Even union economists accept cutting penalty rates creates jobs

Even union economists accept cutting penalty rates creates jobs

by Aaron Patrick, Australian Financial Review

Even the brains behind the unions' penalty rates argument believe that lowering the cost of employees on Saturdays and Sunday will create jobs. All that the experts involved in the case disagree on is how many.

"There may be some small [positive] employment effect in the sector," says Professor Jeff Borland, a Melbourne University economist who spent six hours in the stand at the Fair Work Commission fighting the change on behalf of the United Voice union.

The Labor Party and Australian Council of Trade Unions don't accept that cutting regulated wages can create jobs. They have mounted a ferocious campaign against the Fair Work Commission's modest reduction in penalty rates on weekends in restaurants, bars, hotels, shops and pharmacies.

Reducing the standard rate for full-time and part-time staff from 175 per cent of to 150 per cent on Sundays (casuals are unaffected) will damage the economy by shifting profits from staff to employers, they say, an argument that is being used to attack the Turnbull government.

Union leaders are now shifting their attention to the ACTU's attempt to increase the minimum wage by $45 a week to $37,420, which ACTU secretary Sally McManus proposed last week at the National Press Club.

"A low minimum wage provides a big incentive for employers to destroy good, steady fairly paid jobs by outsourcing them, cancelling agreements and using labour hire," McManus told the press club in Canberra last week.

Mixed messages

The economic arguments made by the unions' experts, in some cases, contradict the messages from leaders of the labour movement and Labor Party.

In a study cited by shadow finance minister Jim Chalmers to attack the government on Sunday, the Australia Institute, a left-wing thinktank, suggested some businesses would struggle to find staff at the lower rate. It didn't acknowledge that they could just pay more than the award minimum.

"The point you make about an increase in jobs is not proven," Chalmers said when asked about the jobs benefit on the Insiders show. "There is not any evidence of that."

Even staunch left-wing economists such as John Quiggin from the University of Queensland accept that a reduction in penalty rates could create jobs – he just doesn't think there will be enough to make the change worthwhile.

"There is an effect but most evidence is that it isn't large," says Quiggin, who was also a union witness in the penalty rates case.

Some people will refuse to work on weekends at the lower rate because they don't need the money that badly, according to the unions' economists. In essence they argue that the market will keep wages above the minimum regulated rate, and therefore there is no or little benefit from cutting it.

"You can't assume wages will come down all the way [because of the decision]" Borland says. "The unions and the Labor Party wouldn't like that argument."

The argument is based in part on a survey by Professor John Rose at the University of South Australia of 472 people who work in restaurants and shops. It found they expected to be paid at least an extra 50 per cent to work Sundays, or $32.10 an hour.

Why business hires:

Economic theory holds that demand for labour increases when the cost is low, and decreases when the cost is high. Workers will be hired if they can increase profits, the theory says, and that won't happen if a company is forced to pay more than the financial benefit they bring to the business.

The theory is used by policymakers to oppose penalty rates and a high minimum wage, which is politically popular and advocated by unions and welfare groups. A paper written in 2015 by a visiting scholar at the San Francisco Federal Reserve estimated that the US minimum wage, which at the federal level is $US7.25 ($9.67) an hour, had cost 100,000 to 200,000 jobs.

The ACTU doesn't accept a higher minimum wage will cost jobs. Because many Australians are working less than they want to, paying them more will get more to turn up to work, according to an ACTU's submission to the Fair Work Commission.

Counter-intuitively, the poor aren't the main beneficiaries of the minimum wage, which covers many people affected by the Sunday penalty rates decision, A study in 2005 by economist Andrew Leigh, who is now Labor's shadow assistant treasurer, found that the poor mostly did not rely on the minimum wage because many of them did not have jobs.

The average minimum wage earner, and even those who earn less than the minimum wage, are members of the middle class, his research found. Presumably that's because they have other sources of income, such as government payments or families.

(Contacted for comment, Leigh says that in families containing at least one worker, the typical minimum wage worker was in the 39th percentile of household income, which he regarded as low income.)

Jobs for the low skilled:

Economists who helped business lobbyists convince the Fair Work Commission to reduce penalties say they want to create more jobs, especially for people with few skills.

"My sympathy is for workers and I don't want to see people unemployed," says Phil Lewis, a veteran labour economist from the University of Canberra, who was a witness for the restaurant, cafe and catering industries. "I think Labor and particularly [leader] Bill Shorten have been particularly opportunistic here."

Lewis presented a picture to the commission very different to the common perception of the penalties debate, which is that hundreds of thousands of the lowest paid are going to suffer from the reduction.

Not many people in hospitality and retailing are paid weekend penalty rates, Lewis says. Small businesses use family members, and pay in cash, or not at all, and some big businesses have negotiated down penalties for higher full-time wages with the shop assistants' union.

Squeezed in the middle are medium-sized businesses. "They have to pay $36 an hour when Woolworths are paying $22 an hour," Lewis says.

To back up its campaign, Shorten is using a Melbourne hotel cleaner, Margarita Murray-Stark, as an example of a victim of the penalty rates decision. But Murray-Stark is a union activist who doesn't know if her employer will cut her wage, according to another newspaper.

The Labor Party blames Prime Minister Malcolm Turnbull for the decision, even though it was made by an independent arbitrator whose president, former ACTU official Iain Ross, was appointed by Shorten when he was employment minister.

Ross, who is never mentioned in Labor attacks on the decision, rejects the arguments put by his former colleagues.

"The evidence of business owners and operators in these proceedings supports the proposition that the current level of Sunday penalty rates has led employers to restrict trading hours, reduce staff levels and restrict the services provided," he says in the judgment.

"The evidence also supports the proposition that a reduction in penalty rates is likely to lead to: increased trading hours, an increase in the level and range of services offered on Sundays and public holidays, and an increase in overall hours worked."