Penalty rate cuts are bad for the economy, say 78 experts

Seventy-eight Australian economists have signed an open letter criticising the Fair Work Commission’s decision to slash penalty rates.

The letter, written by Stephen Koukoulas, Jim Stanford and John Quiggin, warned the wage cut will hurt vulnerable groups and be a blow to the economy and government tax revenue, all without any solid evidence of a boost to employment.

Dr Koukoulas, former economic advisor to Julia Gillard, told The New Daily he was surprised by the strong reaction. “It’s really something that’s struck a nerve in the economics profession and in the general community.”

The Commission decided on February 23 to cut penalty rates for Sunday work in the retail, hospitality, fast food and pharmacy industries, where workers do not have an enterprise bargaining agreement (EBA).

The key argument put forward by business groups was that the wage cut would create jobs, which the letter directly contradicted.

“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,” the economists wrote.

“Statistical data confirms 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.”

During their review of the economic literature, Dr Koukoulas and his fellow authors found “no strong link between the level of wages or wage cuts and an improvement in the labour market, which goes to the question: why did they make that decision?”

Instead of boosting jobs in affected sectors, Sunday employment could instead cannibalise working hours from Monday through Saturday. Or workers might simply supply less of their labour, Dr Koukoulas said.

“We consumers only spend X dollars per week. It doesn’t mean we’re going to spend any more.”

One of the big economic problems the Reserve Bank is currently struggling with is that households, which contribute roughly half of Australia’s gross domestic product (GDP), aren’t spending enough, as recent retail data showed. This is reflected in below-target inflation (1.5 per cent), sluggish economic growth (2.4 per cent) and record-low wage growth (1.9 per cent).

This makes any blow to spending power, via wage cuts in the absence of new jobs, a serious threat to economic growth and government revenue, Dr Koukoulas told The New Daily.

“There’s no two-ways about it. We have had a very soft demand side to the economy, given spending’s been weak, and that’s the lion’s share of the economy.

“We’ve been struggling to get GDP anything above 2.5 per cent. In fact, we haven’t really sustained that for several years now. And wage cuts don’t seem to be the thing that’s going to help that along.”

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