Commission increases award wages out of proportion to cash and inflation rate

Are you an employee concerned about job security in an increasingly volatile local and global economy? Are you an employer who wants to expand your operations and employ more people? Are you a parent concerned about the sluggish growth in employment opportunities for your children?

Surprisingly, the Fair Work Commission Expert Panel on minimum wages (“Panel”) has decided to increase Award wages by 3.3%. This increased labour cost takes effect on 1 July 2017, with many commentators noting the 3.3% increase is out of all proportion to the inflation rate, cash rate and economic outlook.

Why did the Fair Work Commission increase Award wages?

The Fair Work Commission’s Expert Panel noted that, among other things, the:

1. Inflation measures showed an increase since 2015-financial year;
2. Nation’s growth in profits was particularly strong in 2016 compared with the preceding years and above the 5-year and 10-year averages for both total industries and non-mining industries; and
3. Over the 5 years to the December quarter 2016, labour productivity growth in the market sector was higher than the previous 5-year period and rose sharply in 2016.

However, many commentators, employers and employees are arguing the increases are out of all proportion to inflation and economic growth. We consider there may be some truth to these very real concerns.

What has been the inflation rate since 2014?

Reserve Bank of Australia (“RBA”) Consumer Price Index data shows that once volatile items are excluded from the CPI formula, inflation has been sitting at less than 1.8% since January-March quarter in 2016. However, even if volatile items are included, then quarterly inflation was:

• Below 1.7% from October-December 2015,
• Below 1.5% for the past 12 months, and
• Only recently (and perhaps temporarily) recovered to above 1.5% (and only if volatile items are included in the measure).

Accordingly, the Fair Work Commission was correct when it observed that inflation was recently showing improvement. However, in the face of overwhelmingly low inflation since mid-2014, there is still an alarming gap between the average inflation rate across 2015-2017, and this now extraordinary rise in Award wages.

What does the RBA cash rate trend tell us?

The RBA Cash Rate is often used as a reliable economic indicator since it demonstrates the predictions for future economic direction being made by the nation’s top financial and economic analysts.

The RBA sets the cash rate based on how it needs to push the economy. For example:

• A low cash rate is adopted to facilitate economic growth when the RBA expects the economy to be sluggish or to decline in the future; and
• A high cash rate is adopted to restrain inflation.

Accordingly, a high cash rate means the RBA predicts strong economic growth and wants to restrain it. However, a low cash rate means the RBA predicts sluggish growth (or even a deterioration in conditions). Alarmingly, the RBA has seen a need to hold the cash rate at an all-time low (1.5%) after steadily decreasing it since 2 November 2011. To put that in perspective, this means that since the impact of the Rudd Government’s stimulus package ended, the RBA has persistently decreased interest rates in an effort to facilitate growth.

The fact the Reserve Bank is holding the cash rate so low for so long is a sure sign that we should not be adopting any policy or stance which will make it more expensive for business to grow, create jobs, or offer more hours to workers.

Where to from here?

Given the ongoing sluggish economic growth since the Global Financial Crisis, we consider the FWC should follow the RBA’s approach facilitate business growth. Accordingly, we respectfully recommend the Fair Work Commission Expert Panel not continue to impose such high increases in labour costs when there is such a clear need to facilitate jobs creation and not stifle the Australian economy with a growth in labour costs far in excess of inflation.