Opinion & Commentary

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Our award system is costing too much

Alexander Philipatos | Australian Financial Review | 14 January 2013

Josh Frydenberg, Liberal MP for Kooyong, has urged Tony Abbott to put labour market policy firmly on the reform agenda, and to present an alternative to deal with the “militancy, flexibility and productivity” issues in the workplace.

No discussion of labour market reform can ignore the award system. It has become a key part of our flexibility and productivity problem since the introduction of Labor’s Fair Work Act in 2009.

Labor has simplified the award system, but it also increased costs for small business which have eroded flexibility and stifled attempts to improve productivity.

At the last count in 2010, roughly 15 per cent of the workforce had their pay and conditions set by award only. Although this is a small proportion of the workforce, the award system has a much wider impact on the labour market because awards serve as the benchmark for collective and individual agreements – a set of minimum wages and conditions with which agreements must comply. Employers can offer more generous conditions than the award but cannot go below the minimum requirements.

Awards have become problematic because of the award modernisation process. As part of the Rudd government’s Forward with Fairness policy, the Australian Industrial Relations Commission (now Fair Work Australia) created new national benchmarks, reducing 3715 federal and state awards to just 122 modern awards.

The amalgamation process in itself is not bad policy. If the award system is to be a safety net, it ought to be as simple as possible.

But at the time, then workplace relations minister Julia Gillard, in a bid to avoid a backlash from welfare groups and the union movement, pledged that “no worker will be made worse off” because of modern awards. When state and federal awards were combined, each with different wage rates and conditions, the conditions were factored up to the highest common denominator.

Of particular concern to the retail industry, one of the economy’s most award-reliant industries, is the subsequent increase in penalty rates. If two awards, one with a lower wage but higher penalty rate and the other with a higher wage but lower penalty rate are combined, the results pay a higher wage and a higher penalty rate.

This has not only been detrimental for business. Consumers have also suffered because it is more difficult for businesses to operate at the times consumers prefer, such as weekends, public holidays or late at night.

The award safety net ought to set an adequate level of minimum conditions. But it is important to remember that Australia’s safety net is quite generous when compared with the rest of the developed world.

In 2011, the Organisation for Economic Co-operation and Development ranked our minimum wage sixth of 26 of the world’s wealthiest countries. Our minimum wage is 54 per cent of the median wage and the award system builds higher wages and conditions on top of this.

Ensuring that the safety net is not too onerous is vital, particularly for small businesses.

The reforms Frydenberg is urging must include substantial changes to our award system. Award conditions, particularly penalty rates, need to be relaxed to reduce the cost burden on small business.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.