Self-Defeating Economics of the Penalty Rate Cut

The Fair Work Commission's decision to cut wages for Sunday and holiday work in the retail and hospitality industries will exacerbate the stagnation of wage incomes in Australia, and undermine the standard of living of hundreds of thousands of workers who are already among the most underpaid and precarious in the whole economy.

Here is a full-length commentary on the decision by the Centre's Director, Jim Stanford, that appeared February 25 in The Age, The Sydney Morning Herald, and the Canberra Times.

*   *   *   *   *

Employers' pyrrhic penalty rates win reflects self-defeating economics

The Fair Work Commission unveiled its long-awaited decision on penalty rates for Sunday and holiday work this week.  Penalty rates for most retail and hospitality workers will be cut, by up to 50 percentage points of the base wage.  Hardest-hit will be retail employees: their wages on Sundays will fall by $10 per hour or more.  For regular weekend workers, that could mean $6000 in lost annual income.

The equity implications of the Commission’s decision are odious.  Store clerks and baristas are already among the least paid, least secure members of Australia’s workforce.  The retail and hospitality workforce is disproportionately female, young, and immigrant.  Most work part time, and casual and labour hire positions are common.  In short, the burden of this decision will be borne by those who can least afford it.

Remember, too, that it is in retail and hospitality that recent scandals regarding underpayment of wages and other violations of labour law have been rife.  Weakening labour standards that are already poorly enforced thus constitutes a double jeopardy for service workers.

It is notable that the Commission only targeted low-paid service workers with this review of penalty rates.  There are many other people who have to work Sundays and holidays: including emergency personnel, essential service workers, health care workers, and more.  The Commission stressed it was not calling for those workers to lose their penalties, too (although employers everywhere are no doubt preparing to push to extend this precedent to other industries).  If it’s all about changing “cultural norms” regarding weekend work, then why have these low-paid service jobs been singled out?

All of this says much about the political and economic context for the Fair Work Commission’s deliberations.  There was no emergency in Australia’s retail and hospitality sector, no crisis that needed immediate attention.  It’s not that stores and restaurants couldn’t do business on Sundays under the existing rules; any casual observer can attest to the brisk trade that now occurs right through the weekend.  It’s just that those businesses would be considerably more profitable, if wages were lower.

So penalty rates became the target of a sustained pressure campaign by business, backed by conservative political leaders.  The Commission heard those complaints, and has acceded to them.  Whatever the precise wording of the Commission’s legislative mandate, it was never envisioned as a mechanism for rolling back employment standards; it was supposed to protect them.  This decision will therefore spark a political debate not only over the merits of this specific decision, but over the Commission’s overall mandate and function.

The politics of that debate will be complicated.  Coalition leaders are hiding behind the supposed neutrality of the Commission – although they are clearly pleased with the decision (and many explicitly lobbied for it).  Labor’s response, meanwhile, is coloured by the fact that it created this Commission; Mr. Shorten now promises to adjust its mandate.  None of this will stop the anger among working-class families who’ll lose income because of this decision.  The threat to penalty rates was a potent doorstep issue for union campaigners across Australia in the run-up to the last election, which the Coalition almost lost.  It will be an even hotter button in the next one.

The economics of the rollback are even more muddled than the politics.  Retail lobbyists claim the decision will unleash a surge of new job-creation, but those promises are hollow.  After all, the market for retail and hospitality services depends primarily on the strength of domestic consumer spending power – more so than any other part of the economy.  Australians have a certain amount of disposable income.  Will they shop more, and eat out more, just because stores and restaurants stay open longer?  Of course not.

To the contrary, slashing retail and hospitality wages can only undermine demand for the very services which these businesses are selling.  It is incredibly ironic that even as Judge Iain Ross of the Fair Work Commission read his judgment on live television, the Australian Bureau of Statistics was releasing yet another dismal report on national wage trends.  Average weekly earnings in the period to last November grew at an annualized rate of just 0.4 percent: slower than any other point in the history of the data, and well behind the rate of inflation.  This reflects both the stagnation of hourly wages, and the continuing shift to part-time and casual work (for which retail and hospitality employers are among the worst culprits).

So this will not increase the amount of money Australians have to spend in shops and restaurants – instead, there will be an incremental decline.  If stores actually do stay open longer hours, the same spending must now be spread across longer operating hours, driving down productivity.  Retail lobbyists should be careful what they ask for.

Meanwhile, employment in these industries will continue to reflect bigger, structural forces.  For example, the whole Australian retail sector has created precisely zero net jobs over the last three years, largely because of the structural shift to big-box retailing (which employs fewer workers per unit of sales).  That’s not going to change just because big box stores can now pay their staff $10 less per hour.

In short, Australia’s economy is not held back because wages are too high.  It is held back because wages are too low.  And the stagnation of wages is not an accident: it is the cumulative result of years of deliberate efforts to weaken the power of wage-setting institutions (including unions, minimum wages, and awards).  The Fair Work Commission chopped away a little more of that edifice this week.

The greatest irony is that it is retail and hospitality businesses – who led the push to cut weekend wages – that confront the weakness of household spending power most directly.  Each employer may individually celebrate the prospect of paying lower wages.  Yet for their industry as a whole, this decision is collectively irrational and ultimately self-defeating.


ACNC_Registered_Charity_Logo

get updates