of 2-3 per cent, up from a decade low of 1.3 per cent in the September quarter 2009. The annual underlying inflation rate (3.4 per cent), however, remains above the RBA’s target band. 5.16 In its February 2010 Statement of Monetary Policy, the RBA stated that the headline CPI inflation is expected to ‘pick up over the next couple of quarters, as the temporary factors that have held it down drop out of the calculations’, while rent inflation and large increases in some utilities prices are expected to add to the measured CPI increase. 5.17 However, the RBA expects underlying inflation to gradually moderate further before picking up a little towards the end of this year, reflecting both a pick-up in wage growth from low levels as the labour market tightens and higher levels of capacity utilisation in the economy. While the RBA revised up both the headline and underlying annual inflation rate forecasts for the December quarter 2010, they both remain within its 2-3 per cent per annum target band. 5.18 Recently the ABS introduced the Analytical Living Cost Indexes (ALCIs) for Selected Australian Household Types. In contrast to the CPI, the ALCIs have been designed to answer the question: ‘By how much would after tax money incomes need to change to allow households to purchase the same quantity of consumer goods and services that they purchased in the base period?’ 68 Australian Government Submission 5.19 The ALCIs are produced as a by-product of the CPI and are the conceptually preferred measures for assessing the effect of changes in prices on the out-of-pocket living expenses experienced by four types of Australian households: Employee households; Age pensioner households; Other government transfer recipient households; and Self- funded retiree households. 5.20 The cost of living for employee households as measured by the ALCI increased by 0.7 per cent in the December quarter 2009. Over the year to December quarter 2009, the cost of living for employee households increased by 0.4 per cent. Over the same period, the CPI rose by 2.1 per cent. 5.21 Despite the methodological differences between the CPI and the ALCIs, changes in living costs for each household type have historically tracked closely to the CPI. Since the ALCIs were established in the June quarter 1998, the living costs of employee households increased by 41.6 per cent. Over the same period, the CPI increased by 40.1 per cent39 (see Chart 5.1). 39 CPI re-referenced to base of June quarter 1998=100 to facilitate longer term comparisons with living cost indexes. Australian Government Submission 69 Chart 5.1 Trends in ALCI and CPI, June 1998 to December 2009 145.0 140.0 135.0 130.0 Index Numbers 125.0 120.0 ALCI - Employee 115.0 CPI 110.0 105.0 100.0 Jun-98 Jun-99 Jun-00 Jun-01 Jun-02 Jun-03 Jun-04 Jun-05 Jun-06 Jun-07 Jun-08 Jun-09 Year Source: ABS Analytical Living Cost Indexes for Selected Australian Household Types (Cat. No. 6463.0), December 2009. 5.22 In the remainder of this chapter, analysis of real wages is undertaken using CPI data. Minimum wage outcomes 5.23 As explained in Chapter 2, the Australian economy experienced extraordinary economic times over the past year and a half as the impact of the global economic downturn unfolded. Indeed, the AFPC noted that 2009 was the most challenging economic environment to confront a minimum wage setting body for decades.40 5.24 In its 2009 decision, the AFPC decided to maintain minimum wages at current (2008) levels. Currently, a full-time adult employee working 38 hours per week on the FMW earns $543.78 per week or approximately $28 300 per year. 5.25 The impact of the 2009 decision was a reduction in the FMW of 1.2 per cent over the year to September 2009 in real terms.41 40 Australian Fair Pay Commission, Wage Setting Decision and Reasons for Decision, 2009, page 25. 41 Assuming a date of effect of 1 October 2009 had the AFPC awarded an increase. 70 Australian Government Submission 5.26 However, it is important to bear in mind that low income households have benefited from the economic stimulus measures implemented by the Government (in both the Economic Security Strategy and the Nation Building and Jobs Plan – as outlined in Chapter 2), as well as the change to the tax thresholds which came into effect on 1 July 2009. 5.27 There has been much comment and criticism of the AFPC’s 2009 decision. While the needs of the low paid are clearly not served if jobs are lost, the Government was disappointed with the AFPC’s decision and believes it did not get the balance right. Table 5.1 Minimum wage increases for the FMW and C10 Pay Scale in annualised terms(a) FMW (C14) C10 Increase Nominal Real Increase Nominal Real $/wk (%) (%) $/wk (%) (%) Australian Industrial Relations Commission 1997 10.00 2.9 2.5 10.00 2.3 2.5 1998 14.00 3.9 3.2 14.00 3.1 2.4 1999 12.00 3.2 2.1 12.00 2.6 1.5 2000 15.00 3.9 0.7 15.00 3.1 0.0 2001 13.00 3.2 -2.6 15.00 2.6 -2.8 2002 18.00 4.4 1.5 18.00 3.5 0.7 2003 17.00 3.9 1.2 17.00 3.2 0.5 2004 19.00 4.2 1.7 19.00 3.5 1.0 2005 17.00 3.6 1.1 17.00 3.0 0.5 Australian Fair Pay Commission 2006 18.07 3.7 0.6 18.10 3.1 0.0 2007 12.34 2.4 0.0 12.33 2.0 -0.4 2008 21.66 4.1 -0.8 21.66 3.5 -1.4 2009 0.00 0.0 -1.2 0.00 0.0 -1.2 Notes: (a) Prior to the establishment of the Australian Fair Pay Commission, increases in the FMW generally occurred on an annual basis. With the Australian Fair Pay Commission's first two decisions the periods between increases were 18 months and 10 months respectively. Accordingly, for comparability, the decisions have been presented in annualised terms. 5.28 Table 5.1 shows that since the FMW was established in 1997, for the most part annual wage reviews have resulted in real increases in the FMW. For example, under the AIRC’s Safety Net Reviews, real increases in the FMW ranged from 0.7 per cent in 2000 to 3.2 per cent in 1998. The only exception was a real decline of 2.6 per cent in 2001 where the introduction of the GST impacted on price movements. Outcomes under the AFPC’s four decisions have been more mixed, with a real increase awarded in 2006, maintenance of real wages in 2007 and Australian Government Submission 71 real declines in 2008 (albeit due to a spike in inflation in that year) and in 2009 (in light of the global economic downturn). 5.29 As shown in Table 5.1, growth in the FMW on a year-to-year (or decision-to-decision) basis can be positive or negative in real terms. However, over the longer term, the FMW has increased in real terms. Over the last 10 years, the FMW has increased from $385.40 per week in 1999 to $543.78 per week in 2009. This is equivalent to a real increase of 2.3 per cent.42 Therefore the value of the FMW has been preserved relative to the prices of goods and services. 5.30 Table 5.1 also shows that in real terms, the FMW generally increases by a slightly higher rate (or decreases by a lower amount) when compared with higher award classifications such as the C10 (Tradespersons) classification in the Manufacturing and Associated Industries and Occupations Award 2010 [MA000010]. This is a result of annual wage decisions being increased by flat dollar amounts rather than percentage increases. Over the last 10 years, the real value of the C10 pay rate has fallen by 3.1 per cent. 5.31 Another way of comparing the relative value of the FMW is to compare its real growth (2.3 per cent) to the growth of wages generally prevailing in the community. Over the last 10 years43, ABS National Accounts data show that real wages44 have increased by 13.8 per cent. 5.32 Finally, the relative value of the FMW can be judged by the minimum wage ‘bite’ which is defined as the ratio of the adult minimum wage to full-time median earnings. The Australian minimum wage bite is high among Organisation of Economic Co-operation and Development (OECD) countries, as shown in Table 5.2, but has declined substantially in recent years. 42 June quarter 1999 (CPI period applicable to AIRC’s 1999 decision) to September quarter 2009 (CPI period applicable to AFPC’s 2009 decision). 43 June quarter 1999 to September quarter 2009 – this period is chosen to align with dates of effect of minimum wage increases. 44 As measured by average non-farm compensation per employee deflated by the implicit price deflator for final consumption expenditure – households from the ABS Australian National Accounts: National Income, Expenditure and Product publication (Cat. No. 5206.0) – AusStats spreadsheets 2, 3 and 20. The data are seasonally adjusted. Broader real wage increases, however, are affected by changes in the composition of employment, in particular, the shift over time toward more highly skilled jobs, combined with increased premia for skills as a result of technological change. 72 Australian Government Submission Table 5.2 Minimum Wage ‘Bite’: adult minimum wages relative to full-time median earnings, mid-2007A Country Percentage France 61.6 New Zealand 58.7 B Australia - LFS 54.5 G - ES 51.4 Greece C 47.8 Belgium 53.1 Ireland 49.9 D United Kingdom 46.7 Netherlands E 42.9 (50.0) Canada 40.7 Portugal F 41.2 (48.0) F Spain 33.8 (39.4) Japan 33.9 United States 29.6 Source: OECD estimates based on OECD Earnings Structure Database, minimum wages and median earnings for full-time workers, July 2007, as cited in the UK National Minimum Wage - Low Pay Commission Report 2009, Table A5.2, page 306. Available from http://www.lowpay.gov.uk/lowpay/report/pdf/7997-BERR- Low%20Pay%20Commission-WEB.pdf (accessed 13 May 2009. Notes: A In all cases, the minimum wage refers to the basic rate for adults. In some cases, the median earnings data for full-time workers for mid-2007 are estimates based on extrapolating data for earlier years in line with other indicators of average earnings growth. All earnings data are gross of employee social security contributions. B Two estimates of median earnings are available based on the Labour Force Survey (LFS) and an Enterprise Survey (ES). In each case, the data refer to weekly earnings. The minimum wage refers to the Federal Minimum Wage. C Minimum wage for blue collar workers. D Differs from the LPC estimate in Chapter 2 (Table2.3), as the OECD estimate is for full-time, rather than all, employees. E The ratio including 8 per cent supplement for holiday pay is given in parentheses. F The ratio including annual supplementary pay of two additional months of salary is given in parentheses. G The estimate of the Australian minimum wage bite in this table precedes the 2007 AFPC Decision and therefore understates the true value of the bite in 2007. This estimate is derived by expressing the FMW following the AFPC’s 2006 Decision ($511.86 per week) as a proportion of full-time median earnings in August 2007 ($940.00 per week). The true value of the bite in 2007 was 55.5 per cent. Australian Government Submission 73 5.33 Despite Australia’s position internationally, Chart 5.2 below shows that there has been a steady decline in the minimum wage bite from 61.9 per cent in 1997 to 54.4 per cent in 2008 (latest data). This decline is due to full-time median earnings increasing faster than the FMW (72.1 per cent compared with 51.3 per cent in nominal terms) over the period. Chart 5.2 Minimum wage ‘bite’ 64.0 62.0 (FMW as a percentage of full-time median weekly earnings) 60.0 Minimum Wage Bite (%) 58.0 56.0 54.0 52.0 50.0 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: DEEWR calculation using wage data and data from ABS Employee Earnings, Benefits and Trade Union Membership (Cat. No. 6310.0). 5.34 In summary, while Australia’s minimum wages remain high by international standards, the value of the FMW, in both real and relative terms, has declined. Inequality 5.35 Analysis of inequality can be conducted by using measures of earnings or incomes. Earnings inequality (and increases in the dispersion of earnings) are generally the result of earnings rising faster at the top of the distribution relative to those at the bottom. Analysis of inequality based on earnings measures does not take into account the impact of changes to the tax-transfer system. 74 Australian Government Submission 5.36 Unlike earnings inequality, analysis of income inequality takes into account the important role the tax-transfer system has to play in mitigating inequality. Earnings inequality 5.37 Table 5.3 below presents the change in real earnings across the workforce over the past two decades to 2008 (latest data). While our main interest lies in recent changes over the last decade, we include an earlier period for historical perspective. Real earnings for the 10th percentile (the point on the earnings distribution at which 90 per cent of employees earn more) have experienced a real increase in their earnings of 3.5 per cent since 1998. 5.38 The higher paid, however, have experience noticeably faster growth rates since 1998. Earnings for the 90th percentile have increased by 19.4 per cent over this period. This is also faster than the rate of growth in median earnings. Table 5.3 Growth in real earnings for full-time adult non-managerial employees by selected percentiles, 1988 to 2008 % Change 1988 to 1998 1998 to 2008 2006 to 2008 10th percentile 8.6 3.5 2.4 25th percentile 10.6 6.5 3.1 50th percentile 13.7 10.0 4.3 75th percentile 16.5 13.5 5.6 90th percentile 17.2 19.4 7.1 Mean earnings 15.0 12.9 5.2 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), unpublished data. 5.39 Table 5.3 also shows that the trend of faster growth in real earnings at the top of the earnings distribution relative to that at the lower end has continued. Between May 2006 and August 2008, real earnings for the 10th percentile increased by 2.4 per cent, compared with 7.1 per cent for the 90th percentile. 5.40 The cumulative effect of faster earnings growth at the top end of the distribution has resulted in an increase in earnings dispersion over time, as shown in Chart 5.3. However, it is important to keep in mind that the chart also shows that earnings at the lowest end of the distribution have increased in real terms, albeit at a slower rate. Australian Government Submission 75 Chart 5.3 Real weekly total earnings (full-time adult non-managerial employees) by percentile, 1996 to 2008 140 135 10th percentile 25th percentile 130 Real FT adult non-managerial weekly earnings 50th percentile 125 75th percentile by percentile (Index 1996 = 100) 90th percentile 120 Mean earnings 115 110 105 100 95 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, published and unpublished data. Note: The EEH Survey was not conducted in 1997, 1999, 2001, 2003, 2005 and 2007. Results for these years have been obtained through linear interpolation.All series deflated by the all groups CPI. Index base 1996 = 100. 5.41 The increasing earnings dispersion in Australia is also evident when examining trends in the ratio of earnings of the high paid to median earnings, earnings of the high paid to that of the low paid and median earnings to that of the low paid. 5.42 When analysing these data, it is important to understand that groups across the earnings distribution are not constant. Many employees would have transited across the earnings distribution groups over time. 5.43 Table 5.4 shows the following: • The ratio of earnings of the high paid (P90) to median earnings (P50) has gradually increased over the past 20 years. While those at P90 earned 1.55 times median earnings in 1988, they earned 1.74 times median earnings in 2008. • The ratio of earnings of P90 to P10 has increased at a faster rate, from 2.19 in 1988 to 2.72 in 2008. 76 Australian Government Submission • The ratio of median earnings (P50) to the earnings of the low paid (P10) has increased at a slower rate from 1.41 in 1988 to 1.57 in 2008. Table 5.4 Change in the ratio of earnings of selected percentiles, 1998 to 2008 1988 1998 2008 P90/P10 2.19 2.36 2.72 P90/P50 1.55 1.60 1.74 P50/P10 1.41 1.47 1.57 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), various years. 5.44 Movements in earnings, however, can be affected by both changes in wages and compositional changes. The impact of compositional change on the growth of earnings is not a new phenomenon. Compositional change to the workforce also affects the distribution of earnings. Income inequality 5.45 As noted above, the distribution of earnings continues to widen over time and can impact on the relative living standards of the low paid. There is potential, however, to compensate for some of the inequality arising from the greater earnings dispersion through changes to the tax- transfer system. That said, changes in the tax-transfer system have not mitigated against increasing inequality over the ten years to 2007-08. 5.46 The Government acknowledges, however, that neither policy lever – minimum wages or the tax-transfer system – is sufficient on its own to address increasing inequality. Both levers must work in a complementary fashion to create an effective safety net for the low paid. 5.47 The latest income distribution data from the ABS show there has been an increase in income inequality in both the short (2005-06 to 2007-08) and longer (1997-98 to 2007-08) term. ABS data on trends in the distribution of real disposable household income (that is, household income after tax and transfers and adjusting for price movements, see Table 5.5) show that while real equivalised disposable household income has increased for all household quintiles – including the lowest – in both the short and longer term: • Real income for the 10th percentile has increased by 8.6 per cent between 2005-06 to 2007-08 and by 31.5 per cent between Australian Government Submission 77 1997-98 to 2007-08, compared with respective increases of 15.4 per cent and 49.6 per cent for the 90th percentile. • There has been a decline in the income share of all quintiles except the highest. The income share of the lowest quintile decreased by 0.4 percentage points, the second quintile fell 0.3 percentage points, the third quintile fell 0.4 percentage points and the fourth quintile fell by 0.3 percentage points between 2005-06 to 2007-08. • In comparison, the income share for the highest (fifth) quintile increased by 1.3 percentage points over the same period. The pattern of decreasing income share for lower quintiles and increasing income share for the highest quintile is also evident over the longer term (1997-98 to 2007-08). • According to the ABS, a major contributor to some of the changes in the income distribution measures in 2007-08, when compared with 2005-06, was the strong rise in wage and salary incomes (up by 28 per cent). • The Gini coefficient, an indicator of income inequality that increases with the degree of inequality, has increased from 0.303 in 1997-98 to 0.314 in 2005-06 and 0.331 in 2007-08. 78 Australian Government Submission Table 5.5 Real equivalised disposable household income Change 2005-06 to Change 1997-98 to 2007-08 2007-08 Indicator 1997–98 2005–06 2007-08 (%) (%) ESTIMATES Mean income per week Lowest quintile $ 214 272 299 9.9 39.7 Second quintile $ 342 444 504 13.5 47.4 Third quintile $ 473 607 692 14.0 46.3 Fourth quintile $ 638 805 922 14.5 44.5 Highest quintile $ 1,016 1,368 1,646 20.3 62.0 All persons $ 537 699 811 16.0 51.0 Second and third deciles $ 290 365 409 12.1 41.0 Change 2005-06 to Change 1997-98 to 2007-08 2007-08 Income per week at top of selected percentiles (%) (%) 10th (P10) $ 241 292 317 8.6 31.5 20th (P20) $ 287 364 410 12.6 42.9 30th (P30) $ 343 444 506 14.0 47.5 40th (P40) $ 399 526 596 13.3 49.4 50th (P50) $ 470 605 692 14.4 47.2 60th (P60) $ 549 700 793 13.3 44.4 70th (P70) $ 636 801 915 14.2 43.9 80th (P80) $ 735 938 1,079 15.0 46.8 90th (P90) $ 909 1,179 1,360 15.4 49.6 Change 2005-06 to Change 1997-98 to 2007-08 2007-08 Income share (Percentage point) (Percentage point) Lowest quintile % 8.0 7.8 7.4 -0.4 -0.6 Second quintile % 12.8 12.7 12.4 -0.3 -0.4 Third quintile % 17.7 17.4 17.0 -0.4 -0.7 Fourth quintile % 23.8 23.0 22.7 -0.3 -1.1 Highest quintile % 37.9 39.2 40.5 1.3 2.6 All persons % 100.0 100.0 100.0 0.0 0.0 Second and third deciles % 10.8 10.4 10.1 -0.3 -0.7 Change 2005-06 to Change 1997-98 to 2007-08 2007-08 Ratio of incomes at top of selected income percentiles (Point change) (Point change) P90/P10 ratio 3.77 4.05 4.30 0.3 0.5 P80/P20 ratio 2.56 2.58 2.63 0.0 0.1 P80/P50 ratio 1.56 1.55 1.56 0.0 0.0 P20/P50 ratio 0.61 0.60 0.59 0.0 0.0 Change 2005-06 to Change 1997-98 to 2007-08 2007-08 (Point change) (Point change) Gini coefficient no. 0.303 0.314 0.331 0.017 0.028 Number of households in sample no. 7,025 9,961 9,345 - - Factor applied to adjust to 2007–08 dollars no. 0.745 0.940 1.000 - - Source: ABS Household Income and Income Distribution, Australia (Cat. No. 6523.0), 2007-08. 5.48 The above data show an increase in income inequality over time, primarily as a result of the faster rate of growth in income for higher income groups. Who are the low paid? 5.49 In the remainder of this chapter, the Government presents information on the incidence and characteristics of those low paid workers who are most likely to benefit from a minimum wage increase using data from the 2007 HILDA (Wave 7) survey. Australian Government Submission 79 5.50 Low paid employees are defined as those employees earning up to two-thirds of median hourly earnings ($16.50 per hour in 2007).45 Characteristics of low paid workers 5.51 Data from the HILDA survey show that low paid workers live in a diverse range of household structures but share some common characteristics. Table 5.6 provides full details of the characteristics of low paid workers. 5.52 In summary: • Around 21.9 per cent of low paid employees live in couple households and 16.0 per cent are single adults; • Low paid employees are more likely to be employed in service industries such as Retail trade (18.3 per cent), Health care and social assistance (16.2 per cent), Manufacturing (8.6 per cent) and Accommodation and food services (8.0 per cent). Together, these industries accounted for 51.1 per cent of all low paid workers; • Low paid workers are more likely to be less educated with around 33.9 per cent having completed Year 11 education or below, compared with 19.1 per cent of all employees; • Low paid workers are much more likely to be less skilled, with 39.9 per cent in the bottom 3 scales46 of the Australian and New Zealand Standard Classification of Occupations (ANZSCO) compared with 19.8 per cent of all employees; • A high proportion of low paid workers live in regional areas; • Low paid workers are more likely to be women who are working in part-time jobs; 45 Consistent with the OECD’s definition, low paid workers were defined as those employees earning between the Federal Minimum Wage and up to two-thirds of the median hourly earnings for full-time employees. The median earnings for full-time employees are sourced from the ABS Employee Earnings, Benefits and Trade Union Membership (Cat. No. 6310.0). The threshold for casual employees was adjusted by up rating the standard low paid bound by 20 per cent. The hourly wage rate thresholds were rounded to the nearest 50 cents. 46 Includes Sales workers, Machinery operators and drivers and Labourers. 80 Australian Government Submission • Low paid employees are also more likely to work in the private sector and in small firms. Table 5.6 Characteristics of low paid workers (2007) (percentage of total unless otherwise specified) Low Low All Low Paid Paid Paid All Employees Males Females Employees Gender Male 39.6 50.0 Female 60.4 50.0 Age 21 to 30 yrs 31.6 38.8 26.9 23.4 31 to 44 yrs 32.0 31.6 32.2 37.2 45 yrs plus 36.5 29.6 40.9 39.4 Country of Birth Born in Australia 82.6 84.0 81.7 80.1 Born in other countries 17.4 16.0 18.3 19.9 Household type Couple family without children or others 21.9 22.5 21.5 25.9 Couple family with children less than 15 (without others) 26.6 25.4 27.3 31.9 Lone Persons 16.0 21.2 12.6 15.0 Education Attainment Degree or Post Graduate 8.4 5.5 10.2 24.0 Certificate/Diploma 38.4 42.7 35.6 42.8 Year 12 19.3 17.9 20.3 14.1 Year 11or below 33.9 33.9 33.9 19.1 Location Major City 57.7 52.8 61.0 66.7 Inner Regional Australia 25.8 27.0 25.0 21.8 Outer Regional Australia 15.1 18.9 12.6 9.6 Remote and Very Remote Area 1.4 1.3 1.5 1.9 Employment Full-time 61.2 81.8 47.8 76.8 Part-time 38.8 18.2 52.2 23.2 Fixed term contract 5.9 6.8 5.3 10.0 Casual 35.1 31.9 37.1 12.2 Permanent 58.8 60.9 57.4 77.5 Private Sector (for profit) 77.1 81.8 74.0 62.7 Public Sector (Government Business Organisation or Statutory Authority) 2.7 2.0 3.2 6.0 Small Business (0 to 19 employees) 48.6 53.4 45.4 31.4 Medium Business (20 to 99 employees) 28.9 25.4 31.1 30.7 Large Business (100 employees plus) 20.8 20.2 21.1 37.2 Average Tenure with current employer (years) 4.7 5.0 4.5 6.8 Average Years in current occupation (years) 7.0 7.6 6.5 9.5 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. Australian Government Submission 81 Table 5.6 (cont.) Characteristics of low paid workers (2007) (percentage of total unless otherwise specified) Low Low All Low Paid Paid Paid All Employees Males Females Employees Occupation Managers 6.1 7.8 4.9 10.8 Professionals 9.4 9.1 9.6 28.9 Technicians and trades workers 11.1 21.8 4.1 12.8 Community and personal service workers 15.7 9.1 20.0 10.1 Clerical and administrative workers 17.8 4.9 26.2 17.6 Sales workers 16.0 8.5 20.9 6.4 Machinery operators and drivers 9.5 19.2 3.2 6.4 Labourers 14.4 19.5 11.1 7.0 Industry Agriculture, forestry and fishing 4.1 8.5 1.3 1.6 Mining 0.9 1.6 0.4 2.3 Manufacturing 8.6 11.7 6.6 9.7 Electricity, gas, water and waste services 0.5 0.7 0.4 1.2 Construction 5.8 11.7 1.9 6.0 Wholesale trade 4.3 6.8 2.6 2.7 Retail trade 18.3 14.0 21.1 7.8 Accommodation and food services 8.0 5.2 9.8 3.3 Transport, postal and warehousing 3.0 4.6 1.9 4.6 Information media and telecommunications 1.7 1.0 2.1 2.9 Financial and insurance services 2.6 1.0 3.6 4.5 Rental, hiring and real estate services 1.4 1.3 1.5 1.2 Professional, scientific and technical services 4.1 2.3 5.3 7.7 Administrative and support services 4.0 3.9 4.1 2.6 Public administration and safety 3.9 6.2 2.4 9.2 Education and training 6.7 4.9 7.9 12.5 Health care and social assistance 16.2 6.5 22.6 15.7 Arts and recreation services 2.1 2.9 1.5 1.5 Other services 3.7 4.9 3.0 2.8 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. 5.53 Table 5.7 reveals that 23.9 per cent of low paid employees were working on a casual part-time basis and 45.1 per cent were working on a permanent full-time basis. 82 Australian Government Submission Table 5.7 Adult workers by employment contract type Low Paid Employees All Employees Fixed-term Contract Full-time 5.0 8.1 Fixed-term Contract Part-time 0.9 1.9 Casual Full-time 11.2 3.7 Casual Part-time 23.9 8.6 Permanent Full-time 45.1 65.0 Permanent Part-time 13.8 12.7 Total 100.0 100.0 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. Incidence of low paid employment 5.54 HILDA data reveal that the incidence of low paid employment increased between 2003 and 2007, with around 14.6 per cent of all employees low paid in 2007 compared with 10.6 per cent in 2003 (see Table 5.8). 5.55 Women are more likely to be low paid – 17.7 per cent of all female employees were low paid in 2007 compared with 11.6 per cent of male employees. Table 5.8 Incidence of low pay by gender 2003 2004 2005 2006 2007 Male 8.7 9.1 10.3 11.3 11.6 Female 12.5 13.3 16.8 17.0 17.7 All 10.6 11.2 13.5 14.1 14.6 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2009. Household income distribution 5.56 A decision to support all low paid workers through increases in minimum wages will deliver the same absolute wage increase to low paid workers residing in more wealthy households and less wealthy households. This latter group is much more dependent on increases in minimum wages to sustain their standard of living. The same can be said about changes in marginal tax rates which effectively raise the disposable income of individuals. 5.57 There are two ways of examining the household distribution of low paid employees. The first is to examine the distribution of low paid employees among all households. The second is to look at the distribution of low paid employees among households with at least one employee. Australian Government Submission 83 5.58 With regard to the first method, clearly the most disadvantaged people in Australia are located in households which do not have somebody in the labour force. These people will not benefit from changes to minimum wages. 5.59 According to the 2007 HILDA data, the distribution of low paid workers among households with at least one employee are located more towards the lower end of the scale. According to the 2007 HILDA data, 38.1 per cent of low paid workers are in the bottom three deciles of the income distribution for households with employees. Alternatively, around 19.4 per cent of low paid workers were in the top three household income deciles (see Chart 5.4). Chart 5.4 Distribution of low paid workers earning two-thirds median weekly earnings by household income decile among households with employees – 2007 18.0 15.9 16.0 14.0 12.9 12.2 12.0 11.1 10.0 10.0 9.6 8.8 (%) 8.1 8.0 6.4 6.0 4.9 4.0 2.0 0.0 Decile 1 Decile 2 Decile 3 Decile 4 Decile 5 Decile 6 Decile 7 Decile 8 Decile 9 Decile 10 Source: Household Income and Labour Dynamics Australia (HILDA) Survey Release 7.0, February 2010. Means to address relative living standards and needs of low paid 5.60 This section examines the ways in which the relative living standards and needs of the low paid can be addressed. The two main tools include the provision of appropriate minimum wages to boost the incomes of the 84 Australian Government Submission low paid and the utilisation of the tax-transfer system to target assistance to low paid individuals and households. Welfare improving potential of minimum wage increases 5.61 Decisions made to protect the living standards of low paid workers should be undertaken in the knowledge that while these workers themselves are low paid, they are spread more evenly throughout the household income distribution. A decision made to support all low paid workers through minimum wage increases will deliver the same pay rise to those living in wealthier households as well as those in relatively low- income households. The same can be said with changes in marginal tax rates which also effectively raise the disposable income of individuals. 5.62 The Government, however, notes the importance of minimum wages in addressing the needs of the low paid, particularly those who are persistently low paid. Increases in minimum wages boost wages for some workers, which may flow through to increase household spending and thereby support jobs. Chapter 4 noted that there are a proportion of low paid workers that remain in low paid employment for long periods of time and are therefore dependent upon increases in minimum wages to support their living standards. Minimum wage increases therefore form an important safety net for these employees. 5.63 As discussed earlier in this chapter, analysis of inequality data indicates that earnings dispersion has widened over time. Although real earnings for the 10th percentile have increased, the higher paid have experienced noticeably faster growth rates. Increases in minimum wages can assist in narrowing the earnings dispersion and thereby the relative position of low paid workers by improving the earnings for workers at the lowest end of the distribution. 5.64 Low-income households spend a greater proportion of their income on basic needs relative to wealthier households. Increases in the cost of living, therefore, affect low-income households to a greater extent. Over the year to the December quarter 2009, strong price rises were recorded for essential commodities such as electricity (15.7 per cent), water and sewerage (14.1 per cent), fruit (4.6 per cent) and rents (5.4 per cent). It is important for Panel to give consideration to the strong increases in these necessities when arriving at its decision. Australian Government Submission 85 The tax-transfer system 5.65 The tax-transfer system also has a significant role to play in alleviating income inequality and supporting the living standards of low paid workers. In particular, the tax-transfer system allows a much greater degree of targeting assistance to low paid families and therefore is an important tool for addressing the relative living standards and needs of the low paid. Under the previous Government the tax-transfer system did not mitigate against an overall increase in inequality. 5.66 Not only does the transfer system provide a substantial share of funds to many low income households, it provides those funds in a way which can be tailored to the particular circumstances of low paid workers. 5.67 The Government is aware that the economic downturn has had adverse economic impacts on the low paid. As noted in Chapter 2, the Government has provided targeted measures to assist low and middle income households. In conjunction with personal income tax cuts, these measures have delivered a fiscal boost to groups most likely to be negatively affected by the flow-on effects of the global economic changes. 5.68 In the AFPC’s 2009 minimum wage decision, it noted that the Government’s changes to the tax-transfer system and fiscal stimulus packages have provided real increases in disposable income for most households.47 Benefits of tax-transfer changes over the last five years 5.69 Table 5.9 shows the percentage change in real disposable income resulting from changes to the tax-transfer system for selected household types over the period 1 January 2005 to 1 January 2010. The households are all assumed to have private incomes equal to the FMW. 5.70 It is important to note that the FMW increased only slightly in real terms over this period by around 0.5 per cent. Accordingly, the changes to real household income shown in the table are almost exclusively due to tax-transfer effects. 47 Australian Fair Pay Commission, Wage Setting Decision and Reasons for Decision, 2009, page 8. 86 Australian Government Submission 5.71 Out of the selected household types examined, over the last five years, single income couples (partner receiving Newstart allowance) without a dependent child received the highest increase in real disposal income of 14 per cent, followed by double income couples without a dependent child where both earn 50 per cent of the FMW and single income couples (partner receiving parenting payment) with a child aged 2 (both received an increase of 13 per cent). Double income couples with no dependent children, both earning the FMW received the lowest increase (5 per cent) over the period. Table 5.9: Changes in real disposable income by selected household types – 1 January 2005 to 1 January 2010 Household type Change (%) Single person (age 21-54) 8 Single income couple (ages 21-54). Income support is Newstart allowance 14 Two income couple (both FMW). 5 Two income couple (both 50% of FMW). Income support is Newstart allowance 13 Single parent (age 21-54; child age 2). Income support is parenting payment 11 Single income couple (ages 21-54; child age 2). Income support is parenting payment 13 Source: DEEWR modelling 5.72 Charts 5.5 and 5.6 below show the percentage change in real disposable income for the household types in the table above over an income range from $0 to $200 000. The FMW is included in the charts for reference. Both charts include a single person with no dependents for reference. 5.73 What the charts show is that for all of the household types examined, households at the lower end of the distribution with private income (including those around the FMW) have, on average, benefited reasonably well in relative terms, particularly compared with middle income households. Households at the upper end of the scale have also generally benefited substantially as well. 5.74 These trends can be explained by the tax-transfer changes made over the last five years. For instance, at the lower end of the distribution a combination of increases in the Low Income Tax Offset and reduced taper rates on some transfer payments have given a significant boost to disposable incomes for those with private income. At the same time, tax cuts have tended to be higher, in percentage terms, for the higher end of the income scale. Middle income households, however, have not received the benefit of transfer payment improvements (or not much), and had proportionally smaller tax cuts. Australian Government Submission 87 5.75 It is important to note, however, that while lower income households have generally benefited the most from the tax-transfer changes over that last five years, income inequality has also increased. As noted earlier in this chapter, the Gini coefficient has increased from 0.314 in 2005-06 to 0.331 in 2007-08. This illustrates that benefits received by lower income households have not been enough to mitigate the increase in inequality. Chart 5.5: Change in real disposable income for various household types without children - 2005 to 2010 (January 2010 $ values) 20.0% Single income couple Single adult 15.0% Change in real disposable income (%) Double income couple 10.0% 5.0% FMW (as at 1 january 2010) 0.0% ‐5.0% 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Yearly private income Single adult Single income couple (100:0) Double income couple (50:50) Source: DEEWR modelling 88 Australian Government Submission Chart 5.6: Change in real disposable income for various household types with children - 2005 to 2010 (January 2010 $ values) 20.0% Single income couple with 1 child aged 2 Single adult 15.0% Change in real disposable income (%) 10.0% 5.0% Sole Parent with 1 child aged 2 FMW (as at 1 January 2010) 0.0% ‐5.0% 0 20,000 40,000 60,000 80,000 100,000 120,000 140,000 160,000 180,000 200,000 Yearly private income Single Adult Sole parent ‐ 1 child aged 2 Single income couple ‐ 1 child aged 2 Source: DEEWR modelling Forthcoming taxation initiatives 5.76 Forthcoming taxation initiatives will assist low income earners by supporting their living standards and preserving the purchasing power of those reliant on minimum wages. 5.77 From 1 July 2010, as part of personal income tax cuts announced in the 2008-09 Budget, the threshold at which the marginal tax rate increases from 15 cents in the dollar to 30 cents in the dollar will rise from $35 001 to $37 001. 5.78 The Low Income Tax Offset (LITO) will also increase from $1350 to $1500 but will continue to be reduced by 4 cents for every dollar of annual income over $30 000. As a result of these changes taxpayers will not pay income tax in 2010-11 until their annual income exceeds $16 000. It will increase the net pay of a worker on the FMW by almost $3.00 a week (or $150 in annual terms). 5.79 This measure will allow low income earners, including part-time workers, to keep more of their earnings and maintain their disposable incomes. Australian Government Submission 89 Conclusion 5.80 The minimum wage freeze in 2009 has resulted in a real decline in minimum wages. While the cost of living has been increasing, the wages of the lowest paid Australians have been standing still. 5.81 The Government does not believe this is a fair or just outcome, nor is it consistent with the new legislative parameters. That is why the Government urges the Panel to grant a considered real increase in minimum wages that, at a minimum, reflects the cost of living increases since the last minimum wage rise in 2008. 5.82 Minimum wage increases have an important role to play in ensuring relative living standards and the needs of the low paid are provided for. 5.83 For minimum wage employees in low-income households who do not transition to higher paying jobs, minimum wages are an important part of existing safety net arrangements. 5.84 It is important, however, that the Panel finds the right balance between the financial needs of low paid workers and considering the potential impact on employment growth. 5.85 The tax-transfer system has an important role to play in minimising income inequality. The Government urges FWA to take into account ongoing tax and transfer policy initiatives which are aimed at supporting the incomes and therefore living standards of low paid workers. 90 Australian Government Submission Australian Government Submission 91 Chapter 6: Equal remuneration Introduction 6.1 As noted in Chapter 1, for the first time, the FW Act includes the concept of equal pay for work of ‘equal or comparable’ value. Previously in federal workplace relations legislation the equal pay concept had been limited to equal pay for work of ‘equal’ value. The new expanded concept is included in the legislative parameters that the Panel must take into account when setting minimum wages. 6.2 This chapter outlines the relationship between pay equity and minimum wage setting. In doing so, the Government submits that pay equity considerations are best addressed through means other than general minimum wage rulings. 6.3 This chapter also provides a snapshot of the latest gender pay gap data to allow FWA to take the equal remuneration parameter into account as well as to help inform general debate of this issue. Equal remuneration provisions under the Fair Work Act 2009 6.4 Like the Workplace Relations Act 1996 (WR Act) before it, the FW Act formally recognises the objective of equal pay through the principle of equal pay for work of equal value. 6.5 For the first time in federal workplace relations legislation, however, the FW Act includes the expanded concept of equal pay for work of ‘equal or comparable’ value. The expansion of the equal remuneration principle to include the term comparable value provides for the consideration of pay equity from a perspective broader than formal equality. 6.6 The Explanatory Memorandum to the FW Act notes that the expansion of the principle allows: …comparisons to be carried out between different but comparable work for the purposes of this Part. Evaluating comparable worth 92 Australian Government Submission (for instance between the work of an executive administrative assistant and a research officer) relies on job and skill evaluation techniques. The Bill also removes the current requirement for the applicant to demonstrate (as a threshold issue) that there has been some kind of discrimination involved in the setting of remuneration. Instead, an applicant must only demonstrate that there is not equal remuneration for work of equal or comparable value.48 6.7 The principle of equal pay for work of equal or comparable value is covered in the FW Act in two ways: • Firstly, equal remuneration is included as part of the principles relating to the safety net of minimum wages and conditions. • Secondly, the FW Act specifically provides for the making of equal remuneration orders. Principles relating to the safety net of minimum wages and conditions 6.8 Section 134 of the FW Act sets out the modern awards objective which provides a guide to FWA in exercising various functions or powers relating to modern awards. The overall objective is to ‘ensure that modern awards, together with the National Employment Standards, provide a fair and relevant minimum safety net of terms and conditions’. Among other things, FWA must take into account the principle of ‘equal remuneration for work of equal or comparable value’. 6.9 The equal remuneration principle is also a specific parameter of the minimum wages objective, outlined in Section 284 of the FW Act.49 In establishing and maintaining a safety net of fair minimum wages, FWA must also, among other things, take into account the principle of equal remuneration for work of equal or comparable value. 48 Paragraph 1191-1192 of the Explanatory Memorandum to the FW Bill. 49 Previously, the AFPC’s wage-setting parameters in Section 23 of the Workplace Relations Act 1996 (WR Act) did not include a specific parameter concerning equal remuneration. However, the AFPC in exercising any of its powers, was still required to ‘apply the principle that men and women should receive equal remuneration for work of equal value’ (s222 of the WR Act), as well as take into account other anti-discrimination legislation. Australian Government Submission 93 The expansion of the equal remuneration principle to include equal remuneration for work of equal or comparable value 6.10 As noted above, pay equity beyond formal equality is affected by gender segmentation in the labour market. That is, female-dominated industries can attract much lower levels of pay than other industries. As many female-dominated industries also have high award or pay-scale reliance, one possibility is that a large minimum wage increase (or series of large increases) could help promote pay equality. 6.11 The Government, however, recognises that an excessive minimum wage increase for the purpose of reducing the gender pay gap could prove counterproductive in terms of its negative effects on overall employment. 6.12 The impact of minimum wage-setting decisions on promoting pay equity (if any) is ambiguous and is an area that requires further investigation. 6.13 While the minimum wages objective sets the parameters (including equal remuneration) that FWA must take into account in performing its wage-setting functions, the FW Act does not prescribe how these parameters are to be taken into account. 6.14 Section 290 of the FW Act provides powers to the President of FWA to direct investigations and reports. In particular, subection 290(1) states: The President may give a direction under section 582 requiring that a matter be investigated, and that a report about the matter be prepared, for consideration in an annual wage review. 6.15 The Government considers work value and pay equity to be issues that may be suitable for referral by the President of FWA for further investigation under subection 290(1) of the FW Act. The Government encourages FWA to consider the use of this option should submissions in relation to minimum wage setting raise specific matters relating to pay equity and work value matters that require detailed consideration. 6.16 More importantly, the Government submits that pay equity issues are best addressed through alternative means such as individual pay equity 94 Australian Government Submission or ‘work value’ cases on an industry or occupational basis, enterprise bargaining or the low paid bargaining stream, where a more thorough examination of the issue can be undertaken rather than through general minimum wage rulings. 6.17 In this light, the Government notes that the Australian Services Union (ASU) has made an application to Fair Work Australia for an equal remuneration order for the social and community sector. 6.18 The Government will participate in the hearing of the ASU’s application and will present evidence and make submissions concerning the approach to be adopted in applying the pay equity principle. 6.19 As indicated above, the Government believes bargaining is one mechanism that can be used to help promote pay equity. The Government has long held the view that enterprise bargaining is important in boosting productivity and has delivered economic benefits to both employers and employees over the past decade and a half. This is why enterprise bargaining is at the centre of the FW Act. 6.20 The Government recognises, however, that over that period not all employers and employees have had access to the benefits of enterprise bargaining and many low-paid employees in areas such as community services, cleaning and child care continue to rely on their award minimum rate of pay. 6.21 This is why the FW Act establishes a new stream of multi-employer bargaining to assist low paid employees and their employers who, historically, have not had much experience or success with enterprise-level collective bargaining. 6.22 The introduction of a low-paid bargaining stream, in addition to the improved safety net, is important because it focuses on the benefits of bargaining for both employees and employers in sectors like aged care, community services and cleaning. The low-paid stream is about FWA helping the parties to negotiate and make an agreement that delivers the improvements to productivity and service delivery that can support further improvement to wages and conditions beyond the safety net. Australian Government Submission 95 Latest gender pay gap data 6.23 On 23 November 2009, the House of Representatives’ Standing Committee on Employment and Workplace Relations tabled its report into pay equity and associated issues related to increasing female participation in the workforce. 6.24 The Government welcomes the release of that report and is currently considering all the recommendations included in the report. The recommendations represent important measures to further guide actions needed to address the gender pay gap. 6.25 In the interim to help inform FWA, the Government provides an updated analysis of the gender pay gap using published and unpublished ABS data. Pay gap trends 6.26 The gender pay gap based on Average Weekly Ordinary Time Earnings (AWOTE) for full-time adults is currently 17.5 per cent. Analysis of the gender pay gap based on average weekly earnings, however, ignores differences in the hours worked by males and females and differences in their employment status. 6.27 Based on data from the latest ABS Average Weekly Earnings survey, the average hourly gender pay gap widened to 13.4 per cent in November 2009 from 12.2 per cent in November 2008. This takes the hourly gender pay gap to its highest level since May 1996 (13.9 per cent). As shown in Chart 6.1 above, the hourly gender pay gap has been on a steady upward trend since the early 2000s. This may be due, in part, to the strength in conditions and wages in traditionally male dominated industries such as Mining in recent years. 96 Australian Government Submission Chart 6.1 Hourly full-time adult gender pay gap 15.0% 14.0% Hourly full-time adult gender pay gap (%) 13.0% 12.0% 11.0% 10.0% 9.0% 8.0% Nov-94 Nov-95 Nov-96 Nov-97 Nov-98 Nov-99 Nov-00 Nov-01 Nov-02 Nov-03 Nov-04 Nov-05 Nov-06 Nov-07 Nov-08 Nov-09 Source: ABS Average Weekly Earnings (Cat. No. 6302.0), November 2009, original data and ABS, Labour Force, Australia, Detailed, Quarterly (Cat. No. 6291.0.55.003), November 2009. Note: Average hourly earnings are calculated by DEEWR by dividing full-time adult average weekly earnings (in original terms) (from ABS Average Weekly Earnings Cat. No. 6302.0) by the number of hours worked by full-time employees, aged 20 years and over in all industries except Agriculture, forestry and fishing for the relevant quarter (from ABS Labour Force, Australia, Detailed, Quarterly, November 2009 Cat. No. 6291.0.55.003). Average Hours 6.28 During the 2000s, women have on average done 10 hours less paid work per week than men. While the gap has narrowed from an average of 10.3 hours in 2001, it was still on average 9.2 hours in 2009 (see Table 6.1). 6.29 Even when comparing average full-time hours, men still did around four additional hours of paid work per week over the same period (see Table 6.2). Australian Government Submission 97 Table 6.1: Average weekly hours worked – all employed persons (2001 to 2009) Average hours (all employed persons) Male Female Difference (hours) 2001 38.1 27.8 10.3 2002 38.4 27.8 10.6 2003 38.5 28 10.5 2004 38 27.8 10.2 2005 38.2 28.1 10.1 2006 37.5 27.9 9.6 2007 36.8 27.4 9.4 2008 37.9 28.3 9.6 2009 37 27.8 9.2 Source: ABS Labour Force, Australia, Detailed - Electronic Delivery (Cat. No. 6291.0.55.001), January 2010. Table 6.2: Average weekly hours worked – full-time employed persons (2001 to 2009) Average hours (full-time employed persons) Difference (hours) Male Female 2001 41.8 37.4 4.4 2002 42.2 37.7 4.5 2003 42.4 38.1 4.3 2004 41.7 37.5 4.2 2005 42 37.9 4.1 2006 41.2 37.4 3.8 2007 40.5 36.6 3.9 2008 41.8 37.7 4.1 2009 41.1 37.3 3.8 Source: ABS Labour Force, Australia, Detailed - Electronic Delivery (Cat. No. 6291.0.55.001), January 2010. Method of setting pay 6.30 Unpublished data from the August 2008 ABS Employee Earnings and Hours (EEH) survey show that the gender pay gap varies according to method of setting pay. For example, the average hourly gender wage gap was greater in every type of individual agreement than it was in every type of collective agreement. Table 6.3 below shows that gender wage gaps ranged from -5.2 per cent for award or pay-scale reliant employees (revealing that females on awards or pay scales earn more than males on awards or pay scales) to 33.8 per cent for state registered individual agreements.50 50 The very small proportion of employees on state registered individual agreements means this estimated gender wage gap is less reliable. These employees (primarily from Western Australia) are too few to quantify. 98 Australian Government Submission Table 6.3 Hourly gender wage gap for non-managerial adults by method of setting pay, August 2008 Adult hourly ordinary time earnings ($) Gender pay gap Method of setting pay Male Female (%) Award or pay scale only 19.20 20.20 -5.2 Collective agreement (Federally registered) 30.60 27.10 11.4 Collective agreement (State registered) 34.10 31.30 8.2 Collective agreement (unregistered) 35.50 31.20 12.1 Individual arrangement (Federally registered) 30.10 26.00 13.6 Individual arrangement (State registered) 30.50 20.20 33.8 Individual arrangement (unregistered) 31.80 26.90 15.4 All methods of setting pay 30.30 26.70 11.9 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, unpublished data. 6.31 The gender pay gap is explained in part by the higher proportion of non-managerial adult females who are award-reliant (19.1 per cent) compared with males (12.9 per cent) in August 2008. As shown in Table 6.3, award-reliant employees (both males and females) earn significantly less than employees on other types of industrial instruments. 6.32 Given the higher award-reliance of females it is plausible that the AFPC’s decision in 2009 to freeze minimum wages may have had a negative impact on the gender pay gap. State/Territory 6.33 Using 2008 ABS EEH data, as Table 6.4 below shows, state/territory gender pay gaps vary from 5.0 per cent in Tasmania to 20.5 per cent in Western Australia. Most of the variation was due to variation in male hourly rates (which varied by $9.50). Leaving aside the ACT, which has relatively high female earnings, female earnings varied by $3.00. The relatively high gender pay gap in Western Australia is influenced by high male earnings. In Western Australia, the male average hourly rate was the second highest and $2.80 above the national average. The female rate, on the other hand, was $0.40 below the national average. Australian Government Submission 99 Table 6.4 Gender pay gap (non-managerial adults) by state/territory - hourly ordinary time rates of pay (August 2008) Adult hourly Gender pay ordinary time earnings ($) gap State/Territory Male Female (%) NSW 31.10 27.80 10.6 VIC 29.50 26.30 10.8 QLD 29.30 25.40 13.3 SA 28.30 25.10 11.3 WA 33.10 26.30 20.5 TAS 26.10 24.80 5.0 NT 29.60 26.30 11.1 ACT 35.60 31.50 11.5 Australia 30.30 26.70 11.9 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, unpublished data. Occupation 6.34 Using 2008 ABS EEH data, as Table 6.5 below shows, the occupation with the lowest gender pay gap was Machinery operators and drivers at 11.3 per cent and the highest was Technicians and trades workers at 20.3 per cent. Table 6.5 Gender pay gap for non-managerial adults by occupation - hourly ordinary time rates of pay (August 2008) Adult hourly ordinary time earnings ($) Occupation Male Female Gender pay gap (%) Managers 41.40 33.50 19.1 Professionals 42.80 35.50 17.1 Technicians and trades workers 28.60 22.80 20.3 Community and personal service workers 27.20 22.60 16.9 Clerical and administrative workers 28.10 24.40 13.2 Sales workers 25.50 20.60 19.2 Machinery operators and drivers 26.60 23.60 11.3 Labourers 21.90 19.40 11.4 All occupations 30.30 26.70 11.9 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, unpublished data. 6.35 Gender pay gaps were below the ‘all occupations’ gap in only two occupations. This indicates that there is a degree of labour market segmentation by occupation. 6.36 That is, if the proportions of men and women were broadly the same across all occupations, then the total gender pay gap would be close to the average of all the individual occupation pay gaps. The fact that the 'all occupations' gap is nearer to the lowest individual occupation gaps means that higher proportions of women are employed in those 100 Australian Government Submission occupations (not to be confused with proportions of employees in the occupation who are female) with the lowest average pay rates overall. Industry 6.37 Using 2008 EEH survey data, as Table 6.6 below shows, gender pay gaps by industry ranged from 1.9 per cent for Accommodation and food services to 28.6 per cent for Financial and insurance services. Table 6.6 Gender pay gaps for non-managerial adults by industry - hourly ordinary time rates of pay, August 2008 AHOTE ($) Females as Gender proportion Award-reliance Pay Gap of total Industry (%) Male Female (%) employment (%) Mining 1.2 46.60 36.60 21.5 15.4 Manufacturing 12.2 27.20 24.30 10.7 24.1 Electricity, gas, water and waste services 5.4 33.10 30.50 7.9 23.6 Construction 9.1 30.50 25.50 16.4 11.8 Wholesale trade 9.0 27.50 24.30 11.6 34.6 Retail trade 28.9 22.40 20.70 7.6 57.7 Accommodation and food services 50.3 20.90 20.50 1.9 56.1 Transport, postal and warehousing 8.3 27.60 26.50 4.0 22.5 Information media and telecommunications 5.6 35.90 30.30 15.6 41.6 Financial and insurance services 2.2 41.30 29.50 28.6 54.3 Rental, hiring and real estate services 20.2 28.50 24.10 15.4 46.2 Professional, scientific and technical services 5.4 40.10 28.70 28.4 45.3 Administrative and support services 33.9 26.40 24.00 9.1 57.9 Public administration and safety 3.6 33.00 30.50 7.6 48.4 Education and training 8.4 34.00 31.40 7.6 70.5 Health care and social assistance 17.2 36.50 27.70 24.1 80.8 Arts and recreation services 14.2 27.70 23.00 17.0 41.6 Other services 25.4 23.80 22.30 6.3 41.7 All industries 16.5 30.30 26.70 11.9 46.8 Source: ABS Employee Earnings and Hours (Cat. No. 6306.0), August 2008, unpublished data. 6.38 Gender pay gaps were below the ‘all industries’ gap in ten industries. This indicates that there is also a degree of labour market segmentation by industry, as there was by occupation. 6.39 There is no clear relationship between the size of the gender pay gap within an industry and the proportion of employees who are women. Gender pay gaps are high in male dominated industries such as Mining, Australian Government Submission 101 Construction and Electricity, gas and water supply but are also high in the female dominated industries of Financial and insurance services and Health care and social services. Age 6.40 The gender pay gap also varies by age. The average gap over the last two decades for full-time employees is smallest amongst younger workers. The gap increases until around age 55, where it narrows towards retirement. Table 6.7: Average gender pay gap by age for full-time employees (1990- 2008) Age Average pay gap for full-time employees (1990-2008) (%) 15-19 4.4 20-24 7.3 25-29 9.6 30-34 12.2 35-39 18.4 40-44 23.4 45-49 24.0 50-54 25.0 55-59 22.0 60-64 17.0 Source: ABS Employee Earnings, Benefits and Trade Union Membership (Cat. No. 6310.0), August 2008, Datacube 63100TS0002. Pay gap data in the above table are calculated using mean weekly earnings in main job. Conclusion 6.41 It is clear there are many factors which contribute to pay inequities, including occupational and industry segregation, undervaluation of women’s work and difficulties in balancing work and caring responsibilities. It is also clear that despite advances on gender equality over the last decades, women continue to earn less than men and the pay gap continues to widen. 6.42 FWA is required when performing its minimum wage setting function, to take into account the principle of equal remuneration for work of equal or comparable value. To that end, the Government has provided a snapshot of the latest gender pay gap data to help inform FWA. 102 Australian Government Submission 6.43 Minimum wage increases can have a positive impact on women’s earnings and on reducing the overall gender pay gap due to the higher concentration of women on minimum wages. 6.44 The Government, however, submits that detailed considerations of pay equity are best addressed through other mechanisms such as through the forthcoming pay equity test case for the social and community services sector, enterprise bargaining or the low paid bargaining stream. Australian Government Submission 103 Chapter 7: Sub-minimum wages Introduction 7.1 When setting minimum wages, the Panel must take into account the objective of providing a comprehensive range of fair minimum wages to sub-minimum wage groups, namely junior employees, employees to whom training arrangements apply and employees with a disability. In this regard, the FW Act also places a number of specific obligations on the Panel in relation to providing for sub-minimum wages groups within the Annual Wage Review. 7.2 This chapter provides a brief outline of these obligations. The chapter also discusses the proposal for FWA to conduct a general review of award wages and training-related conditions for apprentices and trainees which was raised during the award modernisation process undertaken by the AIRC. FWA’s obligations under the FW Act 7.3 As outlined in Chapter 1, the NMW will apply to all award/agreement free employees51 except junior employees, employees to whom training arrangements apply and employees with a disability.52 53 The Panel is required to set special NMWs for award/agreement free junior employees, employees to whom training arrangements apply and employees with a disability.54 7.4 The scope of special NMWs is at the discretion of the Panel. A special NMW may be expressed to apply to all award/agreement free employees in a particular class (for example, all employees with a disability), or to a sub-class of those employees.55 If special NMWs are set by sub-class, the Panel must ensure there is a special NMW for all employees in the class. 51 Award/agreement free employee is defined in section 12 of the FW Act as a ‘national system employee to whom neither a modern award not an enterprise agreement applies.’ Item 32 of Schedule 3 and item 47 of Schedule 3A to the T&C Act also make clear that an employee is not award/agreement free while the employee is covered by a transitional instrument or Division 2B State instrument. 52 As defined in section 12 of the FW Act. 53 Subsection 294(3) of the FW Act. 54 Paragraph 294(1)(b) of the FW Act. 55 Paragraph 294(1)(b) of the FW Act. 104 Australian Government Submission 7.5 The FW Act requires the Panel to set special NMWs in each review.56 There is an exception, however, for the first annual wage review.57 In the first annual wage review, the Panel is only required to set a special NMW for a class (or sub-class) of employees if there is already a special NMW for those employees in the transitional NMW order.58 7.6 The transitional NMW order sets two special NMWs: • for employees with a disability where the effects of their disability do not impact on their productive capacity. • for employees with a disability in open employment who are unable to perform the range of duties to the competence level required because of the effects of disability on their productive capacity. 7.7 The transitional NMW order does not set special NMWs for junior employees and employees to whom training arrangements apply. The transitional NMW also does not set a special NMW for employees with a disability who are either a junior employee or an employee to whom a training arrangement applies. These groups of employees with a disability are excluded from the existing special NMWs. 7.8 In the first annual wage review, therefore, the Panel is only required to set a special NMW for employees with a disability covered by the two special NMWs in the transitional NMW order – although it would be open to the Panel to also set special NMWs for the other classes as well. If the Panel does not set a full range of special NMWs for all classes in this review, the President must establish a process for setting special NMWs for the other classes in the second annual wage review to occur in 2010-11.59 7.9 The Government notes the statement made by the President on 19 February 2010, that FWA does not intend to set special national minimum wages for award free junior employees or award free employees to whom training arrangements apply in the 2010 Annual Wage Review. Instead, FWA will give consideration to those wages in 56 Paragraph 285(2)(c) and paragraph 294(1)(b) of the FW Act. 57 Subitem 4(1) of Schedule 9 to the T&C Act. 58 Subitem 4(2) of Schedule 9 to the T&C Act. 59 Subitem 4(3) of Schedule 9 to the T&C Act. Australian Government Submission 105 the latter period of 2010 with a view to including wages for those classes of employees in the national minimum wage order to be made in the 2010-11 Annual Wage Review. 7.10 The Government has no objections to this course of action. Review of apprentice and trainee award wages and conditions 7.11 The Australian Government is committed to a strong national training system that delivers economic and social benefits to individual students, industry and business. 7.12 Vocational Education and Training (VET) plays a central role in developing the skills base of Australia’s workforce by offering opportunities for all Australians to pursue their career aspirations. Traditionally, young people have undertaken training through VET, but many more Australians are now upgrading their formal skills to meet new workforce requirements and to better position themselves to take up emerging opportunities. The national training system now provides high-quality, industry-driven and nationally recognised training to one in eight working age Australians. 7.13 In conjunction with states and territories, the Australian Government has worked with industry to develop a training system that provides Australians with the vocational skills they need to enter or re-enter the workforce and to upskill. This cooperation is reflected in the National Agreement on Skills and Workforce Development, which identifies the long term objectives of the Australian and state and territory governments on skills and workforce development and affirms the common commitment of all governments to work in partnership, and to work with business and industry, to develop the skills of the Australian people. 7.14 In terms of workplace relations arrangements for apprentices and trainees, the recent award modernisation process conducted by the AIRC, however, reinforced that there is a great diversity and inconsistency in minimum wage and related provisions for apprentices and trainees. A number of stakeholders (including the Commonwealth) 106 Australian Government Submission indicated support for a broad review of wages and conditions for all award-covered trainees and apprentices, with a view to identifying opportunities for greater consistency and uniformity across industries and occupations. 7.15 In a decision dated 2 September 2009, the AIRC agreed such a review was desirable but did not conduct the review as part of the award modernisation process. The AIRC indicated the review might be a task FWA could undertake at the same time as developing the special NMW for award/agreement free trainees and apprentices in its first or second annual wage review (in 2010 or 2011). 7.16 The Government would like to reiterate its support that a broad review of apprentice and trainees award wages and conditions take place as soon as possible in order to build on and complement the broader VET reform agenda. 7.17 A review of this nature would align with a proposed review of the Australian Apprenticeships system with a view to future reform. 7.18 By way of background, the Council of Australian Governments agreed at its meeting of 7 December 2009, to a set of recommendations that will drive a national approach to change in the Apprenticeships system, including better support for the principle of competency based progression and completion of apprenticeships. Giving effect to this principle would deliver qualified and skilled workers more quickly, paid under equitable pay structures based on levels of competency. This will assist to build a strong skills base in a shorter period to support economic recovery and growth. 7.19 The Government asks the Panel to indicate in its decision to the 2010 Annual Wage Review whether it or FWA intends to conduct this review and if so provide interested parties with an indication of the timeframe and forum that the review will take place. For example, whether it will form part of a future Annual Wage Review, the 2-yearly review of modern awards or as a separate review/process.