DECISION

Fair Work Act 2009
s.285—Annual wage review

Annual Wage Review 2017–18
(C2018/1)

Contents

Abbreviations

1. The Decision

Introduction

[1] This Chapter summarises the matters we have considered, our reasoning and the increases we have decided upon. Chapters 2–4 of this decision deal with the statutory considerations we are required to take into account. We do not repeat that material here but the views expressed in this Chapter should be seen in the context of our decision as a whole.

[2] The Fair Work Act 2009 (Cth) (Act) requires the Expert Panel for annual wage reviews (Panel) to conduct and complete a review of the national minimum wage (NMW) and modern award minimum wages, in each financial year (the Review). The Panel must make a NMW order and may set, vary or revoke modern award minimum wages. The NMW order applies to award/agreement free employees 1 and modern award minimum wages are the minimum wages contained in modern awards.2

[3] The number of employees who have their pay set by an award is estimated to be 2.3 million or 22.7 per cent of all employees. 3 The proportion of employees that are paid at the adult NMW rate is estimated to be 1.9 per cent. Further, a significant number of employees are paid at junior or apprentice/trainee rates based on the NMW rate and modern award minimum wages. The Panel’s decision will also affect employees paid close to the NMW and modern award minimum wages and those whose pay is set by a collective agreement which is linked to the outcomes of the Review.

[4] The Panel is required to conduct each Review within the legislative framework of the Act, particularly the object of the Act in s.3, the modern awards objective and the minimum wages objective. As part of the Review, the Panel considers both the setting of the NMW rate and whether to make any variation determinations in respect of modern award minimum wages. Each of these tasks is undertaken by reference to the particular statutory criteria applicable to each function.

The Statutory Framework

[5] The minimum wages objective applies to the exercise of functions and powers under Part 2-6 of the Act (which includes the Review), 4 and is set out in s.284(1) of the Act:

‘284 The minimum wages objective

What is the minimum wages objective?

(1) The FWC must 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; and

(b) promoting social inclusion through increased workforce participation; and

(c) relative living standards and the needs of the low paid; and

(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.

This is the minimum wages objective.’

[6] The modern awards objective applies to the performance or exercise of ‘modern award powers’ 5 (which are defined to include the variation of modern award minimum wages),6 and is set out in s.134(1) of the Act:

‘134 The modern awards objective

What is the modern awards objective?

(1) The FWC must ensure that modern awards, together with the National Employment Standards, provide a fair and relevant minimum safety net of terms and conditions, taking into account:

(a) relative living standards and the needs of the low paid; and

(b) the need to encourage collective bargaining; and

(c) the need to promote social inclusion through increased workforce participation; and

(d) the need to promote flexible modern work practices and the efficient and productive performance of work; and

(da) the need to provide additional remuneration for:

(i) employees working overtime; or

(ii) employees working unsocial, irregular or unpredictable hours; or

(iii) employees working on weekends or public holidays; or

(iv) employees working shifts; and

(e) the principle of equal remuneration for work of equal or comparable value; and

(f) the likely impact of any exercise of modern award powers on business, including on productivity, employment costs and the regulatory burden; and

(g) the need to ensure a simple, easy to understand, stable and sustainable modern award system for Australia that avoids unnecessary overlap of modern awards; and

(h) the likely impact of any exercise of modern award powers on employment growth, inflation and the sustainability, performance and competitiveness of the national economy.

This is the modern awards objective.’

[7] Further, s.578(a) provides that the Panel must take into account the objects of the Act in performing its functions or exercising its powers in a Review.

[8] Sections 134, 284 and 578 of the Act each direct the Panel to take into account certain specified considerations in conducting and completing a Review. As noted in Peko-Wallsend, 7 matters which a decision maker must ‘take into account’ are matters the decision maker is bound to consider and treat as matters of significance in the decision-making process.8

[9] There is a substantial degree of overlap in the considerations the Panel is required to take into account under the minimum wages objective and the modern awards objective, though some of these considerations are not expressed in the same terms. 9 Both the minimum wages objective and the modern awards objective require the Panel to take into account:

•  promoting social inclusion through increased workforce participation; 10 

•  relative living standards and the needs of the low paid; 11 

•  the principle of equal remuneration for work of equal or comparable value; 12 and

•  various economic considerations. 13 

[10] There are differences in the expression of the economic considerations that the Panel is required to take into account under the modern awards objective and the minimum wages objective. 14 But the underlying intention of the various economic considerations referred to in ss 134 and 284 is that the Panel takes into account the effect of its decisions on national economic prosperity and in so doing gives particular emphasis to the economic indicators specifically mentioned in the relevant statutory provisions.

[11] The modern awards objective also requires the Panel to take into account ‘the need to encourage collective bargaining,’ 15 whereas the minimum wages objective makes no express reference to any such consideration. This is relevant because it is the minimum wages objective, not the modern awards objective, which is relevant to setting the NMW rate. But as the Panel observed in the Annual Wage Review 2014–15 decision (2014–15 Review decision),16 the fact that the minimum wages objective does not require the Panel to take this consideration into account does not make much difference, in practice, to the Panel’s task. This is because the Panel is required to take into account the object of the Act and one of the stated means by which the object of the Act is given effect is ‘through an emphasis on enterprise-level collective bargaining’ (s.3(f)). While not expressed in the same terms as in the modern awards objective, it is plain from s.3(f) and a reading of the Act as a whole that one of the purposes of the Act is to encourage collective bargaining. It is appropriate that the Panel takes that legislative purpose into account in setting the NMW rate.

[12] We also observe that the considerations in ss.134(1)(da) and (g) have little relevance in the context of the Review.

[13] We turn first to deal with some general aspects of the proper construction of the modern awards objective and the minimum wages objective.

[14] The statutory tasks in ss 134 and 284 involve an ‘evaluative exercise’ which is informed by the considerations in s.134(1)(a)–(h) and s.284(1)(a)–(e). While these statutory considerations inform the evaluation of what might constitute ‘a fair and relevant minimum safety net of terms and conditions’ and ‘a safety net of fair minimum wages’, they do not necessarily exhaust the matters which the Panel might properly consider to be relevant. The range of such matters ‘must be determined by implication from the subject-matter, scope and purpose’ of the Act. 17

[15] The considerations which the Panel is required to take into account do not generally set a particular standard against which a modern award or the ‘safety net of fair minimum wages’ can be evaluated; many of them may be characterised as broad social objectives. As the Full Court of the Federal Court said in National Retail Association v Fair Work Commission:

‘It is apparent from the terms of s 134(1) that the factors listed in (a) to (h) are broad considerations which the FWC must take into account in considering whether a modern award meets the objective set by s 134(1), that is to say, whether it provides a fair and relevant minimum safety net of terms and conditions. The listed factors do not, in themselves, however, pose any questions or set any standard against which a modern award could be evaluated. Many of them are broad social objectives. What, for example, was the finding called for in relation to the first factor (“relative living standards and the needs of the low paid”)?’ 18

[16] The statutory provisions relating to the Review and to NMW orders are set out in Divisions 3 (ss 284–292) and 4 (ss 293–299) of Part 2-6 of Chapter 2 of the Act. The purpose of Chapter 2 of the Act is to prescribe minimum terms and conditions of employment for national system employees (including those terms and conditions arising from a NMW order). 19 We accept that it is appropriate to characterise the statutory provisions relating to the Review and to NMW orders as remedial, or beneficial, provisions. They are intended to benefit national system employees by creating regulatory instruments which intervene in the market, setting minimum wages to lift the floor of such wages. While these statutory provisions are properly characterised as remedial or beneficial provisions, the extent to which they are to be given ‘a fair, large and liberal’ interpretation in pursuit of that broad purpose is constrained by the fact that the relevant provisions seek to strike a balance between competing interests.

[17] Fairness is central to both the modern awards objective and the minimum wages objective. Section 134(1) refers to a ‘fair … minimum safety net’ and s.284(1) refers to ‘a safety net of fair minimum wages.’ In the Annual Wage Review 2016–17 decision (2016–17 Review decision) the Panel concluded that fairness in this context ‘is to be assessed from the perspective of the employees and employers’ 20 affected by the Review decision, and noted that:

‘It seems to us that the statutory provisions relevant to the fixation of the NMW plainly seek to strike a balance between competing interests. So much is clear from the range of considerations the Panel is required to take into account in giving effect to the minimum wages objective (for example compare s.284(1)(a) and (c)). It is also clear from the minimum wages objective itself—to “establish and maintain a safety net of fair minimum wages”. Fairness in this context is to be assessed from the perspective of the employees and employers covered by the NMW order. The object of the Act also speaks to multiple legislative purposes. Section 3 provides that the object of the Act ‘is to provide a balanced framework for cooperative and productive workplace relations that promotes national prosperity and social inclusion for all Australians’ (emphasis added), by the means specified in sections 3(a) to (g).’ 21

[18] The Australian Catholic Council for Employment Relations (ACCER) submits that the Panel’s construction of s.284(1) in the 2016–17 Review decision was erroneous and should be reconsidered. 22

[19] ACCER contends that a beneficial reading of s.284(1) excludes decision making being based on the application of the criterion of fairness as between employers and employees²³ and that the Panel’s ‘primary obligation’ in setting wage rates is to set a safety net wage rate that will provide a decent standard of living.²⁴ In particular, ACCER contends that the ‘operational objective’ of minimum wage setting under the Act is that:

‘Full time workers have a reasonable expectation of a standard of living that will be in excess of poverty and one which will enable them to purchase the essentials for a “decent standard of living” and engage in community life, assessed in the context of community norms.’ 25

[20] ACCER acknowledges that the specified considerations in s.284(1)(a)–(e) inform and constrain this ‘operational objective.’ 26

[21] We reject the proposition that ‘fairness’ in the context of the modern awards objective and the minimum wages objective excludes the perspective of employers.

[22] The Panel’s conclusion in last year’s decision was based upon observations made by the Full Bench in the 4 yearly review of modern awards – Penalty Rates – hospitality and retail industries decision (the Penalty Rates decision) 27 about the proper construction of the expression ‘a fair and relevant minimum safety net of terms and conditions’ in the modern awards objective. The Full Bench’s decision was the subject of an application for judicial review to the Federal Court which was dismissed by the Full Court of the Federal Court in Shop, Distributive and Allied Employees Association v The Australian Industry Group and Others (the Penalty Rates Review decision).28

[23] In the course of its judgment in the Penalty Rates Review decision the Full Court considered the expression ‘a fair and relevant minimum safety net of terms and conditions’ in the modern awards objective and held:

‘It is apparent that “a fair and relevant minimum safety net of terms and conditions” is itself a composite phrase within which “fair and relevant” are adjectives describing the qualities of the minimum safety net of terms and conditions to which the FWC’s duty relates. Those qualities are broadly conceived and will often involve competing value judgments about broad questions of social and economic policy. As such, the FWC is to perform the required evaluative function taking into account the s 134(1)(a)–(h) matters and assessing the qualities of the safety net by reference to the statutory criteria of fairness and relevance. It is entitled to conceptualise those criteria by reference to the potential universe of relevant facts, relevance being determined by implication from the subject matter, scope and purpose of the Fair Work Act…’

…

For the reasons already given it cannot be doubted that the perspectives of employers and employees and the contemporary circumstances in which an award operates are circumstances within a permissible conception of a “fair and relevant” safety net taking into account the s 134(1)(a)–(h) matters.’ 29 (emphasis added)

[24] The above observations are entirely consistent with the proposition that fairness in the context of minimum wage fixation is to be assessed from the perspective of the employees and employers affected by Review decisions.

[25] We also reject ACCER’s submission as to the ‘operational objective’ of minimum wage setting under the Act. The proposition advanced finds no support in the words of the statute and seeks to elevate one relevant consideration (‘relative living standards and the needs of the low paid’) above all others. As the Full Court observed in the Penalty Rates Review decision:

‘It is not legitimate to take one element in the overall suite of potentially relevant considerations to the discharge of the FWC’s functions … and discern from that one matter a Parliamentary intention that the scheme as a whole is to be construed with that end alone in mind.’ 30

[26] However, as we note later, we accept the proposition that it is reasonable for full time employees to expect a standard of living in excess of poverty. But, as noted in previous Review decisions, the Act requires the Panel to take into account all of the relevant statutory considerations, 31 and the relative living standards and needs of the low paid are but ‘one of a number of considerations that [the Panel] must take into account.’32

[27] We now turn to consider some of the particular considerations which we are required to take into account.

[28] As noted earlier, the Panel is required to take into account the need to promote ‘social inclusion through increased workforce participation’ (ss 134(1)(c) and 284(1)(b)). Consistent with past Review decisions, we interpret this to mean increased employment. We also accept however that minimum rates of pay impact upon an employee’s capacity to engage in community life and the extent of their social participation. Higher minimum wages can also provide incentives to those not in the labour market to seek paid work, which needs to be balanced against potential negative impacts of increases in minimum wages on the supply of jobs for low-paid workers. In each Review, we must take into account the employment impacts of the NMW and modern award minimum wages and any proposed increases to those rates.

[29] The minimum wages objective and the modern awards objective both require the Panel to take into account relative living standards and the needs of the low paid when setting minimum wage rates (ss 134(1)(a) and 284(1)(c)). Those matters are different, but related, concepts.

[30] The relative living standards of employees on the NMW and award-reliant employees are affected by the level of wages that they earn, the hours they work, tax-transfer payments and the circumstances of the households in which they live. 33 The net effect of these factors is summarised in the notion of equivalised household disposable income, a measure to which we return later in Chapter 3.

[31] The assessment of relative living standards requires a comparison of the living standards of workers reliant on the NMW and modern award minimum wages with those of other groups that are deemed to be relevant. We particularly focus on the comparison between low-paid workers (including NMW and award-reliant workers) and other employed workers, especially non-managerial workers. 34 There is little basis for comparing the household income of the low paid and the award reliant with that of households that are principally reliant on social welfare benefits or private savings, when the purpose is to identify whether an increase in the NMW and modern award minimum wages will assist the relative standard of living of the low paid.

[32] The assessment of the needs of the low paid requires an examination of the extent to which low-paid workers are able to purchase the essentials for a ‘decent standard of living’ and to engage in community life, assessed in the context of contemporary norms. 35 In successive Review decisions the Panel has concluded that a threshold of two-thirds of median (adult) full-time ordinary earnings provides ‘a suitable and operational benchmark for identifying who is low paid,’ within the meaning of s.134(1)(a).36 The risk of poverty is also relevant in addressing the needs of the low paid. We accept, as we have in previous Review decisions, that if the low paid are forced to live in poverty then their needs are not being met.37

[33] The modern awards objective and the minimum wages objective both provide that in a Review we must take into account ‘the principle of equal remuneration for work of equal or comparable value’ (s.134(1)(e) and s.284(1)(d)). The Dictionary section of the Act (s.10) directs attention to s.302(2) for the definition of the expression ‘equal remuneration for work of equal or comparable value.’ Section 302(2) is in Part 2-7 ‘Equal Remuneration’ and defines this expression to mean ‘equal remuneration for men and women workers for work of equal or comparable value.’ It seems highly unlikely that Parliament intended this expression to mean something different in ss 134 and 284. Hence, the appropriate approach to the construction of ss 134(1)(e) and 284(1)(d) is to read the definition into the substantive provision. 38 Accordingly, the relevant consideration is to be read as follows:

‘the principle of equal remuneration for men and women workers for work of equal or comparable value.’

[34] In the Equal Remuneration Decision 2015 39 the Full Bench concluded that the expression ‘work of equal or comparable value’ in s.302(1) refers to equality or comparability in ‘work value.’40 We agree and, further, the same meaning should be attributed to this expression in ss 134(1)(e) and 284(1)(d). As explained in the Equal Remuneration Decision 2015, the principle of equal remuneration for work of equal or comparable value is enlivened when an employee or group of employees of one gender do not enjoy remuneration equal to that of another employee or group of employees of the other gender who perform work of equal or comparable value. Further, as the Full Bench observed:

‘This is essentially a comparative exercise in which the remuneration and the value of the work of a female employee or group of female employees is required to be compared to that of a male employee or group of male employees.’ 41

[35] The application of the principle of equal remuneration for work of equal or comparable value is such that it is likely to be of only limited relevance in the context of a Review. Indeed it would only be likely to arise if it were contended that particular modern award minimum wage rates were inconsistent with the principle of equal remuneration for work of equal or comparable value; or, if the form of a proposed increase enlivened the principle. We agree with the observations of a number of parties that Review proceedings are of limited utility in addressing any systemic gender undervaluation of work. It seems to us that proceedings under Part 2-7 and applications to vary modern award minimum wages for ‘work value reasons’ pursuant to ss 156(3) and 157(2) provide more appropriate mechanisms for addressing such issues.

[36] But the broader issue of gender pay equity, and in particular the gender pay gap, is relevant to the Review. This is so because it is an element of the requirement to establish a safety net that is ‘fair.’ It may also arise for consideration in respect of s.284(1)(b) (‘promoting social inclusion through workforce participation’), because it may have effects on female participation in the workforce. 42

[37] The gender pay gap refers to the difference between the average wages earned by men and women. It may be expressed as a ratio which converts average female earnings into a proportion of average male earnings on either a weekly or an hourly basis. 43 The Statistical Report—Annual Wage Review 2017–18 (Statistical report) sets out three measures of the gender pay gap, ranging from 11.0 per cent to 15.3 per cent (see Table 4.1).

[38] As noted in the Annual Wage Review 2015–16 decision (2015–16 Review decision), the causes of the gender pay gap are complex and influenced by factors such as: differences in the types of jobs performed by men and women; discretionary payments; workplace structures and practices; and the historical undervaluation of female work and female-dominated occupations. 44 We accept that moderate increases in the NMW and modern award minimum wages would be likely to have a relatively small, but nonetheless beneficial, effect on the gender pay gap.

[39] As the Panel has observed in previous Review decisions, there is a degree of overlap between the various considerations which the Panel must take into account. 45 A degree of tension is also evident between some of these considerations, for example, the extent to which minimum wage increases are able to meet the needs of the low paid may, depending on the magnitude of the increase and the prevailing circumstances, be constrained by the potential impact of such increases on employment. No particular primacy is attached to any of these considerations,46 and it is this complexity that has led the Panel to reject a mechanistic or decision-rule approach to wage fixation.47

[40] The Act also sets out some important procedural fairness requirements for the Review. The Panel must ensure that all persons and bodies (referred to collectively as parties) are given a reasonable opportunity to make and reply to written submissions (s.289(1)). In this Review, a number of parties took this opportunity by lodging one or more written submissions and participating in consultations on 15 and 16 May 2018.

[41] The timetable for the Review and all of the submissions, transcripts, research reports, and some additional economic data were published on the Fair Work Commission’s (Commission) website to ensure that all parties had a reasonable opportunity to participate. The Panel considered all the material received from parties, the information in the statistical report and the research referred to in the Research reference list in making its decision.

The Panel’s approach

[42] As part of the Review, the Panel considers both the setting of the NMW rate and whether to make any determinations varying modern award minimum wages. These tasks are undertaken by reference to the particular statutory criteria applicable to each function.

[43] The review and variation of modern award minimum wages is a separate, though related, function to reviewing and making a NMW order. In exercising its powers to set, vary or revoke modern award minimum wages, the Panel ‘must take into account the rate of the national minimum wage that it proposes to set in the Review.’ 48 It follows that, as part of our decision-making process, we must first form a view about the rate of the NMW we propose to set, and then take that proposed NMW rate into account (along with the other relevant statutory considerations) in exercising our powers to set, vary or revoke modern award minimum wage rates.49

[44] The range of considerations we are required to take into account calls for the exercise of broad judgment rather than a mechanistic or decision rule approach to wage fixation. It is on this basis that past Review decisions have rejected proposals for the adoption of real wage maintenance; 50 a medium term target for the NMW;51 and the variation of modern award minimum wages based on trends in market wages.52

[45] We accept that the Panel’s decision-making process should be as transparent as possible and that the Panel should disclose the factors which are most relevant in a particular year, and we have done so in this decision.

[46] In assessing the various economic considerations, we take into account both actual data and forecasts. The actual indicators are the primary consideration because, by their nature, they are more reliable than forecasts. 53 But it is also appropriate to have regard to future projections that cast some light on the circumstances expected to apply during the period when any adjustment will operate. It is not uncommon for actual outcomes to differ from those forecast and those differences form part of our broad assessment and consideration of the actual indicators in subsequent reviews.

[47] We pay particular attention to trends, because of the volatility in some of the economic indicators 54 and routinely look to developments over the medium and long term, as well as to changes over the past year. This is evident in the material that is included in the Statistical Report that accompanies the Review. The longer-term perspective reduces our reliance on contemporary data that can be volatile and subject to revision. It also enables us to see the cumulative effects of the annual changes that we focus on, including our own decisions.

[48] We also compare past forecasts with actual economic outcomes, but this is not undertaken to enable some sort of quantifiable adjustment to minimum wage outcomes. There is no formulaic relationship between changes in particular indicators or factors over time and the outcome of Reviews.

[49] Given the range of considerations which we are required to take into account, it is neither necessary nor appropriate to quantify the weight given to particular considerations. This view is supported by the Full Court in the Penalty Rates Review decision, which held:

‘The fact that the FWC did not attempt to explain the relative weight it gave to the competing considerations in reaching its overall conclusions is immaterial. It is difficult to know how the FWC might meaningfully have done so given the nature of the decisions it was making and the broad scope of facts, matters and circumstances which fed into the conclusions (National Retail Association v Fair Work Commission [2014] FCAFC 118; (2014) 225 FCR 154 at [109]). Nothing in the statutory scheme or otherwise required the FWC to attempt to explain the relative weight it gave to the competing considerations in reaching its overall conclusions. What is apparent is that the FWC found that the relevant considerations did not all point in the same direction. They pulled in different directions, which is to be expected given the nature of the task. Provided the relevant matters were considered, the attribution of weight was wholly a matter for the FWC. That the FWC may be taken from the determinations to have given more weight to matters other than the relative living standards and needs of the low paid does not mean the FWC abdicated its responsibility for considering those matters or failed to consider them.’ 55

The Decision

[50] The Panel received submissions from the Australian Government, several state governments, bodies that represent the interests of employees and employers, other entities and individuals. As in previous Reviews, the quantum and form of proposed increases to the NMW and/or modern award minimum wages varied significantly. The various proposals are set out in Appendix 2.

[51] National Retail Association (NRA) and Restaurant and Catering Industrial (RCI) proposed that no increase be made to minimum wage rates. RCI argued that ‘the prevailing economic conditions do not warrant any increase’. 56 A number of other business and industry associations proposed percentage increases of varying amounts. Master Grocers Australia (MGA) proposed an increase of not more than 1.1 per cent. Australian Industry Group (Ai Group) proposed an increase of 1.8 per cent. Australian Chamber of Commerce and Industry (ACCI), Australian Business Industrial and the NSW Business Chamber Ltd (ABI and NSWBC), Australian Hotels Association (AHA), Australian Retailers Association (ARA), Australian Federation of Employers and Industries (AFEI) and Chamber of Commerce and Industry Queensland (CCIQ) all proposed an increase of no more than 1.9 per cent.

[52] The State Governments of Queensland and Victoria proposed increasing the NMW to $722.00 per week or $19.00 per hour (an increase of $27.10 per week or about 3.9 per cent) and that modern award minimum wages be adjusted by a ‘fair and reasonable increase.’ 57

[53] The Australian Council of Trade Unions (ACTU) proposed that the NMW and modern award minimum wages be increased by 7.2 per cent. ACCER proposed a tiered adjustment to minimum wages, the NMW to be increased to $735.00 (an increase of $40.10 per week, or about 5.8 per cent); increasing modern award minimum wages up to and including the Engineering/Manufacturing Tradesperson Level 1 (C10) rate by $32.00 per week; and increasing modern award minimum wages above the C10 rate by 3.9 per cent.

[54] A number of submissions did not propose a particular level of increase in the NMW or modern award minimum wages, including the Australian Government and the NSW, SA and WA Governments. Australian Council of Social Service (ACOSS) proposed that the Panel ‘increase real minimum wages substantially in order to specifically reduce the gap between them and median pay levels’ 58 and the Federal opposition proposed ‘a fair and economically responsible real increase.’59

[55] The modern awards objective and the minimum wages objective require us to take into account various economic and labour market considerations. While some of these are specifically mentioned in the Act, the Panel also considers other relevant indicators.

[56] While we seek to explain our view of the circumstances (including forecasts or projections) prevailing in each Review in comparison with previous years, it is not feasible to quantify the weight given to particular factors in balancing the various considerations prescribed by the Act. Rather, we consider all information about the economic and social environment that is available (including forecasts and any divergence from prior forecasts) to inform our decision.

[57] The Panel’s approach to its statutory function is encapsulated in the following extract from the 2014–15 Review decision:

‘In taking into account available economic and social data, the Panel’s approach is broadly to assess the changes in these data from year to year and determine how they inform the statutory criteria. Put another way, and consistent with ACCI’s submission, if there were no change in the relevant considerations from one year to the next then, all other things being equal, a similar outcome would result.’ 60

[58] Broadly speaking, differently constituted Panels should evaluate the evidence and submissions before them in accordance with a consistent and stable interpretation of the legislative framework. Justice requires consistent decision making unless a difference can be articulated and applied. 61

[59] The table below compares the data and Budget forecasts at the time of the 2016–17 Review with those before us in the current Review.

Note: Forecasts are (a) through-the-year growth rate to the June quarter, original series; (b) through-the-year growth rate to the June quarter; (c) seasonally adjusted, through-the-year growth rate to the June quarter; (d) seasonally adjusted rate for the June quarter. *Seasonally adjusted, year to December quarter 2016/2017, #Trend, April 2017/2018, ^Seasonally adjusted, Year to March quarter 2017/2018.

Source: Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2017–18, Canberra, p. 2-6; Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2018–19, Canberra, p. 2-6; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0; ABS, Consumer Price Index, Australia, Mar 2018, Catalogue No. 6401.0; ABS, Wage Price Index, Australia, Mar 18, Catalogue No. 6345.0; ABS, Labour Force, Australia, Apr 2018, Catalogue No. 6202.0; ABS, Labour Force, Australia, Apr 2017, Catalogue No. 6202.0; [2017] FWCFB 3500.

[60] Compared to the position at the time of the 2016–17 Review, the economic indicators now point more unequivocally to a healthy national economy and labour market. The recent data has shown strong growth in full-time employment together with a high participation rate.

[61] As the Treasurer and the Minister succinctly put it in their post Budget correspondence:

‘The Australian economy has entered its 27th year of economic growth and has performed remarkably well in adjusting from the investment phase of the mining boom towards broader-based sources of growth. Real GDP is forecast to grow by 2¾ per cent in 2017–18 and to accelerate further to 3 per cent growth in 2018–19 and 2019–20.’ 62

[62] Some of the key changes to the economy evident in this Review include:

•  Full-time employment grew by 3.1 per cent, significantly greater than the 1.0 per cent growth over the previous year.

•  Hours worked increased by 3.3 per cent over the year to April 2018, compared with 1.8 per cent a year earlier.

•  At 66.7 per cent in April 2018, the age-adjusted participation rate is at a record high and 0.8 percentage points higher than one year before.

•  At 77.2 per cent, the employment to population ratio for persons aged 20–64 years, reached a historic high in December 2017.

•  Strong contributions to gross domestic product (GDP) growth from non-mining business investment and household consumption.

•  Business conditions are generally robust.

[63] The labour market has improved significantly with strong employment growth of
355 200 workers over the year to April 2018, of which 256 100 were full-time employees. Employment growth of over 3 per cent recorded at the end of 2017 and in early 2018 is much higher than at the time of the last Review. Further, as pointed out by the Reserve Bank of Australia (RBA), recent employment growth has been higher than population growth.⁶³

[64] Three out of the four most award-reliant industries experienced positive growth in employment over the year. Table 2.9 in Chapter 2 shows the variation in the performance of the four industries that have the highest proportion of employees paid at the award rate. Some general conclusions may be made from the data:

•  the most award-reliant industries mainly had higher than average rates of growth in output and in profits;

•  with the exception of Retail trade, business entry rates exceeded exit rates, as they have for the whole economy;

•  the Wage Price Index (WPI) mostly grew at a rate that was below or at the economy-wide average, and wage growth under new collective agreements was, except in Other services, mostly below average; and

•  employment growth was mixed, with strong growth in employment and in hours worked in Retail trade but weaker growth, or some decline, in the other sectors.

[65] Over the past year the unemployment rate and the underemployment rate declined only slightly, reflecting a sharp rise in the participation rate. The shift from part-time employment to full-time employment may explain some of the fall in underemployment. Despite strong employment growth, the unemployment rate dropped only 0.2 percentage points to 5.5 per cent. The strong growth in employment has not translated into a lower unemployment rate because the age-adjusted participation rate is much higher than one year ago. These indicators provide further evidence that the labour market is strengthening.

[66] The labour market is currently supporting social inclusion through increased workforce participation and there is no evidence that this is being inhibited by the current level of minimum wages. Over the year to April 2018, the youth unemployment rate fell by 0.3 percentage points to 12.6 per cent, which is just below its average over the past five years. The persistence of long-term unemployment and the rise in disengagement among 20–24 year old adults are principally the result of rapid structural change in the economy that is causing a relatively high mismatch between the skills of the non-employed and those sought by employers. There is no evidence that it was caused by excessive levels of minimum wages.

[67] Measures of labour productivity declined during 2017, but annual measures of productivity must be approached with caution. When measured over the course of the current business cycle, the rate of growth in labour productivity is 1.9 per cent per annum. It is likely that the measure of productivity for 2017 was affected by a surge in the total number of hours worked. Further, as noted by the RBA, recent employment growth was concentrated in household services, which typically has low measured productivity growth.⁶⁴

[68] GDP grew by 2.4 per cent, consistent with the five-year average for economic growth, and exceeded the average for the major seven Organisation for Economic Co-operation and Development (OECD) countries across three of the five quarters to the December quarter 2017. Growth in 2017 was broad-based, with 16 out of 19 industries recording growth. There was a significant contraction (8.8 per cent) in one industry only, Agriculture, forestry and fishing, following growth of 22.5 per cent in that sector in 2016.

[69] Business conditions remain positive. Profits grew by 4.3 per cent in 2017 and by 5.8 per cent in the non-mining sector. This growth, coupled with low wages growth, caused the profit share of total factor income to remain at its highest level since 2013. The business bankruptcy rate remained stable at a comparatively low level compared to the whole of the previous decade, business survival rates are the highest in at least a decade and business entry rates exceeded business exit rates by a larger than usual margin. Survey measures of overall business conditions are at their highest levels since the global financial crisis (GFC). 65

[70] Inflation and wages growth remain low. The Consumer Price Index (CPI) increased by 1.9 per cent over the year to the March quarter 2018 and underlying inflation and the Living Cost Index (LCI) for employee households rose by 2.0 per cent. Despite substantial employment growth, there was no appreciable acceleration in wages growth in 2017. The WPI increased by 2.1 per cent, which is slightly below the average for the last five years and historically very low, and the rate of wage increases arising from enterprise agreements is substantially below their ten-year average.

[71] Low wages growth has significant economic and social consequences. As RBA Governor Philip Lowe has remarked sustained low wages growth diminishes the sense of shared prosperity.⁶⁶

[72] The economic forecasts from the Australian Government, as presented in the 2018–19 Budget, the RBA and the International Monetary Fund (IMF) all point to improving economic conditions.

[73] The RBA’s outlook for the economy is for GDP growth to be around trend in the near term before increasing, with employment to continue to grow faster than the working-age population leading to a slight decline in the unemployment rate.⁶⁷ GDP growth is forecast to be strongest over the year to the June quarter 2019.⁶⁸

[74] The Budget forecasts presented in the 2016–17 Review expected wages growth, as measured by the WPI, to be 2½ per cent over 2017–18.⁶⁹ This has been reduced to 2¼ per cent in the 2018–19 Budget. The 2018–19 Budget also forecasts the WPI to increase to 2¾ percent in 2018–19 and to 3¼ percent in 2019–20. The RBA does not provide a forecast for the WPI but expects wages growth to ‘pick up only gradually as labour market spare capacity declines and any effects of structural factors that are weighing on wages growth start to dissipate.’⁷⁰

[75] The latest data show that the WPI increased by 2.1 per cent over the year to the March quarter 2018, having increased by 0.5 per cent in each of the last two quarters. To reach the Budget forecast for 2017–18 would require a quarterly increase of 0.7 per cent, which would be the highest increase since the March quarter 2014. Such an outcome seems unlikely.

[76] The WPI forecast in the Budget is predicated on increased GDP growth leading to a tighter labour market and hence wages growth. Productivity growth and the forecast increases in inflation were also expected to result in an increase in the WPI.

[77] The international experience, particularly in the United States of America (US), shows that a lower unemployment rate has not translated to stronger wages growth. The RBA has cautioned that there is uncertainty around the level of the unemployment rate consistent with full employment which could turn out to be lower than previously assumed, and that there is a risk that it may take a lower unemployment rate than currently expected to generate higher wages growth. Both the Budget and RBA forecasts are for the unemployment rate to only fall to 5¼ per cent by 2019–20.

[78] The Budget forecasts in respect of the WPI appear overly optimistic, particularly as the RBA expects increases in wages growth to be gradual and the unemployment rate is only expected to decline slightly. For the reasons given in Chapter 2, while we expect wages growth to pick up over time, this is likely to be a more gradual process than that forecast in the Budget. We expect that our decision in this Review will result in an increase in the WPI but we do not expect any other significant sources of increase in wages growth in the short term.

[79] As mentioned earlier, in each Review we must take into account the employment impacts of the national NMW and modern award minimum wages and any proposed increases to those rates.

[80] We remain of the view that modest and regular minimum wage increases do not result in disemployment effects or inhibit workforce participation. Recent Australian research published by the RBA (Bishop 2018), discussed in Chapter 2, provides support for our view. Recent research in the UK continues to support this conclusion. The position is more contested in the US.

[81] A number of parties submitted that the increase of 3.3 per cent awarded in last year’s Review was too high in the prevailing circumstances. 71 No party was able to identify any economic indicator which demonstrated any discernible detriment arising from last year’s decision. However, we accept that the 2016–17 Review increase may have longer-term effects which are not yet discernible.

[82] As to the impact of last year’s Review decision, we note that employment continued to grow strongly in the economy generally, and it also grew in three of the four most award-reliant industries. The increase did not lead to inflationary pressure. Nor did it have a discernible effect upon general wages growth. Surprisingly, the WPI figure over the year to the March quarter 2018 increased in two out of the four most award-reliant sectors by less than for the economy as a whole, and in all four sectors the percentage WPI increase was substantially less than the percentage increase which we awarded in the 2016–17 Review.

[83] The prevailing economic circumstances provide an opportunity to improve the relative living standards of the low paid, and to enable them to better meet their needs.

[84] The real value of the NMW has increased by 5.8 per cent over the last decade, and by 4.3 per cent over the past five years. However, this has not resulted in improvements to the actual or relative living standards for many categories of NMW and award-reliant households due to changes in the tax-transfer system.

[85] The effect of taxes and transfers on the disposable incomes of the low paid is relevant to the needs of the low paid and their relative living standards, both in terms of specific changes to the tax-transfer system and in assessing broader information in relation to measures of relative income of the low paid.

[86] There has been a decline in real disposable incomes for households that are more reliant on the tax and transfer system. Real disposable income for 11 out of 14 hypothetical NMW households fell over the year to 1 July 2017. Over the five years to July 2017, real disposable income for 10 out of 14 household types fell despite the real NMW rising by 3.9 per cent over the same period. The only family types that experienced an increase in real disposable income over the past year were single adults and couples without children. As noted by the Australian Government, increases in minimum wages in recent years have ‘been important for maintaining the real disposable incomes of many low-income households.’ 72

[87] Consistent with the view the Panel has taken in past, we have not taken into account the measures proposed in the recent Budget which are yet to be legislated.

[88] The minimum wage bite increased by 0.8 percentage points to 54.8 per cent between 2016 and 2017, and has increased since 2012 following a decline between 1994 and 2012. The majority of hypothetical household types on NMW or award wage rates have disposable incomes above a relative poverty line of 60 per cent of median income. However, a number of household types with a single earner and children remain below the relative poverty line at both the NMW and the C10 award wage rate. It is also notable that, despite the increase of 3.3 per cent awarded in last year’s Review, the relative position of many NMW and award-dependent household types with children vis-a-vis the relative poverty line actually deteriorated due to changes in the tax-transfer system in 2017.

[89] The latest data suggests that income inequality in Australia has stabilised for some period with some indicators showing that income growth for households at the bottom of the distribution increased by more than for households at the top of the income distribution. However, inequality of household income remains high in Australia, relative to the past and to other comparable countries.

[90] A new report estimating budget standards based on the Minimum Income for Healthy Living (MIHL) standard has been released since the last Review. Overall, there was low support from the parties regarding the consideration of the new budget standards for this year’s Review. Application of the budget standards concluded that, in 2016, the disposable incomes of families comprising a NMW earner who were single adults, sole parents with one child and couple households with one child (with a partner not in the labour force) were above the corresponding MIHL budget standard. The remaining two family types that were evaluated had incomes below the standard. We consider the MIHL budget standards to be useful and relevant insofar as they provide direct, if imperfect, evidence that a full time job at the NMW rate is sufficient to provide a single adult with a reasonable standard of living. This concurs with the assessment based on the 60 per cent relative poverty line.

[91] Measures of financial stress and deprivation find that low-paid families have considerably more stress than all employee families. Rates of financial stress and deprivation fell in all 15 indicators for all employee households between 2009–10 and 2015–16, although the base for measurement is the immediate aftermath of the GFC. For low-paid families, levels of stress and deprivation on three indicators rose. They fell for the other 12 indicators, some by less than for all employee families. This suggests that the level of financial comfort for low-paid families has fallen relative to all employee families, but their absolute position has probably improved.

[92] A number of other matters are relevant to the outcome of the Review.

[93] The Penalty Rates decision 73 provides for the phased reduction of Sunday penalty rates in certain awards in the hospitality and retail sectors which will reduce the employment costs of some employers covered by the modern awards affected by the decision.74 We note that there have also been other changes to modern awards that have increased employment costs. It is not appropriate to take account all of these matters in some quantifiable or mechanistic way to support a particular outcome in the Review. But these matters form part of the broad context in which the Review is conducted and are relevant considerations.

[94] As mentioned earlier, one of the matters we are required to take into account is ‘the need to encourage collective bargaining.’ As set out in Chapter 4, while we accept that there has been a decline in current enterprise agreement making, a range of factors impact on the propensity to engage in collective bargaining, many of which are unrelated to increases in the NMW and modern award minimum wages.

[95] We are not persuaded that the gap between modern award minimum wages and bargained wages, to the extent it can be identified with any precision, has reached a level where it is encouraging or discouraging collective bargaining.

[96] We maintain the view expressed in past Review decisions that given the complexity of factors which may contribute to decision making about whether or not to bargain, we are unable to predict the precise impact of our decision. We cannot be satisfied that the increase we have determined will encourage collective bargaining and this is a factor to be weighed along with the other statutory considerations. However, we are also of the view that it is likely that the increase we have determined in this Review will impact on different sectors in different ways and will not, in aggregate, discourage collective bargaining.

[97] The gender pay gap is a factor in favour of an increase in minimum wages and we have considered this together with the various statutory considerations we are required to take into account.

[98] We conclude by noting that we have taken into account the circumstances of different regions, industries and sectors as part of our broader consideration of the national economy. These circumstances include that there are economic challenges currently facing certain regions and sectors as a result of the transition taking place in the economy and other factors including natural disasters. CCIQ again contended that there were ‘extenuating circumstances’ including Cyclone Debbie which hit North Queensland in March 2017 and more recent flooding events, which combined with ongoing drought in other parts of Queensland, warrant ‘exemption from the minimum wage adjustment for a given period.’ 75 CCIQ has advanced substantially the same proposition in past Review proceedings. As the Panel has observed in past Review decisions, we accept that such events cause hardship to both employers and employees.76 However for the reasons we have set out at length in previous Review decisions in relation to the same submission that is advanced by CCIQ in these proceedings, CCIQ has failed to address the requirements to be met by a party seeking such an exemption.77 No exceptional circumstances are demonstrated such as to warrant a deferral of the increases we have awarded. We are not persuaded to depart from the conclusions reached in past Review decisions in respect of this issue.78

[99] For completeness, we note that we also reject ARA’s proposal that we adopt an award by award approach and provide an interim decision in this Review. 79 Submissions in substantially the same terms have been made previously, and rejected in past Review decisions.80 We are not persuaded to depart from the conclusions the Panel has reached in past decisions in respect of this issue.

[100] The level of increase we have decided upon will not lead to undue inflationary pressure and is highly unlikely to have any measurable negative impact on employment. However, such an increase will mean an improvement in the real wages for those employees who are reliant on the NMW and modern award minimum wages and, absent any negative tax-transfer effects, an improvement in their living standards. We acknowledge that the compounding effect of increases over time may have a cumulative effect which is not apparent in the short term. We will continue to closely monitor this in future reviews.

[101] We have determined that it is appropriate to increase the NMW. The factors identified above have led us to award an increase of 3.5 per cent. The NMW will be $719.20 per week or $18.93 per hour. The hourly rate has been calculated by dividing the weekly rate by 38, on the basis of the 38-hour week for a full-time employee. This constitutes an increase of $24.30 per week to the weekly rate or 64 cents per hour to the hourly rate.

[102] Having regard to the proposed NMW and the other relevant considerations, we also consider that it is appropriate to adjust modern award minimum wages.

[103] ACCER proposed a higher adjustment to the NMW than the adjustment they proposed to modern award minimum wages (or to award rates above a certain classification level), with the intention of providing a more substantial increase to the lowest paid. ACCER also contended that since the Annual Wage Review 2011–12 decision (2011–12 Review decision), the Panel has applied what it describes as a ‘wages relativities policy’, which it submits has been contrary to law. 81

[104] We accept that if the low paid are forced to live in poverty then their needs are not being met and that those in full-time employment can reasonably expect a standard of living that exceeds poverty levels.⁸² The increases we propose to award will not lift all NMW and award-reliant employees out of poverty (measured by household disposable income below a 60 per cent median income poverty line). But to grant an increase to the NMW and modern award minimum wages the size necessary to immediately lift all full-time workers out of poverty, or an increase of the size proposed by ACCER and the ACTU, is likely to run a substantial risk of adverse employment effects. Such adverse effects will impact on those groups who are already marginalised in the labour market, with a corresponding impact on the vulnerability of households to poverty due to loss of employment or hours. An increase of the magnitude proposed by ACCER and the ACTU would also carry a substantial risk of reducing the employment opportunities for low-skilled workers, including many young persons, who are looking for work.

[105] Workers at the lower end of the wage distribution (such as those paid the NMW), including those on modern awards who tend to have less skill than other workers, are more vulnerable to disemployment. There is no justification to increase the NMW by a higher rate than modern award minimum wages (as proposed by ACCER). To do so would create a significant risk of disemployment effects—thus putting low-paid workers at risk of unemployment and poverty. Nor would it be fair to those on higher modern award minimum wages as it would erode the recognition of their higher skill and relative ‘work value.’

[106] As to ACCER’s ‘wages relativities policy’ argument, we considered, and rejected, a submission in substantially the same terms in the 2016–17 Review decision. 83 Nothing put in the present proceedings has persuaded us to depart from the views expressed in our previous decision.

[107] The proposed NMW and the relevant statutory considerations have led us to increase modern award minimum wages by 3.5 per cent.

[108] The determinations and order giving effect to our decision will come into operation on 1 July 2018. Weekly wages will be rounded to the nearest 10 cents.

2. Economic and Labour Market Considerations

[109] The economic and labour market considerations required to be taken into account in relation to the minimum wages objective in s.284(1)(a) and (b) and in relation to the modern awards objective in s.134(1)(c), (d), (f) and (h) are dealt with in this chapter. In addition, the Panel also considers a range of other relevant indicators. In doing so we examine information presented in the Statistical report, in submissions from parties, and in research published or referenced in the Research reference list by the Commission.

[110] We note at the outset the submission advanced by ABI and NSWBC that macroeconomic data are unlikely to be useful in a Review as they take a high-level view of the economy and that the Panel’s ‘primary consideration’ should be on parts of the economy most affected by Review decisions. 84 ACCI advances a submission in similar terms.85 We do not accept this view for a number of reasons.

[111] Firstly, although the degree of award reliance varies between industries, all industries contain a proportion of award-reliant employees, and in none are the majority of employees award reliant. 86 That requires us to have regard to developments in all industries and, in that context, macroeconomic data affecting all sectors is relevant and useful.

[112] Secondly, the Act requires that we make a national decision concerning the NMW and to consider variations to the minimum wages prescribed in all modern awards. Noting that no party (with one possible exception 87) has submitted that we should differentiate between modern awards in respect of minimum wage increases to arise from this Review, that necessarily requires us to pay regard to developments in the national economy as a whole.

[113] Thirdly, the minimum wages objective in s.284(a) requires us to take into account ‘the performance and competitiveness of the national economy,’ and this must accordingly be treated as a matter of significance in the decision-making process. 88

[114] Fourthly, the ABI and NSWBC submission implicitly assumes that employees in a particular industry are not, in respect of minimum wage adjustments, entitled to some share in the prosperity of the national economy if that sector is not doing as well as the economy as a whole. That is an assumption which we do not accept (nor its corollary that employees in a better-performing sector should, in respect of minimum wage adjustments, not share in any mitigation that might be required if the national economy is performing poorly). In a dynamic economy, there will always be firms and industries that are doing better or worse than the economy-wide average, and there will always be firms that are failing, together with new firms that are being created. We do, however, pay close attention to developments in the most award-reliant industries as we discuss later in this chapter.

Economic growth

[115] Annual growth in GDP over the year to the December quarter 2017 was the same as its five-year average of 2.4 per cent 89 after falling below 2 per cent early in 2017 (Chart 2.1).

Source: Statistical report, Chart 1.1; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[116] Household consumption increased by 2.9 per cent over the year to the December quarter 2017, contributing 1.7 percentage points to GDP growth, both higher than the previous year. 90 Compensation of employees increased by 4.8 per cent over the year, largely due to strong employment growth, while the household saving ratio continued to decline, from 4.0 per cent in the December quarter 2016 to 2.7 per cent in the December quarter 2017. Public investment grew by 1.5 per cent over the year, much lower than the previous year, contributing only 0.1 percentage points of GDP growth. Exports increased by 0.8 per cent, contributing 0.2 percentage points of GDP growth. Mining; Information media and telecommunications; Rental, hiring and real estate services; Public administration and safety; and Health care and social assistance all made positive contributions to growth in the December quarter.91

[117] Australia’s GDP growth exceeded the average growth rate for the major seven OECD economies in three of the five quarters to the December quarter 2017 (Chart 2.2).

Chart 2.2: International comparisons of quarterly GDP growth rates

Note: March quarter 2018 data are not yet available for Canada and Australia.

Source: OECD (2018), Quarterly GDP (indicator), <http://data.oecd.org/gdp/quarterly-gdp.htm>.

[118] The Panel has, for several Reviews, given consideration to real net national disposable income (RNNDI) which is influenced by movements in the terms of trade and net flows of income overseas and is a better measure of incomes available to Australians than GDP. 92 However, the Panel has noted that short-term movements in RNNDI have not formed part of its decision.93

[119] Chart 2.3 shows that, despite variation during the period, GDP and RNNDI have grown at similar rates over the last 10 years. On a per capita basis, RNNDI did not grow at all in 2017 94 and remains at the same level as in 2011, having dipped during the interim due to falls in the terms of trade.

Source: Statistical report, Chart 1.3; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[120] Some submissions were concerned that growth was not broad-based across industries and that conditions in award-reliant industries were not as strong as in other parts of the economy. 95 However, Chart 2.4 shows that gross value added (GVA) grew over the year to the December quarter 2017 in all but three of the 19 industries. Growth was highest in the award-reliant industry Accommodation and food services (6.7 per cent) as well as Health care and social assistance (6.4 per cent). GVA fell by a large –8.8 per cent in Agriculture, forestry and fishing and also fell in Other services (–0.7 per cent).

Source: Statistical report, Chart 1.4; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[121] In relation to investment, the Australian economy was transitioning from the investment phase of the mining boom to the production phase for some time. According to the RBA, this transition is continuing, but the ‘drag from falling mining investment is expected to have disappeared completely towards the end of the forecast period; recent data suggest the trough in mining investment may occur later in 2018 or early 2019 (compared to the Bank’s expectation in February that it would be around the middle of this year).’ 96 Both the RBA’s May 2018 Statement on Monetary Policy and the 2018–19 Budget point to the ‘stronger than expected’ growth in non-mining investment.97 Non-mining business investment grew by 12½ per cent in 2017 according to the RBA.98 Chart 2.5 presents RBA estimates of year-ended growth in non-mining and mining investment.

Note: Includes cultivated biological resources (mainly livestock, vineyards and orchards), computer software, research development, mineral exploration and artistic originals.

Source: RBA (2018), Statement on Monetary Policy, May, p. 22, Graph 2.3.

Productivity and unit labour costs

[122] Both productivity and unit labour costs are relevant considerations in a Review. We have previously discussed these concepts 99 and continue to support the conclusion that ‘increases in minimum wages are more likely to stimulate productivity measures by some employers directly affected by minimum wage increases, rather than inhibit productivity.’100

[123] The most recent data show that the absolute value of labour productivity across the whole economy and in the market sector declined over the course of 2017. However, we note the observation of the Australian Government that ‘productivity measures over short time periods can be volatile, cyclical and are subject to revisions.’ 101 ACCER provided as an illustration of revisions to productivity estimates, that the estimate for 2004 was revised from a decline to an increase of 1.2 per cent.102 As shown in Table 2.1, GDP per hour worked fell by 1.0 per cent and GVA per hour worked in the market sector fell by 0.9 per cent over the year to the December quarter 2017. However, it also shows that hours worked increased strongly during this period, by 3.5 per cent across the whole economy and 3.1 per cent in the market sector.

[124] It is likely that the fall in measured labour productivity is caused in some part by the large rise in the measured number of hours worked over the year to the December quarter 2017. A similar phenomenon occurred over the year to the December quarter 2015. In that year, total hours worked rose by 2.8 per cent and GDP per hour worked fell by 0.1 per cent. As shown in Table 2.1, there is a clear negative relationship between the annual growth in hours worked and the associated growth in labour productivity. The three years of decline in labour productivity (2010, 2015 and 2017) are each associated with unusually large increases in hours worked. In the year following each of 2010 and 2015, the rate of increase of both hours worked and labour productivity returned to more usual levels. As we did in the 2015–16 Review decision, we ‘treat with caution the significantly higher hours growth reported over the year to the December quarter 2015 [2017] and the consequent reduction in productivity growth shown over the year to the December quarter 2015 [2017].’ 103

[125] In its May 2018 Statement on Monetary Policy, the RBA points out that recent employment growth has been particularly concentrated in Health care and social assistance over the past year, with an additional 130,000 jobs in this sector. Many of these jobs are for aged and disabled carers and child care workers and they expect this growth to continue. It concludes that the concentration of employment growth in household services has contributed to low growth in labour productivity ‘because measured productivity growth in household services has typically been quite low,’ and changes in the output and quality of such services are hard to measure. 104

Note: Data from the National Accounts are seasonally adjusted. The percentage changes are calculated in relation to the corresponding quarter of the previous year. Hours worked data from the Labour Force are expressed in trend terms. The percentage changes are calculated in relation to the corresponding month of the previous year.

Source: Statistical report, Table 2.2; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0; ABS, Labour Force, Australia, Apr 2018, Catalogue No. 6202.0.

[126] Trends in productivity measures over the 10 years to the December quarter 2017 are presented in Chart 2.6.

Note: Labour productivity is measured as real GDP per hour worked. Gross value added measures the value of output at basic prices minus the value of intermediate consumption at purchasers’ prices. The market sector includes all industries except for Public administration and safety, Education and training and Health care and social assistance.

Source: Statistical report, Chart 2.1; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[127] We have previously concluded that short-term trends in labour productivity should be treated with caution as productivity is best measured over the business cycle, which is problematic as the business cycle does not align with the period of a Review. 105 A number of parties supported the assessment of productivity growth over the longer term or over cycles.106 No party submitted that we should pay primary regard to the measurement of productivity over the most recent 12 months. However, we note that there appears to be no growth in labour productivity, measured as GVA per hour worked in the market sector, over the past 18 months, as shown in Chart 2.6. If this trend continues over a longer period, that is a matter to which the Panel would need to give greater weight in future Reviews, but for the reasons earlier given in paragraph [123] above we do not expect this trend to continue.

[128] Chart 2.7 presents changes in labour productivity over the most recent cycles together with its components: multifactor productivity and capital deepening. Since the last Review, the Australian Bureau of Statistics (ABS) has revised the time period of the last two business cycles and this is reflected in the chart. In last year’s Review, the current business cycle was estimated to have begun in 2007–08, however, this has been revised to 2011–12.

[129] Ai Group submitted that productivity growth ‘has been exceedingly weak over the past decade and over the current productivity growth cycle.’ 107 This proposition is not supported by the available statistical material, nor by the Australian Government submission. The Australian Government submitted: ‘… labour productivity in the whole economy has grown at an average annual rate of 1.5 per cent over the past five years. This compares with a long-term average of 1.6 per cent over the past 30 years.’108 Chart 2.7 shows that productivity growth was higher over the most recent cycle compared with the previous one, though it was lower than the 1998–99 to 2003–04 business cycle. The chart shows that, in contrast to the previous cycle, a substantial proportion of the labour productivity growth in the current cycle has been due to multifactor productivity improvements, and not just due to capital deepening as in the previous cycle.

Note: Multifactor productivity is measured as output per combined unit of labour and capital. Capital deepening is the component of labour productivity growth which is due to the increase in the amount of capital that each unit of labour has to work with. Labour productivity is represented by the numbers above the bars, and is the sum of multifactor productivity and capital deepening. As a result of ABS revisions to the National Accounts, the productivity growth cycle has changed. The 2007–08 peak previously identified in the last publication has been revised to 2011–12.

Source: Statistical report, Chart 2.2; ABS, Australian System of National Accounts, 2016–17, Catalogue No. 5204.0.

[130] The ACTU referred to recent research from the Commonwealth Treasury (Campbell and Withers 2017, cited in the Research reference) list, that examined the impact of structural change on Australian productivity trends. The ACTU highlighted from this research that ‘it is labour productivity growth in the services sectors that has been underpinning aggregate productivity growth in Australia over recent decades.’ 109 Over half of annual aggregate labour productivity growth was from growth within the services sector and around one-quarter was attributable to mining. The research found that aggregate productivity growth is driven overwhelmingly by within-sector productivity growth rather than across sectors (that is, a structural shift from lower to higher productivity industries), except during a mining boom period. Just over 90 per cent of aggregate labour productivity growth came from the within-sector contribution from the period 1989–90 to 2015–16.110

[131] In another paper included on the Research reference list, the Productivity Commission determined that structural change had a negative effect on productivity growth as Australia saw a long-term shift towards more labour-intensive service industries which, on average, have lower levels of productivity. This change is likely to reduce labour productivity growth during the adjustment following the mining boom period. 111

[132] The Australian Government, citing the Productivity Commission study, agreed that structural change probably had a negative impact on growth in labour productivity in Australia and in many other OECD countries. 112 The Victorian Government also submitted that slower productivity growth appears to be a trend across advanced economies, according to the IMF.113

[133] In last year’s Review, the information before the Panel was that real unit labour costs had fallen, largely due to the rise in the terms of trade, and the Panel placed little weight on this fall as the RBA was of the view that the high levels of the terms of trade were unlikely to be sustained. 114 Over the course of 2017, the terms of trade did fall as anticipated, but only by a modest amount (see Chart 2.3 above), and hence real unit labour costs subsequently only rose by a small amount. The most recent data show that both nominal and real unit labour costs increased over the year to the December quarter 2017 (Chart 2.8).

Source: Statistical report, Chart 2.3; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[134] During the period of the last five years, real unit labour costs reached a peak in the December quarter 2015 before falling to their lowest level in the last decade in early 2017. They rose somewhat since then but remain at a lower level than at any time in the last decade prior to the December quarter 2016. The Australian Government observes that ‘[c]hanges in the wage share reflect essentially the same phenomenon as changes in real unit labour costs’ 115 and that ‘the fall in the wage share from the recent peak of 55 per cent in March 2016 to 53 per cent in December 2017 can largely be attributed to volatility in commodity prices.’116 The Commonwealth Treasury found that, over the year to the June quarter 2017, real unit labour costs declined by 4.3 per cent. They explain that ‘[t]his means that the prices of firms’ outputs have been growing faster than the labour costs of producing those outputs. The recent increases in the terms of trade have been an important part of the decline in real unit labour costs.’117 We conclude that, as anticipated in last year’s Review, there was some reversal of the previous sizeable fall in real unit labour costs (and associated fall in labour’s share of national income), due to some decline in the terms of trade during 2017. Despite this, real unit labour costs and labour’s share of national income remain at unusually low levels.

Business competitiveness and viability

[135] Profits growth of 4.3 per cent over the year to the December quarter 2017 was much lower than the particularly strong result in the preceding year, and also lower than the five-year and 10-year averages (Table 2.2). The lower result was mainly driven by weaker growth in mining profits, which were exceptional (at 75.8 per cent) in the previous year. While profits growth in the non-mining sector was also lower than the previous year, it was above its five-year and 10-year averages. The Australian Government submitted that the recent profits growth follows years of low growth of profits in the non-mining economy. 118 Evidence that supports this proposition is shown in Table 2.2 below.

Note: *Annualised growth rates.

Source: Statistical report, Table 3.3; ABS, Business Indicators, Australia, Dec 2017, Catalogue No. 5676.0.

[136] The profits and wages share of total factor income experienced relatively large changes over the two years to the December quarter 2017 (Chart 2.9). After declining between the September quarter 2011 and the June quarter 2016, the profits share increased sharply and, at 27.0 per cent in the December quarter 2017, is similar to the previous December quarter. In contrast, the wages share increased between 2011 and 2016 before falling, particularly late in 2016 and early 2017. It has since risen to be 52.9 per cent in the December quarter 2017, above its level in the previous year and similar to the levels experienced in much of the past decade.

[137] The parties’ submissions provided several explanations for the recent fluctuations in the wages and profits share. We accept that the most important recent factor is volatility in the price of commodities, which has a direct impact on the profitability of the affected exporters. The substantial growth in employment over the course of 2017 is likely to also have had some effect in increasing the wages share. 119

Source: Statistical report, Chart 3.1; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0.

[138] Chart 2.10 presents the business entry, exit, and net entry rates over the 10 years to 2016–17. It shows that, since 2012–13, the entry rate increased while the exit rate declined, resulting in a positive net entry rate since 2013–14. The net entry rate in 2016–17 was the highest since 2009–10.

Note: Entry rates are business entries in the financial year as a proportion of total businesses operating at the start of the financial year. Exit rates are total business exits in the financial year as a proportion of total businesses operating at the start of the financial year. Net entry rates are the difference between the entry and exit rates, and represent the percentage growth in the number of businesses over the respective financial year.

Source: Statistical report, Chart 3.4; ABS, Counts of Australian Businesses, Including Entries and Exits, various, Catalogue No. 8165.0.

[139] Business entry rates were higher than exit rates over the year to June 2017 across all industries except for Retail trade, Mining and Agriculture, forestry and fishing (Table 2.3).

Note: Entry rates are business entries in the financial year as a proportion of total businesses operating at the start of the financial year. Exit rates are total business exits in the financial year as a proportion of total businesses operating at the start of the financial year. Only data for those businesses that were able to be classified to an industry division are presented. Of all businesses that were actively trading as at June 2017, 1.2 per cent were not classified to an industry.

Source: Statistical report, Table 3.5; ABS, Counts of Australian Businesses, Including Entries and Exits, June 2013 to June 2017, Catalogue No. 8165.0.

[140] Chart 2.11 shows business survival rates over four-yearly intervals, that is, the proportion of businesses in the initial period that were still trading four years later. The chart shows that business survival rates for the most recent period (June 2013 to June 2017) were the highest recorded over the past 10 years.

Note: A surviving business is defined as a business which was actively trading in the first period and continued to be trading in the second period.

Source: Statistical report, Chart 3.5; ABS, Counts of Australian Businesses, Including Entries and Exits, various, Catalogue No. 8165.0.

[141] ACCI 120 and Ai Group121 contended that the Panel should consider Australia’s international competitiveness as part of this Review. In particular, Ai Group submitted that:

‘Australia’s relatively higher minimum wages reflect higher living costs and other factors in Australia over a very long period of time. Significantly, they do not appear to reflect higher labour productivity in Australia than in comparable economies. For example, OECD data indicate that on a PPP basis, Australia’s average labour productivity (measured as real output per hour worked) has been lower than in the US since at least the 1970s and that it has fallen further behind the US over the past decade … This growing labour productivity ‘gap’ is indicative of Australia’s poor competitiveness across a range of factors that affect our productivity and performance, absolutely and relative to our global peers.’ 122

[142] We deal with many of the issues that arise from this proposition, including business profitability and survival, productivity, and the degree to which minimum wage increases have in practice led to job or hours losses, elsewhere in this decision. It is not clear from the submissions how the broader issues of international competitiveness should bear upon our present considerations and the Panel may be assisted by hearing further from all parties in subsequent Reviews.

Small business and surveys of business performance

[143] The Panel gives consideration to small business as the general object of the Act is directed to providing a balanced framework for cooperative and productive workplace relations, which promote national economic prosperity and social inclusion for all Australians by, amongst other things, acknowledging the special circumstances of small and medium-sized businesses. 123

[144] The Australian Government again submitted an analysis of the characteristics of small businesses, identifying that:

•  Small businesses are found in every sector of the economy, although they are less prevalent in Mining, Manufacturing and Electricity, gas, water and waste services; 124

•  Small businesses contributed a higher proportion of employment compared with output for almost every industry, suggesting that they are more labour intensive relative to larger businesses, even within the same industry, and have lower labour productivity; 125

•  Labour costs for small employing businesses averaged 17 per cent of total expenses in 2015–16; 126 and

•  Small businesses accounted for around 34 per cent of all award-reliant employees, with 35 per cent of employees in small businesses being award reliant, a higher proportion than for larger businesses (100–999 employees) but similar to the proportion businesses with (20–49 employees). 127

[145] In response to a question on notice from the Panel, the Australian Government provided data that showed that, from 2014 to 2016, small businesses accounted for 17.8 per cent of the increase in total numbers of employees. 128 This is a much smaller proportion than their share of total non-financial private sector employment of 44 per cent.129 Table 3.4 in the Statistical report shows that profit margins for small businesses (including non-employing businesses) exceeded those of all businesses both in the latest year for which data are available (2016–17) and in the five years to 2016–17. This higher small business profit margin was apparent also for most of the award-reliant industries (the exception being Accommodation and food services). While we are cognisant of the circumstances of small and medium enterprises, we have no reason to believe that their relative position in the Australian economy in 2017–18 is noticeably different from normal.

[146] Consistent with prior Reviews, the Panel has considered relevant business surveys that the Australian Government and RBA believe to ‘be quite reliable predictors of output and employment growth.’ 130 The Australian Government,131 Ai Group,132 and the Federal opposition133 discussed various business surveys which showed that business conditions are improving both at an aggregate level, and across most major sectors of the economy. For example, the National Australia Bank (NAB) concludes that:

‘Business conditions continued to look very healthy in the December quarter NAB Quarterly Business Survey… Investment expectations are looking strong for the year ahead, with most industries (outside retail) sitting above long-run average levels. Employment intentions were also higher, while the increased difficulty firms are having finding suitable labour suggests further labour market tightening.’ 134

[147] The same report finds that, by a small margin, more firms are saying that difficulty in finding suitable labour is a constraint on expansion than saying that this constraint comes from a lack of demand for their output. 135

[148] The Australian Government commented that the NAB surveys show a difference between the economic conditions of small and larger-sized businesses, with all businesses reporting better conditions than small businesses. 136 Even so, business conditions for small businesses in the December quarter 2017 have risen quite strongly over the past two years, to be at their highest level for 10 years.137 A separate NAB survey of small to medium enterprises finds that more small businesses are increasing than decreasing employment, especially businesses with a turnover of $2–$10m.138 The Sensis small and medium business survey for the March quarter 2018 reported that the overall assessment of the economy improved for the fourth quarter in succession and is at the highest level recorded since December 2010.139 In its May 2018 Statement on Monetary Policy, the RBA concluded:

‘Survey measures of overall business conditions are around their highest levels since before the global financial crisis.’ 140

Inflation and wages

[149] The Review is being conducted during a period of low inflation and low wages growth. This is discussed in the following section.

Inflation

[150] Measures of inflation across 2017 were higher than the year before, although they remain at relatively low rates. The CPI increased by 1.9 per cent over the year to the March quarter 2018 and underlying inflation and the LCI for employee households increased by 2 per cent over the year, with the LCI increasing from a low of 1.0 per cent over the year to the December quarter 2016 (Chart 2.12).

Source: Statistical report, Chart 4.1; ABS, Consumer Price Index, Australia, Mar 2018, Catalogue No. 6401.0; ABS, Selected Living Cost Indexes, Australia, Mar 2018, Catalogue No. 6467.0.

[151] Reasons for the relatively low inflation were discussed by parties and included low wages growth and heightened competition in the retail sector. 141 Employer organisations submitted that low inflation suggests businesses do not have much pricing power142 and that their ability to raise prices to fund wage increases is limited.143

Wages

[152] Low wages growth was discussed in last year’s Review, 144 and measures of wages growth have not shown signs of strengthening over the past year. This is evident in Chart 2.13 by the quarterly increase in the WPI which has fallen from around 1.0 per cent in the March quarter 2012 to around 0.5 per cent in the March quarter 2018. As noted in the Statistical report, the most recent data show that the WPI increased by 2.1 per cent over the year to the March quarter 2018, average weekly ordinary time earnings (AWOTE) increased by 2.4 per cent over the year to the November quarter 2017 and the average annualised wage increase (AAWI) for federal enterprise agreements approved in the December quarter 2017 was 2.5 per cent, each around or below their five-year average145, but substantially below their 10-year average. If the WPI is expressed in real terms (deflated by the CPI), there was a 0.2 per cent increase to the March quarter 2018, compared with the five-year average of 0.3 per cent. If the WPI is deflated by the GDP deflator (i.e., by producer prices) then it rose by 1.0 per cent in 2017, compared with a five-year average of 1.1 per cent.146 Taken over a 10-year period, the Engineering/Manufacturing Employee Level 1 (C14) and C10 rates have increased at around the same level as the WPI (Chart 2.13).

Note: The WPI is an index for total hourly rates of pay excluding bonuses in both private and public sectors. It is unaffected by changes in the quality or quantity of work performed. AWOTE is calculated by dividing estimates of weekly ordinary time earnings by estimates of the number of employees. Ordinary time earnings refers to earnings attributable to award, standard or agreed hours of work. It is calculated before taxation and other deductions such as superannuation. It also excludes payments which are not related to the reference period such as overtime, leave loading and redundancy payments. AWOTE estimates refer to full-time adult employees. AAWI measures the average percentage increase in the base rates of pay across registered agreements for the year. It does not take into account payments such as allowances, bonuses and increases linked to productivity. The AAWI index is calculated by first deriving a quarterly rate from the AAWI per employee for agreements approved in the quarter for all sectors. The C14 and the C10 are minimum award rates set under the Manufacturing and Associated Industries and Occupations Award 2010 (Manufacturing Award) and the former Metal, Engineering and Associated Industries Award 1998. AWOTE data are published half-yearly for May and November, hence, a quarterly series has been derived. AWOTE data are expressed in original terms.

Source: Statistical report, Chart 5.1; ABS, Average Weekly Earnings, Australia, Nov 2017, Catalogue No. 6302.0; ABS, Wage Price Index, Australia, Mar 2018, Catalogue No. 6345.0; Department of Employment, Trends in Federal Enterprise Bargaining, December quarter 2017, <http://employment.gov.au/trends-federal-enterprise-bargaining>; Metal, Engineering and Associated Industries Award 1998; Manufacturing Award (from 1 January 2010).

[153] In last year’s Review, the Panel agreed with research from the RBA which stated that the reasons for low wages growth are somewhat puzzling. 147 Parties in this Review referred to factors including spare capacity in the labour market, lower inflation, more competition, structural adjustment after the mining boom, growth in part-time employment, lower business confidence and a focus on cutting costs as reasons for low wages growth.148

[154] The decline in collective bargaining was also considered in submissions as reasons for low wages growth. The ACTU submitted that employees’ position in bargaining has weakened with the shift towards part-time employment. 149 ACCI also drew attention to the low growth in private demand, which they submit grew at 0.2 per cent in late 2016, compared with the 30-year average growth rate of 3.7 per cent.150 ACCI associated this with the low growth in wages.151 The most recent National Accounts data show that over the year to the December quarter 2017, domestic final demand increased by 3.1 per cent and private demand increased by 2.8 per cent.152

[155] Further research has since been undertaken on recent wages growth and was available for this Review (and included as part of the Research reference list). These include research from the IMF, RBA and the Commonwealth Treasury.

[156] The IMF analysed recent wage dynamics in advanced countries and concluded that the majority of the slowdown can be explained by labour market slack (both unemployment and underutilisation), low inflation expectations and trend productivity growth. 153 Although no specific analysis was undertaken of Australia, the research considered countries where the unemployment rate was still above the levels before the GFC (such as Australia).

[157] The Commonwealth Treasury has published a series of research papers that analysed different aspects of recent trends in wages growth. They start from a position that ‘[t]he key driver of wage growth over the long-term is productivity and inflation expectations. This means that real wage growth—wage growth relative to the increase in prices in the economy—reflects labour productivity growth.’ 154 Further specific points from the research are that:

•  over the past five years, annual real wage growth (measured by the WPI) has averaged 0.4 per cent, compared with 1.0 per cent in the decade prior; 155

•  all industries have experienced lower wage growth over the last five years, particularly in Mining; 156

•  the weakness in real wage growth has not been as pronounced as the weakness in nominal wage growth due to low inflation; 157

•  weaker labour productivity growth seems unlikely to be a cause of the current period of low wage growth in Australia and over the past five years labour productivity has grown at about the 30-year average; 158

•  the unwinding of the mining investment boom and spare capacity in the labour market are important cyclical factors that are currently weighing on wage growth; 159

•  wage growth is weaker than the historical relationship between wage growth and the unemployment rate would suggest; 160

•  the Treasury Labour Market Conditions index was positive as at September 2017—i.e. conditions in the labour market were tighter than average, following a prolonged period of weak labour market conditions; 161

•  inflation expectations are low and this is weighing on nominal growth in wages, because wage-setting decisions are forward-looking; 162

•  many advanced economies have experienced low wage growth, particularly since the GFC; 163 and

•  structural change has caused a shift towards greater employment in the services industries which tend to have lower productivity and wages. 164

[158] In response to a question on notice, the Australian Government amended a chart on growth in real wages and labour productivity during the mining boom that it had included in its initial submission to include the NMW deflated by each of the CPI and the household consumption deflator. 165 Their revised chart is included below (Chart 2.14).

Chart 2.14: Real wages and labour productivity during the mining boom

Note: The real producer wage is AENA (per hour) deflated by the GDP deflator; the real consumer wage is AENA (per hour) deflated by the household consumption deflator; labour productivity is per hour. March 2003 = 100; for real minimum wage June 2003 = 100.

Source: Australian Government response to questions on notice, 9 April 2018 at p. 10; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0; Departmment of Treasury calculations.

[159] The chart uses measures of inflation derived from the ABS National Accounts, in addition to the usual CPI measure. It shows that the high levels of the terms of trade and the associated increases in the Australian dollar exchange rate that occurred during the resources investment boom had an unusual effect in driving a wedge between the growth in the prices facing consumers and the growth in the prices being received by producers. The net effect was that between 2002 and 2011, the real consumer wage rose by about 20 per cent while the real producer wage (deflated by the prices that producers received for their product) rose by only half that amount. Labour productivity grew in line with the real producer wage, while the real consumer wage rose at a substantially faster rate than labour productivity. Since 2011, the real consumer wage has not increased at all, while the real producer wage and labour productivity rose steadily until mid-2016 and since then both have declined.

[160] In the past 10 years, the real value of the NMW has grown much more slowly than the real consumer wage, but unlike that wage, it has had modest increases over the past five years. When measured by the household consumption deflator, the real value of the NMW has grown a little faster than it has when measured by the CPI over the past 10 years. But in neither case has it grown as fast as labour productivity, the real producer wage or (by a substantial margin) the real consumer wage.

[161] The Australian Government submitted that low wages growth ‘is part of the adjustment as the economy transitions from the investment phase to the production phase of the commodities boom.’ 166 The Federal opposition also cited low GDP growth and some spare capacity in the labour market from weak demand as relevant factors.167

[162] Over the year to the December quarter 2017, the WPI for three of the most award-reliant industries increased by an amount less than the growth in award rates. In response to a question for final consultations, parties offered a number of possible reasons for the large discrepancy in increases in the WPI and that awarded in the 2016–17 Review decision. All agreed that the reasons given could not fully account for the difference. The possible reasons given included some non-compliance with the increase in the NMW and modern award minimum wages, 168 and the potential that over-award payments had been absorbed.169 There are varying estimates about the degree of non-compliance and it is important for the integrity of the minimum wage system that the monitoring of compliance and appropriate enforcement measures are given a very high priority. However, whilst non-compliance may be a factor, it is unlikely to fully explain the most recent WPI results. In its response to the question, Ai Group provided a chart that showed the history over the past 10 years of increases to the NMW, the WPI and enterprise bargaining agreements.170 The chart shows that the large gap between the 3.3 per cent increase from the 2016–17 Review decision and the subsequent levels of increase in the WPI (2.1 per cent for the WPI across all sectors and 1.9 per cent for the private sector WPI) is an anomaly and that these series have tracked each other more closely in the past. It is an issue which should be kept under consideration in subsequent Reviews.

[163] We conclude that since about 2011 a range of factors have operated to depress the rate of growth of nominal wages and, to a lesser extent, of real wages. The phenomenon is not fully understood and is not confined to Australia; and it must be noted that over the past decade real wages as measured by producer prices have continued to rise at about the rate of labour productivity. Further, the real value of the wage measured at consumer prices, while almost unchanged over the past six years, has still grown more rapidly than the real producer wage over the period since 2003.

[164] Whatever the relative weight that should be attributed to the many factors identified as weighing on wage growth, the low wage growth environment supports an increase to the NMW and modern award minimum wages. So too does the extent to which growth in the real values of the NMW and modern award minimum wages has lagged behind growth in labour productivity over time.

Labour market

[165] Trends relating to the labour market encompass employment and hours worked, as well as data on workforce participation indicators such as underemployment, long-term unemployment and participation rates. As in the Statistical report, trend data are used in this section unless otherwise indicated.

Employment and hours worked

[166] According to the RBA’s May 2018 Statement on Monetary Policy, conditions in the domestic labour market improved significantly over 2017 and into 2018, although spare capacity still remains:

‘Employment grew by 3½ per cent over the past year. This is the strongest rate of growth since 2008 and full-time employment contributed the bulk of that growth. Employment growth has moderated in recent months, though it remains higher than working-age population growth. Leading indicators of labour demand, such as job vacancies and hiring intentions, continue to point to above-average growth in employment over the next six months, though it is not expected to be as strong as seen over the past year.’ 171

[167] Growth in employment and hours worked is shown in Chart 2.15. Over the year to April 2018 the number of employed persons increased by 2.9 per cent, a rate that was well above the five-year average of 1.7 per cent. 172 Similarly, hours worked increased strongly over the year, at 3.3 per cent.

Chart 2.15: Employed persons and monthly hours worked, growth rate over the year

Source: Statistical report, Chart 6.2; ABS, Labour Force, Australia, Apr 2018, Catalogue No. 6202.0.

[168] Chart 2.16 shows the change in employment by full-time and part-time status and by gender over the year to April 2018. Total employment increased by 355,200 persons, with 72.1 per cent of the increase attributable to full-time employment. This is in contrast to the latest data for the previous year where only 32.4 per cent of employment growth came from full-time positions. 173 The majority of additional full-time employment went to females. Total employment growth was also higher among females, growing by 213,100 persons (3.8 per cent) compared with 142,100 persons for males (2.2 per cent).

Note: All data are expressed in trend terms.

Source: Statistical report, Chart 6.4; ABS, Labour Force, Australia, Apr 2018, Catalogue No. 6202.0.

[169] Growth in employment across industries was again quite diverse: employment increased across the majority of the 19 industries over the year to the February quarter 2018, with the highest increase in Arts and recreation services (Table 2.4).

[170] Three out of the four most award-reliant industries experienced positive growth in employment over the year. Total employment in Retail trade increased strongly at 5.5 per cent, above the all industries average. Employment in Other services also increased above the all industries average, however, employment growth was below the all industries average in Accommodation and food services, while it fell in Administrative and support services. The employment growth in Retail trade is notable, given both the relatively rapid recent growth in multifactor productivity in that sector 174 and the generally pessimistic views about the circumstances of the retail industry that was expressed in a number of submissions.175

Note: All data are expressed in trend terms.

Source: Statistical report, Table 6.3; ABS, Labour Force, Detailed, Quarterly, Feb 2018, Catalogue No. 6291.0.55.003.

Unemployment and underemployment

[171] In last year’s decision, the Panel noted that since the mid-2000s the unemployment rate and underemployment rate had generally moved similarly, but had recently diverged somewhat. 176 Over the past year to April 2018, the two rates have fallen, particularly the underemployment rate. The Australian Government submitted that the increase in full-time employment has come at the same time as the decline in underemployment.177 It may be that some of these people would have previously been classified as underemployed but ceased to be underemployed once additional hours were obtained. This would have the effect of decreasing the underemployment rate without affecting the unemployment rate.

[172] Despite strong employment growth, the unemployment rate only declined by 0.2 percentage points to 5.5 per cent over the year to April 2018. 178 The unemployment rate remained unchanged for the nine months to April 2018 and is below its five-year average of 5.8 per cent (Chart 2.17).179

[173] Over the year to February 2018, the underemployment rate fell 0.4 percentage points to 8.3 per cent, the equal lowest figure since August 2014. The shift from part-time employment to full-time employment may explain some of the fall in underemployment.

Chart 2.17: Unemployment and underemployment rates

Note: The unemployment rate and the underemployment rate is the number of unemployed and underemployed persons, respectively, expressed as a percentage of the labour force. A person is underemployed if they want, and are available, to work more hours than they currently have. Underemployment is only considered for people employed part-time and for full-time persons who, for economic reasons, worked part time hours during the reference week. All data are expressed in trend terms. The unemployment rates are monthly, while the underemployment rate is quarterly.

Source: Statistical report, Chart 6.1 and Chart 6.5; ABS, Labour Force, Australia, Apr 2018, Catalogue No. 6202.0.

[174] Over the year to April 2018, the youth unemployment rate fell by 0.3 percentage points to 12.6 per cent, which is just below its average over the past five years. 180 It has broadly followed aggregate unemployment, but with a greater degree of fluctuation, as shown in Chart 2.17.

[175] The Panel has previously stated that the youth unemployment rate is generally more sensitive to demand or supply shocks affecting aggregate unemployment. 181 The Australian Government explained that:

‘When labour markets rebound, disadvantaged groups, such as youth, are generally the last to reap benefits from strong jobs growth since they are competing with cohorts possessing greater skills and experience. Similarly, when labour market conditions are weak, youth are particularly vulnerable as they often have fewer skills, and less experience and education and are therefore the first to be retrenched by employers in times of economic difficulty.’ 182

[176] This explanation is consistent with the greater amplitude shown in the youth unemployment rate.

[177] The youth unemployment rate encompasses youth who were actively looking for work. The Australian Government drew attention to the rise in the proportion of youth who were disengaged; i.e., not in the labour force and not in full-time education. 183 The increase has been driven entirely by those aged 20–24 years, especially males, whose rate of disengagement has risen from 9.2 per cent in September 2008 to 12.9 per cent in January 2018.184 In response to a question on notice, the Australian Government submitted that the higher rate of disengagement of young men is likely to be the result of the structural changes in the economy away from male-intensive occupations towards female-intensive occupations.185 We accept these interpretations of the causes of high levels of youth unemployment and disengagement, and the implied conclusion that the level of minimum wages for youth is not a significant cause.

[178] The characteristics of the underemployed were examined in research for this Review (Research Report 2/2018—The characteristics of the underemployed and unemployed). The research involved two parts: the first examined whether underemployed workers were similar to unemployed and other employed workers; the second involved analysis of the duration of underemployment and how underemployed workers transition out of underemployment.

[179] The paper found that personal and household characteristics of underemployed workers were similar to those of the unemployed. These included characteristics such as age, family type, whether born in a non-English speaking country and being a full-time student. However, after including work characteristics (therefore excluding unemployed workers), underemployed workers more closely resembled other part-time workers (not preferring to work more hours). This was the case for particular industries (Accommodation and food services, Education and training and Health care and social assistance) and casual employment.

[180] The dynamic analysis of underemployment found that most workers who were underemployed in one year were not underemployed in the following year, including almost half who moved to full employment (where they did not prefer to work more hours) and usually remained with the same employer. Males were more likely to exit underemployment to full employment, particularly partnered males. Older workers and those with a work-limiting health condition were more likely to exit underemployment to non-employment.

[181] The second part of the paper concluded that, for most people who experience underemployment, it appears to be a relatively short-term experience, although some exit underemployment to non-employment while others have a change in their preferred working hours.

Long-term unemployment

[182] Long-term unemployment has risen 5.2 per cent over the past 12 months and remains relatively high, at 24.5 per cent of all unemployed. 186 Long-term unemployment is particularly damaging to skills, confidence and to the prospect of re-employment. One source of long-term unemployment is a mismatch between the skills of the unemployed and those required by employers. The Australian Government cites a 2017 report by the OECD that found that Australia has a comparatively high incidence of skills mismatch, in part caused by the restructuring of the economy away from manufacturing and towards services such as health care, education, retail and hospitality.187

Workforce participation

[183] The reason that strong employment growth has not translated into a much lower unemployment rate is that there has been a corresponding increase in individuals participating in the labour force.

[184] It is interesting to note the views expressed by the Deputy Governor of the RBA, Dr Guy Debelle, on the behaviour of unemployment. He stated that:

‘The reduction in the unemployment rate has stalled for some months. I find the unemployment rate is the most useful single statistic to assess the state of the labour market. The unemployment rate has remained steady in an environment where employment growth has been measured to be particularly strong. Labour supply has risen strongly alongside it. Part of the explanation for this is an increase in female participation and older workers remaining in employment longer than previously. The strong employment growth has reduced unused capacity, which is a positive development, but not in a way that has lowered the unemployment rate.’ 188

[185] The Australian Government added that on their estimate, cyclical factors produced an encouraged worker effect that added 0.33 percentage points to the participation rate. 189

[186] The RBA also referred to the strong employment growth—of more than 150,000 in the year to February 2018—in the Health care and social assistance industry. They noted that this particularly encouraged women aged between 25 and 44 years to enter the labour force to take these jobs. 190

[187] In their submission, the Australian Government estimated that had there been no change in the age distribution of the population since January 2013, the participation rate would be 1 percentage point higher than it was in January 2018. 191 That is, the ageing of the population is having a depressing effect on the participation rate that is independent of the state of the labour market. Chart 2.18 uses the same methodology to adjust the participation rate, updating the data for April 2018. The chart shows that both measures of the participation rate increased strongly over the past year, to be at their highest levels in at least five years.

Source: Australian Government submission at para. 111, Chart 4.4; ABS, Labour Force, Australia, Detailed—Electronic Delivery, Apr 2018, Catalogue No. 6291.0.55.001.

[188] Because of the changes in the age composition of the population, in previous decisions the Panel has preferred measures of participation for the adult working age population (20–64 years) (Table 2.5). Over the year to April 2018, this measure of the working-age participation rate continued its upward trend, increasing 0.5 percentage points to 80.3 per cent. 192 The female working age participation rate increased by 1.1 percentage points, much higher than the male working age participation rate which decreased by 0.1 percentage points. This continued a recent trend. The RBA reported that ‘[t]he increase in labour market participation has been most notable for females, especially those aged 25–44 years, and older males.’193

Table 2.5: Participation rate by gender, 20–64 years

Note: The participation rate is the number of persons in the labour force expressed as a percentage of the civilian population. The percentage point change is calculated in relation to the corresponding month in the previous year. All data are expressed in original terms.

Source: Statistical report, Table 6.9; ABS, Labour Force, Australia, Detailed—Electronic Delivery, Apr 2018, Catalogue No. 6291.0.55.001.

[189] The increase in participation rates is further evidence that the labour market is strengthening. Ai Group submitted that the increase in participation was a sign that current wage rates are attracting more people into the labour force. 194 We note that a change in wage rates has an ambiguous impact on labour force participation. On the one hand, a higher wage rate increases the reward for working, and hence, encourages greater participation. This is the effect on which Ai Group focussed. But a higher wage rate also means that a given level of earnings can be achieved with a reduction in working hours, and might therefore induce a lower level of family labour supply.

[190] Over the year to April 2018, the employment to population ratio among the adult working age population increased by 0.6 percentage points (Table 2.6). This was underpinned by an increase in the proportion of people working full time, which increased by 0.8 percentage points, above the decrease of 0.2 percentage points for part-time work.

Note: The employment to population ratio is the number of employed persons expressed as a percentage of the civilian population. Change over year (ppts) calculates the percentage point change from the corresponding month in the previous year. All data are expressed in original terms.

Source: Statistical report, Table 6.6; ABS, Labour Force, Australia, Detailed—Electronic Delivery, Apr 2018, Catalogue No. 6291.0.55.001.

[191] As was the case with the increase in the participation rate, much of the growth in the employment to population ratio was driven by increases in female employment. The female working age employment to population ratio increased by 1.3 percentage points to 71.0 per cent and the male working age employment to population ratio decreased 0.2 percentage points to 81.8 per cent. 195

[192] This increase in the working-age employment to population ratio, in conjunction with the increase in employment, hours worked and participation rate, point to a labour market that is stronger than it has been in recent years.

Labour market transitions

[193] As in previous Reviews, the Australian Government presented data from the Household, Income and Labour Dynamics in Australia (HILDA) survey on duration in low-paid employment, updated for the latest release (Tables 2.7 and 2.8). It reported that ‘35 per cent of people who enter the workforce do so by taking a low-paid job’ and that this is the case for 45 per cent of workers aged under 25 years and 43 per cent of workers with Year 12 qualifications or below. 196 The Australian Government submitted that the analysis supported its argument that low-paid employment provides opportunities or a ‘stepping stone’ to higher-paid employment.197 As the Panel noted in the 2016–17 Review, the data again show that about half of low-paid workers198 spend less than a year in low-paid work before moving to higher-paid work.199 The remainder either spend more than one year in low-paid work, or move from a low-paid job into unemployment or not in the labour force.

Note: Data is based on flows into low-paid work, not the number of people in low-paid work at a point in time. Numbers are mutually exclusive.

Source: Australian Government submission, 13 March 2018 at p. 57, Table 7.1; HILDA survey, pooled waves 1 to 16.

Note: Those remaining in low pay for 5 years or more are not shown due to a small sample size.

Source: Australian Government submission, 13 March 2018 at p. 57, Table 7.2; HILDA survey, pooled waves 1 to 16.

[194] The above data are not significantly different to that submitted by the Australian Government in the 2016–17 Review. As such, while in the 2016–17 Review decision we agreed that employment in low-paid work is a stepping stone for many into higher-paid work, as discussed above there are many others for whom this is not true. We have also previously observed that ‘[w]e cannot be indifferent to the standard of living of low-paid workers just because many do not stay in that situation for long periods.’ 200

Award-reliant industries

[195] Table 2.9 summarises various indicators for award-reliant industries that were provided in previous sections. The Panel continues to use these data to assist with an understanding of the overall conditions of these industries.

Table 2.9: Current economic indicators by award-reliant industries

Note: (a) All industries excludes Agriculture, forestry and fishing; (b) All industries excludes Education and training, Health care and social assistance and some subdivisions of Finance and insurance services. The award-reliant industries selected are the four industries with the highest proportion of employees reliant on award rates of pay according to the Employee Earnings and Hours 2016 survey. The WPI and actual hours worked data are expressed in original terms. Employment data are expressed in trend terms. Entry rates are business entries in the financial year as a proportion of total businesses operating at the start of the financial year. Exit rates are total business exits in the financial year as a proportion of total businesses operating at the start of the financial year.

Source: Statistical report, Table 7.2; ABS, Australian National Accounts: National Income, Expenditure and Product, Dec 2017, Catalogue No. 5206.0; ABS, Business Indicators, Australia, Dec 2017, Catalogue No. 5676.0; ABS, Counts of Australian Businesses, including Entries and Exits, Jun 2013 to Jun 2017, Catalogue No. 8165.0; ABS, Employee Earnings and Hours, Australia, May 2016, Catalogue No. 6306.0; ABS, Labour Force, Australia, Detailed, Quarterly, Feb 2018, Catalogue No. 6291.0.55.003; ABS, Wage Price Index, Australia, Mar 2018, Catalogue No. 6345.0; Department of Jobs and Small Business, Trends in Federal Enterprise Bargaining, December quarter 2017, <http://employment.gov.au/trends-federal-enterprise-bargaining>.

[196] The table shows mixed fortunes for the four industries that have the highest proportion of their workforces that are paid at the award rate. We are aware that some of the indices, including growth rates of value added and profits, are quite volatile when disaggregated to this industry level. Nonetheless, we can draw some general conclusions from the data. These include:

•  The most award-reliant industries mainly had higher than average rates of growth in output and in profits.

•  With the exception of Retail trade, business entry rates exceeded exit rates, as they have for the whole economy.

•  The WPI mostly grew at a rate that was below or at the economy-wide average, and wage growth under new collective agreements was, except in Other services, mostly below average.

•  Employment growth was mixed, with strong growth in employment and in hours worked in Retail trade but weaker growth, or some decline, in the other sectors.

[197] The evidence from this table suggests that the four most award-reliant industries have performed relatively well over the past year. Accommodation and food services and Administrative and support services both had good growth in output, profits and entry of new businesses, but had relatively low growth in bargained wages and below average or negative growth in employment. In contrast, Other services showed a decline in profitability but relatively high growth in employment. Retail trade stands out as having both a significant improvement in profitability and a high growth in employment (but little growth in wages). The data on Retail trade do not support the somewhat negative picture that was provided in a number of submissions. 201 ACCI noted the relatively strong productivity growth in Retail trade.202 This is consistent with the industry’s relatively strong profit growth but not with its strong employment growth. The observation by the Australian Government that Retail trade ‘might be passing on productivity increases through lower consumer prices rather than higher nominal wages’203 may provide a partial explanation for the low growth in wages in that sector. We accept that the retail industry is experiencing technological disruption and strong international competition, together with subdued demand from consumers. Further, there will be diversity of experience among different parts of the retail sector. Nonetheless, it appears that the sector has recently managed to increase output, profits and employment in the face of these challenges.

[198] As shown in Table 2.9, the WPI grew by 2.1 per cent for Accommodation and food services; 1.9 per cent for Administrative and support services; and 1.5 per cent for Retail trade over the year to the March quarter 2018. During that year, the NMW and modern award minimum wages increased by 3.3 per cent. It remains a puzzle as to why the increase in minimum wages that was awarded in the 2016–17 Review is not reflected more fully in the WPI for the industries that are most affected by this decision. As we have mentioned, in response to a question on notice on this matter, the parties offered a number of possible reasons, but all agreed that the reasons given could not fully account for the difference. 204

Apprenticeships and traineeships

[199] ACCI,    ACOSS,    ARA and Housing Industry Association (HIA) all highlighted in their submissions the ongoing reduction in commencement and in-training rates for apprenticeships and traineeships since 2012. 205 Both ACCI and HIA also referred to an increase in cancellation and withdrawal rates for apprenticeships and traineeships over the year to June 2017.206

[200] ACCI 207 and ARA208 attributed the long-term decline in apprenticeship and traineeship commencement rates to demand-side factors (that have reduced employer demand for apprentices), specifically, on-going increases in modern award minimum wages and their cumulative effects.

[201] Conversely, ACOSS attributed the long-term decline in trade commencement rates to supply-side factors (that have reduced the number of people wanting to undertake apprenticeships), including, but not limited to, age-related cultural issues, wage rates and the duration of apprenticeships. 209 ACCI also noted the removal of government subsidies for adult apprentices in reducing commencement and completion rates for trade apprenticeships for those aged 25 years and older.210

[202] As outlined in the last Review, the Commission published Research Report 3/2017–Factors affecting apprenticeships and traineeships in February 2017. 211 This report discussed both supply-side and demand-side factors that can affect people commencing and completing apprenticeships and traineeships.

[203] Part II of this report contended that demand-side factors were dominant in determining apprenticeship and traineeship rates, as opposed to supply-side factors, and suggested that commencement and in-training rates would be higher if more apprenticeships and traineeships were offered.

[204] The report concluded that the decline in government subsidies clearly contributed to the decline in commencement rates, whilst the decision made by the Full Bench in the 2013 Modern Awards Review (Apprentices decision) 212 to increase apprentice wages ‘may have played a role, but it seems that any effect appears minor.’213 The report also concluded that ‘employers are becoming increasingly less enamoured with the apprenticeship and traineeship model.’214

[205] The Panel concluded from this research that although both the removal of government subsidies and the Apprentices decision contributed to a decline in commencement rates, the Apprentices decision only had a minor effect. 215 The latter conclusion was supported by the occurrence of over-award payments to apprentices and the lack of uniformity in commencement trends across industries. Nothing advanced in the submissions in this Review would cause us to reach any different conclusion.

Economic outlook

[206] The economic forecasts from the Australian Government, as presented in the 2018–19 Budget, the RBA and the IMF all point to improved economic conditions.

Global forecasts

[207] The IMF global growth forecasts are presented in Table 2.10 and show a projected increase in Australian GDP growth to around 3 per cent or more in 2018 and 2019, a significant increase from 2017 and higher than for other advanced economies. Growth in world GDP is expected to increase slightly to 3.9 per cent.

Note: Year-on-year percentage changes shown. World and domestic economy growth rates are calculated using GDP weights based on purchasing power parity (PPP).

Source: Statistical report, Table 12.2; IMF (2018), World Economic Outlook, April, http://www.imf.org/en/Publications/WEO/Issues/2018/03/20/world-economic-outlook-april-2018?cid=em-COM-123-36912.

[208] According to the 2018–19 Budget, global growth over 2017 was at its fastest pace since 2011, with the economic strength seen across most advanced and emerging economies expected to continue in the near term. The Australian Government forecasts, provided in Table 2.11, show that growth in Australia’s major trading partners is expected to remain above world growth. Short-term risks are evenly balanced. The possibility of growth exceeding expectations in some economies is an upside risk, whilst the RBA listed a number of downside risks to global growth including an escalation in protectionist measures or geopolitical events, the risk that global inflation will be higher than expected prompting a faster tightening of monetary policy and the continuing high debt levels in China. Europe continues to face legacy issues following the GFC and upward movement in US interest rates is also a source of uncertainty. 216

Note: World growth rates are calculated using GDP weights based on PPP, while growth rates for major trading partners are calculated using export trade weights.

Source: Statistical report, Table 12.1; Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2018–19, Canberra, p. 2-10.

Australian forecasts

[209] The 2018–19 Budget stated that the Australian economy strengthened in the second half of 2017 due to contributions from non-mining business investment and household consumption which are forecast to continue. 217 Recent employment growth has led to a strengthening in household consumption which is forecast to continue to grow faster than household income, leading to a continued fall in the household saving rate. However, uncertainty remains with regards to the extent of decline in this rate, with changes in asset prices and attitudes to savings and debt to affect the outlook for both household consumption and income.218

[210] Wage growth is forecast to increase as the economy improves above its potential rate and spare capacity is absorbed. While leading indicators suggest continued jobs growth, the higher participation rate presents uncertainty around the amount of spare capacity in the labour market and wage pressures. 219 Inflation is also forecast to increase over the period.220

[211] The effect of falling mining investment is diminishing and while it is expected to decline further, its impact on the Australian economy is almost complete. 221 The final transition to the production phase of the mining boom is expected by the end of the forecast period.222 The 2018–19 Budget forecasts that non-mining investment will increase by 10½ per cent in the 2017–18 financial year, then moderate to a ‘still solid pace’ of 5½ per cent in 2018–19 and 5 per cent in 2019–20.223

[212] Table 2.12 presents the Australian Treasury forecasts for the domestic economy.

Note: The forecasts for the domestic economy are based on several technical assumptions. The exchange rate is assumed to remain around its recent average level—a trade-weighted index of around 63 and a US dollar exchange rate of around 77 US cents. Interest rates are assumed to move broadly in line with market expectations. World oil prices (Malaysian Tapis) are assumed to remain around US$71 per barrel.

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

(b) Calculated using original data unless otherwise indicated.

(c) Excluding second-hand asset sales from the public sector to the private sector.

(d) Percentage point contribution to growth in GDP.

(e) Through-the-year growth rate to the June quarter.

(f) Seasonally adjusted, through-the-year growth rate to the June quarter.

(g) Seasonally adjusted rate for the June quarter.

(h) The forecasts are underpinned by price assumptions for key commodities: Iron ore spot price remaining at US$55/tonne free-on-board (FOB); metallurgical coal spot price falling over the June and September quarters of 2018 to reach US$120/tonne FOB by the December 2018 quarter; and the thermal coal spot price remaining at US$93/tonne FOB.

Source: Statistical report, Table 12.3; Australian Government, Budget Paper No. 1: Budget Strategy and Outlook 2018–19, Canberra, p. 2-6.

[213] The RBA expects GDP growth to be around trend in the near term, peaking at 3½ per cent over the year to the June quarter 2019. 224 The RBA’s GDP forecasts are for stronger growth than in the Budget. The unemployment rate is forecast by the RBA to remain at around 5½ per cent over 2018 before falling gradually. Growth in the CPI is forecast to pick up to be around 2¼ per cent over most of the forecast period with underlying inflation increasing more gradually (Table 2.13).

Note: *Average rate in the quarter. Percentage change for the year-ended shown. Technical assumptions include A$ at US$0.75, Trade Weighted Index at 62, Brent crude oil price at US$71 per barrel. Shaded regions are historical data.

Source: Statistical report, Table 12.4; RBA (2018), Statement on Monetary Policy, May, p. 58, Table 5.1.

[214] The RBA’s forecast of strengthening GDP growth is due to the drag from decreasing mining investment subsiding and the current monetary policy settings providing support for growth in household income and consumption as well as non-mining business investment. 225 GDP growth is expected to slow towards the end of the forecast period due to the production of liquefied natural gas reaching its ‘steady-state’ level.226 Growth in non-mining business investment is expected to remain ‘solid over the coming year.’227

[215] The RBA identifies a number of potential risks to its domestic forecasts being:

•  Uncertainty about how much spare capacity there is in the labour market and how quickly it might decline, particularly given the recent improvements in the participation rate;

•  Uncertainty about how much decline in spare capacity will build into wage pressures and inflation;

•  Uncertainty about the outlook for household income growth which translates into uncertainty about household consumption and so GDP; and

•  High levels of household debt are likely to increase the sensitivity of households’ consumption decisions to changes in their income and wealth. 228

[216] The Budget forecasts presented in the 2016–17 Review expected wages growth, as measured by the WPI, to be 2½ per cent over 2017–18. 229 This has been reduced to 2¼ per cent in the 2018–19 Budget. The 2018–19 Budget also forecasts the WPI to increase to 2¾ percent in 2018–19 and to 3¼ percent in 2019–20. The RBA does not provide a forecast for the WPI but expects wages growth to ‘pick up only gradually as labour market spare capacity declines and any effects of structural factors that are weighing on wages growth start to dissipate.’230

[217] In response to questions about the WPI forecasts during the consultations on 15 May 2018, the Australian Government representatives submitted that the WPI was expected to increase as higher GDP growth leads to a tighter labour market. Productivity growth and the forecast increases in inflation were also expected to result in an increase in the WPI. 231

[218] While we expect wages growth to pick up over time, a number of considerations suggest that this is likely to be a more gradual process than that forecast in the Budget.

[219] First, the latest data show that the WPI increased by 2.1 per cent over the year to the March quarter 2018, having increased by 0.5 per cent in each of the last two quarters. It would therefore require an increase of 0.7 per cent in the June quarter 2018 to achieve the Budget forecast of 2¼ percent. An increase of 0.7 percent would be the highest quarterly increase since the March quarter 2014. Such an outcome seems unlikely.

[220] Second, the international experience shows that a reduced unemployment rate has not immediately translated into stronger wages growth. Wages growth has remained subdued in the US despite strong labour markets, low unemployment and a pick-up in overall economic performance. 232 As the RBA has cautioned, ‘there is uncertainty around the level of the unemployment rate that is consistent with full employment (that is, spare capacity in the labour market having been fully absorbed). If experience overseas is any guide, this level of the unemployment rate could turn out to be lower than previously assumed.’233 Further, in a recent speech, RBA Deputy Governor Dr Guy Debelle observed:

‘The experience of other countries with labour markets closer to full capacity than Australia's is that wages growth may remain lower than historical experience would suggest. In Australia, 2 per cent seems to have become the focal point for wage outcomes, compared with 3–4 per cent in the past.’ 234

[221] The Deputy Governor concluded that there is a risk that it may take a lower unemployment rate than currently expected to generate higher wages growth, that is, above 2 per cent growth. Recent research supports this contention, with an estimate of the long run annual WPI growth at less than 3 per cent in Australia 235 and researchers in the United Kingdom (UK) suggesting that the natural rate of unemployment (or NAIRU) is closer to 3 per cent in the UK and ‘is well below 4% and perhaps even below 3%’ in most advanced countries.236 We note that both the Budget and RBA forecasts are for the unemployment rate to only fall to 5¼ per cent by 2019–20.

[222] Third, the AAWI for approved federal enterprise agreements reached a low of 2.2 per cent in the September quarter 2017, increasing to 2.5 per cent in the December quarter 2017. As the RBA has observed, these agreements will be in place for a little over three years, 237 suggesting that ‘new enterprise bargaining agreements with lower wage growth than current agreements will exert downward pressure on overall wage growth for the next couple of years.’238

[223] The information before us in this Review does not suggest that wages growth will accelerate significantly in the near term. The Budget forecasts in respect of the WPI appear overly optimistic, particularly as the RBA expects increases in wages growth to be gradual and the unemployment rate is only expected to decline slightly. In sum, while we expect that our decision in this Review will result in an increase in the WPI, we do not expect any other significant increase in wages growth in the short term.

Employment effects of minimum wage increases

[224] Given its significance, the Panel pays close attention to new research that might provide additional insight on the impact of minimum wages on employment, hours worked and unemployment. Since the last Review, there were an unusually large number of new studies, most of them based on other countries.

[225] The ACTU identified, and briefly described, four papers written on the Seattle experience, six other new papers for the US, four papers on the German experience, the many papers commissioned by the UK Low Pay Commission, and a number of others including those by international agencies. 239 All these were published within the past 18 months.

[226] The UK Low Pay Commission has commissioned research on a range of possible consequences of the decisions that they make. Of particular interest are studies on the effect of the introduction of the National Living Wage (NLW) and meta studies that seek to draw lessons from the full range of relevant literature. The NLW increased the minimum wage for those over the age of 24 years by 7.5 per cent in 2016 and led to a minimum wage bite of 56.4 per cent. 240

[227] In the US, particular attention has focussed on the implementation in the city of Seattle of an increase to their minimum wage of 58 per cent for large employers (to $15.00) and 37 per cent (to $13.00) for smaller employers, between April 2015 and January 2018.

[228] Of particular interest for this Review is a paper by Bishop of the RBA. Bishop (2018) used unpublished job-level data from a survey of firms undertaken for the construction of the ABS WPI survey. 241 The survey has not previously been used for an assessment of any types of employment changes.

[229] A feature of the WPI survey is that the unit of analysis is a job rather than an employee. The survey can identify if a job is paid at an award rate, and if it continues from one period to the next (independent of who might be employed in that job). Firms and their jobs are followed for a period of five years. The sample for the research was restricted to private sector jobs (full or part time) filled by adults on award rates of pay and excluded juniors, apprentices and trainees. The data used have several distinct advantages over other sources of data used in Australian (and many international) studies. The jobs that are paid the award rate, the rate of pay and the hours worked in those jobs, are obtained from firms’ payroll records. Further, this information for each individual job is observed every quarter for five years. There are about 18,000 jobs observed in each quarter, 15–20 per cent of which are paid exactly at the award rate. 242

[230] Bishop analysed the period between 1998 and 2008 when minimum wages increased by a flat dollar amount, which led to larger percentage increases for lower-paid award-reliant jobs compared with higher-paid award-reliant jobs. Using the difference-in-difference method, Bishop found that changes in the NMW and modern award minimum wages were almost fully passed through to wages. 243 To determine any employment effects, Bishop estimated the impact on the number of hours worked and the extent to which jobs were eliminated in response to increases in award rates. He found no statistically significant effect on either measure.244

[231] However, Bishop (2018) cautioned that this does not rule out an adverse effect on employment borne by job seekers rather than job holders. 245 He also observed that ‘the results may not necessarily generalize to large, unanticipated changes in award wages.’246

[232] The research by Bishop has been published by the RBA, but is yet to be fully evaluated by other researchers. Nonetheless, it is an important addition to the very limited research that is available for Australia.

[233] Research commissioned by the UK Low Pay Commission includes an interim report on the impact of the NLW on employment and hours. 247 The interim report found that the NLW led to large increases in real wages for NLW workers, particularly for those who were previously paid the UK NMW, and larger for those paid just above the NLW than for those earning higher wages. Using variations of the difference-in-difference approach, the report did not find evidence of a robust impact on employment, although the report found mixed evidence on hours worked for those who retained their jobs.248 We note that this is an interim, not the final, report.

[234] Researchers in the UK are now reasonably settled on the view that, at the levels and rates of change in the minimum wages experienced, there is little or no disemployment effect. The situation in the US is quite different. The impact on employment from minimum wages and adjustments remain a point of contention for US labour economists. This dispute has intensified as substantial wage increases have been implemented: more than 30 US states, cities or counties have implemented or have committed to implement minimum wage policies ranging from $11.00 to $15.00 per hour. 249 The first jurisdiction to begin implementation was Seattle.

[235] In April 2015, Seattle increased its minimum wage from $9.47 an hour to $11.00—an increase of 16.2 per cent. In January 2016, the minimum was increased to $13.00 an hour for large employers that do not provide health insurance—an increase of 18.2 per cent. For these large employers, the rate increased again in January 2017 by 15.4 per cent to reach $15.00. For small employers and those contributing to health insurance, the rate will increase progressively to $15.00 at various times out to 2021. 250 The minimum wage for large companies that do not provide health insurance has risen by a cumulative 58.4 per cent over a little less than three years.

[236] These increases are far beyond what we and other participants would consider ‘modest.’ However, academic researchers who have been pressing for higher minimum wages argue that the increases to $13.00 are within the range of increases that research has shown had little or no impact on employment. They focus on the starting point and the ratio of minimum wages to median wages (i.e., the minimum wage bite). According to Zipperer and Schmitt (2017), increasing the minimum wage up to a level that is about half or less of an area’s median wage is expected to lead at most to a small reduction in employment. The observed range of the minimum wage bite that covers 90 per cent of cases is 32 per cent to 55 per cent. 251 The $13.00 increase lifted the Seattle bite to 50.7 per cent. The increase to $15.00 lifted the bite to a little over 55 per cent.252

[237] Two academic teams have studied the impact of the first two steps implemented by Seattle—i.e., the increase to $13.00. Neither has, at this point, been peer reviewed. While their findings were vastly different, they were consistent with each group’s prior views. Reich et al. (2017) conducted the first of these studies. They also used the synthetic control method. Their focus was on the food service and restaurant sectors. This is also common practice and is based on the view that the impact of the minimum wage on employment will be largest for those workers whose wages experience the largest rise in the minimum wage. 253 The study’s results show that wages in food services did increase—indicating the policy achieved its goal. Wages increased much less among full services restaurants, indicating employers took advantage of the tip credit which is quite common across the US but was only introduced in Seattle as part of the minimum wage package. However, employment in the food sector was not affected. The authors contend the Seattle experience extends knowledge of minimum wage effects to policies as high as $13.00. However, they note that the ‘new wave of minimum wages policies’254 and the extent of the increases being implemented lie well beyond previous studies of the topic.255

[238] The second Seattle study was undertaken by Jardim et al. (2017). The study used administrative data on quarterly payroll records for all workers who receive wages in Washington and are covered by unemployment insurance for the period between 2005 and the third quarter of 2016. The data included earnings and hours for each quarter for each worker. For workers earning below $19.00 per hour, the study found no statistically significant impact on employment and hours resulting from the increase in the minimum wage from $9.47 to $11.00. For the increase to $13.00 it found negative effects of around 7 per cent for employment and 9 per cent for hours worked. 256

[239] The data used by Jardim et al. (2017) enabled them to analyse individual industries. They used these data to analyse the impact on the restaurant industry as it is often the only sector studied. They found a zero or near zero impact on headcount employment, which, of course, was also found by Reich et al. and many earlier studies which have focussed on restaurant workers and teenagers.

[240] Zipperer and Schmitt (2017) have criticised the Jardim et al. study saying it has a number of ‘data and methodological problems that bias the study in the direction of finding job loss, even where there may have been no job loss at all.’ 257

[241] Neumark (2017) examined why, even with developments in data and new methodologies, the employment effects of minimum wages remains contentious. Like Reich, he is very conscious that what is happening across many states and counties is well outside past experience. He notes that ‘[t]rying to predict the effects of large minimum wage increases from simple extrapolation of reduced-form estimates of the employment effects of minimum wages, based on evidence from much lower minimum levels and much more moderate changes, is a highly dubious exercise.’ 258

[242] In a peer reviewed paper, Totty (2017) used factor model methods ‘to resolve issues in the minimum wage-employment debate’, explaining that the methods are ‘robust to critiques from either side of the debate.’ 259 He analysed data on restaurant workers and teenagers and found that estimates from factor model methods were smaller than those produced by other methods.260 Overall, Totty found little to no effect of minimum wage increases on restaurant or teenage employment over the last three decades but cautioned that the size of the minimum wage increase is important and that his study may not be informative about the effects of larger increases.261

[243] Australia has not had a long period in which its minimum wages have been frozen in nominal terms. Consistent with this we have a minimum wage bite that is relatively high. Although our circumstances are very different from those in the US, we will observe future developments and invite parties to consider this research in their submissions to future Reviews.

[244] Most of the new research, particularly that of Bishop, reinforces the view of the Panel that moderate and regular increases to the NMW and to modern award minimum wages do not cause significant job losses or reductions in hours worked.

[245] For completeness, we turn to consider the position put by the ACTU that increased wages for the low paid would likely raise aggregate demand ‘because low paid people spend most or all of their incomes’ 262 and thereby have positive employment effects. In response to a question from the Panel, the ACTU estimated that an increase in minimum wages by the amount of its claim would (using two different methodologies) result in an increase in employment of between 40 000 and 57 000 in the first year and 27 000 and 30 000 in the second year.263

[246] Ai Group argued that there would be a number of offsetting considerations which would ‘impede the impact on aggregate demand of an increase in minimum wage rates.’ 264 These included the effect of taxes and the changes to income transfers on the amount finally received by the worker, that many low-paid individuals are in middle and high-income households, and that those who have to pay wage increases may correspondingly reduce spending and investment.265 ACCI responded by arguing that ‘[a]ggregate household consumption is best encouraged by policies that promote greater workforce participation, employment growth and a low unemployment rate.’266

[247] The Australian Government concluded that ‘[t]he net effect of raising minimum wages on aggregate household incomes is ambiguous and rough calculations suggest that the net effect can be close to zero.’ 267

[248] This issue was canvassed in last year’s Review when the Panel found that the impact of an increase in minimum wages was ‘not likely to be comparable to that of a public sector macroeconomic stimulus.’ 268 Nonetheless, the ACTU submission makes the important point that increases to the NMW and award wages are likely to have some effect on consumer demand that needs to be taken into account.’269 We remain of that view. Its significance for this Review is not that we seek to have an effect on macroeconomic outcomes, as suggested by ACCI.270 Rather, it provides some part of the reasoning for why a modest increase in minimum wage rates has little negative impact on employment.

The incentive to seek employment at the NMW and the tax-transfer system

[249] The Panel has previously stated that the incentives for people to obtain paid work are a relevant consideration in a Review 271 and that the level of the NMW and modern award minimum wages ‘will play some, but probably a small, part’ in determining household and individual appetite for paid employment.272

[250] As in previous Reviews, 273 the Australian Government modelled the effect of the tax-transfer system on changes in disposable income when unemployed members of various hypothetical household types obtain employment at the NMW.274

[251] The modelling found that all household types were better off after an unemployed member gained employment, 275 with some variation between households. For example, a single adult household without children increased disposable income by 127.9 per cent by obtaining a full-time NMW job. However, a second member of a household with two children (with child care) increased disposable income by only 5.6 per cent when they found a part-time NMW job.276

[252] As we noted in the 2016–17 Review, those who received the greatest financial benefit from obtaining employment are also those who receive the least in payments from the tax-transfer system. 277

[253] Based on the Australian Government’s modelling, as at 1 January 2018, the NMW was set at a sufficient level to ensure all persons employed at the NMW would be better off than if unemployed and in receipt of welfare benefits. It is important to note, however, that in some cases, this net financial gain is quite small and may become negligible once incidental costs of employment (including transport costs) are taken into account.

Conclusion

[254] As compared to the 2016–17 Review, the economic indicators point more unequivocally to a healthy national economy and labour market. GDP grew by 2.4 per cent, consistent with the five-year average for economic growth, and equalled or exceeded the average for the major seven OECD countries across three of the five quarters to December 2017. RNNDI has grown at a rate (1.5 per cent) that is close to the five-year average. We draw attention, however, to the fact that RNNDI per capita is no higher in the December quarter 2017 than it was in the December quarter 2011. Growth in 2017 was broad-based, with 16 out of 19 industries recording growth. There was a significant contraction (8.8 per cent) in one industry only, Agriculture, forestry and fishing, but this followed growth of 22.5 per cent in 2016.

[255] Business conditions remain positive. Profits grew by 4.3 per cent in 2017 and by 5.8 per cent in the non-mining sector. This growth, coupled with low wages growth has caused the profit share of total factor income to remain at around its highest level since 2013. The business bankruptcy rate remained stable at a comparatively low level compared to the whole of the previous decade, 278 business survival rates are the highest in at least a decade and business entry rates exceeded business exit rates by a larger than usual margin. Business surveys, including those for small and medium businesses, show that business conditions are very healthy, with above average expectations for future investment and employment.
[256] The labour market is strong. Total employment increased by 355,200 over the year to April 2018, with about three-quarters of the growth being in full-time employment (unlike previous years in which growth in part-time employment predominated). Employment grew in 14 of the 19 industry sectors. The unemployment rate and the underemployment rate have declined only slightly, reflecting a sharp rise in the participation rate. The age-adjusted participation rate reached a historic high in April 2018. The employment to population ratio is also at a historic high. We accept the view that the persistence of long-term unemployment and the rise in disengagement among 20–24 year old adults are principally the result of rapid structural change in the economy that is causing a relatively high mismatch between the skills of the non-employed and those sought by employers. There was no evidence that it has been caused by excessive levels of minimum wages. We consider that the labour market is currently supporting social inclusion through increased workforce participation and that this is not being inhibited by the current safety net of the NMW and modern award minimum wages.

[257] Inflation and wages growth remain low. The CPI increased by 1.9 per cent over the year to the March quarter 2018 and underlying inflation and the LCI for employee households rose by 2 per cent. Despite substantial employment growth, there was no appreciable acceleration in wages growth in 2017. The WPI increased by 2.1 per cent, which is slightly below the average for the last five years and historically very low, and the rate of wage increases arising from federal enterprise agreements is significantly below the five-year average.

[258] Measures of labour productivity showed a decline during 2017. As discussed earlier, annual measures of productivity, which may be the subject of subsequent revision, must be approached with caution. It is likely that the measure of productivity for 2017 has been affected by a surge in the total number of hours worked. When measured over the course of the business cycle, the rate of growth in labour productivity is 1.9 per cent per annum, and improvements to multifactor productivity have been making a substantial contribution to this.

[259] We remain of the view that modest and regular minimum wage increases do not result in disemployment effects or inhibit workforce participation. The strongest new evidence in support of this view is that provided for Australia in the 2018 paper by Bishop. Recent research in the UK, including that commissioned by the UK Low Pay Commission, continues to support this conclusion. The position is more contested in the US where studies, including those of the very large minimum wage increases in Seattle, have rendered mixed and conflicting results. The recent US studies are, in our view, of limited relevance given that the minimum wages increases involved were as high as 37 per cent, and implemented in a short space of time from a low base (that is, they did not, in any view, involve ‘modest and regular’ increases).

[260] We expressed the view in the 2016–17 Review that the international research, particularly that from the UK, suggested that the Panel’s past assessment of what constitutes a ‘modest’ increase may have been overly cautious in terms of its assessed disemployment effects. 279 This influenced our decision to increase the NMW and modern award minimum wages in modern awards by 3.3 per cent. We also stated ‘[t]he level of increase we have decided upon will not lead to inflationary pressure and is highly unlikely to have any measurable negative impact on employment.’280

[261] A number of parties submitted that the increase of 3.3 per cent we awarded in the 2016–17 Review was too high in the prevailing circumstances. However, no party was able to identify any economic indicator which demonstrated any discernible detriment arising from the 2016–17 Review decision. Employment continued to grow strongly in the economy generally, and it also grew in three of the four most award-reliant industries. The employment to population ratio, a key indicator, rose to record high levels during 2017. The increase did not lead to inflationary pressure. Nor did it have a discernible effect upon general wages growth. Surprisingly, the WPI figure over the year to the March quarter 2018 increased in two out of the four most award-reliant sectors less than for the economy as a whole, and in all four sectors the percentage WPI increase was substantially less than the percentage increase which we awarded in the 2016–17 Review.

[262] We accept it is possible that the 2016–17 Review increase may have longer-term effects which are not yet discernible in the available economic information. Furthermore, the compounding effect of increases over time may have a cumulative economic effect which is not apparent in the short term. We will continue to closely monitor this in future Reviews. However the information available to us at the present time tends to affirm the view we expressed in the 2016–17 Review that our previous assessments as to what constituted a ‘modest’ increases without disemployment effects may have been too conservative.

3. Relative living standards and the needs of the low paid

[263] In this chapter we deal with the social considerations in s.284(1)(c) in respect of the minimum wages objective and in s.134(1)(a) in relation to the modern awards objective. We do so by providing an assessment of the relative living standards of workers reliant on the NMW and modern award minimum wages and an examination of the extent to which low-paid workers are able to meet their needs, judged as their ability to purchase the essentials for a decent standard of living. 281

[264] The assessment of some of these considerations has benefited from new data released by the ABS that has not been updated for six years. 282 Although the Survey of Employee Earnings and Hours (EEH) data referred to in the last Review remains the most recent, we take note of the recent budget standards study of the Minimum Income for Healthy Living (MIHL).

Award-reliant employees and the low-paid workforce

[265] The number of award-reliant employees (that is those employees that are paid exactly an award rate) is estimated to be 2.3 million or 22.7 per cent of all employees. 283 The proportion of employees that is paid at the adult NMW rate is estimated to be 1.9 per cent. Further, a significant number of employees are paid at junior or apprentice/trainee rates based on the NMW rate and modern award rates.284 This makes it clear that most workers whose pay is directly affected by a rise in the NMW and modern award minimum wages are on rates that exceed the NMW. However not all of the estimated 2.3 million workers who are award reliant will be affected by this decision, because a proportion of these are state public sector employees and private sector employees in non-incorporated businesses in Western Australia who are not in the federal industrial relations system.

[266] The Panel’s decision is also likely to affect employees ‘paid close to the national minimum wage rate and workers whose pay is set by collective agreement which is linked to the outcomes of the Annual Wage Review.’ 285 It is also likely that there are workers whose pay is set by individual arrangements which are referenced to an award rate—for example, by being paid a certain dollar amount or percentage above the modern award. The Australian Government also submitted that employers ‘may also pass on the minimum wage rate adjustments to higher wage earners in order to maintain wage relativities.’286

[267] Research by Commission staff undertaken for this Review (Research Report 3/2018— Characteristics of workers earning the national minimum wage rate and of the low paid) used the EEH to provide the most recent information on characteristics of employees earning around the adult NMW and low-paid adult employees. The findings from the report are consistent with previous studies. The analysis found that a relatively high proportion of NMW earners were female, employed on a casual basis, working part time, award reliant, and 22 per cent were aged between 15 and 20 years.

[268] The analysis of the characteristics of low-paid (as distinct from NMW) adult employees was undertaken using data from the HILDA survey for 2016. A ‘low-paid employee’ was defined as an adult employee paid below two-thirds of median hourly earnings, consistent with the approach used in prior Reviews. 287 The analysis found that 13.1 per cent of all employees were low-paid adult employees,288 which compares to the Australian Government submission to last year’s Review (using data from the 2016 EEH) which found that 12.4 per cent of all employees were low-paid employees.289

[269] The analysis found some substantial differences between higher-paid adult employees and low-paid adult employees. Low-paid adult employees were more likely to be employed on a casual basis, work part time, prefer to work more hours, work in the private sector, and work in small businesses. They were also more likely to be award reliant, have Year 12 or below as their highest level of education, work in the Accommodation and food services and Retail trade industries, and be aged between 21 and 24 years. Low-paid adult employees were also substantially more likely to be non-dependent children and, among couple households, substantially more likely to be secondary earners.

[270] A detailed analysis by the Australian Government, also using data from the HILDA survey for 2016, covered all low-paid workers, juniors, as well as adults. It showed, among other things, that of the low paid 41 per cent were aged 15–24 years; 62 per cent were single; 71 per cent had no children; 19 per cent had a long-term health condition; 77 per cent had two or more years of work experience and 63 per cent were on casual contracts; and they were predominantly employed as Community and personal service workers, Sales workers and Labourers. 290

[271] Overall, the Commission’s research found that NMW earners and low-paid adult employees had very similar characteristics. The Victorian Government submitted that the research identifies groups where minimum wages can address disadvantage. 291 ACOSS also highlighted the following findings from the research report:

•  people under 25 years accounted for 41 per cent of all NMW employees; 292

•  22 per cent of low-paid workers were non-dependent children living with their parents; 293 and

•  for low-paid employees in couple households, 38 per cent were either sole or primary earners. 294

Award-reliant and low-paid households in the income distribution

[272] The Australian Government presented data, updated from the last Review, on the distribution of low-paid employees across equivalised household disposable income for both employee households (with at least one employee) and all households (including jobless and retiree households), using data from the 2016 HILDA survey. 295 The Panel continues to consider that the former distribution ‘provides the best basis for assessing the relative living standards and the needs of the low paid on the basis of where they fall within the distribution of household income.’296

[273] Similar to analysis presented in previous Reviews, 297 the Australian Government found that, while the low paid are spread across the income distribution of employee households, they are concentrated in the lower deciles: 64.6 per cent of low-paid employees were in the bottom half of the distribution of employee households.298 This is consistent with the Panel’s conclusion in the 2015–16 Review that around two-thirds of low-paid employees are in the bottom half of the income distribution for employee households.299

[274] The Statistical report included data on the distribution of low-paid employees across equivalised household disposable income for employee and all households using data for 2015–16 from the ABS Household Expenditure, Income and Housing (Chart 3.1). In contrast to the Australian Government’s definition of employee households using the HILDA survey, this analysis defined employee households as those whose principal source of income is from wages and salary.

[275] The results from the two different estimates are similar. Chart 3.1 shows that across all employee households, the low paid are disproportionately found in the bottom deciles, with 62.3 per cent of the low paid in the bottom half of the distribution.

Note: Low-paid employees refer to all employees whose hourly earnings are below two-thirds of median hourly earnings of full-time adult employees, including juniors. Hourly earnings are calculated as current weekly cash employee income from main job (including salary sacrifice) divided by usual hours worked per week in main job. Usual hours worked in main job are top-coded at 60 hours per week. No allowance for casual loading has been made as casual employees cannot be identified. Employee households are those whose principal source of income is from wages and salary.

Source: Statistical report, Chart 8.7; ABS, Microdata: Household Expenditure, Income and Housing, 2015–16, Detailed Microdata, DataLab, Catalogue No. 6540.0.

[276] On the basis of this evidence, we remain of the view that low-paid workers, whose wages are likely to be affected by the NMW or modern award minimum wages, are disproportionately located in the lower deciles of equivalised household disposable income.

Real earnings

[277] The NMW increased in real terms by 5.8 per cent over the decade to the December quarter 2017, and by 4.3 per cent in the last five years, and there has been a real increase across each calendar year since 2014 (Table 3.1). The real increase of 1.4 per cent over the year to the December quarter 2017 was the highest since the year to the December quarter 2010.

Note: Real minimum wage calculated from the NMW/FMW and CPI from the December quarter of each year.

Source: Statistical report, Table 9.1; Australian Fair Pay Commission/Fair Work Australia/Commission decisions; ABS, Consumer Price Index, Australia, Mar 2018, Catalogue No. 6401.0.

[278] Chart 3.2 compares the growth in the real value of selected modern award minimum wages from the December quarter 2007 to the March quarter 2018. The chart shows that the real value of each of these modern award minimum wages is above its value from 10 years ago and highlights the consistent increases in value from 2014. The relative values of modern award minimum wages have not changed since the Panel awarded uniform percentage increases across all minimum rates in the Annual Wage Review 2010–11 (2010–11 Review) and each subsequent Review.

Note: Up to 30 June 2009, the minimum rates are those in Australian Pay and Classifications Scale (and from 1 July 2009, transitional Australian Pay and Classification Scale) derived from the Metal, Engineering, and Associated Industries Award 1998; post 1 January 2010 minimum rates C14, C10 and C4 are those in the Manufacturing Award and the L4 rate from the Professional Employees Award 2010. For the purpose of the analysis, the L4 rate was calculated by dividing the annual salary for the L4 classification by 365 and multiplying by 7 to get a weekly rate.

Source: Statistical report, Chart 9.1; ABS, Consumer Price Index, Australia, Mar 2018, Catalogue No. 6401.0; Metal, Engineering and Associated Industries Award 1998; Manufacturing Award; Professional Employees Award 2010.

[279] In the last two Reviews, we indicated that it was our intent to provide a level of minimum wage increase that would result in an improvement in real wages and relative living standards of those reliant on the NMW and modern award minimum wages. 300 There has been an increase in real wages, but this has not resulted in an improvement in actual or relative living standards for all categories of such employees due to changes in the tax-transfer system, as discussed later in this chapter.

Household disposable income and tax-transfer system changes

[280] The Panel has accepted that the effect of taxes and transfers on disposable incomes of the low paid is relevant to the needs of the low paid and their relative living standards, both in terms of specific changes to the tax-transfer system and in assessing broader information in relation to measures of the relative income of the low paid. 301

[281] The measure of income most commonly used in analysis of living standards is equivalised household disposable income. This measure considers the type of household and also incorporates both labour market earnings and income from other sources, as well as the net impact from taxes and transfers.

[282] In this section we discuss changes made to the tax-transfer system and changes in disposable income following the 2016–17 Review decision for selected household types.

[283] In its initial submission, the Australian Government advised that a single adult household working full time at the NMW would not attract transfer payments, but ‘those working part-time, couples with one partner earning the full-time minimum wage and families with children can receive significant additional assistance … For full-time minimum wage workers in single-income households with children, transfer payments are typically around a third of disposable income.’ 302 The Australian Government also submitted that:

‘… full-time workers without children retained the greatest fraction of the minimum wage increase after taxes and transfers (nearly 80 per cent), since they receive no transfer payments and therefore face no income tests. Part-time workers and workers with children kept less, since they are affected by the means tests on payments such as Newstart and FTB [Family Tax Benefit]. Couples with one partner on Newstart retained the least.’ 303

[284] The points made by the Australian Government above highlight the tension in the interaction between the level of minimum wages and the tax-transfer system in providing for the needs of the low paid. Families with children or an unemployed partner face the greater challenge in meeting their needs, but also receive the smallest benefits from increases in minimum wages. Despite this, all family types that have been modelled do receive some increase in their disposable income from an increase in the NMW. In this respect, we note the view of the Australian Government that ‘[i]ncreases to the minimum wage have, over recent years, been important for maintaining the real disposable incomes of many low-income households … however the tax-transfer system remains the primary means of redistributing income to low-income households.’ 304

[285] The Social Services Legislation Amendment Act 2017 included a measure to freeze the base and the maximum rate of Family Tax Benefit (FTB) (Part A) and FTB (Part B) for low-income families commencing from 1 July 2017 to 2019. This change reduces the real incomes of families receiving these benefits over the two years. 305

[286] From July 2018, the Child Care Subsidy (CCS) will replace the current Child Care Benefit and the Child Care Rebate with a single means-tested subsidy. 306As these changes will apply when our decision is in operation they are potentially relevant to this Review.

[287] Amongst the parties who addressed this issue there were quite different views. The Federal opposition submitted that the changes to child care assistance will leave 279 000 families worse off, including those on low incomes. 307 In contrast, Ai Group argued that the CCS will provide ‘significant benefit to most low income workers who are currently receiving childcare assistance’ and that the Panel should award a lower increase than it otherwise would in consequence.308

[288] It is difficult to evaluate the impact of the changes to child care assistance on low-paid employees, in part because the current arrangements are complex. While the new arrangements are intended to simplify them, they remain difficult to assess. The previous arrangements included a means tested scheme and a non-means tested scheme. An activity test (encompassing the self-employed, employees, and those engaging in study or training or looking for work) applied to the previous non-means tested scheme. The new scheme is both means tested and activity tested. The maximum benefit is payable at a family income of $66,958 and is phased out to zero at $351,248. 309 The means test on the current scheme provides maximum payments at incomes below $45,114 and reduces to zero at a family income of $156,914 with one child in approved care.310

[289] Perhaps the most helpful summary of the impact of the changes is provided in the media release of the Minister for Education and Training at the time of the announcement of the changes. This release included the advice that the new child care package would deliver:

•  ‘the highest rate of subsidy to those on the lowest income levels and more hours of subsidy to those who work the most’; and

•  ‘increasing the base subsidy from around 72 per cent to 85 per cent for the more than 370 000 families earning around $65,000 or less a year.’ 311

[290] On the information available, the Panel cannot determine what the precise financial impact of the changes to child care assistance will be on low-wage families, although we accept that it will probably be of some benefit. Because the impact is uncertain, we have given it little weight in this decision. If thought relevant, the parties are invited to provide further material to the Annual Wage Review 2018–19 (2018–19 Review).

[291] The Australian Government’s 2018–19 Budget, announced proposed changes to income tax rates for individuals to be phased in over a number of years. The earliest step in the proposed changes is a tax offset increase targeted at low to middle income taxpayers for 2018–19. The benefit is payable as a tax refund at the end of the 2018–19 tax year.

[292] Because the tax changes have not been legislated for, and in any event would not as a practical matter provide any financial benefits to employed persons on or before 30 June 2019, the Panel does not propose to take them into account in this Review.

[293] Table 3.2 presents the changes to nominal disposable income for a range of hypothetical household types reliant on the NMW. It incorporates the increase to the NMW and modern award minimum wages of 3.3 per cent from the 2016–17 Review decision, and the reductions in a range of benefits for low-income families, including the removal of the Schoolkids Bonus. Over the year to July 2017, changes in nominal disposable incomes ranged between a fall of –2.0 per cent (single parent working part time with two children) to an increase of 3.0 per cent (dual-earner couple, no children). Six out of the 14 selected household types experienced a decline in their nominal disposable incomes. Growth in nominal disposable income exceeded the CPI in only three of the 14 selected household types. Those which had a real increase were adult singles or couples without children. Since the increases to the NMW and modern award minimum wages exceeded inflation over the year to July 2017, the falls in nominal and real disposable incomes have come from the effects of, and changes to, the tax-transfer system.

[294] Over the five years to July 2017, growth in nominal disposable income for 10 out of the 14 selected household types was below CPI. Over the same five-year period, increases to the NMW and modern award minimum wages exceeded the CPI by 3.9 per cent, which highlights the negative impact of changes to the tax-transfer system. Of the selected household types, dual-earner couples with no children had the highest growth in nominal disposable income while single parents with two children and working part time had the lowest.

[295] While there has been a real increase in minimum wages over the past five years, changes to the tax-transfer system have negatively affected disposable incomes for some household types. As the Australian Government submitted, ‘[o]utcomes for families receiving transfer payments were … affected by measures such as the ceasing of the School Kids Bonus, closure of Energy Supplement paid with FTB for new entrants, and the measure to maintain the current FTB rates for two years from 1 July 2017.’ 312

Note: The percentage change in the CPI over July 2016 to July 2017 and July 2012 to July 2017 were calculated with reference to the June quarter.

Assumptions: Single-earner households earn 100 per cent of the weekly NMW. Single parents working part time (PT) are earning 50 per cent of the weekly NMW rate, those working full time (FT) earn 100 per cent of the NMW. Dual-earner households comprise one partner earning 100 per cent of the NMW, the other earns 50 per cent of this rate. Applicable minimum wage rates (equivalent to the C14 rate) per week are: $606.40 in July 2012; $672.70 in July 2016; and $694.90 in July 2017.

Tax/transfer parameters as at July each year. Disposable income includes all available income transfers, unless otherwise specified. Children are aged 8–12 years and attending primary school. Households paying sufficient rent to receive maximum Rent Assistance where applicable. Single-earner couples are modelled in two scenarios: 1) the non-earning partner is in the labour force and receiving proportional rates of Newstart Allowance (NSA) and 2) the non-earning partner is not in the labour force and therefore not in receipt of NSA. Single-parent households and secondary earners in dual-earner households are not seeking further work and not in receipt of income support.

Households with children receive the fixed value of the Education Tax Refund (ETR) transitional lump-sum payment in 2012 and the Schoolkids Bonus from 2013 to 2016. Disposable incomes for households with children for 2012 to 2016 reflect the average weekly rate of the ETR transitional lump-sum payment, or Schoolkids Bonus instalments, in the given year. In 2016 the Schoolkids Bonus accounted for a weekly average of $8.27 per child in the disposable income for all households with children modelled (excepting dual earner households earning AWOTE as they were not eligible for this transfer). The Schoolkids Bonus was not payable in 2017.

Source: Statistical report, Table 8.4; ABS, Consumer Price Index, Australia, Mar 2018, Catalogue No. 6401.0; Fair Work Commission modelling.

[296] The Australian Government’s submission also contained modelling of changes in real disposable household income for identified household types for the period 2013–2018. That modelling showed that there was a reduction in real income for a single-parent family earning the NMW full-time with one child (aged 3 or 9), a single parent family on the NMW part-time with one child (aged 9), a single-income couple with one parent on the NMW full-time and one or two children, and dual-income couples with one parent on the NMW full-time and the other part-time with two children. The Australian Government’s modelling showed that NMW increases had a net positive effect on income in relation to each household type modelled, but that the tax-transfer system made a negative contribution in 10 out of the 14 households types, including the six household types where real income declined over the five year period. This is consistent with the Commission’s own modelling and demonstrates that changes to the tax-transfer system have caused a reduction in real income for a number of household types, notwithstanding real increases to the NMW over the period.

[297] We concur with the Australian Government’s submission that ‘[i]ncreases in the minimum wage are not fully reflected in household disposable income, although it plays a large role in improving household income for low-income, minimum wage families.’ 313

[298] Table 3.3 shows the proportion of the increase awarded in the 2016–17 Review which was retained by the same range of household types. Almost all households had their disposable income reduced by the income tax: single parents working part-time retained 100 per cent of the increase while a single-earner couple receiving Newstart Allowance (NSA) retained less than one-sixth of the increase. In addition, single-earner couples with a partner receiving NSA, with and without children, and dual-earner couples with children also had a reduction in their transfer payments. Households that received NSA retained the smallest share of the increase to the NMW.

Note: Tax/transfer parameters as at July 2017. The NMW increase retained is calculated as the change in disposable income as a proportion of the wage increase. Other assumptions as per Table 3.2.

Source: Statistical report, Table 8.5; Fair Work Commission modelling.

[299] One important additional change to the tax-transfer system has been legislated reductions to corporate taxation rates. As part of a progressive reduction in tax rates for small and medium-sized incorporated business, the taxation rate was reduced for ‘small business entities’ with a threshold of $2 million turnover from 30 per cent to 28.5 per cent in 2015–16, and to 27.5 per cent in 2016–17 with a threshold of $10 million turnover. For ‘base rate entities’ with a turnover threshold of $25 million, the rate was reduced to 27.5 per cent in 2017–18, and the threshold is to increase to $50 million in future years. 314

[300] The Australian Government has modelled the long-term impact of corporate taxation reductions. However, this modelling includes the effect of the reductions that are yet to take effect and further proposed reductions which are yet to be legislated. The modelling in general predicts that the reductions will lead to higher business investment and productivity and drive an improvement in real wages. However, the modelling ‘does not describe the transition path to the long-term,’ and the Australian Government submitted that ‘it will be difficult to identify when business investment is responding to the tax cut.’ 315 This means that it is not possible to ascertain what, if any, effect the tax reductions which have already come into effect have had on investment, productivity, employer profitability, employees’ wages or income and wealth inequality. Only the ACTU submitted that we should take into account the corporate tax reductions in this year’s Review, on the basis that their impact ‘ought to be that the Panel is less restrained in its awarding of increases than it otherwise would be.’316 However, the impact of the changes at this point cannot be assessed, and as a result we will not take them into account in this Review. The Panel will look for reliable evidence of their effect, if any, in future Reviews.

[301] We accept that changes to the tax-transfer system are relevant to our consideration of the needs of the low paid and their relative living standards. The identified changes to the tax-transfer system and their adverse effects on low-paid employees have been taken into account pursuant to s.134(1)(a) and s.284(1)(c). Consistent with the approach taken in the 2016–17 Review decision, we do not accept that a mechanistic or formulaic approach can be taken in regard to our consideration on this matter. 317 However, the above evidence does emphasise, once changes to the tax-transfer system which have occurred are taken into account, the importance of increases to the NMW and modern award minimum wages in maintaining the real disposable income of many low-income households.

Relative earnings and earnings inequality

[302] As the Panel has previously noted, the relative living standards of low-paid workers are affected by the degree of dispersion in earnings. If the earnings of workers in the lowest deciles are growing more slowly than those in the higher deciles, then the relative earnings of the low paid will fall. 318

[303] In this section we consider earnings inequality with reference to changes in the minimum wage relative to median earnings of full-time employees (the minimum wage bite) and, more broadly, in the distribution of real weekly earnings for full-time non-managerial adult employees.

[304] The minimum wage bite was estimated at 54.8 per cent in 2017, 0.8 percentage points higher than in 2016. This followed a decline between 1994 and 2012 to a low of 52.7 per cent, with the bite increasing by 2.1 percentage points since 2012.

[305] The Australian Government submitted that the NMW has increased by an average of 2.8 per cent per annum over the last 10 years, compared with an average increase of 2.7 per cent in median full-time earnings. 319 ACOSS and the Federal opposition submitted that a major reason for the recent increase in the minimum wage bite is slow overall wages growth.320 The Australian Government attributed part of the decline in the minimum wage bite prior to 2008 to the mining boom, which pushed up median wages.321 Clearly, the behaviour of median wages is a significant contributor to the level of the minimum wage bite.

[306] The minimum wage bite is usually based on the median earnings of full-time workers. An ABS measure of hourly earnings is available from 2004. The benefit of using hourly earnings is that it can incorporate part-time workers. As noted previously, more than three-quarters of NMW employees work part time (including youth who are paid at reduced rates).

[307] The Australian Government did not specify a preference for the use of an hourly or weekly minimum wage bite, but noted that it used the median wage bite of full-time employees and owner managers of incorporated enterprises in its submission, which is the same approach as the OECD. 322 ACCI argued that while the Panel should have regard for all the different measures of the minimum wage bite, the hourly measure for all employees is the closest to how minimum wages are applied.323 The ACTU did not have a preference for the weekly or hourly measure, but argued that ‘for as long as the dominant form of employment is full time, the full time median should be used.’324 RCI preferred the current approach, which is using the full-time weekly measure of the minimum wage bite.325

[308] Chart 3.3 compares the different measures of the minimum wage bite using the following measures of median earnings:

•  weekly median earnings of full-time employees;

•  hourly earnings of full-time employees; and

•  hourly earnings of adult full-time and part-time employees.

[309] Although the trends between 2004 and 2017 are broadly similar across the different measures, the chart shows that using median hourly earnings of full-time employees raises the minimum wage bite to 56.3 per cent in 2017. This higher bite is likely to be the result of including reported hours worked, which will include any unpaid hours worked, thereby reducing the hourly earnings of workers and increasing the minimum wage bite.

[310] Using the median hourly earnings of adult full-time and part-time employees raises the minimum wage bite to 58.5 per cent in 2017. This is most likely to be because part-time workers tend to be concentrated at the lower end of the wage distribution.

[311] There is a clear case for continuing to pay attention to the conventional measure of the minimum wage bite, i.e. the NMW as a percentage of weekly median earnings of full-time employees and owner managers of incorporated enterprises. This measure has a long history, and is used in standard international comparisons. We think it is also valuable to consider the wage bite expressed in hourly terms, because it includes the many employees who are paid at or near to the NMW who work part time.

[312] Whatever the measure chosen, it can be seen that there has been some modest rise in the wage bite since 2014.

Note: Median earnings are measured in August of each year. Following the amendments to the Workplace Relations Act 1996 (Cth) taking effect in 2006, the Federal Minimum Wage (FMW) was set at $12.75 per hour, equivalent to $484.50 per week. Earnings are for employees including owner-managers of incorporated enterprises. Median earnings from 2004 onwards are taken from the August 2017 Characteristics of Employment survey.

Source: ABS, Characteristics of Employment, Australia, August 2017, Catalogue No. 6333.0; ABS, Employee Earnings, Benefits and Trade Union Membership, Australia, various, Catalogue No. 6310.0; ABS, Weekly Earnings of Employees (Distribution), Australia, various, Catalogue No. 6310.0; Metal, Engineering and Associated Industries Award 1998; Manufacturing Award.

[313] The Australian Government submitted that the median full-time award-reliant wage, that is, the median wage among all full-time award-reliant employees, not just those on the NMW, was 82.8 per cent of the median full-time wage among all employees. 326

[314] The Australian Government also provided a list of the lowest adult rates across modern awards in the most award-reliant industries as a proportion of the median wage of all full-time employees. Among the list of 14 modern awards, only two included wage rates equivalent to the NMW, at a minimum wage bite of 54.8 per cent. Of the remaining modern awards, the wage bite was calculated as between 56.0 per cent and 60.7 per cent. 327

[315] Another way of measuring earnings inequality is to compare changes in modern award minimum wages with broader measures of wage growth. Chart 3.4 compares the growth in the C14 and C10 classifications with AWOTE, average weekly earnings (AWE), and the WPI between the December quarter 2009 and the March quarter 2018. While their relative growth rates varied somewhat over the period, by the March quarter 2018 the rate of growth in modern award minimum wages had exceeded that of the WPI and matched that of AWOTE. This recent development has made some contribution towards improving the relative position of the low paid.

Note: WPI is the index for total hourly rates of pay excluding bonuses in both private and public sectors. It is unaffected by change in the quality or quantity of work performed. AWOTE is calculated by dividing estimates of weekly ordinary time earnings by estimates of the number of employees. It is calculated before taxation and other deductions such as superannuation. It also excludes payments which are not related to the reference period such as overtime, leave loading and redundancy payments. AWOTE estimates refer to full-time adult employees. AWE is the gross (before tax) earnings of employees (excluding salary sacrifice). The C14 and the C10 are minimum award rates set under the Manufacturing Award and the former Metal, Engineering and Associated Industries Award 1998. AWOTE and AWE data are published half-yearly for May and November; hence, a quarterly series has been derived. AWOTE and AWE data are expressed in original terms.

Source: ABS, Average Weekly Earnings, Australia, Nov 2017, Catalogue No. 6302.0; ABS, Wage Price Index, Australia, Mar 2018, Catalogue No. 6345.0; Metal, Engineering and Associated Industries Award 1998; Manufacturing Award.

[316] No new data were available to update movements in the distribution of real weekly total earnings of full-time non-managerial employees. As we noted in the 2016–17 Review decision, over the decade to 2016, total earnings at the 90^th percentile rose faster (22 per cent) than for the 10^th percentile (13 per cent) but real earnings rose for all points in the earnings distribution. 328 Much of the increase in inequality occurred in the first part of the decade and there has been no clear growth in inequality of earnings over the last five years.

Income and wealth inequality

[317] The Panel takes into account a broad range of measures when assessing inequality, which is relevant to a consideration of the relative living standards of the low paid.

[318] As we explained earlier, the most appropriate analysis when making comparisons of living standards is at the household level, specifically, equivalised household disposable income. 329

[319] In the 2016–17 Review decision, the Panel referred to trends in two measures of inequality: the Gini coefficient and the distribution of equivalised household disposable income, which reflected data from 2013–14. These measures have been updated with new data for 2015–16.

[320] A measure of the Gini coefficient is shown in Chart 3.5. 330 By this measure, income inequality in 2015–16 is higher than in the mid-1990s but has stabilised from at least 2007–08, with the Gini coefficient falling from 0.336 then to 0.323 in 2015–16.

Note: Estimates presented for 2007–08 onwards are not fully comparable with estimates for previous cycles due to improvements made to measuring income introduced in the 2007–08 cycle. Estimates for 2003–04 and 2005–06 have been recompiled to reflect those improvements; however, not all components introduced in 2007–08 were available for earlier cycles. Changes in the methodology are likely to have exaggerated income growth at the top of the distribution over this period (see Australian Government submission, 13 March 2018 at para. 248, fn. 34).

Source: Statistical report, Chart 8.5; ABS, Household Income and Wealth, Australia, 2015–16, Catalogue No. 6523.0.

[321] The Australian Government referred to data from the HILDA survey on the Gini coefficient from 2001 to 2015. In comparison to the ABS estimates, the Gini coefficient estimated from the HILDA survey was lower and more stable, falling from 0.303 to 0.296 over the period. The report also showed that real equivalised household disposable income increased by 38.3 per cent at the 10^th percentile from 2001 to 2015, higher than at the median (28.5 per cent) and the 90^th percentile (29.9 per cent). 331

[322] The Australian Government provided data showing that Australia was ranked 11th out of the 35 OECD countries in terms of inequality, one place higher than last year, 332 and remains more unequal than a number of major European economies including France and Germany (Chart 3.6). It is, however, more equal compared to the US, UK and New Zealand.

[323] It is not possible to make such international comparisons with precision, so small differences should be ignored. But Australia’s position in the distribution suggests that a number of similar countries, including Canada, the Netherlands, France and Germany, are able to achieve higher degrees of equality than the current level in Australia.

Note: Latest available data refer to 2015, except for except for Israel (2016); Japan (2012); and Mexico, New Zealand, Australia, Italy, Ireland, Switzerland, Germany, Hungary, Luxembourg, Czech Republic and Iceland (2014).

Source: Australian Government, 13 March 2018, at Chart 8.1; OECD Stat, Income Inequality, <https://data.oecd.org/inequality/income-inequality.htm>.

[324] Table 3.4 presents the growth in real weekly equivalised household disposable income for selected percentiles from 2007–08 to 2015–16 (and therefore provides a consistent time series unaffected by methodological changes). It shows that real growth at the 10th percentile exceeded growth at the median and 90^th percentile over both the first and second half of the period. This suggests that there has been a significant decline in the inequality of household disposable income over the past 10 years.

Source: Statistical report, Table 8.7; ABS, Household Income and Wealth, Australia, 2015–16, Catalogue No. 6523.0.

[325] Chart 3.7 presents a more complete picture, showing growth in the real weekly equivalised household disposable income for each quintile, comparing the same two periods as Table 3.4 above. Over the four years to 2011–12, the two lowest quintiles experienced the highest rates of growth, increasing by 4.7 and 4.5 per cent, respectively. In comparison, income at the highest quintile fell by 2.4 per cent. Over the following four years, real household income growth was again highest at the lowest quintile, at 3.5 per cent, while income at the highest quintile increased by 2.3 per cent. Real weekly equivalised household disposable income fell in this period for the third, or middle, quintile. The overall consequences for inequality are less clear than they appear to be in Table 3.4, although households in the lowest quintile have had strong gains over the decade.

Source: Statistical Report, Chart 8.6; ABS, Household Income and Wealth, Australia, 2015–16, Catalogue No. 6523.0.

[326] In the 2016–17 Review, the Panel found that ‘there was no evidence of recent rises in inequality of household disposable income among at least the bottom half of the income distribution for all households.’ 333 The latest data suggest that income inequality has stabilised for some period, with some indicators showing income growth for households at the bottom of the distribution increasing more than households at the middle and top of the income distribution. However, referring to ABS data, the ACTU pointed out that after taking into account the number and age of people in the household, households in the highest income quintile received 40 per cent of total income in 2015–16.334 By comparison, households in the lowest income quintile received just 8 per cent of total income. Income inequality, while it has fallen recently, is still quite high, relative to the past in Australia and relative to other OECD countries.

[327] The ACTU submitted that the Panel should take into account wealth inequality in Australia when considering relative living standards and the needs of the low paid. In support of this submission, it referred to several studies that showed that wealth and income inequality are correlated and have a negative impact on economic growth. They also provided data from the ABS that showed that wealth inequality in Australia is high and rising. 335

[328] The Panel considers that, notwithstanding the evidence of substantial and increasing wealth inequality, it is a matter which may only be assigned limited weight in this Review. While there is undoubtedly a link between income levels and wealth accumulation, there are a range of factors which contribute more significantly to wealth inequality (as the ACTU’s submissions recognised 336). We consider it unlikely that any adjustment to the NMW or modern award minimum wages arising from this Review, within the range of outcomes proposed by the various interested parties, could have any discernible effect upon wealth inequality.

Poverty and poverty lines

[329] Consideration of the needs of the low paid involves an assessment of an employee’s capacity to purchase the essentials for a ‘decent standard of living’ and to engage in community life, assessed in the context of contemporary norms. In this regard, the Panel assesses measures, or the risk, of poverty for NMW-reliant and award-reliant employees and their ability to meet basic needs. 337 As we have previously stated:

‘If the low paid are forced to live in poverty then their needs are not being met and those in full-time employment can reasonably expect a standard of living that exceeds poverty levels.’ 338

[330] Because families differ in their size, composition and extent of employment, it is not feasible that minimum wages on their own could ensure that all families with a full-time minimum wage worker have incomes that exceed poverty levels. Larger families may need help from the welfare system.

[331] In each Statistical report, the Panel presents the disposable incomes of hypothetical households earning the NMW, selected modern award minimum wages and AWOTE and compares them against a relative poverty line.

[332] Relative poverty lines are essentially a measure of inequality at the lower end of the income distribution. They are not based on an observed incapacity to meet needs. This incapacity is better indicated by measures of deprivation and financial stress. The recent publication of research on budget standards, based on the MIHL, 339 provides an additional benchmark against which to assess the ability of the low paid to meet their needs. The MIHL is discussed later in this chapter.

[333] The Panel has generally relied on poverty lines that are based on median income, using a 60 per cent threshold on the basis that those in full-time employment can reasonably expect some margin above a harsher measure of poverty. 340

[334] Table 3.5 compares the equivalised household disposable income for a range of hypothetical households reliant on the NMW and selected modern award minimum wages with a 60 per cent median income poverty line. The table includes additional households to that in the last Review, 341 including a single parent working part time (assumed to be working half of 38 hours). We remain aware, however, that the margin between the selected poverty line and the equivalised disposable income of award-reliant households provides, at best, a broad indicator of the extent to which the needs of the low paid are met.

[335] We can observe from this table that most of the hypothetical household types have a disposable income above the relative poverty measure. Households earning the NMW with disposable income below the relative poverty line were single-earner households working part time with children, and couple households where the non-earning partner is outside the labour force and not receiving NSA.

[336] We give particular weight to the capacity of the NMW and modern award minimum wages to provide an adequate standard of living to a single adult. This worker receives no assistance from the welfare system and is entirely reliant on his or her earnings. The table shows that a single adult on the NMW had a disposable income that exceeded the 60 per cent poverty line by 20 per cent in 2017, a little higher than in 2016. The margin for a worker on the C10 rate was 34 per cent. In contrast, the disposable income of a single-earner couple, with or without children, was about 10 to 20 per cent below the 60 per cent poverty line and either stayed the same or fell compared with the relative poverty measure over the year, notwithstanding the 3.3 per cent adjustment which resulted from last year’s Review. As noted by ACOSS, this is reflective of ‘ongoing reductions in the real value of family tax benefits and the abolition of the Schoolkids Bonus’ in 2017. 342 ACOSS concluded that this has led to low-income families being more reliant on wage increases, with which we concur.343

Note: Poverty lines are based on estimates of median equivalised household disposable income for 2015–16 for December 2015 and for December 2016, and adjusted for movements in household disposable income per head as calculated by the Melbourne Institute of Applied Economic and Social Research, and adjusted for household composition using the modified OECD equivalence scale. AWOTE data are expressed in original terms.

Assumptions: Tax-transfer parameters as at December 2016 and December 2017. Wage rates for 2016: NMW = $672.70 pw; C10 = $783.30 pw; C4 = $940.90 pw; and AWOTE of full-time employees = $1533.40. Wage rates for 2017: NMW = $694.90 pw; C10 = $809.10 pw; C4 = $971.90 pw; and AWOTE of full-time employees = $1569.60. Other assumptions as per Table 3.2.

Source: Statistical Report, Table 8.6; ABS, Average Weekly Earnings, Australia, Nov 2017, Catalogue No. 6302.0; ABS, Household Income and Income Distribution, Australia, 2011–12, Catalogue No. 6623.0; ABS, Household Income and Wealth, Australia, 2015–16, Catalogue No. 6523.0; Fair Work Commission modelling; Manufacturing and Associated Industries and Occupations Award 2010; Melbourne Institute of Applied Economic and Social Research (2018), Poverty Lines: Australia, December quarter 2017.

[337] We have previously stated that the tax-transfer system plays a major role in raising the living standards of families reliant on the NMW and modern award minimum wages that have children. 344 However, it does not support them to the point that single parents working part time and single-earner couples with one partner not in the labour force are able to maintain an income above the poverty line. Single adults and single parents able to obtain full-time employment and those couples where the second partner gains part-time employment at the NMW have a substantial margin above the poverty line.

[338] ACCER argued, as it has previously, that the minimum wage should be sufficient to support sole parents and single-earner couples with one or two children, 345 with the implication that the Panel should set a NMW for these families at a margin above the 60 per cent relative poverty line.346 ACCER referred the Panel to the Panel’s earlier comments that a full-time employee should reasonably expect a standard of living exceeding the poverty line and questioned why the single breadwinner family falls below this standard.347

[339] On this matter, we note that we have one instrument available, namely the level of minimum wages, and a number of statutory considerations that we have to take into account. We are required to set the NMW and modern award minimum wages that are fair to both employees and to employers. It is not possible, with this one instrument, to accommodate the normal variation in the composition of families and in the levels of household labour supply. The level of the NMW and modern award minimum wages that would be sufficient alone to exceed 60 per cent of median equivalised household disposable income for a single breadwinner family with several children would be more than sufficient for a single adult or dual-income couple without children. In this context, we note the data provided by the Australian Government that 77.5 per cent of low-paid workers have no children (between
0–17 years). 348 We also note that 40 per cent of all the hours worked by employees paid at or below the C12 level (i.e. close to or a little above the NMW) were worked by youth aged
15–19 years and a further 24 per cent of such hours were worked by adults aged 20–24 years.349 We may reasonably presume that most of these young people do not have dependent children, yet they would, under the ACCER proposal, be the main beneficiaries of a large rise in the NMW and nearby modern award minimum wages.

[340] The size of the adjustment required to reach such a level would also, in our judgement, run a substantial risk of causing job losses and reduced employment opportunities for low-skilled workers, including many youth. We are reassured that the NMW and modern award minimum wages that we have set are at least sufficient to enable a single adult who works full time to have an income that is significantly above the 60 per cent poverty line. This will contribute to providing an adequate income to other household types, but those with dependents also need assistance from the tax-transfer system.

Budget standards

[341] Budget standards estimate what is needed, in terms of material goods and services, by a particular family type in order to achieve a particular standard of living. In previous Reviews, parties have referred to research on budget standards conducted in the mid-1990s. 350 The Panel concluded that the budget standards estimated in that research ‘were not seen to provide useful contemporary information about the needs of the low paid.’351

[342] In a Statement issued on 11 August 2017, 352 the Panel referred to a current project to provide contemporary budget standards data and that the Panel would consider a preliminary hearing on their outcomes. The report was published on 23 August 2017 (Saunders and Bedford 2017).353 A further Statement,354 released on 25 August 2017, invited parties to give consideration to the report and provide comment on the utility of holding a preliminary hearing to discuss its outcomes for the Review. Following submissions which did not support a separate hearing on the matter, a Statement355 on 20 September 2017 was released that cancelled the proposed hearing and noted that Commission staff would seek another forum for the discussion of the budget standards research.356

[343] The Commission invited interested parties to attend a presentation by the authors of the report, Professor Peter Saunders and Megan Bedford, held on 27 November 2017. The session was recorded and materials were made available on the 2017–18 Review website.

[344] The new budget estimates are based on the MIHL standard which encompasses the ‘ingredients of a healthy life in all of its dimensions, including diet, clothing, personal hygiene, health promotion, exercise and other forms of social engagement and activity.’ 357 They state that they are intended to provide ‘a set of contemporary budget standards that reflect the needs of low-income working and unemployed individuals and families that can be used to assess income adequacy and guide decision-making.’358 They therefore differ from the earlier budget standards calculated for Australia that focussed on income adequacy to avoid poverty.

[345] Saunders and Bedford (2017) provided the MIHL budget estimates for five different family types and compared these to their disposable income if one member was earning the NMW as at June 2016. Their analysis showed that the disposable incomes of families comprising single adults, sole parents with one child and couple households with one child (with the female partner not in the labour force) earning the NMW were above the corresponding MIHL budget standard (ranging from $8.84 to $61.91 per week above). However, the disposable income of the remaining two family types, couple household with no children (with the female partner unemployed) and couple household with two children (with the female partner not in the labour force), fell below the estimated budget standard (by $39.03 and $88.74 per week, respectively). 359

[346] These findings differ somewhat from findings of adequacy that are based on the application of the 60 per cent of median income poverty line. Specifically, they find that, in 2015–16, several NMW-reliant family types with children had disposable incomes that exceeded the MIHL. Two family types that were evaluated had incomes below the standard. Both indicators concluded that a full-time job at the NMW was sufficient to provide a single adult with a reasonable standard of living.

[347] ACOSS submitted that, while the approach of the research is transparent and adaptable, there are problems with relying on the judgements of experts and the need to update the standards to reflect changes in a ‘basic’ standard of living. 360 ACOSS noted that the ‘new budgets are more stringent’ compared with the previous research and would only support a ‘frugal living standard, arguably below that which the [NMW] should support… .’361

[348] Overall, there was low support from parties regarding the consideration of the budget standard for this year’s Review. Parties identified particular aspects of the methods used to calculate the standards that they felt undermined their confidence in the outcomes. 362 The ACTU submitted that the budget standards be given ‘no special status’ and were ‘far too modest to in fact reflect the needs of a person or household today.’363 The ACTU also argued that the research ‘failed to enumerate or address the many costs of working that are not immediately apparent.’364

[349] ACCI submitted that the availability of the research does not ‘elevate relative living standards and the needs of the low paid above other considerations.’ 365 ACCI urged the Panel to use caution in forming a decision based on the new budget standards research, and that ‘[t]o the extent that the Panel is attracted to the Budget Standards material and wishes to accord weight to it in its decision making, we suggest the Panel advance any conclusions tentatively or provide suggestions of its thinking at this point which can be responded to and engaged with in 2019 and beyond.’366

[350] ACCER broadly supported the use of the budget standards research as it identifies and measures a contemporary decent standard of living consistent with the Panel’s statements that an assessment of the needs of the low paid ‘requires an examination of the extent to which low-paid workers are able to purchase the essentials for a ‘decent standard of living’ and to engage in community life, assessed in the context of contemporary norms.’ 367 In its submission in reply, ACCER noted the reservations articulated by the ACTU, ACOSS, ACCI and Ai Group. It concluded that despite these reservations, ‘the budget standards research presents the FWC and the parties to annual wage reviews with a very valuable resource… .’368

[351] The new budget standards research is the first time that a serious effort has been made, using contemporary scholarship in this field, to estimate the needs of low-paid employee households. We judge it to be useful and relevant, while recognising its limitations and the Panel has taken it into account along with all of the relevant material we have before us. We note the comment from the authors that ‘[b]udget standards are not a panacea but they provide important information that can inform and assist decisions taken about adequacy… .’ 369

[352] We agree with ACCER’s submission that the research is the ‘best evidence available in regard to the needs of the low paid Australian workers and their families,’ 370 but also with ACCI’s submission that the ‘budget standards cannot of themselves be determinative of the NMW or any uprating of minimum award rates.’371

Other measures of relative living standards

[353] To understand the relative standard of living and the needs of the low paid we also consider data on patterns of expenditure and levels of financial stress.

[354] Updated data on expenditure patterns and financial stress indicators of households was released by the ABS since the last Review and included in this year’s Statistical report. This data was last released in 2009–10.

Expenditure

[355] Table 3.6 presents data on the composition of household expenditure of low-paid and all employee households in 2015–16. Low-paid employee households are defined as those in the bottom quintile of equivalised household disposable income of employee households. Employee households are those whose main source of income is from wages and salary.

[356] We find little difference in the pattern of expenditure between low-paid employee households and all employee households. Most expenditure is directed to current housing costs, food and non-alcoholic beverages, and transport. Low-paid households allocate relatively more expenditure to current housing costs and food and non-alcoholic beverages, and relatively less to transport. We note that even for low-paid households, only 3.3 per cent of total expenditure went to payment for domestic fuel and power, although this percentage has probably increased in light of recent sharp rises in power prices. These conclusions are similar to those reached by the Minimum Wage Panel in the Annual Wage Review 2012–13 decision (2012–13 Review) based on data from 2009–10. 372

[357] Table 3.6 shows that the difference in average total expenditure between low-paid and all employee households is smaller than the difference in their average total income. The table also shows that the average expenditure of low-paid households exceeds their income (this was also found in 2009–10 373).

[358] The data used in Table 3.6 is only updated by the ABS every six years, and as such, it has greater value as a point-in-time estimate of expenditure patterns. We do find, however, that similar proportions of average expenditure were evident in the 2009–10 data, presented in the Statistical report—Annual Wage Review 2014–15. 374

Note: Employee households are those whose principal source of income is from salary and wages. Other capital housing costs (restricted) excludes Mortgage repayments—principal component (other property), Purchase of selected dwelling or other property and Capital housing costs not elsewhere classified (nec). About 28.9 per cent of all adult employees in the bottom quintile of EHDI are classified as low paid, with hourly earnings equal to or below two-thirds of median hourly earnings of full-time adult employees. Hourly earnings are calculated as current weekly income (including salary sacrifice) divided by usual hours worked per week in main and second job. Communication and Education were introduced as separate categories of expenditure in the 2015–16 Household Expenditure Classification.

Source: ABS, Microdata: Household Expenditure, Income and Housing, 2015–16, Detailed Microdata, DataLab, Catalogue No. 6540.

Financial stress and deprivation

[359] The Statistical report also includes a comparison of financial stress and deprivation indicators from 2009–10 and 2015–16 using data from the ABS. The Panel considers that changes in the levels of financial stress and deprivation reported by low-paid households over time, both in absolute terms and relative to other households, assists with its assessment of the extent to which the needs of the low paid are being met, and that minimum wages are fair. 375

[360] Table 3.7 presents this information for all employee households and for households with only low-paid adult employees. The table generally shows a decline in the proportion of households experiencing financial stress or deprivation. We note, however, that the data for 2009–10 are for the period immediately after the GFC, when the economy was coping with a substantial negative shock. It is to be expected that levels of financial stress were elevated in that year.

[361] Households with only low-paid adult employees were more likely than all employee households to report experiencing financial stress and deprivation, which is not surprising. By 2015–16, both sets of households had noticeable falls in the proportions who reported experiencing specific indicators of financial stress, such as not being able to pay utility bills on time. The one exception was a rise in the proportion of households with low-paid adult employees who felt unable to raise $2000 in a week for something important.

[362] The situation reflected by the indicators of deprivation was different. For all employee households, the experience of specific indicators of deprivation fell substantially. But for low-paid households, their gains were either small, or in the case of two out of the six indicators, the levels of deprivation rose. For example, 13 per cent of low-paid families said that they could not afford to have friends or family over for a meal once a month (this was 11 per cent five years earlier) while 18 per cent said they could only afford second hand clothes most of the time (previously 17 per cent). This provides some evidence that the economic gains that have flowed more generally to the workforce have not been fully shared with the low paid. It is also evidence that some employee families are struggling to have a decent standard of living.