Penalty Rate Cuts Will Boost Inequality, Not Employment

Public Letter from Economists, April 6 2017

Australia’s Fair Work Commission has recently decided to reduce penalty rates for work on Sundays and public holidays in the retail and hospitality sectors.  Rates would fall by 25 to 50 percentage points of base wages, for most employees covered by the retail, pharmacy, fast food, and hospitality awards.  For some workers this would result in a one-quarter reduction in hourly compensation for Sunday work (equivalent to a pay cut of $10 per hour or more).

Workers covered by individual contracts or Enterprise Bargaining Agreements will also see downward pressure on their own rates of pay for Sundays and holidays, since the awards system establishes an overall floor for compensation; hence those workers will eventually be asked to agree to reductions in their own penalty rates and/or offsetting compensation provisions.  We also expect that the precedent established in these sectors will be extended to other parts of the economy, as employers invoke the same rationale for lower penalty rates as was accepted by the Fair Work Commission for retail and hospitality work.

We do not expect that lower wages for work on Sundays and public holidays will result in significant net job creation in retail and hospitality, for several reasons:

1. Economic research indicates that overall business activity in retail and hospitality, and hence overall employment in those sectors, depends most importantly on the level of consumer expenditure on retail and hospitality services, which in turn is determined mostly by aggregate economic performance and personal incomes.  Lower wages for work on Sundays and holidays cannot increase the overall budget constraint that limits consumer spending.  (To the contrary, by undermining incomes for a group of workers, it will marginally reduce aggregate personal disposable incomes.)

2. While the impact of lower penalty rates on individuals who regularly work Sundays and public holidays would be significant, the impact on overall average compensation costs across retail and hospitality will be very small (since most work in those sectors is performed on other days of the week, and will not be affected by this decision). Therefore, the impact on overall hiring decisions in these sectors cannot be large.

3. By reducing the relative costs of operating on Sundays versus other days of the week, lower penalty rates will likely encourage a shift of activity from other days to Sundays and holidays.  New demand for lower-cost labour on Sundays will be at least partly offset by reduced demand for labour on other days.  And by shifting consumer demand from other days to Sundays, lower penalty rates could actually reduce productivity and operating margins on those other days of the week, with unpredictable effects on overall employment levels.

4. Modern economic research confirms that the impact of changes in statutory minimum wages on employment is very small, and often indeterminate in direction.  The traditional assumption that higher minimum wages necessarily result in less employment has been disproven by exhaustive peer-reviewed research; it is equally illegitimate to conclude that lower minimum wages will result in more employment. Economists have discovered several channels through which minimum wages affect business decisions (including through their impact on productivity, retention, recruitment, and training), in complex ways that make it impossible to predict even the direction of the final impact on employment.  Moreover, at lower wage rates, workers will be less inclined to supply their labour, which could have a detrimental effect on workforce participation.

While it is doubtful that lower penalty rates will result in any measureable increase in total employment in the retail and hospitality industries, there is no doubt that this decision will reduce incomes for some of the most insecure and poorly-paid workers in the economy.  Statistical data confirm that the retail and hospitality workforce is disproportionately reliant on women, immigrants, and youth: groups which already earn below-average incomes and are already likely to face precarious, unstable work arrangements.  By reducing wages for this low-income segment of the workforce, lower penalty rates would incrementally widen income inequality in Australia, and exacerbate its varied economic and social consequences.  It would also undermine government fiscal balances, by both reducing tax revenues and increasing welfare payments.

More broadly, the penalty rate decision (and other policy actions which effectively suppress wage levels) will also aggravate a more important and damaging problem in Australia’s macroeconomy: namely, the unprecedented stagnation of wage and salary incomes, and resulting weakness in household finances.  Growth in hourly wages and weekly earnings has decelerated to the slowest pace in postwar history: below 2 percent per year at present.  Total labour incomes have fared even worse, in part because of the shift to part-time and casual work (and resulting decline in average hours worked per week).  Total nominal labour incomes actually declined by 0.5 percent in the most recent quarterly national income statistics; this unusual and damaging result reflects the erosion of institutional supports for wage-setting (as well as chronic weakness in demand conditions).  The decision to reduce penalty rates for work on Sundays and public holidays contributes to this trend, and hence would further undermine the performance of household incomes and national growth.

Signed by over 75 Australian professionals working in economics and related disciplines.

1. Tim Anderson, Senior Lecturer, Political Economy, University of Sydney
2. Tony Aspromourgos, Professor of Economics, University of Sydney
3. Siobhan Austen, Professor of Economics, Curtin University
4. Tom Barnes, Research Fellow, Institute for Religion, Politics & Society, Australian Catholic University
5. Tim Battin, University of New England, Armidale
6. Michael Beggs Senior Lecturer, Political Economy, University of Sydney
7. Grant Belchamber, International Consultant, Australian Council of Trade Unions
8. Gareth Bryant Political Economy, University of Sydney
9. John Buchanan, Professor / Chair of Discipline, Business Analytics University of Sydney Business School
10. Gavan Butler, University of Sydney, Sydney
11. Damien Cahill, Professor, Political Economy Department, University of Sydney
12. Rod, Campbell, Economist, The Australia Institute
13. Lynne Chester, Assoc. Professor, University of Sydney
14. Anis Chowdhury, Arndt-Corden Economics Dept, ANU
15. Joe Collins, Department of Political Economy, University of Sydney
16. Huon Curtis, Senior Research Analyst, Institute of Business and Social Innovation, UTS Business School
17. Richard Denniss, Chief Economist, The Australia Institute
18. Corrado Di Guilmi, Senior Lecturer, Economics Discipline Group, University of Technology Sydney
19. Geoff Dow, Honourary Research Fellow, School of Political Science & International Studies, University of Queensland
20. Tim Dunlop, Author
21. Bill Dunn, Assoc. Professor, Department of Political Economy, University of Sydney
22. Peter Earl, Assoc. Professor of Economics, University of Queensland
23. Bernie Fraser
24. Caleb Goods, Lecturer, University of Western Australia Business School
25. Matt Grudnoff, Senior Economist The Australia Institute
26. Joseph Halevi, University of Sydney
27. Geoff Harcourt, Professor, University of New South Wales
28. Peter Harkness, Senior Lecturer (retired), Swinburne University of Technology
29. Elizabeth Humphrys, Scholarly Teaching Fellow, Social and Political Sciences, University of Technology Sydney
30. Russell Jackson, Principal, RJ Industrial Marketing Services; VP Society for Australian Industry & Employment
31. Michael Johnson, Hon. Assoc. Professor, University of New South Wales
32. Evan Jones, Sydney University
33. Raja Junankar Emeritus Professor, Western Sydney University, UNSW
34. Anne Junor, University of New South Wales
35. Steve Keen, Professor of Economics, Kingston University
36. Prue Kerr, University of Adelaide
37. Stephen Koukoulas*, Managing Director, Market Economics Pty Ltd.
38. Peter Kriesler, Assoc. Professor, University of New South Wales
39. Damian Kyloh, Economist, Australian Council of Trade Unions
40. Russell Lansbury, Emeritus Professor, University of Sydney Business School Sydney
41. Wayne Lewchuk, Professor and Visiting Scholar, Dept. of Ageing, Work and Health Research, University of Sydney
42. Edward Mariyani-Squire, Western Sydney University
43. Robert Marks, Professor Emeritus of Economics, University of New South Wales
44. Margaret McKenzie, Economist, Australian Council of Trade Unions
45. Gabrielle Meagher, Professor, Department of Sociology, Macquarie University
46. Alex Millmow, Assoc. Professor in Economics, Federation Business School
47. William Mitchell, Professor, Centre of Full Employment and Equity, University of Newcastle
48. Adam Morton, Professor, University of Sydney
49. Martin O’Brien, Senior Lecturer, University of Wollongong
50. Rod O’Donnell, Professor of Economics, University of Technology Sydney
51. Barbara Pocock, Emeritus Professor, Business School, University of South Australia
52. Jocelyn Pixley, Honorary Prof., Macquarie University
53. David Primrose, Department of Political Economy, University of Sydney
54. John Quiggin*, Australian Research Council Laureate Fellow, University of Queensland
55. Patricia Ranald, University of Sydney
56. David Richardson, Senior Research Fellow, The Australia Institute
57. Toby Rogers, Dept. of Political Economy, University of Sydney
58. Stuart Rosewarne, Assoc. Professor, Department of Political Economy, The University of Sydney
59. Peter Ross, University of New South Wales
60. Susan Schroeder, Senior Lecturer, University of Sydney
61. Rhonda Shar, Adjunct Professor Economics, AM, Hawke Research Institute, U. of South Australia Adelaide
62. Christopher Sheil, University of New South Wales
63. Julie Smith, Associate Professor, ARC Future Fellow, Menzies Centre for Health Policy & ANU Fellow Canberra
64. Warwick Smith, Research Economist, The University of Melbourne & Per Capita
65. Ben Spies-Butcher, Senior Lecturer, Macquarie University
66. John Spoehr, Professor, Australian Industrial Transformation Institute, Flinders University Business School, Adelaide
67. Jim Stanford*, Economist and Director, Centre for Future Work
68. Frank Stilwell, Emeritus Prof. of Political Economy, University of Sydney
69. Tony Stokes, Greenacre Educational Publications
70. Tim Thornton, Lecturer in Political Economy, Department of Politics and Philosophy, La Trobe University
71. Phillip Toner, Honorary Fellow, Department of Political Economy, University of Sydney
72. Diane Van Den Broek, Assoc. Professor University of Sydney
73. Jeremy Walker, Lecturer, University of Technology Sydney, Social and Political Sciences Program
74. Ian Watson, Labour Market Researcher
75. Shaun Wilson, Assoc. Professor, Department of Sociology, Macquarie University
76. Chris Wright, Senior Lecturer, University of Sydney Business School, The University of Sydney
77. Sarah Wright, Australian Catholic University
78. Misha Zelinsky, Economist and Assistant National Secretary, Australian Workers Union

*Members of the drafting committee for the open letter