Pay

1
Chapter 11

• Pay

2
Objectives

• Explain the differences between wage as a cost of
  production and wage as an income
• Differentiate between gross and take-home pay,
  nominal and real wage
• Explain the concept of the living wage
• Explain how wages were set in the era of
  centralised wage determination in Australia
• Explain how wages were set in the period of the
  Prices and Incomes Accord
• Explain why there was a shift towards
  enterprise-based bargaining to determine wages in
  the early 1990s
• List the different mechanisms or processes
  through which wages are currently determined in
  Australia
• Explain why pay differs across jobs, industries
  and individuals

3
Objectives (contd)

• Explain how wages impact on economic performance
• Explain the reason for having safety net wage
  adjustments
• List the principles behind safety net wage
  adjustment decisions
• Outline the functions of the Australian Fair Pay
  Commission
• Discuss wage-setting arrangements under the Rudd
  government
• Explain how wages are set within organisations
  that have an internal labour market
• Explain what is meant by productivity and what
  the relationship is between productivity and
  wages
• Explain why it is diffi cult to measure average
  wage increases
• List those factors that contribute towards
  growing wage dispersion in Australia.

4
Features of Wage Setting In Australia

• The four features that stand out regarding the
  contemporary methods of wage determination in
  Australia are its
• Diversity in terms of the range of processes
  through which wages can be set
• The underlying tension that has always persisted
  between equity (especially the needs of the low
  paid) and efficiency (the impact of wage
  increases on the economy)
• The range of criteria available for awarding wage
  increases, this reflects the diversity of
  instruments available
• The presence of formal and informal methods of
  wage settlement individual and collective methods

5
Different Wage Concepts

• Nominal wage money wage per period
• Real wage the purchasing power of wages
  nominal wage adjusted for inflation
• Take home wage nominal wage less deductions
  such as income tax

6
Centralised Wage Determination

• Minimum wage as the living wage see the
  harvester case
• Margins for skill based on work value and wage
  relativities the metals industry award as a
  key benchmark
• The total wage combine minimum wage and margins
• Over award payments also present - how
  determined?

7
Centralised Wage Determination Principles

• The wage set should not lead to further wage
  claims or industrial disputation
• Maintain the purchasing power of wages the
  indexation of wages
• Adjust wages according to the capacity of
  industry to pay
• Meet the needs of the low paid

8
Award Wage Adjustment Principles

• At the level of awards the important principles
  were comparative wage justice and work value
• The assessment of work value usually involved a
  consideration of the conditions of work and the
  skills required to perform work
• Dabscheck and Niland (1981 322-323) list the
  principal criteria associated with the Printing
  Industry Case of 1947. These principles were
• a change in material circumstances since the last
  case
• the true value of work being performed
• this principle should consider the rates payable
  in comparable industries or occupations

9
Wage Indexation

• Linking wage increases to increases in the cost
  of living as indicated by changes in the
  consumer price index
• Partial indexation and plateau indexation
  decisions in the 1975-80 era of indexation
• Applied to some phases of the Prices and Incomes
  Accord 1983-1996
• Use of wage trade-offs and partial indexation
  under the Accord to improve the social wage

10
Shift towards Decentralised Wage Determination
1987

• The shift to enterprise-based wage determination
  was gradual, managed and partial
• Why?
• the nature of the economy had changed
• there was a strong argument that productivity and
  capability should be increased at the enterprise
  level in order to enhance international
  competitiveness.
• the centralised control through the Accord had
  meant that the wage structure remained rigid and
  controlled, real wages had declined - pressure
  in some sections of the workforce for real wage
  increases.
• employer associations were strongly lobbying for
  a decentralised wage setting system, linking this
  to improvements in national competitiveness
• Improved labour flexibility (see ch.4)

11
Current Wage Setting Arrangements

• National wage cases these now only apply to
  minimum wages and for workers who cannot conclude
  an enterprise bargain with their employer (now
  known as safety net wage increases)
• Awards a system of award wage determination
  still exists, largely in the State industrial
  relations system Federal awards have been
  consolidated and simplified
• Workplace collective agreement making are
  agreements between employees and managers may
  involve a trade union are registered with
  industrial tribunals
• Informal individual agreements (also known as
  common law contracts) largely determined on the
  basis of accepting a wage offer from management

12
The Australian Fair Pay Commission (AFPC)

• Established under Work Choices - The purpose of
  the AFPC was to review the national minimum wage,
  determine special minimum wages (for example, for
  junior employees), determine minimum award wages
  through the Australian Pay Classification Scales
  and review the loadings paid to casual workers.
• In setting the national minimum wage (NMW) the
  AFPC had to have regard to
• the capacity of the low paid to remain in
  employment and the capacity of the unemployed to
  obtain work
• employment and competitiveness across the economy
• providing a safety net for the low paid

13
Minimum Wages Panel 2009

• The Minimum Wages Panel will conduct its annual
  wage reviews through a non-adversarial process,
  and will do so openly and transparently.
• All updated wage rates in modern awards take
  effect from the first pay period on or after 1
  July each year and are enforceable by law.
• The Minimum Wages Panel will also set a national
  minimum wage for employees who are not covered by
  a modern award.
• It will be able to set minimum wages for junior
  employees, employees to whom training
  arrangements apply and employees with a
  disability.

14
Minimum Wages Panel 2009 (contd)

• The Minimum Wages Panel will set a safety net
  casual loading for casual employees who are not
  covered by either an award or an agreement.
• When setting and adjusting minimum wages, the
  Minimum Wages Panel will take into account
• the performance and competitiveness of the
  national economy, including productivity,
  inflation and employment growth
• promoting social inclusion through increased
  workforce participation
• relative living standards and the needs of the
  low paid and
• providing a comprehensive range of fair minimum
  wages for junior employees, employees to whom
  training arrangements apply and employees with a
  disability.

15
Methods of Setting Pay

• In May 2006 the distribution of pay setting was
  as follows
• award only 19 per cent of employees
• collective agreement 41 of employees
• individual agreements 35 per cent of employees
  (of which 3 per cent were registered, largely
  AWAs)
• (the other 5 per cent covered working proprietors
  of incorporated businesses)
• since 2000 the trend has been for a declining
  share of award only coverage (from 23 to 19 per
  cent) and an increase in collective agreement
  coverage (from 37 to 41 per cent).

16
Methods of Setting Pay (contd)

• In terms of occupation award coverage was
  relatively high for community and personal
  service workers and sales workers (both female
  dominated occupations). Collective agreements
  were important for professionals and technicians
  and trades workers. Individual agreements were
  the main instrument for setting the wages of
  managers.
• In terms of industry accommodation, cafes and
  restaurants had 57 per cent of employees under
  award pay setting. In the utilities sector 84 per
  cent of employees were covered by collective
  agreements. 67 per cent of employees in the
  mining sector were covered by individual
  agreements.

17
Why do Wage Rates Differ?

• System or jurisdiction of wage determination?
  There are different mechanisms or instruments for
  determining wage rates, from awards through to
  individual agreements.
• But why do pay rates differ?
• There are differences in skill, qualifications
  and experience.
• Where you work has an impact on your pay. Large
  firms pay better than small firms.
• Personal characteristics are also important.
• The occupation you work in can also be important.
  If there are strict controls over entry into the
  occupation, then supply can be limited and
  shortages can push up wage rates.
• The industry of employment. See large wage
  differences by industry. Why? Different
  occupational mixes differences in demand
  conditions.
• Institutions are also important. Trade unions can
  bargain collectively on behalf of members,
  professional organisations can set fee schedules.
  

18
Why are There Pay Differences within Firms or
Under the Same Award?

• The job description the tasks and functions
  performed different jobs are accorded different
  pay levels.
• The experience and qualifications required
  there are grades assigned to the different
  occupations.
• The hours worked the obvious difference is
  between full-time and part-time hours, but there
  are also penalty rates for over-time.

19
Why are There Pay Differences within Firms or
Under the Same Award? (contd)

• The days that are worked there are higher pay
  rates for weekends and public holidays.
• The form of employment full-time, part-time,
  casual.
• The age of the worker junior rates are below
  adult rates and linked to the age of the worker.
• Allowances penalty rates for shifts payments
  for uniforms payments for training, travel.

20
Wages and Economic Performance

• How do wages affect economic performance? There
  are a number of different mechanisms
• Wage increases raise the costs of production,
  this can lead to higher product costs (inflation)
  and reduced labour use, and lead to job loss
  this is known as cost push inflation.
• If wage increases are also associated with
  productivity increases (workers working harder,
  longer hours, using new or better equipment, or
  working more more efficiently) then nominal wage
  increases need not have the above effect, as
  higher labour costs are offset by increased
  output.

21
Wages and Economic Performance (contd)

• How do wages affect economic performance? There
  are a number of different mechanisms (contd)
• Wage increases lead to increase take home pay,
  this can lead to increased expenditure and
  increase the demand for labour (more jobs) but
  also lead to pressure on prices (this is the case
  of demand pull inflation).
• Higher wages may force businesses to economise on
  their use of labour (fewer jobs) and substitute
  capital equipment for labour this will raise
  productivity and reduce the costs of employing
  labour (this is known as capital-labour
  substitution).

22
Decentralised Wage Setting and Economic
Performance

• How can wages impact on performance impact on
  inflation employment competitiveness?
• Impact of more decentralised wage determination
  system Burgess and Preston (2003 191) argued
  that such wage setting arrangements are
• less likely to be inflationary since wage
  increases are staggered through time and are
  different across industry (wage relativities or
  the wage structure is much more flexible)
• associated with greater dispersion in wage
  increases and growing wage inequality

23
Safety Net Wage Increases

• Wage adjustments for the low paid those outside
  of agreement making
• Annual case heard by the AIRC before 2006 by the
  Low Pay Commission 2006-2008 by the Minimum
  Wages Panel from 2009
• Submissions from federal and state government
  ACTU employer groups welfare groups community
  groups

24
Other Reasons for Wage Changes

• Wage increases negotiated through collective
  agreements
• Changes in hours of work or days of work
  overtime and penalty rates
• Changes in tasks of work reclassification of
  job
• Performance-related pay increases and bonuses
• Promotion and grade progression

25
Organisational Wage Determination

• Related to the internal labour market
• Use of job evaluation to compare and rank jobs
  and establish a wage hierarchy
• Possible criteria skill, qualifications,
  experience, conditions, responsibility

26
Productivity and Wages

• Productivity what is it? different
  productivity concepts
• Productivity does not equal effort
• Many sources of productivity growth
• Many occupations are not productive non-market
  activity, supporting other activities
• Wage increases are one avenue for distributing
  productivity gains
• Problems of linking wage increases to
  productivity growth

27
Interpreting Average Wage Increases

• Different measures average weekly earnings
  full-time average ordinary time weekly earnings.
• Reasons for increase higher wage rates
  compositional changes to the workforce changes
  in average hours worked.
• More difficult to interpret with enterprise
  bargaining could be wage trade-offs receiving
  wage increase for longer hours, shorter holidays.

28
Growing Wage Dispersion

• Strong wage growth for the highest paid,
  moderate/no wage growth for the low paid.
• Facilitated by decentralised bargaining greater
  dispersion of wage outcomes and higher wage
  increases to those with market power.

29
Non Wage Benefits

• Holidays, long service leave, other benefits
  e.g. travel and uniform allowances, telephone
  allowances.
• Access-related to employment conditions (casuals
  usually excluded) duration of service and pay
  rates.
• Extent of disparity greater once non-wage
  benefits are included.
• Protecting non wage benefits.

30
Executive Salaries

• Forms of remuneration stock options, bonuses
• Individually bargained
• Executive payments and firm performance

31
Conclusion

• Wages are an ambiguous concept
• Australia has moved from centralised to
  decentralised systems of wage determination
• Currently there is a hybrid system of wage
  determination
• There continues to be centralised wage-setting
  for the low paid
• Wage dispersion in Australia has been growing
• The extent of dispersion is greater if non-wage
  benefits are considered
• A decentralised system is likely to be less
  inflationary and have greater wage dispersion
  than a centralised wage determination system