The Safety Net and the Role of the Industrial Relations Commission
Alison McClelland
Discussion on paper by David Peetz for the Conference Economics and Industrial Relations:
Reappraising the Relationship
Conference in Honour of Professor Emeritus Joe Isaac
4-5th December 1997,
Australian National University
Introduction
It is gratifying to be asked to act as discussant to David Peetz’s paper and to contribute to a
conference in honour of Professor Joe Isaac. It reflects some recognition by the conference
organisers of the link between wages and welfare and the critical contribution that wages make to
the living standards of Australians.
It was that link, thrown into relief by the marked changes in our economy, work force and wage
setting, that prompted the Brotherhood of St Laurence (BSL) and the Australian Council of Social
Service (ACOSS) to take the unprecedented step of intervening in the Industrial Relations
Commission’s (AIRC) hearing of the ACTU’s Living Wage claim in 1996. We were concerned that
such changes were undermining the capacity of employment to provide people with a decent
standard of living and that they were also promoting significant social division.
In my comments today I will draw on those submissions, alongside some more recent evidence, to
elaborate on some of the points made by David.
David makes three critical points in his paper. First, when making its decisions the AIRC has a
legislative responsibility to take into account the needs of the low-paid and also the need to provide
fair minimum standards in the context of living standards prevailing in the Australian community.
He expresses some concerns about the achievements of these criteria because of the growing gap
between those reliant on safety net adjustments (more likely to be low-paid) and those benefiting
from enterprise bargaining. I will spend most time elaborating this point, noting that the later
session on “whom do Minimum Wages protect” is highly pertinent to this issue.
David’s second and major point is that reasons given for the AIRC’s conservative approach in its
recent decision (which awarded a relatively low safety net increase) were misplaced. Much of this
is well made and I will not elaborate, apart from commenting briefly on the relationship between
wages and unemployment.
Third, David proposes an approach to help ensure that the real earnings of employees on award
minima do not decline over the medium term. I will conclude with some comments about this.
In these comments I am essentially agreeing with the thrust of David’s argument—which is that the
AIRC was too conservative in its decision and that in future (including in its consideration of the
current ACTU claim) the AIRC should take a more generous approach to the lowest paid.
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Inequality and hardship
The main reason is that Australia has seen a sustained increase in the inequality of wage earnings in
Australia, possibly producing hardship and a poor quality of life for many over a prolonged period.
In the future the adverse impact on living standards may not be sufficiently moderated by the social
wage.
The general and consistent findings of numerous studies of income distribution in Australia is that
an increase in inequality in wage and salary earnings has occurred, including amongst full-time
workers. This increase was probably higher in the 1970s and in the 1990s. While it was not so
marked during the 1980s, during that decade it was accompanied by a decline in the real earnings
for low wage full-time workers, and this fall was not sufficiently redressed in the 1990s. As a
result, full-time low wage earners have experienced a real decline in their earnings over the period
1982 - 94 (Harding 1997). This trend has continued to 1997 with growing differentials between
those obtaining wages from enterprise bargaining and those dependant on safety net adjustments,
and with declining real earnings for some low-paid workers (Access Economics 1997). Some BSL
analysis has also indicated a decline in the real earnings of part-time workers (Ford and Siemon
1995).
While the increase in inequality does not necessarily indicate waged poverty, NATSEM (1996) data
suggests the possibility of just under 200,000 income units (roughly equivalent to family income)
where at least one person was in full-time work and where income was less than 100 per cent of the
Henderson Poverty Line and 500,000 in similar situations on less than 110 per cent of the
Henderson Poverty Line. Such data raise concerns that a substantial number of wage earners may be
experiencing hardship.
In a recent report the OECD finds that countries which have a higher incidence of low-paid work
tend to have higher poverty rates overall (OECD 1997).
The OECD further cautions against the assumption that the experience of low pay and low income
may be temporary. A considerable number of low-paid workers do not move up into higher
incomes over a five year period (OECD 1997).
It is generally acknowledged that this is less likely to apply to younger workers. However recent
work by the BSL (McClelland, Macdonald and MacDonald 1997) indicates that a sizeable minority
of teenagers who are not studying, may be stuck for a considerable time in lower-paid casual and
part-time work.
For the Living Wage case the BSL interviewed a small number of adult low wage earners (21) and
amongst other things, we asked them about their living standards and quality of life. Most of the
participants in our study were receiving wage earnings between $20,000 to $25,000 per annum.
The key findings of this study were that the low wage earners experienced:

a continual juggling of expenses, often serious financial hardship and a lack of capacity to
afford items such as reasonable housing in convenient locations, some medical expenses (for
example pharmaceuticals, dental and ambulance fees, and education and fuel costs;

few recreational opportunities;

use of emergency relief and Op shops to make ends meet;

an adverse impact on family and social life; and

a concern about the long-term impact of low family finances on children.
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Some comments from study participants include the following:
‘I don’t have enough money to go out and buy new clothes, new sneakers or to go to the pictures.
It’s been three or four years since we’ve gone to the pictures.’ (Fred)
‘Last winter, you know, there was just my son and I in the house, my heater broke down and I ran
out of firewood. I sat and froze. I sat and cried because I was cold. My mother ended up paying
for it and that’s degrading. You know that’s the only way you’ll get it fixed.’ (Barbara)
‘I don’t have a social life. I have to work weekends because of the penalties because if I was
working Monday to Friday I’d only be earning about $270 a week. I couldn’t live off that...I feel
they should be giving us decent wages to live on in accordance with the cost of living. They
couldn’t live off $300 a week could they? How do they expect us to live off $300 a week?’
(Christina) (Brotherhood of St Laurence 1996)
Study participants also talked about having to work harder with little monetary gain or promotion—a
reflection of David Peetz’s broad important point that work intensification has increased for both the lower
and the more highly paid, but those who have engaged in enterprise bargaining have received some wage
increases in return, in contrast with others who have not.
In general, for many low wage earners, the quality of life on low wages equated to a feeling of social
exclusion; not feeling normal and experiencing stress and depression and social isolation.
The role of the social wage
There have been some suggestions that the adverse effects of declining wage among low-paid and
increasing wage inequality could be overcome through a greater reliance on the social wage and we
have seen proposals for the introduction of further wage supplements through, for example, some
form of guaranteed minimum income. Certainly the social wage, and in particular the payments to
low-wage families which were introduced in the 1980s, has been very important in moderating
poverty and inequality in Australia and further wage supplements may be necessary in the future.
However there are limits to the extent that this approach can be used as a substitute for reasonable
wages.
First there are efficiency costs associated with an excessive reliance on the social wage which
include:

the financing costs; and

the high effective tax rates that are likely to occur, especially for low to moderate wage
earners as income-tested wage top-ups or service subsidies are tapered off. A recent study
by Ingles (1997) points to the unsustainability of the current effective tax rates faced by low
wage working families. He shows that such families face effective tax rates higher than 80
or 90 per cent with some facing effective tax rates of well over 100 per cent. It is extremely
unlikely that wage supplements would be provided to everyone, which is the only sure way
to prevent higher effective marginal tax rates.
The second problem is that the social wage may not end up providing effective protection to low
wage earners. This is partly because of the political difficulties of obtaining the substantial increase
in expenditure and taxation which would be necessary to finance the increase in the social wage.
Within a climate of expenditure restraint and resistance to increasing revenue, it has been extremely
difficult to obtain support for government revenue at levels sufficient to provide decent protection
for living standards at existing wage levels, let alone the increase that would be required if wages
were to be lower.
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Indeed, lowering wages may lead to worse social protection. It is also unlikely that social security
payments would remain at existing levels, as there would be a community concern about
replacement rates (that is the increase in income a person would receive on obtaining a job
compared with the level of income that a person would receive through reliance on unemployment
allowance). Where countries have lowered wages, social security payments have also been lowered.
For example when the New Zealand Government introduced its Employment Contract Act it also
substantially lowered social security payments, especially for unemployed people (ACOSS, ACTU
& AMWU 1996). In the United States where wages are relatively low, so also are social security
payments. A study by Saunders & Hobbes (1988) found that there was a positive relationship
between the redistributive impact of the market and the redistributive role of governments.
Countries where market inequality (including wage inequality) was high had government policies
which were less redistributive than countries where market inequality was lower.
Conclusion
My comments have pointed to the risk of greater hardship and social division if action is not taken
to at least maintain in real terms (if not improve) the position of low paid workers in Australia.
Some argue that we should take this risk because of the positive contribution of increasing wage
dispersion to the reduction of unemployment in Australia—especially for the employment prospects
of low skilled workers. David Peetz raises significant doubts about the need for this, and about the
effectiveness of lowering wages for low-skilled workers as a strategy to reduce unemployment. His
points mirror the doubts of a number of other commentators, including the findings of an extensive
review undertaken by Professor John Nevile (1996). In a recent paper, the OECD (1997) also
cautions about an uncritical acceptance of the view that expanding low-paid employment is a cure
for high and persistent unemployment. But the OECD also finds that the long-standing
disadvantage of low-skilled workers has typically worsened overall.
This suggest that something must be done, and David provides an approach that the AIRC could
adopt in the future. This is to ensure that safety net adjustments are such that real wages of lowpaid workers are maintained at least in the medium term with the further possibility of additional
overall productivity related increases. He also warns that the strategy of pursuing flat rate wage
increases as an approach to containing the growth of inequality in wage earnings may be
unsustainable.
David’s suggested approach deserves full consideration. We need strategies for containing the
damage done to people’s lives in the short to medium term. However in the longer term, such an
approach will not necessarily contain the growth of inequality of earnings and more will be needed.
At the very least such an approach must be accompanied by aggressive and concerted action to
improve the education and training opportunities of disadvantaged workers, particularly of young
people. David’s proposal accepts the limitations of the current legislation—in the long term we
may wish to revisit the possibility of an incomes policy which provides for some restraints on the
part of all, including higher paid workers, and not only on the part of those who are most vulnerable.
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References
Access Economics 1997, Economic Monitor, November, Access Economics Pty Ltd, Canberra.
Australian Council of Social Service, Australian Council of Trade Unions & Australian
Miscellaneous Workers Union 1996, Report on the Study Program on Structural Adjustment and
Social Change: Stage 1 New Zealand, ACOSS & ACTU, Sydney & Melbourne.
Brotherhood of St Laurence, 1996 Written Submission to the National Wage Case, Brotherhood of
St Laurence, Melbourne.
Ford, G & Siemon, D 1995, ‘Poverty and the wages system’, Brotherhood Comment, December,
BSL, Fitzroy, pp 4-5.
Harding, A 1997, The Suffering Middle: trends in income inequality in Australia 1982 -1993-94,
Discussion paper No. 21, NATSEM, University of Canberra.
Ingles, D 1997, Low Income Traps for Working Families, Discussion paper No. 363, Centre for
Economic Policy Research, ANU, Canberra.
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disadvantage: The situation of young people not in education or full-time work, paper presented at
the Learning and Work: The situation of young Australians, Dusseldorf Conference, November 11
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National Centre for Social and Economic Modelling (NATSEM) 1996, Income Distribution Report,
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of New South Wales, Sydney, pp. 198-212.
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