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Federal

Jul 8, 2009

Fair Pay: the perils of politicians appointing 'independent' experts

The Fair Pay Commission is a classic example of when politicians appoint independent experts, things often don’t turn out exactly the way they planned.

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When the Fair Pay Commission was established under WorkChoices in 2005, expectations weren’t exactly high that it would live up to its title which, like much of the selling of the Howard Government’s IR changes, had an air of doublethink to it.

And its newly-appointed head, Ian Harper, was savagely attacked before the commission had even commenced, labelled by unions and the Left as an “evangelical Christian nut”, a “zealot” with “hands-on experience making working people’s lives misery”. And the presence of hard-Right warriors like Judith Sloan on the Commission suggested Australia’s lowest-paid workers would be waiting a long time for a raise.

But the Commission, which handed down its last decision yesterday before being overtaken by Julia Gillard’s world of Fair Work, ended up as an object lesson in the perils of politicians appointing independent experts — things often don’t turn out exactly the way they planned. Indeed, the Commission’s short history shows it was a lot closer to the wages approach of the Hawke-Keating years than the Howard Government would have been comfortable with.

The Commission’s first decision in October 2006 came as a bombshell: a rise of $27.36 per week, less than $3 a week shy of what the ACTU had asked for. Right-wingers like HR Nicholls Society were disgusted and employers wondered if the Industrial Relations Commission hadn’t been quite so bad after all.

“Setting minimum wages ‘too high’ will have a detrimental effect on employment growth and could even cause unemployment to rise,” said the Commission at the time.

“On the other hand, minimum wages form part of the safety net and help to sustain the living standards of the low paid.”

Continued strong economic growth and the absence of evidence that wages growth was feeding into inflation encouraged the Commission to award a substantial rise. Its reasoning was indistinguishable from the IRC.

The Howard Government politely welcomed the decision, and must have wondered what on earth was going on.

Its second decision in July 2007 was more in line with conservative expectations. The very lowest paid received $10 a week. The ACTU had sought $28 a week. The Commission also excluded farmers from the impact of the decision, given the drought. But the Commission had noted that a major round of tax cuts had commenced from 1 July 2007 targeting low income earners and that played a significant role in the maintenance of incomes for the lowest-paid. It also noted, but rejected, a push from employers to incorporate underemployment as a factor in assessing the impact of wage rises.

But the incorporation of both wage levels and the impact of tax-transfer system in assessing safety net incomes was straight from the early Accord era, when the Hawke Government traded off tax cuts and transfer payments like Medicare for wage restraint from unions.

Last year the commission granted a $21 a week rise, only $5 less than that sought by the ACTU. Handed down – unknowingly – on the cusp of an economic crisis, the decision drew the usual attacks from employers. At that point, the focus in economic debate was on inflation, said genie of which was apparently out of the bottle, but Ian Harper explicitly rejected the link between minimum wage rises and inflation.

“The Commission believes that its decision will have only a minor impact upon wage and inflation outcomes in the economy as a whole,” he said.

Yesterday’s decision for the first time elevated the link between wages and demand for employment to critical status. The Commission rejected the ACTU argument that a wage rise would stimulate demand, saying its modelling showed a short-term boost would be more than offset by longer-run reductions in demand due to unemployment caused by the wage rise. It also indicated it was paying more attention to the underemployment issue.

But the Commission also emphasised that the tax-transfer system (including further rounds of tax cuts) was continuing to support low-income earners even in the absence of a wage rise:

Wage-earning households, especially those with children, also received a considerable boost to their disposable income during the 2008–09 financial year as a result of the Australian Government’s economic stimulus packages. These payments should have helped to mitigate financial pressures for many families. The additional support provided by them has enabled the Commission to make a cautious decision designed to protect employment in the short term, pending the next wage review in 2010.

The Commission also noted — possibly slightly tartly — “these increases in real disposable income for low-paid employee households contrast with the situation of unemployed people, whose incomes are increased only for movements in the Consumer Price Index and who received no payments under the recent economic stimulus packages.”

The Commission has been a strong advocate of exactly the approach used by the Hawke Government and accepted by the ACTU in the 1980s: the maintenance of income, particularly for low-income earners, isn’t merely about wages but about how much is lost in tax and how much is received via transfer payments and other social services. And in difficult economic circumstances, the tax-transfer system can play a greater role in supporting incomes than wage rises, which will reduce demand for low-skilled labour or even tip some marginal businesses over the edge.

Those who vilified Harper before he even started the job might look back on the Commission’s four decisions and wonder whether he is owed an apology.

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