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Cutting Penalty Rates Will Defeat The PM's Vision For Australia

You can't have a 'high-wage, first-world' economy with low productivity and aggregate consumer demand.

28/02/2017 9:39 AM AEDT | Updated 28/02/2017 9:40 AM AEDT
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"Looking after workers is smart economics. It raises productivity and boosts demand to drive robust and inclusive growth."

The peak employer group welcomed the recent landmark ruling of the Fair Work Commission. So have some senior Coalition Government MPs, including the Employment Minister, Michaelia Cash.

Business -- big and small -- has been seeking this cut for years. They have been arguing that Sunday penalties are a legacy of a bygone era where families went to church -- one that's costing them a tidy sum. It is not fit for purpose to run a 24/7 modern economy.

Business groups welcomed the cuts, saying they are necessary to reinvigorate Sunday trade, to allow employers to put more staff on and stay open longer. Peter Strong, Chief Executive of the Council of Small Business Australia, said: "There will be more jobs." But he also cautioned, "It might not be a lot, it might be 10,000. We don't know how many, but we'll find out."

This is the crux of the matter that must not be missed in the blame game between the opposition and the government, which decided not to make any submission to the Fair Work Commission deliberating on the issue.

Why? Because the hundreds of thousands of retail and hospitality workers affected by this decision are also customers. They either have to work more hours, or they have to cut their spending to match their new, lower wage.

Looking after workers is smart economics. It raises productivity and boosts demand to drive robust and inclusive growth.

Where will they get more work or hours to compensate for lost income?

Given that unemployment is stubbornly high at 5.7 percent, and underemployment is at near record levels, it seems unlikely that they will actually get more work to make up their lost pay.

So the decision to cut penalty rates will likely weigh down aggregate demand. This is especially so when wages growth has been at an historic low and slowing; while household debt is soaring, currently at 187 percent of household income, due mainly to rising house prices.

Slow or falling wage growth will also hurt the economy's productivity growth as inefficient business can get away with outdated business practices, opting not to upgrade technology or spend on on-the job training and skills development. The Australian economy will rapidly lose international competitiveness as it fails to restructure to high-wage, high-productivity activities.

Thus, the penalty rate cuts, along with slowing wage growth, will likely ironically defeat the Prime Minister's vision to turn Australia into a "high-wage, first-world economy".

The penalty rates may be a "legacy of a bygone era", unfit for a 24/7 world, but the principles of economics hold, just as the law of gravity -- at least in this case.

Robert Bosch, the German industrialist, engineer and inventor, founder of Robert Bosch GmbH (electrical co), introduced 8-hour working days in 1906, free Saturdays in 1910 and other benefits for his workers. When he said: "I don't pay good wages because I have a lot of money; I have a lot of money because I pay good wages," Bosch was referring to the boost in productivity due to better working and pay conditions.

The penalty rates may be a "legacy of a bygone era", unfit for a 24/7 world, but the principles of economics hold, just as the law of gravity -- at least in this case.

Henry Ford, the American industrialist, founder of the Ford Motor Company, and sponsor of the development of the assembly line technique of mass production, doubled the pay of his workers to $5 a day in 1914. He said: "Of course the higher wage drew a more productive worker. But that wasn't the real reason. The fact was, it was no good mass-producing a cheap automobile if there weren't masses of workers and farmers who could afford to buy it."

The new US census data released in late September (2016) showed large employment and wage gains, particularly for the lower end of the jobs spectrum, following the increase in the legislated US minimum wage.

About 3.5 million people in the US climbed out of poverty, as employers are finally creating more jobs, and paying higher wages 7 years after the GFC hit.

Thus, the available historical evidence, as well as theoretical considerations, tell us that looking after workers is smart economics. It raises productivity and boosts demand to drive robust and inclusive growth.

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