Local wages will mean local jobs

Greg Lindsay, Patrick Carvalho

06 January 2016 | Australian Financial Review

jobs employmentBeneath the growing dispute over Sunday penalty rates lies a much broader discussion over the limits and effectiveness of our national minimum wage system.

Australians — in particular many young unemployed — would benefit from exploring further options to mandated wages, including flexible arrangements such as local minimum and award wages.

The introduction of local discounts to the minimum wage and industry-specific awards, including penalty rates, will help alleviate the alarming youth unemployment figures throughout Australia.

 

Under this approach, the Fair Work Commission could allow concessional rates based on local economic conditions such as living costs and unemployment levels.

The rationale behind this proposal is straightforward: nationally mandated high pay levels can be detrimental to local job creation, particularly making it difficult for the most vulnerable in our society such as the low-skilled, inexperienced youth who can be summarily priced out of the labour market.

The proposed local discount policy would provide some flexibility in the system, allowing different economic areas to shoulder different pay floors. For instance, what might be considered an affordable pay in major Australian cities such as Sydney, Brisbane and Perth might be economically prohibitive — and indeed unfair to those left without a job as a corollary — in inner Tasmania or regional Queensland.

The diverse nominal local pay floor is not a new concept. Many countries with large regional economic discrepancies — such as Canada, Russia, India, Brazil, Indonesia, Japan, Mexico and United States — already concede different regional wage floors. Indeed, the OECD advises allowing minimum wages to vary by region to reflect differences in economic conditions as a key policy principle.

And the concept does not go against the long established principle in Australia of ‘equal remuneration for work of equal or comparable value’. As highlighted by the recent Productivity Commission draft report on workplace relations, “jobs yielding the same monetary benefits may provide quite different non-monetary benefits for workers, and the value (in terms of the wellbeing gained) of a particular quantum of money is likely to vary from one person to the next, and from one place to the next, given differences in preferences and living costs. Equalising monetary remuneration will thus not equalise the benefits people gain from work ‘of equal value’, and in some cases may inhibit efficient matching of workers with jobs.”

In Australia, a similar proposal was advocated by the 2014 National Commission of Audit Report, recommending minimum wages be set on a state basis to better reflect local labour market conditions and cost of living expenses. In particular, the report suggests the regional minimum wage should be, after a transitional period, set at 44% of the average weekly earnings (AWE) in each jurisdiction.

The Productivity Commission also contemplated the introduction of non-uniform national minimum wages. In its key points, the Commission recognises that nationally uniform minimum wages do not take into account the differences in living costs and labour market conditions in different regions, and that most of the variations in economic conditions occur intra-state.

The local pay floor discount proposal builds both upon the NCA recommendations and the PC reservations.

First, pay floor discounts would be intended at local rather than state level. Second, for integrity purposes, local discounts should extend not just to the federal minimum wage, but also to all other forms of nationally regulated pay floors (e.g. modern awards, including penalty rates) as well as national unemployment welfare payments. Third, instead of a fixed formula as proposed by the NCA 44%-AWE minimum wage rule, local discounts should be decided according to the Fair Work Commission adjudication after ample consultation to interested parties.

There is much hope and science behind the proposal for local discounts to minimum pay floors to reduce potential demand-side barriers to job creation. A more technical, evidence-based debate — not ideological diatribes — should underpin consideration of the concept.

Greg Lindsay is Executive Director of the Centre for Independent Studies. Dr Patrick Carvalho is a Research Fellow at the Centre for Independent Studies and author of the research report Youth Unemployment in Australia.

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