A penalty for our most vulnerable workers

The federal government has spoken out against the inconsistencies in our current penalty rate system, declaring it a hallmark of times long past with no place in modern Australia’s seven-day economy.

Changes to the system will be an improvement, but are not enough to end the discriminatory hidden features of artificially imposed penalty rates. Australia would be better off by stripping the whole penalty rate system altogether.

The current system benefits the lucky few employed on weekends and other non-conventional shifts at the expense of severely undermining the chances of low-skilled jobseekers — i.e. the most vulnerable in our society — getting a toehold in the workforce. Not exactly an impeccable example of fairness.

In addition, our penalty rate system defies common sense when comparing the punitive rates across industries and across the different types of working hours. This is clearly shown in the interactive graph outlining the disparities between the pay of hospitality workers and registered nurses.

On what grounds one can sustain the argument that working on a Sunday morning requires higher pay than similar work performed on after-midnight shifts? Who could defend that a level 1 registered nurse should be paid less than a fast-food worker for a night shift, or on a public holiday? Why should a casual entry level worker in the fast-food industry receive a much higher rate on Sundays compared to a similar job position in a non-fast-food restaurant?

Yet, the even more damaging feature of mandated penalty rates — which can reach over $50/hr for some entry-level, low-skilled job positions — regards the undermining effect on job creation itself.

It is important to have in perspective that for many small businesses, which comprise 90% of Australia’s workplace environment, labour costs constitute the major overhead expense. And in response to arguably high penalty rates, most businesses have a reduced pool of options — none of which benefit the hundreds of thousands of currently unemployed Australians.

The first business option is to understaff under punitive working hours, eliminating low-productivity job positions. In addition, the remaining staff have to cope with increased workload in order to make economic sense for the business to remain open.

Another response from business to cope with some excessive penalty pay rates is to automate its services. A range of new research offers evidence that high pay levels have the potential to nudge companies to substitute low-skilled workers with machines. Self-service checkouts, tablet menus at restaurant tables, and vending machines are just a few examples of how regulation can bias business to reduce their staff, especially in non-conventional hours.

A third consequence of high penalty rates relates to the dragging of skilled workers towards low-skilled jobs at the expense of less experienced and lower educated jobseekers. This further competition for low-skilled work might explain why almost 200,000 disadvantaged Australians struggle to reverse the dire consequences of long-term unemployment, even though they would be willing to work for much lower pay premiums — and would not necessarily deem working on a weekend or night shift as a plausible inconvenience.

Ultimately, as a result of some prohibitive penalty rate levels, employers always have the extreme option of closing down their businesses outside the so-called conventional hours. Hardly a good outcome for anyone.

In this regard, the New Zealand experiment is quite telling, where there are no statutory requirements for weekend penalty rates (even though it allows businesses to often engage in other forms of voluntary pay rises to attract workers). Research by the Productivity Commission draft report on workplace relations framework shows that whereas 70.4% of all restaurants in Auckland remain open all week, the figure is only 49.2% in Sydney.

The debate over penalty rates should seriously consider the widespread evidence over its impact on job obstruction; and, on fairness grounds, it should also give proper weight to the welfare all Australians struggling to find a job or completely discouraged to even engage in the labour market.

We should continuously aspire to be a high-wage nation that properly compensate workers for toiling under demanding circumstances. Nonetheless, there is no doubt that our high working standards rely far more on our high productivity rather than government intervention. Smart regulation, not top-down pay floors, is a more fruitful path.

The take-away message is there is no free lunch. Artificially raising pay levels above what the market can sustain always bring undesired consequences, not unusually with low-skilled, marginalised jobseekers unfortunately having to foot the bill.

As the saying goes, the rope always breaks at the weakest point.

Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies.