Explainer: What the new minimum wage really means for workers

Workers will see a percentage increase in their pay packet from today. AAP/Greg Wood

Fair Work Australia’s annual wage determination takes effect today. Importantly, we’re set to see award wages rise not by a single dollar sum, as in the past, but by 3.4%.

This goes someway to addressing an often overlooked aspect of our wage fixing system that has seen the pay of many award-reliant workers decline in real terms since safety net reviews were instigated in the mid-1990s.

Fair Work Australia took over the job from the Fair Pay Commission last year, and that body in turn superseded the federal industrial relations tribunal which had set Australian wage rates for a century.

Australia’s unique approach

Australia has always had a fairly distinctive method of minimum wage fixing.

For example, Britain’s Low Pay Commission recommends a single minimum wage, as does the US Congress.

But whilst the dollar amount of Australia’s federal minimum wage drives headlines each year, the Australian tribunals and commissions have never set just a single minimum wage.

Rather they set an entire wage sale. It applies to all award-reliant workers: that is, those who have been unable to bargain a rate above the minimum rates for their relevant industry and skill level.

So a lot of workers whose pay is set by Fair Work Australia are not on the federal minimum wage, but on higher award rates.

What’s the real increase?

Recent research by Fair Work Australia shows that in 2006 when the federal minimum wage was around $13 an hour, only about 6 per cent of ongoing adult award-reliant employees earned that amount.

Seventy per cent earned over $15, including around 20 per cent earning over $21 and 10 per cent over $27 per hour.

But it was the practice of the Fair Pay Commission and, before it, the Australian Industrial Relations Commission, to award dollar increases in wage scales.

A dollar increase of, say, $15 or $20 to the weekly federal minimum wage was invariably reported as a 2 or 3 or 4 percent wage rise, and often assessed against indicators such as the percentage increase in the cost of living or average earnings and so on.

Yet workers on rates above the federal minimum wage were not given a percentage increase in their pay - they were given the flat dollar increase. And the percentage value of a nominal dollar increase declines as one moves up the rates.

Enterprise agreements

Award-reliant workers therefore fared poorly compared with workers covered by enterprise agreements. Most enterprise agreements provide for (usually staggered) percentage pay increases across the life of the agreement to all workers covered by the agreement.

A couple of things flow from this.

Firstly, it meant a significant proportion of award-reliant workers above the lowest unskilled award rates, but probably earning below average weekly earnings, were paid low rates in comparison to most workers at that skill level.

Secondly, the real wages of many award-reliant workers fell in real terms.

Famously, in 2009 the Fair Pay Commission delivered no increase to award rates, citing the global financial crisis. The union movement protested that all award-reliant workers got a real wage cut.

But the chair of the Fair Pay Commission, Professor Ian Harper, had boasted as early as its 2006 decision that the Commission’s favoured approach had, largely unnoticed, delivered a real wage cut to award-reliant workers above the bottom two rates.

Again, in 2008 the Fair Pay Commission gave an adjustment of $21.66 per week. This amounted to a 4 percentage adjustment of the federal minimum wage which was more or less in line with the CPI.

For federal minimum wage workers, their real wage was retained. But for all those award-reliant workers above the federal minimum wage, a flat dollar increase of $21 was less than a CPI increase: that is, for these workers their real wage declined.

Award wages

The problem wasn’t limited to the Fair Pay Commission. The Commission’s predecessor, the Australian Industrial Relations Commission, pursued a similar path of awarding flat dollar increases in its annual wage reviews in the early 1990s, sometimes even specifying a lesser dollar amount for workers higher up the pay scale.

Recent research by Josh Healy of Flinders University shows that across the period 2002 to 2006 it appears that only workers on the lowest four classifications actually received real wage increases. Other award-reliant workers saw their real wages decline.

The entire structure of award wages is meant to operate as a “safety net” underpinning enterprise agreements. To reduce the real value of award rates seems to amount to an unravelling of the safety net rather than its maintenance.

There is a certain irony to all this.

The politics of pay

Across its 11 year term, the Coalition government often pushed for amendments to its Workplace Relations Act that would have limited the federal tribunal’s wage reviews to those clustered near the bottom of the earnings distribution - at or below the C10 classification (“tradesperson”) of the Metal Industries Award.

Given the figures from the Fair Work Australia research quoted earlier, this would have excluded around 70 percent of award-reliant workers from the benefits of the tribunal’s decisions.

This would have made the Australian wage setting mechanism look a lot more like overseas models: setting a single minimum for the very low paid whilst not being concerned with anyone else.

Prior to 2005 these moves were defeated in the Senate, and the Coalition did not use the opportunity provided by Work Choices to enshrine this approach in the new legislation.

But both the Fair Pay Commission’s approach to wage setting and, as Healy’s research shows, before that the Australian Industrial Relations Commission, achieved what the Howard government sought in terms of outcomes: no real wage increases for award-reliant workers above the C10 rate.

Last year Fair Work Australia queried the use of dollar increases over percentage increases. Now it has finally addressed the issue and will make a real difference to the value of the wages people get in their pockets.

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