Minimum Wage Fixation 1996–2005

Industrial Relations Society of the Northern Territory Convention
Darwin, 2 September 2005

Justice Giudice, President
Australian Industrial Relations Commission

[1] The topic for this afternoon is minimum wage fixation from 1996 to 2005. The first thing to note is the changes in the industrial relations environment in recent years. At the end of the 1980s there were around 3,500 awards, some prescribing minimum rates of pay, but many prescribing actual rates of pay. Award rates were related at various levels in a haphazard way. There was a tendency to uniformity in various industries, for example, oil processing and distribution, banking, building and construction, in a number of manufacturing industries such as vehicle manufacturing, and so on. Alongside these awards there were a number of craft based awards – transport, maintenance and warehousing, for example – which cut across a whole range of industries.

[2] There were national wage cases, usually conducted annually, which prescribed a uniform increase which applied across all awards. The results of these cases affected the incomes of most of the employed workforce. And there were no significant increases in wages or conditions beyond what was available through the central process.

[3] During the years of the Accords, the dominance of centralised wage fixation meant that bargaining, in over-award or formal agreement areas, was very limited. This was the trade-off for the benefits of the centralised approach, benefits which all employees shared regardless of their bargaining power. In certifying agreements the Commission’s role was to ensure that the agreement was not contrary to the public interest, which meant in practice that increases would not be approved if they threatened the stability of the system. Increases outside the centrally derived amount were rare and carefully monitored.

[4] From the perspective of employees, access to the system was dominated by registered organisations. Individual employees had no right to be heard in relation to award matters. The Commission dealt only with collective disputes and the legislation did not recognize industrial agreements unless they were made with a registered union. Formal and informal arrangements for preference to union members were widespread.

[5] The system we now have, leaving aside for the moment the Government’s foreshadowed legislative proposals, provides for wages and conditions to be negotiated at the level of the enterprise against a background of minimum wages and conditions established and maintained by the Commission. The awards constitute a safety net, a minimum requirement for employers and a minimum entitlement for employees. They contain core conditions only. Award coverage has been rationalised and outmoded provisions removed. The number of awards has reduced by about one-third to just over 2,000. The Commission’s arbitral power is limited to prescribing minimum rates and conditions, subject to some exceptions which have had relatively little use.

[6] While there are still annual wage reviews, the focus is different. Safety net adjustments only apply to employees who have not had any increase as a result of bargaining at the enterprise level. The objects of the Act emphasise the importance of encouraging enterprise bargaining in whatever form the parties at the enterprise think most appropriate. Bargaining has become wide-spread and for millions of employees it is the only method of obtaining improvements in wages and conditions. Around one-third of the workforce is involved in formal enterprise bargaining under the Workplace Relations Act. In certifying agreements the Commission’s role is primarily quality control – monitoring the agreement process and ensuring that agreements do not undercut the award safety net. Generally speaking, the nature of the increases potential flow-on effects and the quality of the agreement are not relevant matters. Bargaining is the major contributor to growth in aggregate earnings and far outstrips earnings growth arising from safety net adjustments. It is not necessary that collective agreements have a union respondent – employers may make collective agreements directly with their employees and such agreements can be certified. There is a process for recognition of individual agreements: AWA’s, again, provided the agreement does not undercut the award.

[7] Registered organisations, although still very important, no longer have the exclusive role in the system which they previously enjoyed. Preference to union members is not permitted under the statutory regime. There is specific recognition of individual rights to employment protection. Unfair dismissal cases are a major part of the Commission’s work. Applicants may be represented by their union, a lawyer or an agent. Unions can and do still represent their members in relation to employment disputes under various dispute settlement procedures.

[8] In 1993 the concept of protected industrial action was introduced. This was a major break from the traditional approach to industrial action. One of the motivations for the creation of a national industrial dispute settling body was the desire to replace industrial conflict with a compulsory arbitration process. Since 1993, strikes and lockouts have been permitted, subject to compliance with prescribed procedures and generally speaking, the parties are immune from civil liability in relation to such action.

[9] Turning to wage fixation specifically, many of you will recall that in 1975 the Commission adopted and applied a system of automatic and then semi-automatic indexation of award wages by reference to price increases. The wage fixing regime included principles designed to ensure that indexation increases were the main source of award adjustments. In 1981 a wages freeze was implemented through a Commission decision to refuse all applications to vary awards for a period of six months. This was followed shortly after by a further period of central wage fixation pursuant to a number of Accords reached between the government and the trade union movement and which were adopted by the Commission. Through this means growth in aggregate incomes was controlled. One of the outcomes was that the wages share of total factor incomes was reduced. At the end of the 80s there was a number of Commission decisions linking wage increases to the negotiation of improvements in productivity and efficiency. Moves to decentralise wage fixing and to increase enterprise bargaining strengthened. At the same time the Commission moved towards reform of the award system. This involved the broadbanding of thousands of different classifications and the rationalisation of classification structures to a 14-level structure. The structures had a common link to the tradesperson rate. Many paid rates awards were converted to minimum rates awards.

[10] These changes were given impetus by the Industrial Relations Reform Act 1993 and the Workplace Relations Act 1996. Award simplification involved completing the task of converting paid rates awards to minimum rates awards, removing provisions which were not allowable award matters and also removing provisions which had the effect of hindering flexibility. This was largely accomplished by agreement, but some arbitrations were necessary, e.g. metal industries award, coal industry award. Most awards now have a classification structure consistent with the 14 levels operating in the metal industries award although very few awards have all 14 levels and most have fewer than 10 levels.

[11] At the beginning of the 90s the Commission’s national wage decisions affected directly 67per cent of the workforce. Currently, with the significant shift to bargaining, only about 20per cent of the workforce has its pay set by awards. A change of that magnitude constitutes a massive decentralisation in pay setting.

[12] Every year since 1996 on application by the trade unions, the Commission has conducted a review of minimum award rates. This calls into play the statutory requirement that the Commission ensures a safety net of fair minimum wages and conditions of employment is established and maintained (s.888B(2)). It is well understood that while the Commission is required to determine the claims before it in accordance with equity, good conscience and the substantial merits of the case, it may not simply give effect to whatever rates it thinks fit. In exercising its discretion it must have regard to a number of criteria specified in the Workplace Relations Act. I shall focus on three of those criteria: employment, the needs of the low paid and living standards generally prevailing.

[13] The Commission must have regard to “economic factors including levels of productivity and inflation, and the desirability of attaining a high level of employment” (s.88B(2)(b)). In relation to economic factors generally, for the whole of the period since 1996 the economy has been in a relatively strong growth phase, with inflation within the Reserve Bank of Australia’s target range of two to three per cent for all but a few quarters. Despite some recent reduction in productivity, productivity still grew by nearly 25 per cent from June 1996 to December 20004.

[14] There has been criticism in some quarters that the Commission has not taken employment effects sufficiently into account. Even a casual reading of the Commission’s decision will reveal that criticism to be false. I urge anyone who is in doubt to read the decisions. In December 1996 unemployment was 8.6 per cent. It is currently around 5 per cent − what has been described as a 30-year low. Could unemployment have been even lower if the safety net adjustments had been lower? The Commission has found that there is a lack of really useful data on this question and has more than once requested parties to cooperate in sponsoring research into the employment effects of Safety Net Reviews. They have not done so. For example, it is apparently not known how many employees are employed at the level of the minimum wage. This makes the calculation of employment effects difficult and the estimates that are produced vary. As the Commission commented in the June 2005 decision:

[15] The Full Bench also commented on the fact that it is required by the legislation to balance the various considerations. It said:

[16] The Commission is also required, when adjusting the safety net, to have regard to the needs of the low paid (s.88B(2)(c)). Each year the Commission receives material and submissions concerning needs and takes them into account. The parties, and the Commission, attempt to grapple with the identification of needs and the Commission has said it is open to a fuller inquiry into needs but no-one has sought to take up that offer in a significant way. For the most part the Commission awards dollar increases − giving the largest proportionate increase to the lowest classification. In its most recent decision the Commission looked at the relationship between prices, wages and earnings.

[17] From June 1996 to March 2004 the CPI increased by 21.1 per cent. During that period the minimum wage increased by 33.8 per cent. Higher award rates increased relatively less. Award rates above C6 have not increased as much as the CPI. The real increase in average weekly ordinary time earnings for full time adults has been 16.6 per cent, compared with a real increase of 10.5 per cent in the minimum wage.

[18] On the question of the relationship between award rates and poverty, the Bench agreed with the Commonwealth’s submission that the research shows that:

[19] The Bench went on to comment that on the limited data available it might be concluded that without the adjustments of recent years the number of full-time award-reliant employees in poverty would be significantly greater. [See para 413]

[20] The Commission is required to have regard to “the need to provide fair minimum standards for employees in the context of living standards generally prevailing in the Australian community” (s.88B(2)(a)) This issue, like the others we hear evidence and submissions on, and strive to reach a conclusion.

[21] It is obvious that there is some tension between the considerations. There is a lot of data to consider. Much of the data is ambiguous and there is a deal of subjectivity in the arguments. One objective measure of living standards generally prevailing is growth in average weekly earnings.

[22] Since 1996, growth in average weekly earnings has outstripped growth in the minimum wage by a significant margin and growth in award wages at the other levels by correspondingly more. There is a continuing divergence between the minimum wage – and award wages generally – and average weekly earnings.

[23] This is even more apparent over a longer period. Between 1983 and 2004 the tradesperson rate dropped from 78 per cent of average weekly earnings to 59 per cent. The minimum wage dropped from 61 per cent to 49 per cent. These data show again the extent to which market rates have diverged from award rates since 1996. The market, fuelled by enterprise bargaining, is moving away from the award safety net which, in relative terms, is falling.

[24] Clearly enough an exercise of judgment is required in observing the statutory criteria: economic factors including employment, the needs of the low paid and fair minimum standards having regard to living standards generally prevailing. Given those statutory criteria, it cannot be credibly argued that the Commission has granted excessive increases.

[25] It has been suggested that Australia’s minimum wage is too high by comparison with other OECD countries. The bench addressed this matter in the June 2005 decision. It was submitted that Australia had the highest ratio of minimum wage to median earnings in the OECD. The Commission sought the data. What the OECD data show is that indeed Australia does have the highest ratio of minimum wages to median earnings. They also show that such has been the case for almost the whole of the last 20 years. [See para 404]. Perhaps more importantly, the ratio has been in decline since 1996. Since the introduction of the Workplace Relations Act, the minimum wage has declined relative to median earnings. The Government and the employers contend that it has not declined enough and the Commonwealth has of course announced that it intends to take steps to further slow the rate of growth in the minimum wage.

[26] On the OECD data, claims that safety net adjustments under the Workplace Relations Act have brought the minimum wage closer to median earnings are untrue, as are claims that Australia has only recently reached the top of the OECD table. There is a similar measure which can be used, based on ABS statistics, comparing the minimum wage with average weekly earnings.

[27] The ratio between the minimum wage and average weekly ordinary time earnings for full time adults was nearly 52 per cent in 1996. At the end of 2004 it was just over 49 per cent. I might add that there is a whole range of statistics one can quote in this area and starting and finishing points can be critical. Nevertheless, there is no doubt about the trend here.

[28] There is little controversy, however, about the growth in corporate profits. Since 1996 the profit share has been increasing, on some measures increasing at a fairly rapid rate. The bench’s most recent findings are set out in the June decision. (see para [411])

[29] In safety net review proceedings each party relies on that part of the statutory regime which best suits its case. Employers supported by the Commonwealth urge us to give greater priority to employment. The unions and welfare groups emphasize the needs of the low-paid and the requirement that we have regard to living standards generally prevailing. The Commission must try to balance these considerations. Criticism of the Commission’s decisions frequently ignores or distorts the statutory framework within which the Commission has been required to operate.

[30] In summary then, since 1996 productivity, employment and GDP have all grown strongly. There have also been significant increases in real wages. Inflation has not been a significant problem and unemployment is at a 30-year low.

[31] Updating some of the earlier figures shows that average weekly earnings have increased by 47.7 per cent since 1996, a real increase of 20 per cent. In the same period the minimum wage has increased by 38 per cent in nominal terms and 13 per cent in real terms. Other award rates have had proportionately lower increases. Wage rates for classifications above C6 have declined in real terms.

[32] Australia has claims to being the best performed economy in the world over the last ten to 15 years. The statutory regime in the Workplace Relations Act has been a part of the institutional framework during this period. It represented a significant deregulation of the labour market, which encouraged bargaining at the level of the enterprise against a background of minimum standards. Proposals to alter the method of fixing minimum standards are within the prerogative of the legislature, subject to the Constitution. The removal of the power to fix minimum wages from an institution with a 100 year track record will be applauded by some and derided by others. That is the way debate about our industrial relations system has always been. There is no doubt, however, that these fundamental changes will raise important questions about the nature of any body which is given the power to fix minimum wages, in particular its independence from the executive Government, the criteria which should be applied and the value system underpinning the choice of criteria, and the transparency of its procedure. Just as significant is the proposal to fix the safety net of conditions for the purpose of collective and individual agreements by direct legislation. This will give to the Commonwealth parliament a power which it has never exercised before. A power to fix both the type and the level of the minimum conditions to which all employees of corporations will be entitled will, among other things, require the Parliament to take direct responsibility for its decisions, a responsibility which until now has been shouldered by an independent tribunal which politicians have been able to blame for unpopular decisions. For the Commission’s part, the members of the Commission will continue to carry out their statutory role, whatever that role may be, faithfully and impartially.