PR002003

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AUSTRALIAN INDUSTRIAL RELATIONS COMMISSION

Workplace Relations Act 1996

s.113 applications for variations

s.108 references of applications to vary

Australian Liquor, Hospitality and Miscellaneous Workers Union

CHILD CARE INDUSTRY (AUSTRALIAN CAPITAL TERRITORY) AWARD, 1998

(ODN C No. 3697 of 1985)

[Print Q2724 [AW772250CRA]]

(C2002/2281)

LAUNDRY INDUSTRY (VICTORIA) AWARD 1998

(ODN C No. 21626 of 1992)

[Print Q6887 [AW787052]]

(C2002/2282)

BUILDING SERVICES (VICTORIA) AWARD 1994

(ODN C No. 21726 of 1992)

[Print L2955 [AW769594]]

(C2002/2283)

THE HOSPITALITY INDUSTRY - ACCOMMODATION, HOTELS, RESORTS AND GAMING AWARD 1998

(ODN C No. 389 of 1975)

[Print P9138 [AW783479]]

(C2002/2284)

Construction, Forestry, Mining and Energy Union

TIMBER AND ALLIED INDUSTRIES AWARD 1999

(ODN C No. 31 of 1950)

[Print R5055 [AW800937]]

(C2002/4268)

National Union of Workers

RUBBER, PLASTIC AND CABLE MAKING INDUSTRY - GENERAL - AWARD 1998

(ODN C No. 1800 of 1982)

[Print R4420 [AW794720]]

(C2002/5545)

GROCERY PRODUCTS MANUFACTURE - MANUFACTURING GROCERS AWARD 1996

(ODN C No. 1152 of 1985)

[Print P1412 [AW782558]]

(C2002/5546)

STORAGE SERVICES - GENERAL - AWARD 1999

(ODN C No. 32518 of 1992)

[Print R1040 [AW796791]]

(C2002/5547)

COMMERCIAL SALES (VICTORIA) AWARD 1999

(ODN C No. 31107 of 1993)

[Print R1382 [AW772623]]

(C2002/5548)

Australian Municipal, Administrative, Clerical and Services Union

VICTORIAN LOCAL AUTHORITIES AWARD 2001

(ODN C No. 36277 of 1989)

[PR910776 [AW811556]]

(C2002/5558)

CLERICAL AND ADMINISTRATIVE EMPLOYEES (VICTORIA) AWARD 1999

(ODN C No. 34749 of 1995)

[Print S1367 [AW773032]]

(C2002/5559)

Transport Workers' Union of Australia

TRANSPORT WORKERS AWARD 1998

(ODN C No. 1520 of 1982)

[Print Q8693 [AW799474CRN]]

(C2002/5569)

Automotive, Food, Metals, Engineering, Printing and Kindred Industries Union

GRAPHIC ARTS - GENERAL - AWARD 2000

(ODN C No. 22956 of 1995)

[Print S1716 [AW782505CR]]

(C2002/5639)

METAL, ENGINEERING AND ASSOCIATED INDUSTRIES AWARD, 1998 - PART I

(ODN C No. 2568 of 1984)

[Print Q2527 [AW789529]]

(C2002/5640)

VEHICLE INDUSTRY AWARD 2000

(ODN C No. 1522 of 1979)

[Print T3920 [AW801818]]

(C2002/5692)

THE VEHICLE INDUSTRY - REPAIR, SERVICES AND RETAIL - AWARD 1983

(ODN C No. 1339 of 1974)

[Print H5658 [AW801827CRA]]

(C2002/5693)

Health Services Union of Australia

HEALTH AND ALLIED SERVICES - PRIVATE SECTOR - VICTORIA CONSOLIDATED AWARD 1998

(ODN C No. 33278 of 1994)

[Print Q2805 [AW783872]]

(C2002/5674)

Shop, Distributive and Allied Employees Association

RETAIL AND WHOLESALE INDUSTRY - SHOP EMPLOYEES - AUSTRALIAN CAPITAL TERRITORY - AWARD 2000

(ODN C No. 30030 of 1993)

[Print T3309 [AW794740]]

(C2002/5679)

The Australian Workers' Union

HORSE TRAINING INDUSTRY AWARD 1998

(ODN C No. 3039 of 1975)

[Print R5058 [AW783476]]

(C2002/5694)

Textile, Clothing and Footwear Union of Australia

CLOTHING TRADES AWARD 1999

(ODN C No. 696 of 1980)

[Print S1147 [AW772144CRA]]

(C2002/5716)

Various employees	Various industries
JUSTICE GIUDICE, PRESIDENT
VICE PRESIDENT ROSS
VICE PRESIDENT LAWLER
SENIOR DEPUTY PRESIDENT WATSON
SENIOR DEPUTY PRESIDENT LACY
COMMISSIONER HOFFMAN
COMMISSIONER LARKIN	MELBOURNE, 6 MAY 2003

CONTENTS

			Paragraph
List of Main Abbreviations
The ACTU's Claim			1
Outline of Responses to the Claim			3
	Employers		3
	Governments		12
	Other Interveners		14
Economic Conditions and Outlook			19
	Submissions of the Parties		19
		The ACTU	19
		The States and Territories	28
		The Commonwealth	31
		ACCI	33
		AiG	39
		MPMSAA	43
		The Retail Motor Industry	44
		NFF	46
		PIAA	48
		WAFFIA	49
	Indicators of Recent Past Economic Activity		50
		Economic Growth	50
		Private Sector Investment	51
		Exports and Imports	52
		Prices	53
		Earnings	54
		The Labour Market	56
		Productivity	65
		Profits	66
		Conclusions from Aggregate Economic Data	67
	Sectoral Considerations		68
		Manufacturing	69
		Agriculture	72
	The Immediate Economic Outlook		79
	The Cost of the ACTU's Claim		98
		Direct Cost of the ACTU's Claim	98
		Conclusions on the Direct Cost Impact of the ACTU's Claim	115
		Indirect Cost of the ACTU's Claim	122
		Conclusion on the Cost of the ACTU's Claim	139
	The Economic Effects of Safety Net Adjustments		141
		Employment	147
	Conclusions in Relation to Employment Effects		175
		Wages Growth and Inflation	178
		Productivity	180
		Conclusion on Economic Considerations	185
Needs of the Low Paid and Living Standards Generally			191
	Conclusion		220
DEAC and Section 88B(3)(c)			231
Decision on the ACTU's Claim			241
Statement of Principles and Related Matters			254
Orders			294
Attachment A - Statement of Principles

LIST OF MAIN ABBREVIATIONS

In this decision the following abbreviations are used:

AACS:	Award and Agreement Coverage Survey 1999
ABARE:	Australian Bureau of Agricultural and Resource Economics
ABS:	Australian Bureau of Statistics
ACCER:	Australian Catholic Commission for Employment Relations
ACCI:	The Australian Chamber of Commerce and Industry
ACOSS:	Australian Council of Social Service
Act:	Workplace Relations Act 1996
ACTU:	Australian Council of Trade Unions
AENA:	Average Earnings National Accounts basis
AiG:	The Australian Industry Group and the Engineering Employers Association, South Australia
April 1997 decision:	Safety Net Review - Wages April 1997 decision [Print P1997, (1997) 71 IR 1]
April 1999 decision:	Safety Net Review - Wages April 1999 decision [Print R1999, (1999) 87 IR 190]
AWIRS:	Australian Workplace Industrial Relations Survey
AWOTE:	Average Weekly Ordinary Time Earnings
CPI:	Consumer Price Index
DEAC:	Disability Employment Action Centre and the National Council on Intellectual Disability
DEWR:	Department of Employment and Workplace Relations
EEH Survey:	ABS Survey of Employee Earnings and Hours, May 2002
EMTR:	Effective Marginal Tax Rates
GDP:	Gross Domestic Product
GNFP:	Gross Non-Farm Product
GOS:	Gross Operating Surplus
GST:	Goods and Services Tax
May 2000 decision:	Safety Net Review - Wages May 2000 decision [Print S5000, (2000) 95 IR 64]
May 2001 decision:	Safety Net Review - Wages May 2001 decision [PR002001, (2001) 104 IR 314]
May 2002 decision:	Safety Net Review - Wages May 2002 decision [PR002002, (2002) 112 IR 411]
MPMSAA:	The Master Plumbers' and Mechanical Services Association of Australia
MYEFO:	Mid-Year Economic and Fiscal Outlook
NATSEM:	National Centre for Social and Economic Modelling
NFF:	National Farmers' Federation
OECD:	Organisation for Economic Co-operation and Development
PIAA:	Printing Industries Association of Australia
RBA:	Reserve Bank of Australia
Retail Motor Industry:	Victorian Automobile Chamber of Commerce, the Motor Trades Associations of New South Wales, Queensland, South Australia, Western Australia, the Australian Capital Territory and the Northern Territory and the Service Station Association of New South Wales
SNA:	Safety Net Adjustment
States and Territories:	States of New South Wales, Victoria, Queensland, Western Australia, South Australia, Tasmania and the Australian Capital Territory and Northern Territory
TRYM:	Treasury Macroeconomic Model
WAFFIA:	Western Australian Farmers Federation Industrial Association
WCI:	Wage Cost Index

REASONS FOR DECISION

THE ACTU'S CLAIM

[1] The Australian Council of Trade Unions (ACTU) claims a $24.60 per week increase in all federal award wage rates with a commensurate increase in wage-related allowances. In pursuit of that claim applications under s.113 of the Workplace Relations Act 1996 (the Act) were filed by unions in November 2002 to vary a number of awards. In support of its claim, the ACTU pointed to evidence which it submitted overwhelmingly established the following five propositions:

(1) the needs of the low paid demand that the Commission should award the greatest amount it can, consistent with economic responsibility;

(2) the Australian economy is growing strongly, despite one of the worst droughts in a century and international uncertainty;

(3) the $18 increase awarded by the Commission last year had no adverse economic impact;

(4) next financial year, when this year's safety net adjustment will take effect, the economy is expected to be even stronger than this year; and

(5) the $24.60 increase will have a negligible impact on growth, employment and inflation.

[2] The ACTU submitted that these five propositions having been established, there was no reason for the Commission to refrain from granting its claim.

OUTLINE OF RESPONSES TO THE CLAIM

Employers

[3] All employer organisations and associations represented opposed the ACTU's claim. Most argued that there should be no increase to safety net rates. A common theme running through the submissions of the employers was the likely adverse impact on employment of the ACTU's claim given an uncertain economic outlook particularly in light of the drought, the state of the world economy and international instability. Three of the employer groups placed reliance upon surveys of employers. It was contended that those surveys demonstrated, amongst other things, the adverse effects on employment of the Commission's Safety Net Review - Wages May 2002 decision (May 2002 decision).¹

[4] The Australian Chamber of Commerce and Industry (ACCI) submitted that the ACTU's claim should be rejected because it is ill-timed, economically irresponsible and not industrially justified. It submitted that the award safety net is not currently in need of adjustment and that there should be no increase at this time. In the alternative, if the Commission awarded an increase it should be moderate, confined to lower level classifications and should operate for a period of 18 months. In the further alternative, any increase should operate for no less than 12 months.

[5] The Australian Industry Group and the Engineering Employers Association, South Australia (jointly AiG) supported an increase of $11 per week to award rates of pay, subject to the principle of absorption. AiG submitted that the increase of $24.60 claimed by the ACTU would result in an overall net detriment for both employers and low-income earners, although it conceded that some low-income earners would benefit. In this regard, AiG once again placed particular emphasis on the inter-relationship between wages and the broader social safety net.

[6] AiG also sought clarification of the Commission's Statement of Principles in relation to applications for retrospective safety net adjustments and, in particular, a declaration that delays arising from the Commission's workload in the hearing of applications for safety net adjustments do not constitute "exceptional circumstances" justifying retrospectivity.

[7] The National Farmers' Federation (NFF) also opposed any increase. However, it submitted in the alternative that if the Commission was inclined to award an increase the detrimental impact of drought on rural businesses should be given substantial weight in determining the amount of the increase. It also sought a modification to the Commission's Economic Incapacity Principle to the effect that qualification for the Commonwealth's "exceptional circumstances" assistance for employers affected by the drought ought to be taken as satisfying the requirements of that principle.

[8] The Western Australian Farmers Federation Industrial Association (WAFFIA) submitted that there should be no increase this year.

[9] The Master Plumbers' and Mechanical Services Association of Australia (MPMSAA) supported the submissions of the AiG generally.

[10] The Victorian Automobile Chamber of Commerce, the Motor Trades Associations of New South Wales, Queensland, South Australia, Western Australia, the Australian Capital Territory and the Northern Territory and the Service Station Association of New South Wales (jointly the Retail Motor Industry) all opposed the ACTU's claim, pointing in particular to the position of small business and the effects of drought.

[11] The Printing Industries Association of Australia (PIAA) also opposed the ACTU's claim. It contended that the claim should be rejected but submitted in the alternative that "if any increase is contemplated it should be modest and confined to the genuinely lower paid".

Governments

[12] The Commonwealth opposed the ACTU's claim on the basis of adverse factors affecting the economic outlook and the adverse impact on employment if the ACTU's claim was granted. The Commonwealth did not oppose a "moderate increase of up to $12 per week in the award rates of the low paid" subject to the following qualifications:

"(a) in order to represent a genuine safety net adjustment, it must only be available to award rates up to and including the equivalent of the tradesperson's rate - C10 in the Metal Industries Award - currently $525.20 per week;

(b) it must apply until the next Safety Net Review and be fully absorbed into all above award payments including from enterprise and informal over-award agreements; and

(c) there must be a twelve month gap between the increase awarded by the Commission in its 2002 decision and any increase decided in this case."²

Further, the Commonwealth submitted that if the Commission were to consider awarding an increase of more than $12 per week in the safety net rates, then such an increase should be phased in over not less than 18 months.

[13] The Governments of the States of New South Wales, Victoria, Queensland, Western Australia, South Australia, Tasmania and the Australian Capital Territory and Northern Territory (jointly the States and Territories) supported an increase of $18 per week in the minimum wage and all minimum award rates.

Other Interveners

[14] A number of community organisations made submissions in support of a safety net adjustment. These organisations all submitted that the Commission should have particular regard to the needs of the low paid.

[15] The Australian Council of Social Service (ACOSS) did not propose a specific sum by which the safety net should be adjusted. Instead, it submitted that in the short-term, the Commission should increase minimum wages so as to ensure that they do not fall any further behind movements in average wage rates. It also submitted that over the medium-term the Commission should conduct an inquiry into the living standards of low paid workers with reference to those in the wider community in order to arrive at an objective benchmark for a minimum wage appropriate for a single adult.

[16] The Australian Catholic Commission for Employment Relations (ACCER) supported an increase of the amount claimed by the ACTU to the federal minimum award wage. It submitted that if other award rates were adjusted "the primary beneficiaries should be those at the lower paid levels of the award system". In the alternative it submitted that if the Commission concludes that there is insufficient economic capacity to adjust the federal minimum wage by $24.60 per week, it should increase only the federal minimum wage and do so to the maximum extent possible consistent with relevant statutory requirements.

[17] ACCER also supported the setting of a "benchmark" so that appropriate guidelines within which to judge needs could be established. In this context ACCER submitted that the Commission should conduct an inquiry into the appropriate level of the federal minimum wage, with a view to the implementation of its findings in 2004. It proposed a further inquiry into the relativities between the federal minimum wage and the rates of pay in award classifications, including those overtaken by the adjustment in the federal minimum wage, with a view to implementation of its findings in or from 2005.

[18] The Disability Employment Action Centre, a Commonwealth funded community legal centre, and the National Council on Intellectual Disability, a national body representing people with disabilities, (jointly DEAC) supported the ACTU's claim. DEAC also made independent submissions concerning the position of workers with disabilities, including in particular:

• the inclusion of the supported wage clause in all awards;



• amendment of the statutory declarations required by the Australian Industrial Relations Commission Rules 1998 to be filed in relation to applications for certification of agreements, the purpose of the amendments being to provide safeguards in relation to workers with disabilities; and



• the establishment of principles for the certification of enterprise agreements covering workers with disabilities or, in the alternative, that the Commission under s.133 of the Act establish an industry consultative council, to be chaired by a member of the Commission.

ECONOMIC CONDITIONS AND OUTLOOK

Submissions of the Parties

The ACTU

[19] The ACTU submitted that the Australian economy has continued to perform strongly and overall prospects for the coming year are good. While noting the effects of drought and weaker demand overseas, it submitted that the official forecasts suggest that the Australian economy is well placed to remain strong and, in fact, may rebound more strongly during 2003-04.

[20] In relation to specific economic indicators, the ACTU submitted that:

• the Australian economy has continued to show strong resilience since the last safety net decision, with trend growth of 3.2 per cent and 4.0 per cent for the total economy and the non-farm economy respectively, over the year to the December quarter 2002, despite the impact of the drought and a weakened global economy;



• employment conditions have continued to improve with total employment growing by 3.2 per cent over the year to February 2003 in seasonally adjusted terms, with solid growth in both full-time and part-time employment and the unemployment rate now back at the levels recorded before the impact of the Goods and Services Tax (GST) - around 6.0 per cent;



• wages growth has remained moderate and inflation has been subdued;



• while company profits moderated during the middle of 2001, following a record high during the previous period, they have rebounded strongly during the past year to a new record high, consistent with significant growth in the Gross Operating Surplus (GOS) measure of company profits over the past year;



• labour productivity continued to increase solidly during 2002, with the Gross Domestic Product (GDP) per hour worked market sector measure increasing by 3.8 per cent over the year to the September quarter 2002; and



• inflationary pressures remain contained and within the Reserve Bank of Australia's (RBA) target range for the medium-term, with the Consumer Price Index (CPI) up 3.0 per cent since the December quarter 2002.

[21] The ACTU characterised the longer-term growth performance, measured by non-farm GDP growth, as one of consistent growth since the early 1990s, with a total of 44 consecutive quarters of positive growth in trend terms, over which time the economy has expanded at an average rate of around 0.9 per cent per quarter, or 3.8 per cent annually. It highlighted both a sharp moderation in growth, evident following the introduction of the GST in the middle of 2000, and the strong recovery from the GST induced decline in growth in a relatively short period of time. It noted that present GDP and non-farm GDP growth remain around their average growth rates for the present expansion.

[22] The ACTU noted the following comments made by the Treasurer following the release of the December quarter 2002 National Accounts data:

"The good outcome in the December quarter National Accounts is against a backdrop of weak global economic conditions with the prospect of war and rising oil prices. During the quarter, Australia was in the grip of the worst drought in a century. Even so, the domestic economy has remained resilient.

Private business investment increased by 7.4 per cent in the December quarter, and was underpinned by a 14 per cent surge in new machinery and equipment investment. Strong investment by the business community reflects the favourable investment environment in Australia, with low interest rates, high levels of capacity utilisation and strong corporate profitability."³

[23] In assessing the components of growth, the ACTU submitted that:

• consumption remains one of the most important contributors to growth;



• the contribution of investment to GDP growth has also increased significantly over the past year; and



• the positive contribution of exports to GDP has fallen slightly over the past year, with a negative contribution from import growth resulting in a net negative impact on growth.

[24] The ACTU submitted that businesses have generally experienced favourable conditions through the past year, relying on the November 2002 RBA Statement on Monetary Policy:

"The overall financial position of the business sector remains in good shape. Debt levels relative to gross operating surplus have been broadly constant in recent years, following significant reductions in leverage in the early 1990s, and they remain low by historical standards. Interest payments expressed as a share of profits remain at low levels. The combination of ready access to funding at a relatively low cost and strong domestic economic growth has been conducive to a solid recovery in investment spending. Business investment rose by nearly 15 per cent over the year to the June quarter, led by strong increases in spending on both machinery and equipment and buildings and structures; growth in computer software investment picked up only modestly through this period. Despite this growth over the past year, investment as a share of GDP still remains at a relatively low level."⁴

[25] Addressing the immediate economic outlook, relying substantially upon the official forecasts for the Australian and global economy produced by the Commonwealth Treasury and the RBA, the ACTU submitted:

• the official forecasts continue to paint a positive picture of the Australian economy over the foreseeable future, despite the expected impact from the current drought, and in sharp contrast with the weak performance which has continued in much of the rest of the developed world;



• the Australian economy is expected to show continued strength during the coming year, with the official forecasts predicting that Australia's GDP will grow by 3 per cent during 2002-03 (revised down slightly from 3.75 previously forecast as a result of the drought). Growth in the non-farm sector of the economy is expected to remain solid, growing 3.75 per cent during 2002-03. GDP is forecast to grow by 4 per cent during 2003-04; and



• employment growth is forecast to be 1-3/4 per cent in 2002-03 in year average terms and the unemployment rate is forecast to decline through the year to around 6 per cent in June 2003 in line with the original Budget forecasts.

[26] The ACTU cited the Organisation for Economic Co-operation and Development (OECD) assessment of the future course of the Australian economy as follows:

"With monetary conditions remaining supportive and the global environment expected to improve, economic growth is projected to remain robust, despite the current farm drought and a likely downturn in the residential property sector. The labour market may improve further, while the combination of wage moderation and sizeable productivity gains will help keep labour costs and inflation under control."⁵

[27] In reply the ACTU submitted that the Australian economy continued to perform strongly, notwithstanding the effects of the drought, already impacting upon National Accounts data, and uncertainty associated with the developments in respect of Iraq. It relied upon the following table to substantiate the continuing strength of the economy.

Table 1: Key Economic Indicators Comparison

	This time last year	Most recent data	MYEFO forecast (2003-04)
GDP	4.0	3.2	4.0
Non-farm GDP	4.0	4.0	n/a
Inflation (CPI)	3.1	3.0	2.75
Employment growth	1.6	3.2	1.75
Unemployment	6.6	6.0	<6.0
Wages
WCI	3.4	3.4	n/a
AENA	4.5	3.5	4.25

Notes:
(a) In the second and third columns: Trend data has been used for all items where available (i.e. all except CPI and WCI) GDP, non-farm GDP, CPI and WCI figures are year to December 2001 and 2002 respectively. Labour Force statistics are year to February 2002 and 2003, respectively.
(b) Fourth column figures are from the Mid-Year Economic and Fiscal Outlook (MYEFO) 2002-03, pp. 16-17.

[Source: Exhibit ACTU 4, Table R1.1 at para R1.13.]

The States and Territories

[28] The States and Territories submitted that the economic position this year is not the same as that which existed during the 2002 Safety Net Review. They accepted that there are different pressures such as the effect of the drought and unresolved geo-political concerns that place an analysis of the economy in a different context. However, they concluded that the economic material suggests that the underlying economy is still strong, and in that respect, current economic prospects are not dissimilar to the projections that the Commission took into account when it awarded an $18 increase last year.

[29] In assessing indicators of economic performance both at the national and state and territory levels, the States and Territories submitted that:

• after modest growth of 1.8 per cent in fiscal 2000-01, the Australian economy bounced back to record firm growth of 3.9 per cent in fiscal 2001-02;



• private consumption spending was once more the mainstay of overall economic growth, rising by 3.5 per cent in fiscal 2001-02 after growing by 3.0 per cent in 2000-01;



• after detracting 1.3 percentage points from GDP growth in 2000-01, a sharp recovery in dwelling investment added 0.9 percentage points to GDP growth in 2001-02;



• business investment also started to recover in 2001-02, contributing around 0.5 per cent to GDP growth, after detracting a similar amount in 2000-01; and



• in 2001-02 export volumes fell by 1.5 per cent, while import volumes rose by 2.3 per cent.

[30] The States and Territories provided the following table showing Gross State Product:

Table 2: Gross State Product, Chain Volume Measures

	2000-2001 (%)	2001-2002 (%)
New South Wales	2.2	2.4
Victoria	2.9	4.9
Queensland	2.0	5.4
South Australia	3.3	3.7
Western Australia	-1.2	5.7
Tasmania	-0.5	3.3
Northern Territory	4.1	4.8
Australian Capital Territory	4.2	3.9

[Source: Exhibit STG 1, Table 1 at para 70.]

The Commonwealth

[31] The Commonwealth submitted that the Australian economy has remained resilient, despite weak global conditions, ongoing global economic and financial uncertainty, and one of the most severe droughts of the past century. It noted that:

• the non-farm economy maintained considerable momentum through 2002, driven by very strong growth in domestic demand, with consumption, dwelling investment and business investment all growing solidly;



• after a soft period in the middle of the year, employment rebounded strongly, consistent with the strength of the non-farm economy and above-average levels of business confidence;



• employment grew by 323,900 (or 3.5 per cent) in the year to January 2003 to reach a record high of 9,586,600, although it noted advice from the Australian Bureau of Statistics (ABS), which suggested that these results may have been affected by the phasing-in of the new labour force survey sample; and



• underlying inflation remained moderate, although one-off factors temporarily pushed up headline inflation to over 3 per cent.

[32] The Commonwealth noted that it is common ground that the outlook for the economy is generally positive. However it submitted that the ACTU, through its claim and in its submissions, fails to properly recognise the impact of some recent developments and the range of risks around the economic outlook. It submitted that the general assessment of the balance of the risks around the outlook shows that there is a greater probability of a weaker potential outcome arising if the risks to the outlook come to pass. While the Mid-Year Economic and Fiscal Outlook (MYEFO) forecasts make some allowance for possible developments in the economy, the downside risks emerging since the time of the forecasts have increased in several different ways:

• the substantial geo-political tensions and the fact that they have increased with the war in Iraq under way and increased uncertainty concerning North Korea;



• sharp rises in oil prices have occurred;



• equity markets are showing renewed weakness and volatility;



• exchange rates have risen substantially; and



• employment growth is likely to ease in coming months.

ACCI

[33] ACCI submitted that the Australian economy in 2003 is materially different from the economy under examination one year ago. Whilst the economy continues to expand at a reasonable rate, the strength that was evident in the economy at the start of 2002 is no longer there. Whilst the economy continues to move forward, it does so with less confidence and amidst far greater uncertainties.

[34] The slower growth was attributed by ACCI to:

• the international downturn evident last year becoming more entrenched;



• international debt levels which continue to rise, due to an increasing trade deficit coupled with a rising dollar;



• the uncertainties due to the potential for war in Iraq;



• the effects of the drought;



• decisions to raise interest rates in May and June last year; and



• the effect of last year's Safety Net decision on economic outcomes.

[35] Whilst ACCI submitted that the Australian economy is at or near being the best performing economy in the entire developed world, it contended that this success is part of the problem, causing policy conclusions that are unwarranted by the underlying difficulties.

[36] The underlying difficulties were said to be reflected in:

• continuing unemployment and under-employment disclosed in the ABS publication Measures of Labour Underutilisation;



• data from the ACCI Business Barometer which, it submitted, is a contemporary measure of economic activity that provides an indication of economic conditions within the private sector. ACCI contended that its Barometer shows that the economy continues to expand but at the present moment growth is neither accelerating nor decelerating; and



• National Accounts data, to the September quarter 2002, show a downward trend in the level of GDP growth which peaked in the September quarter of 2001 at a quarterly growth rate of 1.3 per cent and has since then continued to move downwards.

[37] ACCI conceded that recent data show a much more hopeful picture in regard to business investment during the past four quarters than had been the case over the earlier periods, with growth through the year until September 2002 of 13.7 per cent, but cautioned that this should be seen only as a start towards a period of hopefully stronger investment growth over a prolonged period of time.

[38] ACCI summarised its assessment of Australia's economic prospects as being "at the start of an ordinary year but one with extraordinary risks". It contended that it will be an ordinary year if the drought breaks, the dollar does not keep rising, the economies of the rest of the world enter recovery, the war with Iraq either does not occur or rapidly ends with no collateral damage for the world's economies and oil prices rapidly return to their previous lower levels. It submitted that the downside risks are large. If, however, the risks do not materialise the economy will experience a reasonable year but it will not be at the robust rate of growth others had expected last year almost as a matter of course.

AiG

[39] AiG submitted that the Australian economy performed well in 2002, being amongst the fastest growing in the OECD. The manufacturing sector was said to have also performed reasonably well, with output growing by around 4 per cent and the sector recording profit growth. However, AiG submitted that the last 12 months have seen manufacturers channel back into the economy almost all of the returns from growth by way of new investment, additional jobs and company and other taxes, and it is appropriate to focus on expected performance rather than past. It submitted that the most current economic data points to slower growth and below average performance relative to previous years, with the economic risks going forward moving increasingly towards the downside.

[40] While AiG accepts that a modest wage adjustment is appropriate, it submitted that acceding to the ACTU's claim simply on a superficial analysis of the past strength of the Australian economy would threaten the growth potential of the Australian economy at a time of global economic uncertainty, falling exports partly impacted by the drought and possible military conflict with Iraq, and fail to recognise that economic conditions have changed for the worse.

[41] Whilst noting that the Australian economy throughout 2002 was one of the fastest growing economies in the OECD, assisted by a strong construction sector, low interest rates, employment growth and strong domestic demand, AiG submitted that growth has slowed in recent quarters, with the National Accounts showing annual growth in GDP of 2.3 per cent in the September quarter 2002. It further submitted that economic forecasts for 2003 expect the Australian economy to slow further due to the combined effects of the drought, a softer housing sector, continued global economic weakness and cautious consumers anxious about the prospect and implications of a war with Iraq.

[42] AiG submitted that after falling sharply throughout 2000 and much of 2001, manufacturing investment has lifted significantly as companies reinvest surplus funds in growing their businesses and improving efficiency and productivity. AiG's Business Prospects for Australian Manufacturing in 2003 highlighted that further investment gains can be anticipated in 2003 with overall investment expected to grow by 5 per cent. Similarly, AiG submitted that after a year and a half of reducing staff levels, the 12 months to November 2002 have seen over 52,000 new jobs created in manufacturing. It submitted that further modest gains in employment are anticipated in 2003, but this could be threatened if companies are required to meet excessive wage claims. AiG submitted that the risks to the Australian economy generally impacted upon the manufacturing sector, as did the decline in share values which impacted upon the investment capacity of listed companies. AiG submitted that 2003 is shaping up to be a year of great economic risks - most of these risks are centred on events and issues outside Australia beyond the control of the Australian Government or the RBA. These were said to include unsteady global sharemarkets which have experienced significant losses over the last 12 months, the weak recovery in world industrial economies, the threat of terrorism, war with Iraq and escalating oil prices and concerns about global supply. It referred to the comments of the OECD in its December 2002 Economic Outlook that:

". . . downside risks seem to dominate at this juncture, including new financial market shocks, with a further deferral of corporate investment; a possible further cut in household wealth stemming from falling property prices; a disorderly unwinding of international imbalances; emerging market crisis and/or a surge in oil prices."⁶

MPMSAA

[43] MPMSAA submitted that in the current economic climate which calls for caution given both domestic and international considerations, a similar increase to that of the May 2002 decision would be immoderate. It expressed concern that any increase in minimum wages is sustainable in the current uncertain economic climate.

The Retail Motor Industry

[44] The Retail Motor Industry focussed its economic submissions on the small business sector in which its members predominantly operate. Their submissions drew attention to:

• the effects of the drought which it contended will continue to have an adverse affect on the state of the economy. The effects of the drought pose potentially significant problems for people in rural communities generally; and



• findings from reports of the Automotive Industry Economic Survey for the December quarter 2002 which show there are many businesses experiencing an improvement in business conditions, whilst other businesses in both Victoria and New South Wales reported a decline in reported business conditions over the past 12 months.

[45] By reference to its surveys, the Retail Motor Industry reported that:

• businesses are overwhelmingly pessimistic about the performance of the retail automotive industry in the coming 12 months;



• profitability in the retail automotive industry in the December quarter 2002 was very low, with large negative net balances recorded; and



• factors such as lack of orders and demand, taxes and charges, climatic conditions, competitive discounting, labour costs and shortage of skilled and suitable labour continue to hinder business performance.

NFF

[46] NFF focussed its submissions on the impact of the drought on the rural economy, submitting that the drought conditions in Australia have created a significant and broad detrimental impact to rural and regional businesses to the extent that the Commission should not grant any wage increase.

[47] NFF submitted that the current drought is one of the worst droughts on record. Between April and October 2002, 68 per cent of Australia had a severe rainfall deficiency. This was the most prevalent incidence of severe rainfall deficiency in recorded history. It submitted that according to the Australian Bureau of Agricultural and Resource Economics (ABARE), around 62 per cent of broadacre farms were affected by drought conditions at the end of October 2002, this being the highest proportion of farms surveyed reporting drought since the 1982 drought. ABARE has forecast the net value of farm production will be $2.15 billion in 2002-03. This figure is nearly 80 per cent below the strong performance of the industry in 2001-02.

PIAA

[48] PIAA submitted that:

• the general economic situation remains uncertain due to internal factors (drought) and external factors (possible conflict in the Middle East, poor global economic conditions) and seems to be trending down;



• employment prospects are flat and full-time employment is not increasing;



• profitability in the printing industry is down and trending further down;



• increased costs, reduced profitability and poor economic outlook all mean that prospects are bleak for a large percentage of the printing industry; and



• economic growth has continued into the September quarter 2002, but a recent slowing has meant that economic conditions in some sectors, such as the manufacturing industry, have been very tough.

WAFFIA

[49] WAFFIA submitted that agricultural industries in Western Australia and Australia have generally experienced extremely low commodity prices, from the late 1980s through the 1990s, until 2001. In recent years much of Western Australia has suffered from severe drought and frosts. These factors have combined to cause very low returns on investment to farmers, an outcome devastating to both the farmers and their families and small businesses in country towns.

Indicators of Recent Past Economic Activity

Economic Growth

Table 3: Real Gross Domestic Product Growth (trend estimates)

	Non-farm GDP		Farm GDP		Total GDP
	% change		% change		% change
Quarter	Over previous quarter	Over previous year	Over previous quarter	Over previous year	Over previous quarter	Over previous year
1999 September	1.0	4.1	1.3	9.7	1.0	4.3
December	1.0	3.9	1.6	7.7	1.0	4.0
2000 March	0.9	3.8	0.3	4.9	0.9	3.8
June	0.5	3.4	0.3	3.5	0.5	3.4
September	0.2	2.6	0.1	2.3	0.2	2.6
December	0.1	1.7	-0.6	0.1	0.1	1.7
2001 March	0.5	1.3	0.1	-0.1	0.5	1.3
June	1.1	2.0	0.4	0.0	1.1	1.9
September	1.3	3.1	1.8	1.7	1.3	3.0
December	1.0	4.0	4.0	6.4	1.1	4.0
2002 March	0.9	4.4	2.5	9.0	0.9	4.5
June	1.0	4.2	-4.4	3.7	0.8	4.2
September	1.1	4.0	-9.2	-7.5	0.8	3.6
December	1.0	4.0	-9.0	-19.1	0.7	3.2

[Source: Exhibit ACTU 5, Tag 1 Table 2 at p. 6.]

[50] Table 3 shows continuing strong growth in non-farm output, throughout 2002, with quarterly growth of real output rising at or around 1 per cent per quarter in each quarter within the year. Non-farm growth has recovered from weaker levels of growth throughout 2000 and into 2001, with a return to stronger growth in the second half of 2001 and the whole of 2002. Non-farm product grew by 4.0 per cent over the year to the December quarter 2002. Table 3 also records the significant negative impact of the recent drought on farm activity throughout most of 2002, with real farm product declining by 19.1 per cent in the year to the December quarter 2002. The decline in farm activity has reduced total GDP growth by around 0.8 percentage points in the year to the December quarter 2002, with total GDP growing by 3.2 per cent, as against the non-farm growth of 4.0 per cent.

Private Sector Investment

Table 4: Private Investment

	Other Buildings & Structures		Machinery & Equipment		Private Business Investment		Dwellings Investment
Quarter	% change		% change		% change		% change
	Quarter	Year to quarter	Quarter	Year to quarter	Quarter	Year to quarter	Quarter	Year to quarter
1999 Dec	-3.3	-7.2	2.1	13.3	0.6	6.9	8.1	11.0
2000 Mar	-5.0	-11.7	1.5	11.3	0.1	4.3	6.6	18.4
Jun	-6.0	-15.8	0.2	7.2	-0.7	1.3	-2.3	15.4
Sep	-6.4	-19.1	0.1	3.9	-0.7	-0.8	-10.8	0.4
Dec	-4.4	-20.0	-0.3	1.4	-0.8	-2.1	-13.0	-19.2
2001 Mar	-0.3	-16.1	-1.0	-1.1	-0.4	-2.6	-5.0	-28.0
Jun	2.3	-8.7	-0.2	-1.5	0.7	-1.2	6.3	-21.7
Sep	2.1	-0.4	1.0	-0.6	1.2	0.7	8.0	-5.2
Dec	3.6	7.9	1.9	1.5	2.1	3.7	6.9	16.4
2002 Mar	8.7	17.6	2.6	5.3	3.6	7.8	5.8	29.7
Jun	10.4	27.0	2.5	8.1	4.1	11.4	5.2	28.5
Sep	8.4	34.8	2.7	10.0	4.1	14.6	5.2	25.2
Dec	5.1	36.8	3.1	11.4	3.9	16.6	4.8	22.7

[Source: Exhibit ACCI 3, Tag A Tables 7-10.]

[51] Private sector investment activity, recorded in Table 4, shows very strong growth in both private business investment and dwellings investment over the past year. Investment in other buildings and structures grew strongly in each quarter of 2002, growing by 36.8 per cent over the year to the December quarter 2002. Private investment in machinery and equipment grew by 11.4 per cent in the year to the December quarter 2002, with increased growth in each quarter through the year. Total private non-dwellings investment grew by 16.1 per cent in the year to the December quarter 2002, with improved growth rates evident since the middle of 2001. Private dwellings investment grew by 22.7 per cent in the year to the December quarter 2002, although a slight moderation in the rate of growth is evident in quarterly growth recorded in each quarter over the course of 2002.

Exports and Imports

[52] Data for Australia's trade performance have shown a weakening in export performance, in part reflecting the impact of the drought on agricultural exports throughout 2002. However, imports have grown strongly in 2002, reflecting continued strong consumption and the strong levels of private sector investment activity. As a consequence, Australia's net export performance has been negative, with net exports detracting 3.0 per cent from overall growth in the year to the December quarter 2002.⁷

Table 5: Exports and Imports (trend)

	Exports		Imports
Quarter	% change		% change
	Quarter	Year to quarter	Quarter	Year to quarter
1999 December	3.6	7.7	3.7	13.6
2000 March	3.0	10.6	2.4	13.7
June	2.1	11.6	0.4	10.7
September	1.2	10.2	-1.1	5.4
December	0.8	7.2	-1.9	-0.3
2001 March	0.9	5.1	-1.9	-4.4
June	0.2	3.2	-1.4	-6.2
September	-0.7	1.2	0.2	-4.9
December	-0.7	-0.2	2.5	-0.6
2002 March	0.1	-1.0	3.8	5.2
June	0.6	-0.7	3.6	10.5
September	0.1	0.1	3.0	13.6
December	-0.4	0.4	2.8	13.8

[Source: Exhibit ACCI 3, Tag A Table 12.]

Prices

Table 6: Consumer Price Index

	% change
Quarter	Previous quarter	Same quarter previous year
1999 December	0.6	1.8
2000 March	0.9	2.8
June	0.8	3.2
September	3.7	6.1
December	0.3	5.8
2001 March	1.1	6.0
June	0.8	6.0
September	0.3	2.5
December	0.9	3.1
2002 March	0.9	2.9
June	0.7	2.8
September	0.7	3.2
December	0.7	3.0

[Source: Exhibits ACCI 3, Tag A Table 20; ACTU 5, Table 10.]

[53] Inflation, as measured by the CPI in Table 6, has been 0.7 per cent for each of the last three quarters of 2002, with annual growth to the December quarter 2002 of 3 per cent, at the top of the RBA target range for inflation of 2-3 per cent.

Earnings

Table 7: Measures of Wage Movements

	Annual increase of wages and prices (% change on a year earlier)
	Average weekly ordinary time earnings (a)	Wage cost index (b)	Current federal agreements (c)
Annual
1998-1999	3.6	3.2
1999-2000	3.6	2.9
2000-2001	5.1	3.4
2001-2002	5.6	3.3
Quarterly - Year to quarter shown
2001 March	5.0	3.7	3.6
June	4.9	3.7	3.7
September	5.4	3.6	3.7
December	5.7	3.4	3.7
2002 March	5.7	3.1	3.8
June	5.4	3.1	3.8
September	5.0	3.3	3.8
December	4.7	3.4	3.8

Notes:
^(a) Source: Exhibit ACTU 5, Table 12 at p. 26.
^(b) Source: Exhibit ACTU 5, Table 11 p. 24.
^(c) Source: Department of Employment and Workplace Relations, Workplace Agreements Database, all current wage agreements, all sectors. Average Annualised Wage Increase.

[54] Table 7 shows ABS average weekly ordinary time earnings (AWOTE) growth of 4.7 per cent per annum over the year to the December quarter 2002, down from levels at or above 5 per cent over the year to each preceding quarter in 2002. The ABS wage cost index (WCI), which does not reflect the impact of compositional change evident in the AWOTE data, grew by 3.4 per cent in the year to the December quarter 2002, following slightly lesser increases over the years to the first three quarters of 2002 and the same level as was recorded for the year to the December quarter 2001. Average wage outcomes in current agreements, for all sectors, grew by 3.8 per cent over the year to each quarter in 2002, marginally up on growth in wages in the agreement sector in 2001.

Table 8: Comparison of Various Wage Measures

	AWOTE (a)	AWE All employees (a)	AWE Full-time adults (a)	AENA (b)	WCI (c)	ADAM (d)	DEWR (d)	Mercer (e)
Most recent figure	4.7	3.7	4.9	3.5	3.3	3.8	4.1	4.5
Most recent figure excluding award employees (f)	4.9	3.8	5.2	3.6	3.4	n/a	n/a	n/a
Average increase three years to June 2002	5.1	4.3	4.8	3.3	3.2	3.8	3.7	4.5

Notes:
^(a) ABS Cat. No. 6302.0 trend figures, most recent figure to November 2002.
^(b) ABS Cat. No. 5206.0 trend figures, most recent figure to December 2002.
^(c) ABS Cat. No. 6345.0, most recent figure to December 2002.
^(d) Most recent figure is average annualised wage increase (AAWI) for agreements certified in September quarter 2002 in the case of ADAM and December quarter 2002 in the case of DEWR. Average increase calculated using AAWI for current agreements. ADAM records AAWI per agreement. DEWR records AAWI per employee.
^(e) Mercer, Quarterly Salary Review, increase in base salary senior management. Most recent figure is to September 2002.
^(f) Wage measures excluding award employees utilise average increase of 3.3%. Percentage of award only employees 21%. Proportion of award-only full-time employees as a percentage of all full-time employees 13.6%

[Source: Exhibit ACTU 4, Table R4.1 at para R4.32.]

[55] Table 8, extracted from the ACTU's reply submission, sets out earnings growth for a broader range of earnings data, over the most recent year shown, in the two top rows and for an average of the three years to June 2002 in the bottom row.

The Labour Market

Table 9: Employment and Unemployment

	Employment			Unemployment
Quarter	% change over the year to quarter shown			% of workforce
	Full-time	Part-time	Total	(seasonally adjusted)
2000 September	3.1	3.7	3.3	6.1
December	2.1	3.2	2.4	6.2
2001 March	1.1	3.1	1.6	6.5
June	-0.4	4.7	1.0	6.8
September	-1.4	5.7	0.5	6.8
December	-0.9	5.9	0.9	6.8
2002 March	-0.2	6.4	1.5	6.7
June	0.4	5.0	1.7	6.3
September	1.0	4.3	1.9	6.2
December	1.6	5.1	2.6	6.1
2003 month of February	2.5	5.0	3.2	6.0

[Source: Exhibit ACTU 5, Tag 1 Tables 14-15 at pp. 30, 32.]

[56] Table 9 sets out recent data from the ABS Labour Force publication. The table records relatively strong and strengthening employment growth over the course of 2002 and into 2003, following weaker employment growth in 2001. The improved employment performance in 2002 and into 2003 is evident for both full-time and part-time employment, although part-time employment growth was relatively stronger. The unemployment rate has fallen over the course of 2002 and into 2003, falling to 6.0 per cent on a seasonally adjusted basis in February 2003.

[57] Both ACCI and the Commonwealth warned that ABS labour market data was potentially unreliable over recent periods, due to a resampling introduced into the series by the ABS commencing November 2002, using 2001 census data. ACCI expressed greatest caution, submitting that:

". . . what is abundantly clear is that something has gone radically wrong with labour force estimates. The official labour force data can not be relied upon to provide accurate estimates of the growth rate between periods, either between months, quarters or across the year."⁸

[58] ACCI relied on inferences drawn from an increase evident in employment growth and the participation rate in the months since November 2002 when compared with the growth for an equivalent period leading up to November 2002 and relatively weaker results in other partial labour market indicators.

[59] The ANZ Bank Index of Job Advertisements showed the number of job advertisements carried by major metropolitan newspapers rose by 0.4 per cent (seasonally adjusted) in March 2003, and 3.2 per cent in February, following a 4.3 per cent increase in January, and a 12.5 per cent decline in December 2002. Compared with March 2002 the number of newspaper job advertisements was up by 6.5 per cent, although it was marginally down in trend terms. It also showed that the number of job advertisements on the four (non-newspaper) internet sites monitored by ANZ rose by 1.1 per cent in March and 11.8 per cent in February to be 7.6 per cent higher. The total number of newspaper and Internet job advertisements fell by 0.8 per cent in March, following a 9.7 per cent rise in February. Compared with March 2002, the total number of job advertisements in newspapers and on internet sites was up by 7.3 per cent.

[60] The Department of Employment and Workplace Relations Skilled Vacancies Index decreased by 1.6 per cent in March 2003 to 107.2 per cent. All three major occupational groups decreased: professionals fell by 1.9 per cent, associate professionals by 4.9 per cent and trades were down by 0.5 per cent.

[61] This partial indicator, showing vacancies for skilled positions, may be contrasted with broader ABS job vacancies data⁹ which shows trend estimates of job vacancies in February 2003 up by 4 per cent on November 2002 and up 15.8 per cent on February 2002. Private sector vacancies were up 5.4 per cent on November 2002 and 21.3 per cent on February 2002, with falls in public sector vacancies over each period.

[62] The ABS was more confident about the effect of the rebasing on recent Labour Force data, stating in the Notes On Estimates in its 13 March 2003 Labour Force, Australia, Preliminary publication¹⁰ that:

"While additional sampling error is expected during implementation of the new sample, there is no evidence from these analyses that the change in sample has materially affected estimates of employment growth. Further analyses are being undertaken, and the ABS will publish the results when they are completed."

[63] In its February 2003 Labour Force publication it is noted that:

"To assist in the interpretation of the published estimates, the ABS is investigating the labour force characteristics of the new sample in comparison with the sample that it is replacing. Analyses to date have used alternate methods that place greater emphasis on the sample that is common between consecutive months of the survey.

The matched rotation group method calculates monthly movements using the 7/8th of the sampled dwellings that are common between consecutive months under the LFS rotation scheme. This method produces an increase in employment (seasonally adjusted) over the last four months of about 30,000 less than the published estimate. However, some caution should be used in interpreting matched rotation group estimates, as they have a tendency to under estimate employment growth. If an adjustment were made for this effect, the estimated change in employment from the matched rotation group estimate would be closer to the published figure.

Composite estimation, a technique which does not exhibit this effect, produces an estimate of employment growth over the last four months that is broadly similar to the currently published figure."¹¹

[64] Whilst the Labour Force survey data must be considered in the context of the November 2002 resampling, it is appropriate that the data be assessed in light of the ABS comments. Those comments suggest the rebasing has had a limited impact upon the published Labour Force data and, in our view, should be afforded greater weight than the inferences ACCI draws from the data. Accordingly, we are satisfied that the broad picture which arises from the Labour Force data of an improved labour market during 2002, continuing into 2003, can be relied upon.

Productivity

Table 10: GDP Per Hour Worked - Market Sector

Percentage growth
Annual	Year average
1993-1994	2.7
1994-1995	0.5
1995-1996	4.0
1996-1997	3.2
1997-1998	4.3
1998-1999	3.8
1999-2000	2.1
2000-2001	0.1
2001-2002	4.4
Quarterly	Change on previous quarter
2001 March	1.0
June	1.6
September	1.3
December	0.9
2002 March	0.9
June	1.0
September	1.0
December	0.8
Annual	Change on same quarter of previous year
2001 March	0.5
June	2.2
September	3.9
December	4.8
2002 March	4.7
June	4.0
September	3.8
December	3.8

[Source: Exhibits ACCI 3, Tables 26; ACTU 1, Figure 5.14 at p. 72.]

[65] Productivity, measured as GDP per hour worked in the market sector, as shown in Table 10, continues to grow strongly, consistent with the positive productivity performance recorded over most of the past decade. In the year to the December quarter 2002, productivity grew by 3.8 per cent.

Profits

Chart 1: Gross Operating Surplus - Australia 1996-2002

[Source: Exhibit ACTU 1, Figure 5.7 at para 5.51.]

Chart 2: Wage and Profit Shares of Total Factor Income - 1974-2002

[Source: Exhibit ACTU 1, Figure 5.8 at para 5.52.]

[66] Data for gross operating surplus and the profit share of GDP, shown in graphs tendered by the ACTU and reproduced above, demonstrate continuing high levels of gross operating surplus and the resumption of strong growth in operating surplus over the course of 2002, following weak growth in the first half of 2001. The profit share of GDP remains at the historically high level of 23 to 24 per cent recorded over the past decade.

Conclusions from Aggregate Economic Data

[67] The Australian economy has continued to grow strongly over the course of 2002. The non-farm economy has maintained growth in the order of 4 per cent per annum, whilst the level of growth in total has eased to 3.2 per cent in the year to the December quarter 2002, reflecting the significant fall in farm activity in the last half of 2002 as a result of drought conditions. Private sector business investment growth has been very strong, with dwellings investment remaining strong, although easing, throughout the course of 2002. The continued healthy growth has been reflected in reasonably strong labour market outcomes, with both full-time and part-time employment growing and unemployment falling in 2002 and into 2003. Inflation and wages growth remain moderate. Significant productivity growth has been recorded. Profits measured by gross operating surplus grew and the profit share of GDP remains at historically high levels.

Sectoral Considerations

[68] Sectoral information was put to us by AiG, the NFF, the Retail Motor Industry and the PIAA, as reflected in the summary of submissions above. In addition, considerable attention was directed in submissions to the impact on the rural economy, and the economy more generally, of the recent drought.

Manufacturing

[69] ABS manufacturing production data¹² show that manufacturing production grew by 4.0 per cent over the 2001-02 financial year. The rate of growth has moderated over the course of 2002, but was still 2.6 per cent over the year to the December quarter, close to the average rate of growth per cent over the past five years.

[70] A special AiG survey of manufacturers estimated that the sector would grow by 4.2 per cent, based on sales and service income, in 2003.

Chart 3: Annual Change in Turnover

[Source: Exhibit AiG 1, Annexure A Chart 3 at p. 4.]

Chart 4: Turnover Forecast for 2003

[Source: Exhibit AiG 1, Annexure A Chart 4 at p. 4.]

[71] Charts 3 and 4 above, extracted from AiG survey material, show growth in turnover over the past decade and the growth expected in 2003. They also show that growth is anticipated across all sectors other than paper, printing and publishing.

Agriculture

[72] The recent drought dominates any consideration of the recent performance of the rural economy. The rainfall deficiency over the period from April 2002 to January 2003 is one of the worst on record. Between April and October 2002, 68 per cent of Australia had a severe rainfall deficiency. This was the widest incidence of severe rainfall deficiency in recorded history. Rains over much of Australia in late February may signal the end of the drought for some regions but further rains are required.

[73] The impact of the drought on aggregate economic growth is evident in the GDP data recorded in Table 3: Real Gross Domestic Product Growth. Farm GDP has declined by 19.1 per cent in the year to the December quarter 2002. Whilst non-farm product has continued to grow strongly, by 4.0 per cent, the significant decline in rural economic activity has reduced total GDP growth by around 0.8 percentage points, to 3.2 per cent over the same period. The reduction of agricultural income has had flowthrough effects on local rural economies, reducing economic activity and employment opportunities in regions and in industries particularly reliant on rural demand.

[74] At the time of hearing the length and severity of the drought remained uncertain. While the effects of the adverse seasonal conditions on activity in 2002-03 are becoming clearer, the outlook for economic activity in 2003-04 is less certain. If the drought breaks and normal seasonal conditions return there will be a rebound in the rural economy. If drought conditions persist into 2003-04 there will be a further impact on farm production and activity.

[75] NFF submitted that it is probable that there is a weakening of the El Nino pattern and the potential for rain during autumn. It noted, however, the Bureau of Meteorology's statement that:

"It may take several months of sustained above average rainfalls in some areas to effectively end drought; the break will not occur uniformly across all drought affected areas and some El Nino indicators may continue to fluctuate in and out of neutral values after the change in the Australian rainfall patterns."¹³

It also referred to a contemporary view that:

"More recent assessments of the meteorological outlook suggest that recent rainfall current indicators on the El Nino show cause for some optimism in almost all of the worst drought-affected areas."¹⁴

[76] In its March 2003 Australian Commodities publication, ABARE observed:

"Assuming that there is a good autumn break to the drought across much of the winter cropping and pastoral areas of Australia, there should be a dramatic improvement in the rural sector's fortunes in 2003-04.

Expanded crop plantings and greatly improved yields can be expected to result in a bounce back in grain grower incomes by late 2003. In the livestock industries, however, production will be lower in the short term as producers retain stock to rebuild depleted herds. As a result livestock incomes are not expected to rebound as quickly or as strongly as cropping incomes."

and:

"Farm incomes are forecast to rise substantially in 2003-04 from the drought induced lows of 2002-03 (figure A). Drought is estimated to cut the net value of farm production to around $2.3 billion in 2002-03 (table 1), close to 80 per cent less than in 2001-02 when farm incomes were the highest in over two decades.

On the assumption that drought-breaking rains prevent a large scale selloff of livestock and allow the planting and harvest of a successful winter crop, the net value of farm production in 2003-04 is forecast to rise by nearly 160 per cent to around $6.0 billion."¹⁵

[77] In an assessment of the economic effects of the drought in November 2003 the RBA concluded that:

"While the drought is a serious negative shock to the economy, past experience suggests that there will subsequently be a significant boost to growth when the drought breaks, as crop production typically rebounds strongly following drought years."¹⁶

[78] Whilst it is usual for a bounceback in rural activity and income following a drought, there is unavoidable uncertainty as to future weather patterns. As a result, some uncertainty remains as to the timing and the geographic pattern of recovery from drought conditions.

The Immediate Economic Outlook

[79] The ACTU submitted that the official forecasts continue to paint a positive picture of the Australian economy over the foreseeable future, despite the expected impact from the current drought, and in sharp contrast with the weak performance which has continued in much of the rest of the developed world. In reply, it submitted that:

"Recent commentary by the Reserve Bank, the Treasurer, the OECD and a number of market commentators suggests that the outlook for the economy is one of a strengthening in growth over 2003-04 and a bounceback in those sectors of the economy presently affected by the drought and international conditions."

[80] It further submitted that the outlook for investment and labour market conditions is positive:

• The most recent data from the ABS's Private New Capital Expenditure and Expected Expenditure series suggests that business investment intentions continue to be strong for the rest of the year and into 2003-04. The most recent "estimate 5" of business investment expenditure over the 2002-03 year was 15.2 per cent higher than the comparable estimate for 2001-02. Further the first estimate for 2003-04 was 4.5 per cent higher than the first estimate for 2002-03, and at $43,413 million, is the highest first estimate on record.



• The latest data on job advertisements was released by the ANZ Bank on 3 March 2003. The survey suggests that:

"The number of job advertisements carried by major metropolitan newspapers rose by 3.2% (seasonally adjusted) in February, to an average of 20,988 per week. This follows a 4.3% increase in January, and a 12.5% decline in December 2002. Compared with February last year the number of newspaper job advertisements was up by 1.5% . . .

The total number of newspaper and internet job advertisements rose by 9.7% in February to a weekly average of 91,696. This was also the largest monthly increase since the combined print and internet series began in mid-1999, and the highest level of job advertising since July 2001."¹⁷

[81] The Commonwealth noted that the Australian economy is expected to grow by around 3 per cent in 2002-03 and around 4 per cent in 2003-04, with a moderation of forecast economic growth in 2002-03, due mainly to the expected effects of the drought on the economy. The more positive outlook in 2003-04 assumed a return to average seasonal conditions in rural Australia and stronger world growth. It noted, as features of the current economic outlook:

• continued strong growth;



• an expected decline in inflation to around the middle of the target band of 2-3 per cent, in line with likely moderate growth in wages and solid ongoing productivity gains; and



• employment growth is forecast to be around 1.75 per cent in both 2002-03 and 2003-04, reflecting the outlook for solid non-farm GDP growth and expected moderate growth in wages, with a gradual decline in the unemployment rate to around 6 per cent in both the June quarter 2003 and the June quarter 2004, compared with the outcome of 6.3 per cent in the June quarter 2002.

[82] The Commonwealth, however, identified the following as substantial risks to the economic outlook:

• further deterioration in global economic conditions;



• the persistence of the drought, notwithstanding recent rains; and



• a greater than expected slowdown in housing activity.

[83] The Commonwealth submitted that the key risk to the outlook for the domestic economy remains the uncertainty surrounding the world outlook. It contended that Australia continues to face an external environment with large and significant risks to domestic stability associated with the heightening of geo-political tensions, the downturn in global equity markets and the sustained rise in oil prices.

[84] ACCI focussed on a concern about the future economic outlook, describing uncertainty and risk as particularly instant and pressing considerations in current circumstances. It put extensive submissions in relation to the major risks it identified: the prevailing geo-political uncertainty and drought conditions.

[85] AiG submitted that:

"While the Australian economy has performed well in 2002, the most recent economic data points to slower growth in 2003 and below average performance relative to previous years. Indeed, the economic risks going forward are moving increasingly towards the down side, reflecting the impact of Australia's worst ever drought on record, continuing share declines, rising oil prices, the prospect of war with Iraq and faltering global growth."¹⁸

[86] The Commonwealth provided the official Treasury outlook data contained in MYEFO. Those data are presented below:

Table 11: Domestic Economy Forecasts ^(a)

			Outcomes(b)	2002-03 Budget	2002-03 MYEFO
			2001-02 year average	Forecasts year average	Forecasts year average
Panel A - Demand and Output(c)
Household consumption			3.8	4	4
Private investment
	Dwellings		19.5	-3	9
	Total business investment(d)		4.3	12	11
		Other buildings and structures(d)	10.4	14	18
		Machinery and equipment(d)	2.6	12	11
Private final demand(d)			5.3	4-3/4	5-1/4
Public final demand(d)			4.1	3-1/4	3-1/4
Total final demand			5.0	4-1/2	3-3/4
Change in inventories(e)
	Private non-farm		-0.1	1/4	1/4
	Farm and private authorities		0.1	0	-1/4
Gross national expenditure			5.0	4-3/4	4-3/4
Exports of goods and services			-1.9	6	2
Imports of goods and services			2.3	11	10
	Net exports(e)		-0.8	-1	-1-3/4
Gross domestic product			3.9	3-3/4	3
	Non-farm product		3.6	3-3/4	3-3/4
	Farm product(f)		9.5	3-3/4	-17
Panel B - Other Selected Economic Measures
External accounts
	Terms of trade		2.6	2-3/4	2-1/4
		Current account balance
		$billion	-22.2	-29	-33
	Percentage of GDP		-3.2	-4	-4-1/2
Labour market
	Employment (Labour Force Survey basis)		1.1	1-3/4	1-3/4
	Unemployment rate (per cent)		6.3	6	6
	Unemployment rate (per cent)(g)		6.9	7	7
	Participation rate		63.7	63-3/4	63-3/4
Prices and wages
	Consumer Price Index		2.9	2-3/4	2-3/4
	Gross non-farm product deflator		2.5	2	2-1/4
	Average earnings(h)		3.8	4-1/4	4-1/4

Notes:
^(a) Percentage change on preceding year unless otherwise indicated.
^(b) Calculated using original data.
^(c) Chain volume measure.
^(d) Excluding transfers of second-hand asset sales from the public sector to the private sector.
^(e) Percentage point contribution to growth in GDP.
^(f) Calculated at basic prices.
^(g) The level in the June quarter of each year, seasonally adjusted.
^(h) Average non-farm compensation of employees (National Accounts basis).

[Source: Exhibit ACTU 3, Tag 2 at p. 49.]

[87] As may be observed from Table 11, the MYEFO forecasts for the economy anticipate growth of 3 per cent in 2002-03, down from 3-3/4 per cent forecast at Budget time. The downward revision reflects largely the anticipated impact of the drought. Non-farm GDP growth is forecast to grow 3.75 per cent, unchanged from the Budget. In contrast to solid growth prospects for the Australian economy in 2002-03, the MYEFO commentary notes a weak and uncertain outlook for the global economy. It notes that whilst global recovery continues, uncertainties around the global outlook have heightened and the risks are predominantly on the downside.

[88] The commentary in respect of the outlook for economic activity in Australia is summarised as follows:

"Despite the subdued global backdrop and the drought, the non-farm part of the economy is continuing to grow solidly, in line with the Budget outlook. Private business investment is picking up strongly and is expected to drive economic growth in 2002-03. The outlook for private consumption is unchanged from the Budget forecasts. The forecast for dwelling construction has been revised up since Budget, reflecting sustained high levels of activity, which have continued into the first half of 2002-03. Dwelling investment is now expected to grow by 9 per cent in 2002-03, compared with the 3 per cent decline forecast at Budget. Exports are expected to remain weak in line with the subdued global environment and the drought.

. . .

Inflation is expected to be moderate over the forecast period, underpinned by steady wage increases and solid productivity growth. Although the economy is expected to grow at a solid pace, wage and price pressures should remain contained. Subdued global conditions are likely to contain import price increases, moderating aggregate inflation. The Consumer Price Index (CPI) is expected to increase by around 2 3/4 per cent in 2002-03 in year-average terms, in line with Budget forecasts.

The labour market forecasts are unchanged from Budget, with employment growth forecast to be 1 3/4 per cent for 2002-03 and the unemployment rate around 6 per cent in the June quarter 2003. This is consistent with the outlook for solid non-farm GDP growth and moderate wages growth. There are some risks to the employment outlook, however, with rural employment already weak because of the drought and the possibility of a substantial downturn in residential construction activity over the coming year."¹⁹

[89] Growth is anticipated to return to 4 per cent in 2003-04, assuming a return to more normal conditions in the rural sector:

"The initial forecast for 2003-04 is GDP growth to increase to around 4 per cent, with the expected rebound largely due to the effects on growth of an assumed return to average seasonal conditions in the rural sector. Non-farm GDP growth is expected to be a little slower than in 2002-03. Strong business investment and solid household consumer spending underpin the outlook, although this should be partly offset by an expected slowdown in housing construction. The unemployment rate is expected to continue to trend downward, to a little below 6 per cent by the June quarter 2004."²⁰

[90] The OECD in its Economic Outlook for Australia was positive in its outlook for the Australian economy:

"The economy continued to perform strongly in the first half of 2002, as buoyant domestic demand more than offset the weakness of exports. With monetary conditions remaining supportive and the global environment expected to improve, economic growth is projected to remain robust, despite the current farm drought and a likely downturn in the residential property sector. The labour market may improve further, while the combination of wage moderation and sizeable productivity gains will help keep labour costs and inflation under control."²¹

[91] Overall, Australia's immediate economic outlook is positive, with official forecasts suggesting the continuation of strong growth in economic activity and further steady inroads into unemployment in the context of further moderate wages and prices growth. Continued productivity growth and private business investment is anticipated.

[92] Those opposing the ACTU's claim have asked the Commission to adopt a cautious approach in determining the ACTU's claim, notwithstanding good recent economic performance and solid economic prospects for the future, on the basis of economic risks identified by them, namely: the possible continuation of drought conditions, a possible weakening of world economic activity, a decline in equity values over the past year and economic uncertainty arising out of the war in Iraq.

[93] Whilst we are conscious of these risks and have regard to them in determining the ACTU's claim, it is not appropriate to assume that the risks will materialise for several reasons.

[94] Firstly, the risks identified have been incorporated to some degree into the formulation of the MYEFO forecasts. For example, the MYEFO commentary contrasts the solid growth prospects for Australia, reflected in the forecasts, with "the weak and uncertain outlook for the global economy". The commentary notes that the main domestic risks to Australia's economic outlook - the drought and the prospect of a downturn in the housing cycle - "by themselves are unlikely to significantly derail the broader economy". The possibility of a further deterioration in the global economy, whilst bringing risks, is thought to be "not the most likely outcome". The MYEFO outlook reflects a view that "the most likely outcome is that supportive policy settings will underpin a gradual, albeit weaker than previously expected, strengthening of global economic conditions over the next year", with the forecast for world growth already reduced by 1/2 per cent since Budget time. On the domestic front MYEFO forecasts, whilst assuming a return to more normal seasonal conditions, have incorporated the effect of the drought to date, both on the farm sector and the broader economy.

[95] Secondly, the underlying strength of the Australian economy has placed it in a strong position to cope well with risks and shocks. This has been evident in the past with the rapid return to the path of strong, non-inflationary growth following the transitional effects of the introduction of the GST in 2000, and the capacity of the Australian economy to deal with the economic crisis in East Asia in 1997 and associated financial instability. The resilience of the Australian economy was noted in the OECD Economic Outlook for Australia in these terms:

"Dogged pursuit of structural reforms across a very broad front, and prudent macroeconomic policies firmly set in a medium-term framework, have combined to make the Australian economy one of the best performers in the OECD, and also one notably resilient to shocks, both internal and external. Incomes growth has remained brisk, employment is expanding, inflation is under control, and public finances are healthy. All the indications are that the continuing effects of previous reforms will continue to help the economy to combat shocks in the immediate future."²²

[96] Thirdly, we do not believe that the low paid should carry the full burden of the uncertainties. We think the correct approach, adopted in the formulation of official forecasts, is to be conscious of risks but not to assume the realisation of the worst case. In this respect the MYEFO commentary notes the potential downside risk for the Australian economy which would arise from the confluence of a further decline in global economic activity, a greater than anticipated effect of the drought on the economy and an expected downturn in housing activity. It also notes that the Australian economy has proved to be very resilient, underpinned by solid fundamentals and supportive policy settings and that a near-term stabilisation in the external outlook, particularly of financial markets and the level of geo-political tensions, could see the Australian economy grow more strongly than forecast.

[97] In our view it is appropriate to have regard to the present uncertainties and risks which might affect the Australian economy. We think it inappropriate, in assessing the capacity to better address the needs of the low paid, to assess economic uncertainties and risks on the basis of a worst case outcome. Nonetheless, we accept the need to have regard to those risks and uncertainties, within the context of a broader range of considerations, when determining the present claim and we have done so.

The Cost of the ACTU's Claim

Direct Cost of the ACTU's Claims

[98] As in past Safety Net Reviews, the parties provided estimates of the cost of the ACTU's claim. The ACTU and the Commonwealth provided estimates of the addition to aggregate wages based on information from unpublished data obtained from the ABS Survey of Employee Earnings and Hours, May 2002 (EEH Survey). ACCI provided a cost estimate in respect of the private sector, incorporating assumed indirect flow-on derived from a survey of its members, also relying on EEH Survey data.

[99] The costings were based on estimates in the EEH Survey which showed 21 per cent of employees were reliant on award rates of pay. Data published subsequently by the ABS, in Employee Earnings and Hours, Australia²³ showed a lower figure of 20.5 per cent. It follows that the cost estimates, based on the earlier higher level of award reliance, would be slightly higher than estimates based on the later figure.

[100] The declining incidence of award reliant employees in the workforce, and a correspondingly diminished direct effect of increases in award rates of pay, is evident in EEH Survey data over time. Whereas ABS data show that 20.5 per cent of employees were award reliant in May 2002, the corresponding figure, used for costings in the May 2002 hearing, was 23.2 per cent.

[101] The ACTU's costing methodology is the same as last year. As the Commission noted in its May 2002 decision²⁴ that methodology is as follows:

• flat dollar increases weighted to account for employment groupings; full-time adult permanent, full-time adult casual, part-time adult permanent, part-time adult casual, and juniors;



• the weighted flat dollar increase is multiplied by the proportion of affected employees; and



• the resultant weighted average wage increase is divided by the estimated AWOTE for all employees.

[102] In the present case, the ACTU provided cost estimates based on all award reliant employees, rather than adjusting estimates for the diminished effect of award increases upon public sector employees as it has in past cases. This adjustment removed one point of controversy between the ACTU and the Commonwealth in relation to costing methodologies.

[103] The remaining area of controversy between the ACTU and the Commonwealth in relation to costing methodologies arises from the ACTU adjustment, within its costings, for the fact that not all employees classified as award only will benefit from safety net increases. This adjustment is made by the ACTU on the basis that some employees classified as award only will not benefit from safety net increases because their wage rates will be governed by formerly paid rates awards with residual amounts sufficient to absorb the ACTU's claim. Some will be excluded because they are under s.170MX awards and there will be some reporting errors. The Commission has found the adjustment to be appropriate in the past, noting that "estimates based on data for award reliant employees might be better described as showing the potential cost impact, rather than the actual impact".²⁵

[104] The ACTU provided estimates of the gross and net impact of its claim, both with and without an adjustment, for the flow of award increases to all award reliant employees as follows:

Table 12: Cost Impact of the ACTU's Claim

Costing assumption	Gross cost impact	Net cost impact
Award-only adjusted for safety net flow	0.42	0.10
Award-only not adjusted for safety net flow	0.53	0.13

[Source: Exhibit ACTU 1, Table 4.1 at para 4.11.]

[105] The ACTU submitted that its claim will have a gross impact of about 0.4 percentage points on economy-wide ordinary time earnings and a net impact of 0.1 percentage points. The gross impact was said to have diminished relative to the estimated gross impact of the ACTU's claim last year because:

• the claim is for a smaller amount than last year;



• earnings have increased in the 12 months since last year; and



• the number of award only employees has declined.

[106] It submitted that the net impact of its claim at 0.1 percentage points on economy-wide earnings is properly described as negligible. The most recent figure for growth in the WCI is 3.3 per cent. If this figure is taken to be an appropriate indicator of wage costs then acceptance of the ACTU's claim would result, all other things being equal, in the wage cost index increasing to 3.4 per cent - a change which will not have adverse economic effects.

[107] The ACTU also provided estimates of the impact on aggregate wages growth of various dollar award increases, again in gross and net terms, and with and without adjustment with respect to the flow of award increases to award reliant employees.

Table 13: Gross Impact of Various Safety Net Adjustments

Costing assumptions	$10	$12	$14	$16	$18	$20	$22	$24
Award-only adjusted for safety net flow	0.17	0.20	0.24	0.27	0.30	0.34	0.37	0.41
Award-only not adjusted for safety net flow	0.22	0.26	0.30	0.34	0.39	0.43	0.47	0.52

[Source: Exhibit ACTU 1, Table 4.2 at para 4.14.]

Table 14: Net Impact of Various Safety Net Adjustments

Costing assumptions	$10	$12	$14	$16	$18	$20	$22	$24
Award-only adjusted for safety net flow	-0.15	-0.11	-0.08	-0.04	-0.01	0.02	0.06	0.09
Award-only not adjusted for safety net flow	-0.19	-0.14	-0.10	-0.06	-0.01	0.03	0.07	0.12

[Source: Exhibit ACTU 1, Table 4.3 at para 4.14.]

[108] The Commonwealth estimates that the ACTU's claim will add 0.51 percentage points to the wages bill. It estimated that the ACTU's $24.60 claim represents a 2.9 per cent increase in average ordinary time hourly earnings for all full-time adult employees, which when multiplied by 17.6 per cent, the percentage of all ordinary time paid hours paid at an award rate, would increase the aggregate wages bill by 0.51 percentage points. This figure represents the difference between the ACTU's claim of $24.60 per week and no safety net adjustment. The Commonwealth also estimated that the $18 increase supported by the States and Territories would add 0.37 percentage points to the aggregate wages bill.

[109] The Commonwealth noted that its estimate last year for the ACTU's slightly larger claim (of $25 per week) was 0.59 percentage points. Apart from the different size of the two claims, the lower cost impact of this year's claim also reflects:

• growth in earnings over the last year, which makes the ACTU's claim smaller compared to the level of total earnings; and



• the continued reduction in the award-paid proportion of the workforce, from 23.2 per cent in May 2000 to 20.5 per cent in May 2002.

[110] The Commonwealth noted that its estimate is very similar to one of the four ACTU estimates, specifically the figure of 0.53 percentage points which represents the gross cost impact without adjustment for flow of safety net increases. It submitted that it was proper to focus on the gross impact, which represented the addition to wages costs on the basis that the entire amount of the ACTU's claim in excess of productivity will have real economic impacts.

[111] The ACTU and Commonwealth agree that the cost of a given dollar increase in award wages will result in a lesser addition to aggregate wages costs than in past cases due to earnings having increased in the 12 months since last year and the number of award-only employees having declined.

[112] ACCI submitted that if the costings were to be restricted to just the direct impact of the claim, then the cost of granting $24.60 would lead to an addition to private sector earnings of 0.65 percentage points, which is substantially higher than the ACTU's 0.53 percentage points estimate. The higher estimate results from two factors: the ACTU's adjustment for flow of award increases to award reliant employees and ACCI's exclusion of public sector earnings from the earnings denominator.

[113] ACCI also submitted that an estimate of the aggregate cost impact of the ACTU's claim ought to include allowance for flow-on of award increases to employees earning in excess of the award rates of pay. It assumed flow-on to 50 per cent of such employees for the purpose of its aggregate cost estimates.²⁶

[114] The ACCI estimate of the effect on wages growth of the ACTU's claim in the private sector was presented as follows:

Table 15: Addition to Private Sector Total Earnings From a Flat $24.60 Increase

	Proportion of total private sector employees	Proportion of employees per category receiving increases directly through Safety Net decision	Proportion of private sector employees receiving increases directly through Safety Net	Weighted increase sought by the ACTU	Addition to earnings growth	Private sector all employees total earnings	Addition to private sector earnings
	%	%	%	$	$	$	%
Column	1	2	3	4	5	6	7
Data source or calculation	ABS	ACCI	1*2	ACTU	3*4	ABS	5/6
Private sector award dependent employees	25.1	100.0	25.1	17.44	4.38	669.00	0.65
Overaward employees	51.0	13.9	7.1	17.44	1.23	669.00	0.18
Non-award employees	23.9	6.3	1.5	17.44	0.26	669.00	0.04
Total							0.87

[Source: Exhibit ACCI 3, Table 12 at para R6.63.]

Conclusions on the Direct Cost Impact of the ACTU's Claim

[115] As noted in past decisions, none of the cost estimates provided are perfect, but they do provide guidance to the Commission.

[116] The ACCI estimate, however, is less useful than those of the ACTU and the Commonwealth. It relates to the private sector and is a gross estimate. As such, it does not provide an economy-wide estimate of the addition to wages costs resulting from the ACTU's claim. The methodology assumes that all persons who would benefit from the safety net increase, directly or indirectly, would receive the full amount of the safety net adjustment. Further, it incorporates an indirect effect based on an assumed 50 per cent flow-on of the increase to employees not directly entitled to the benefit of safety net increases. There is no evidentiary basis for this assumption. Accordingly, limited weight only can be placed on the ACCI cost estimate.

[117] The ACTU and the Commonwealth methods of estimating the aggregate cost of the ACTU's claim are broadly similar. A previous difference reflecting the treatment of public sector employees in estimating the proportion of all employees paid at award rates is no longer present. The remaining differences are those arising from:

• the ACTU's lower estimate of the flow-on of award increases to award reliant employees; and



• the use of gross cost estimates by the Commonwealth, whilst the ACTU relies on net effects, reflecting the additional cost over that arising from the 2002 safety net increase.

[118] With respect to the first issue, the effect is evident in the ACTU estimates reproduced above. In gross terms, the aggregate cost adjusted for safety net flow is 0.42 percentage points compared with 0.53 percentage points without such an adjustment. The net costs are 0.10 percentage points and 0.13 percentage points respectively. We remain of the view that the higher unadjusted figure represents an overstatement.²⁷

[119] With respect to the second issue, we also remain of the view that it is appropriate to consider the net impact on aggregate wages growth, in assessing the likely impact of the proposals currently before us against present levels of relevant economic indicators. Current aggregate earnings growth partly reflects the effect of the 2002 adjustments and any economic impacts are reflected in current economic indicators.²⁸

[120] We conclude that the gross direct aggregate addition to labour costs of the ACTU's claim would be in the order of 0.4 to 0.5 percentage points and the net impact, having regard to the continuing effect of the 2002 safety net adjustment, is in the order of 0.1 percentage points.

[121] ACCI submitted that a focus on the aggregate labour cost impact of award wage increases is inappropriate. It contended that the focus should instead be upon those employers affected by increased award wages. It submitted that aggregate economy-wide cost estimates mask the true impact of award increases. In our view, whilst micro-economic impacts are relevant they are only part of the picture. A proper assessment of employment effects requires an overall assessment, taking into account aggregate cost and economic impacts. To illustrate, a focus on an employer affected by award wage increases who might cease trading, with the wage increase representing a final straw, with consequent employment losses might not reflect the full impact on employment. Another employer who secured that business's former clients might increase employment.

Indirect Cost of the ACTU's Claim

[122] The Commonwealth and employer associations submitted that any estimate of the direct cost of the ACTU's claim understates the total cost because of indirect effects resulting from the flow-on of the safety net increase to employees not directly entitled to them.

[123] In the present case ACCI, AiG and the Retail Motor Industry relied on data from surveys of their members.

[124] The ACCI survey results were as follows:

Table 16: Proportion of Firms Passing on Safety Net Adjustments

	Proportion of firms passing on SNA to at least one employee receiving overaward payments	Proportion of firms passing on SNA to at least one non-award employee
Firms required to pass on SNA increase to at least one employee	56.1%	37.0%
Firms not required to pass on SNA increase to at least one employee	6.3%	5.2%
All firms	27.7%	12.6%

[Source: Exhibit ACCI 2, Tag 11 at pp. 11-11 to 11-19.]

[125] In the case of ACCI survey respondents, 27.7 per cent of businesses flowed the 2002 safety net adjustment on to at least one overaward employee who was not entitled to that increase and 12.6 per cent of firms flowed the safety net adjustments on to at least one non-award employee who was not entitled to that increase. A significantly greater proportion of those firms required to pay safety net increases to at least one employee reported flowing the increase on to at least one employee in receipt of overaward payments or at least one non-award employee.

[126] According to the AiG survey,²⁹ 29.5 per cent of respondents passed on the 2002 safety net increase to employees receiving overaward increases. The proportion was higher for small firms. AiG frankly conceded, however, that there were some methodological limitations in its survey.

[127] Forty-one per cent of respondents to the Retail Motor Industry flowed safety net adjustments on to at least one overaward employee who was not entitled to that increase.³⁰

[128] Each of the surveys was subject to criticism by the ACTU and the expert evidence of Dr Ian Gordon, Director of the Statistical Consulting Centre at the University of Melbourne.³¹ In relation to the ACCI survey, Dr Gordon drew attention to the fact that the absence of detail as to the sampling process prevented an assessment of its adequacy. He also stated that the response rate of 28.6-30.9 per cent was so low as to raise serious concerns about the reliability of the results. He also expressed concern about non-response bias and the absence of any testing of the effect of such bias and, finally, he expressed reservations about the design of some of the questions.

[129] Similar concerns were expressed by Dr Gordon about the AiG survey. However, Dr Gordon judged the AiG survey more harshly in some respects. For example, he found the 7.35 per cent response rate to the AiG survey to be "unacceptably low" and that the nature of the introductory comments raised the implication of bias.

[130] The ACTU relied on that part of the Retail Motor Industry survey³² which suggests that 13 per cent of respondents who did not have any employees indicated that they had decreased the number of permanent employees as a result of the safety net adjustment awarded in 2002. The ACTU submitted that this provided evidence that a certain proportion of employers will always say that an award increase had a disastrous impact on their business, no matter what their circumstances, whether logically they could have been affected by an award increase or not. The ACTU also noted that 26 per cent of respondents voluntarily chose to pass on more than the $18 increase awarded in 2002, yet ascribed a negative impact to the award increase.

[131] Whilst the surveys provide some guidance and confirm that some level of flow-on occurs, little weight can be placed on the specific results. The technical problems identified by Dr Gordon, particularly those relating to response rates and the absence of testing for non-response bias, are such that no reliance can be reasonably placed on the specific magnitudes. The potential for non-response bias to distort survey results is well illustrated by the significant variation in responses as between respondents and non-respondents to the survey recently conducted on behalf of the UK Low Pay Commission.³³

[132] Further, none of the surveys provides conclusive evidence about the number of employees who might receive the benefit of safety net increases and there may be various explanations for the survey results. The increases recorded in relation to employees paid above-award rates may reflect the desire of employers to maintain internal relativities. On the other hand, those increases may reflect the effect of labour shortages on wage rates. For example, the Retail Motor Industry economic surveys of their industry report that "the industry is required to pay higher rates of pay to attract and retain skilled employees in an industry which is currently experiencing both a skill and labour shortage."³⁴ The Retail Motor Industry submitted that:

"one of the problems that the industry has is the ability to attract and retain skilled employees, and for that reason, and I have said it last year and I will say it again. I think that there is a reason why a lot of the businesses pay in excess of the award, because there is a need to retain quality staff."

The fact that some employers reported adjusting wages of persons in receipt of overaward wages by more than the level of safety net adjustments suggests that some employers may use the timing of such adjustments as a convenient time to make market based adjustments to wage levels.

[133] The Commonwealth submitted that data from the Workplace Agreements Database indicate that safety net increases could potentially flow-on to around half a million employees covered by federal enterprise agreements.

[134] The Commonwealth set out the numbers of employees subject to various agreement provisions as follows:

Table 17: Extent of Safety Net Flow-On Provisions for all Wage Agreements

Current at 30 September 2002

No extra claims commitment	No. of agreements	No. of employees	% of agreements	% of employees
Closed to safety net increases	11 117	1 059 100	76.9	68.9
Where consistent with Safety Net Review	999	97 700	6.9	6.4
Safety net increases conditional (may be open)	622	57 700	4.3	3.7
Safety net increases automatically passed on	301	21 200	2.1	1.4
Unspecified	1 411	302 100	9.8	19.6
Total	14 450	1 537 700	100	100

[Source: Exhibit Commonwealth 1, Figure 6.1 at para 6.32.]

[135] Table 17 shows that 68.9 per cent of employees are covered by agreements closed to safety net increases. The four categories for which the Commonwealth makes a claim of potential indirect effects are:

• safety net increases automatically passed on;



• unspecified;



• where consistent with safety net review; and



• safety net increases conditional.

[136] In our view, the Commonwealth analysis of agreements does not provide evidence of a significant flow-on of safety net increases to employees subject to enterprise agreements. There is some flow-on evident in respect of agreements which specifically provide for it and, in some instances, in respect of agreements conditionally providing for it. There is further potential for flow-on where consistent with the safety net adjustments. We do not think it reasonable to suppose that flow-on is available or occurs to any significant extent with respect to agreements which provide for wage increases and are silent as to the effect of safety net adjustments.

[137] Whilst the Commonwealth material illustrates a potential for flow-on of safety net increases to employees covered by agreements, it does not establish the extent to which flow-on actually occurs.

[138] The only direct evidence of the extent of flow-on from a comprehensive survey is that arising from the Award and Agreement Coverage Survey 1999 (AACS), dealt with in the Safety Net Review - Wages May 2000 decision.³⁵ It supports a conclusion that whilst there is likely to be some indirect cost associated with a safety net adjustment, it is limited. We are not satisfied that the survey material or the Commonwealth assessment of agreement data provides a sufficient basis to alter that conclusion.

Conclusion on the Cost of the ACTU's Claim

[139] The aggregate cost of the ACTU's claim will be less than that arising from its claim in 2002 because the dollar increase sought is smaller, the dollar increase applies to a higher level of award wages and the proportion of employees reliant on award increases is smaller as a result of the continuing spread of enterprise bargaining. The ACTU and Commonwealth estimates of the gross direct impact of the ACTU's claim on aggregate earnings are broadly similar - in the range of 0.42-0.53 percentage points. Taking into account the fact that the 1995 Australian Workplace Industrial Relations Survey (AWIRS) and the 1999 AACS suggest that not all employees classified by survey respondents as award reliant benefit from safety net increases, we remain of the view that estimates based on data for award reliant employees might be better described as showing the potential cost impact, rather than the actual impact.³⁶

[140] Further, in assessing the impact of safety net increases on aggregate wages growth, it is appropriate to note that current aggregate earnings growth partly reflects the effect of the 2002 adjustments. Accordingly, in assessing the likely impact of the proposals currently before us against present levels of relevant economic indicators, it is appropriate to consider the net impact on aggregate wages growth. We think the estimate of 0.1 percentage points direct net addition to aggregate wages growth is broadly indicative of the cost of the ACTU's claim. Increases at the level between those awarded in 2002 and the ACTU's claim would result in roughly proportionate net additions to aggregate wages cost.

The Economic Effects of Safety Net Adjustments

[141] In determining the applications before us, we are required by s.88B(2)(b) of the Act to have regard to economic factors, "including levels of productivity and inflation and the desirability of attaining a high level of employment". Submissions were addressed to the likely economic effects of safety net adjustments at two broad levels:

• aggregate effects on the economy; and



• the effects at the sectoral or enterprise level.

[142] The latter perspective recognises that the impact of safety net adjustments will vary as a result of the different incidence of enterprise bargaining and overaward payments. These micro-economic effects will arise between and within sectors of the economy and between those employees benefiting from safety net adjustments and other employees.

[143] The economic effects of any safety net increase will depend upon a number of factors including its magnitude, any monetary and fiscal policy response and the effect of any productivity improvements made by employers in an attempt to offset the cost of the increase, any conditions attaching to the adjustment and the general economic context.

[144] In assessing the likely economic impact of a safety net adjustment we have had regard to the performance of the Australian economy in light of the $18 increase in award rates decided in the May 2002 decision. This increase had effect at around the time of an additional labour cost increase arising from the 1 July 2002 increase in the minimum employer superannuation contribution required of employers from 8 per cent to 9 per cent. It is the last such increase presently legislated for.

[145] Based on our review of the economy we are unable to discern any adverse aggregate economic impact from the 2002 safety net increase. Whilst it is impossible to isolate the specific impact of the safety net increases, a consideration of Australia's aggregate economic performance since the middle of last year does not disclose any obvious adverse impacts. The non-farm economy has continued to grow strongly. The detraction from aggregate growth arising from the significant decline in farm output is reasonably attributable to the drought. Productivity continued to increase strongly and aggregate labour market performance was good, with reasonable employment growth and a continuing reduction in unemployment. Wage growth overall remained moderate and the rate of inflation remained stable, within the RBA target range.

[146] Against that general background, we move to consider more closely the likely economic impact of a safety net increase on employment, inflation and productivity.

Employment

[147] Most attention in submissions directed to the likely economic effects of the ACTU's claim was directed to the effect on labour market performance. In this regard, the Commission is required by the Act to ensure a safety net of fair wages and conditions is established and maintained, having regard to, amongst other matters, the desirability of attaining a high level of employment.

[148] In assessing the likely impact on employment of safety net increases some guidance may be had by a broad assessment of recent employment outcomes. Such an assessment is of limited value because no counterfactual comparison is available and it is not possible to isolate the impact of safety net adjustments, as against the range of other factors impacting upon employment growth. Nonetheless, a general assessment of labour market performance does allow some consideration of employment growth in award reliant sectors where the economic impact of safety net adjustments would be expected to be most pronounced.

[149] A general assessment of recent employment data shows:

• relatively strong employment growth over the past year, during which time the $18 award adjustment decided in the May 2002 decision had effect. In the year to February 2003, employment grew by 3.2 per cent overall and 2.5 per cent for full-time employment;



• hours worked for the economy as a whole grew by 1.6 per cent in the year to the December quarter 2002 (0.1 per cent in the market sector);



• in the year to February 2003, female employment grew by 4.4 per cent whilst male employment grew by 2.0 per cent, notwithstanding a significantly greater level of award reliance amongst female workers;



• since May 1996 employment growth in the three most award reliant sectors has significantly exceeded total employment growth of 12.5 per cent. Employment grew 24.7 per cent in health and community services, 19.7 per cent in accommodation, cafes and restaurants, and 14.6 per cent in the retail industry; and



• whilst volatile year to year, over a number of years of safety net adjustments, growth in hours of employment in the most award reliant industries has exceeded growth in hours of employment for the economy as a whole. Between 1997-98 to 2001-02, total employment hours grew by 6.4 per cent, compared with 12.7 per cent in health and community services, 12 per cent in accommodation, cafes and restaurants, and 11.6 per cent in the retail industry.

[150] Given the complex range of factors acting on employment, it is not possible to draw specific conclusions as to the impact of safety net adjustments on employment. However, the general assessment of employment data, including a focus on more heavily award reliant sectors, does not disclose any basis to suggest that past safety net adjustments have had significant adverse employment effects.

[151] As in the past, the parties also relied on academic papers and other research materials. The ACTU tendered, and relied upon, a paper by two Australian academics, Dowrick and Quiggin.³⁷

[152] Dowrick and Quiggin's conclusions in relation to employment effects, set out in their Executive Summary, are:

• "A failure to increase minimum wages would contribute to further growth in inequality. To be justified, a decision to accept such growth in inequality would require convincing evidence that minimum-wage workers would benefit from substantial employment growth. No such evidence exists.



• Econometric studies on the impact of changes in minimum wages have yielded ambiguous results. The work of Card and Krueger, and subsequent studies using similar methods suggests that, in some cases, increases in minimum wages may have no effect, or even a positive effect, on unemployment.

. . .

• We present evidence confirming previous findings that countries with regulated labour markets have been able to resist the global trend towards rising inequality without suffering either higher unemployment or lower employment than countries with deregulated labour markets.



• It follows that there is little reason to expect strong employment benefits from freezing minimum wages in nominal terms, that is, reducing minimum wages in real terms.



• Furthermore, in order to avoid further widening of inequality, and to avoid the exacerbation of poverty traps, minimum wages need to be indexed not to the Consumer Price Index but to the average or median wage - allowing workers in low-pay occupations to share in the benefits of rising productivity."³⁸

[153] The ACTU also relied upon the conclusions of the UK Low Pay Commission's Fourth Report arising from its assessment of research undertaken for it. In the Executive Summary the Low Pay Commission concluded:

"The labour market remains tight by historical standards, but employment growth has slowed. Employment growth among groups and sectors most affected by the minimum wage has, however, generally been stronger than average. The main exception to this is among young people. Formal tests of the impact of the minimum wage on employment of those directly affected suggest minimal negative effects."³⁹

[154] In assessing the research results the Low Pay Commission noted:

"The extensive academic research on the effect of minimum wages on employment often produces conflicting results. Because any negative employment impact is more likely to be found among those groups and sectors most affected, our analysis has paid particular attention to these areas."⁴⁰

[155] It considered three studies, reaching the following conclusions:

"The results suggest that there is little evidence that the introduction of the National Minimum Wage had an adverse impact on the probability of subsequent employment of those affected. The estimates of the 2000 uprating are more mixed. There is some evidence of a negative effect, mainly for adult women, but it is sensitive to the choice of wage variable and estimation method and was only significant in one of the four specifications. Moreover, there is evidence that the differential impact of the slowdown in employment growth (which may affect low-paid workers more than those higher up the earnings distribution) biases the estimates. Once this is controlled for the results are insignificant. Analysis of the impact of the 2001 uprating is restricted by the available data, but initial results largely support the view that there was no adverse impact."⁴¹

"Their results show that those firms affected most by the introduction of the minimum wage are more likely to experience falls in employment and hours. Elasticities of employment with respect to the change in wages are in the region of -0.2 to -0.4 in this sector, depending on the precise specification used. This means that a 10 per cent increase in wages leads to a 2 to 4 per cent fall in employment. As we noted earlier, this is a very unusual sector that is most at risk of adverse employment effects."⁴²

"In another study, Stewart (2002a) evaluates the impact of the introduction of the National Minimum Wage by analysing the geographical variation in wages, which means that the minimum wage `bites' at different points in the earnings distribution around the country. The results indicate that, although the minimum wage had differential wage-distribution effects across the 140 areas of the country, employment growth after its introduction was not significantly lower in areas of the country with a high proportion of low-wage workers, whose wages had to be raised to comply, compared with that in areas with a low proportion of such workers."⁴³

[156] The Low Pay Commission concluded from this research that:

"These are valuable pieces of research which add to our understanding of the impact of the minimum wage on employment in the UK labour market. The results from Stewart (2003) show that the minimum wage has had no strong adverse impact on employment, particularly when the impact of the growth slowdown on workers at different points of the earnings distribution is taken into account. Even where negative effects are found, they are confined to specific groups and specifications and the size of the effects is modest. The Machin et al. (2002) study is an important piece of research into a sector particularly vulnerable to adverse employment effects of the minimum wage. But this study relates to one sector, and does not therefore take account of offsetting rises in other sectors. Even if these employment effects were replicated in all low-paying sectors, the effect on aggregate employment would be minimal."⁴⁴

[157] The Low Pay Commission also considered a survey undertaken for it, concluding that:

"Figure 2.24 shows that overall the vast majority of firms, nearly 65 per cent of those affected, reported no change in staffing following the October 2001 uprating. Just over 30 per cent of those affected said they reduced staffing levels whilst 5 per cent said they increased them. But these represent only 14 per cent and just over 2 per cent respectively of all respondents to our survey. There was no large variation by sector, but the childcare and social care sectors were least likely to report reductions."⁴⁵

[158] The Low Pay Commission summarised its assessment of the research and its consultation as follows:

"In summary, growth in the labour market has slowed over the recent past but conditions remain tight. Despite this easing there is little evidence that the introduction of the National Minimum Wage or subsequent upratings led to a worsening in the employment prospects of groups most affected, particularly women and ethnic groups. Young people's employment has, however, fallen relative to employment rates generally; this could be a cyclical effect and is discussed further in Chapter 4. Results from research that formally tests the employment response of groups directly affected generally indicate minimal negative effects. Where adverse effects are found they are limited to particular models and time periods. Results from our survey and consultation show that a minority of firms affected by the October 2001 uprating undertook other measures to reduce labour costs, including reducing hours. Research we commissioned to test for a minimum wage effect on hours shows a fall in hours worked among male workers, but not among groups most likely to be affected - women and young people. Data at the sectoral level indicate that, since the October 2001 uprating, employment in low-paying sectors as a whole has been stronger than in non low-paying sectors. Econometric research in the residential care sector indicated a modest negative employment effect on this sector."⁴⁶

[159] As in the 2002 Safety Net Review, ACCI relied upon studies previously considered by the Commission.⁴⁷ One of the papers, by Lewis and McDonald, reviewed the results of a number of Australian studies and found they "suggest an employment elasticity with respect to real wages of about -0.6 and -0.8". The authors were critical of the studies and made their own estimate, finding an elasticity of demand for labour with respect to real wages of -0.8, close to the "wrongly interpreted and estimated `elasticity' of other studies". Other papers tendered by ACCI were critical of the research results of Card and Krueger.

[160] The Commonwealth reviewed the literature in relation to the employment effects of the minimum wage, focussing on criticism of the work of Card and Krueger. It submitted that Dowrick and Quiggin, in their literature review, paid insufficient attention to such critical assessments of Card and Krueger. The Commonwealth relied on other studies, including Burkhauser, Couch and Wittenberg⁴⁸ which concluded that the Card and Krueger results, when properly controlled for the influence of general economic conditions on employment levels, reveal a consistently negative employment elasticity, ranging from -0.2 to -0.6 per cent.

[161] Having regard to the various studies and the research findings of the UK Low Pay Commission, it is evident that there is a continuing controversy amongst academics and researchers as to the employment effects of minimum wage improvements.⁴⁹ As noted by the UK Low Pay Commission, the research results often conflict. That Commission concluded, from the research undertaken for it, that negative effects do occur but that those effects are modest and confined to specific groups. Taking all of the research into account, it has not been established that moderate increases in the wages of the low paid, of themselves, will diminish aggregate employment outcomes, although some studies suggest that some negative effects might occur for employees receiving the minimum wage.

[162] The Commonwealth relied upon modelling undertaken through the Treasury Macroeconomic Model (TRYM) and the Murphy model. The Commission's consideration of the results of the TRYM modelling in the May 2002 decision remains relevant.⁵⁰ In particular, we note that whilst the TRYM modelling provides some guidance as to the direction of effects, limited weight should be attached to the specific magnitudes. As the Commission has noted in the past, models such as the TRYM are the product of technical specifications, which are open to debate and involve a wide range of inputs and the application of judgment.

[163] The Commonwealth tendered estimates of the economic impact of the ACTU's claim, arising from the TRYM and Murphy models, on the basis of its estimate of the gross cost and on the basis of various assumed monetary policy responses (from zero to 0.5 percentage points). The gross cost estimate in effect modelled the impact of the ACTU's claim, if granted, as against no increase at all. The results were:

Table 18: Macroeconomic Impact of the ACTU's 2002-03 Claim^(a)

	TRYM model		Murphy model
	2003-04	2004-05	2003-04	2004-05
	No interest rate response
GDP level (b)	0.0	-0.1	0.0	-0.1
Inflation (c)	0.4	0.4	0.3	0.2
Employment level (d)	-0.1	-0.1	-0.1	-0.1
Employment ('000) (e)	-5	-10	-7	-9
Unemployment rate (f)	0.0	0.1	0.0	0.1
Wages growth (c)	0.7	0.4	0.4	0.1
	25 basis point interest rate increase
GDP level (b)	0.0	-0.2	-0.1	-0.2
Inflation (c)	0.4	0.3	0.2	0.1
Employment level (d)	-0.1	-0.2	-0.1	-0.2
Employment ('000) (e)	-7	-17	-11	-16
Unemployment rate (f)	0.0	0.1	0.1	0.1
Wages growth (c)	0.6	0.3	0.4	0.0
	50 basis point interest rate increase
GDP level (b)	-0.1	-0.3	-0.1	-0.2
Inflation (c)	0.4	0.2	0.2	0.1
Employment level (d)	-0.1	-0.3	-0.1	-0.2
Employment ('000) (e)	-9	-24	-14	-23
Unemployment rate (f)	0.1	0.1	0.1	0.1
Wages growth (c)	0.6	0.2	0.3	-0.1

Notes:
^(a) Table shows differences between a baseline with no safety net wage increase and outcomes with a $24.60 increase in award wages and interest rates either unchanged or 25 or 50 basis points higher than under the baseline.
^(b) Difference between average levels over the year as percentage of baseline.
^(c) Difference between through-the-year rates.
^(d) Difference between June quarter levels as a percentage of baseline.
^(e) Difference between June quarter levels in thousands of persons.
^(f) Difference in June quarter in percentage points.

[Source: Exhibit Commonwealth 1, Figure 6.3 at para 6.45.]

[164] The ACTU obtained from the Commonwealth, and tendered, modelling results on the basis of its estimate of the net addition to aggregate wages costs and on the assumption of no monetary policy response, a table described by the ACTU as the "table of zeros".

Table 19: Commonwealth Modelling of Macroeconomic Effects of the ACTU's Claim^(a)

	TRYM model		Murphy model
	2003-04	2004-05	2003-04	2004-05
GDP level (year-average)
- Deviation from baseline	0.0	0.0	0.0	0.0
- Growth rate	0.0	0.0	0.0	0.0
Inflation (through-the-year)	0.1	0.1	0.1	0.0
Employment level
- Deviation from baseline (June)	0.0	0.0	0.0	0.0
- Growth rate (through-the-year)	0.0	0.0	0.0	0.0
Employment ('000)
- Deviation from baseline (June)	-1	-2	-1	-2
- Growth (through-the-year)	-1	-1	-1	-1
Unemployment rate (June)	0.0	0.0	0.0	0.0
Wages growth (through-the-year)	0.1	0.1	0.1	0.0

Note:
^(a) Figures are per cent deviation from baseline unless otherwise indicated.

[Source: Exhibit ACTU 4, Table R6.1 at para R6.5.]

[165] With respect to employment it may be seen that the Commonwealth's method resulted in reported adverse employment effects ranging from -0.1 percentage points (no monetary policy response) to -0.3 percentage points (assuming a 0.5 percentage points interest rate increase). The ACTU's net cost approach, with no monetary policy response, resulted in no measurable change in employment growth and, at worst, 2000 fewer jobs, a result without statistical significance.

[166] For the reasons set out in the May 2002 decision, we think the net approach is to be preferred and that the assumption of a monetary response is unrealistic in the present circumstances. Consideration of the net impact on aggregate wages costs of the ACTU's claim, absent a monetary policy response through increased interest rates, suggests a very limited impact of the ACTU's claim on economic growth and employment. The modelling analysis, to the extent that specific orders of magnitude can be relied upon, suggests that the net additional labour costs arising from the ACTU's claim would not materially detract from employment growth. To the extent that adverse effects arise from the RBA interest rate response imposed upon the model in response to marginal additions to aggregate wages growth and inflation, we think the modelling results are unrealistic. The modelling undertaken by the Commonwealth provides no basis to find that the safety net increases we have decided upon will have material adverse aggregate employment effects.

[167] Surveys undertaken by ACCI, AiG and the Retail Motor Industry after the 2002 safety net adjustment asked respondents about employment effects of the adjustment. The ACCI survey asked respondents if the 2002 safety net adjustment had affected employment. The responses were as follows:

Table 19: ACCI Survey Responses to 2002 Safety Net Adjustment

Response	Firms required to directly pay SNA increases	Firms not required to directly pay SNA increases	All firms
Employment higher than it otherwise would have been	2.9%	1.0%	2.5%
No effect on employment	81.2%	95.9%	90.4%
Employment lower than it otherwise would have been	15.9%	3.1%	7.1%

[Source: Exhibit ACCI 2, Tag 11 at pp. 11-12 to 11-18.]

[168] ACCI also asked if the series of safety net increases since 1997 had affected employment. Of all respondents 80.4 per cent answered that the increases had no effect on employment, 0.5 per cent answered that employment was higher than it otherwise would have been and 19.1 per cent reported employment to be lower than it otherwise would have been.⁵¹

[169] The AiG survey results included:

Table 20: AiG Survey Responses to 2002 Safety Net Adjustment

Response	Small firms	Large firms	All firms
Number of employees increased	1.6%	5.1%	4.8%
Number of employees decreased	17.2%	6.6%	10.1%

[Source: Exhibit AiG 1, Annexure L Table 24 at p. 232.]

[170] The Retail Motor Industry survey suggested that the 2002 safety net adjustment had resulted in 7 per cent of respondents offering more hours of employment, 12 per cent of respondents offering fewer hours of employment and no change in the number of hours offered by 77 per cent of respondents (4 per cent did not know).

[171] The surveys conducted by the employer associations were subject to criticism by the ACTU. It relied on expert evidence from Dr Gordon. These criticisms are discussed above in relation to the calculation of the indirect cost of the ACTU's claim. Some issues in relation to the reported employment effects of safety net adjustments warrant particular consideration. First, whilst the surveys provide information about the proportion of employers reporting employment effects, they do not provide quantification of changes in employment levels. Nor do they provide information in relation to the net impact on employment. Second, two aspects of the survey suggest that even the results in relation to the proportion of firms reporting employment effects should be treated with significant caution because they are likely to reflect over-statement of adverse employment effects. The first aspect is that the low response rates, together with standard errors, are such that the specific reported proportions of respondents fall within a relatively broad range of probable results. The second aspect is the possibility of non-respondent bias. Non-respondent bias is well recognised in statistical analysis, reflecting the concept that the affected members of a survey population are more likely to respond than the unaffected and indifferent. The significant divergence in reported outcomes between respondents and non-respondents in the UK Low Pay Commission survey is illustrative of the operation of the bias of this kind. We think it is unsafe to assume that non-respondent bias does not affect the employer surveys. Because there is no check on non-respondent bias it is not possible to conclude that the results are representative of all employers surveyed.

[172] Bearing these significant limitations in mind, the surveys do tell us that a significant proportion of employers report no employment effect (77 per cent to 90.4 per cent). A small proportion of employers (7.1 per cent to 12 per cent) report an unspecified adverse employment effect. A smaller number still (2.5 per cent to 7 per cent) report an unspecified positive employment effect. The ACCI survey suggests that any adverse impacts are concentrated on those firms legally required to pay safety net increases. The surveys support the following conclusions:

• there are employment effects of safety net increases with respect to some employers;



• such effects operate differentially; and



• adverse employment effects are more evident in relation to those employers directly affected by safety net increases.

The likelihood of some adverse effect on some employers is a relevant consideration to be balanced within the range of considerations relevant to the determination of the claims before us.

[173] The surveys highlight the reality that safety net increases will impact differently on different sectors of the economy and on different enterprises. The differential impact reflects a range of considerations, including:

• the incidence of award dependent employees, whose wages will be directly affected by safety net increases;



• different economic circumstances between industries;



• differential productivity performance;



• differential profitability; and



• varying competitive pressures.

[174] Sectoral considerations are among many factors to be taken into account in determining the level of safety net adjustments to be awarded. Further, the sectoral perspective is necessarily viewed in the context of the Commission's task in determining, for the award structure as a whole, appropriate minimum rates of pay for the purpose of ensuring that a safety net of fair minimum wages and conditions of employment is established and maintained, having regard to the statutory considerations, including those in s.88B of the Act.

Conclusions in Relation to Employment Effects

[175] From the materials considered above, we draw the following conclusions:

• a general assessment of employment data, including a focus on more heavily award reliant sectors, does not disclose any basis to suggest that past safety net adjustments have had significant adverse employment effects;



• there remains a continuing controversy amongst academics and researchers as to the employment effects of minimum wage improvements. As noted by the UK Low Pay Commission the research undertaken often produces conflicting results;



• the various studies do not establish that moderate increases in the minimum wage, of themselves, will diminish aggregate employment effects;



• whilst there is no automatic relationship between the two, real wage growth can adversely affect aggregate employment growth. The extent of such effect will depend upon the prevailing economic circumstances and the extent of the real wage movement;



• in respect of the modelling undertaken by the Commonwealth, consideration of the net impact on aggregate wages costs of the ACTU's claim, absent a monetary policy response through increased interest rates, suggests a very limited impact of the ACTU's claim on economic growth and employment;



• the ACCI, AiG and Retail Motor Industry surveys provide no data as to the magnitude of employment effects and the results in relation to the proportion of firms reporting particular effects should be treated with some caution. The surveys do, however, support a conclusion that there are employment effects of safety net increases with respect to some employers, such effects operate differentially and adverse employment effects are more evident in relation to those employers directly affected by safety net increases;



• the likelihood of some adverse effect of award increases on some employers is a relevant consideration to be balanced within the range of considerations relevant to the determination of the claims before us;



• safety net increases will impact differently on different sectors of the economy and on different enterprises; and



• the limited addition to aggregate wages costs associated with our decision will not have a significant real wages effect. In the context of strong productivity growth, and in the absence of any factor share imbalances, we think it is unlikely to cause dislocation to labour market outcomes.

[176] One final issue arose with respect to survey evidence. AiG noted some methodological limitations in relation to its survey of members and submitted that it is desirable that the Commission conduct its own comprehensive independent survey to inform itself of the impact of its Safety Net Review decisions. We agree with the Commonwealth that there is a range of material already put before the Commission which is relevant and of assistance in determining applications to adjust the safety net. However, there is limited material directed specifically to the effect of safety net adjustments on employment in the Australian context. We see value in a comprehensive, representative and technically robust survey directed to providing direct and contemporary information relevant to the Commission's task in adjusting the wages safety net. In the past surveys such as the AACS and AWIRS, whilst broader in their scope than the survey suggested by AiG, have provided worthwhile information. We do not think, however, that the Commission should undertake such a survey. Were it to do so it would be required to make a number of judgments about the questions to be asked and technical matters, raising potential issues in relation to its role as the independent arbitrator of the claims before it. Suggestions might arise that the Commission, in exercising its judgment in formulating a survey, had created a bias, or in some way favoured one interest or the other in these proceedings. Nevertheless the Commission would be assisted by a more comprehensive base of information and a relatively high level of agreement that the results were reliable. Accordingly, we urge the parties and in particular the Commonwealth to give consideration to facilitating survey research of the nature suggested by AiG.

[177] Various parties have submitted that the employment effects of safety net adjustments should weigh more heavily in the Commission's deliberations. That submission would obviously be assisted by high quality research into those effects. Some degree of consultation, and hopefully agreement, between the major parties and interveners as to the scope, content and technical specification of any such research would enhance the value of the results.

Wages Growth and Inflation

[178] The MYEFO statement noted an expected moderation in inflation over the forecast period, said to be underpinned by steady wage increases and solid productivity growth.⁵² The February 2003 RBA Statement on Monetary policy⁵³ noted a decline in underlying inflation during the year to December 2002, compared to the previous year, mainly due to the fading of the impact of currency depreciation over 1998-2000, but also due to some easing in wage pressures and upstream price pressures during much of 2002. The OECD has also noted that "(Australia's) (g)ood inflation performance was underpinned by wage moderation and very strong labour productivity growth".⁵⁴

[179] Given the limited impact of the ACTU's claim on aggregate wages, it is likely to have a minimal impact on inflation. The increase we have determined will not, in our opinion, lead to an acceleration of aggregate wages growth or inflation, being consistent with continuing moderate aggregate wages growth and continuing low levels of inflation, within the RBA target range.

Productivity

[180] Productivity continues to grow strongly, growing by 3.8 per cent for the non-market sector over the past year. This continues a trend of relatively strong growth over the course of the current growth cycle.⁵⁵ Productivity has also increased during 2001-02 in each of the major award reliant sectors of accommodation, cafes and restaurants, retail trade and community services, although annual increases tend to be variable from year to year. Although not evidence of a positive association between safety net increases and productivity, the growth in productivity in those sectors does not support a conclusion that safety net increases impact negatively on productivity.

[181] The Commonwealth presented a graph comparing award coverage as at May 2002 and labour productivity growth by industry from June 1990 to June 2002,⁵⁶ which it contended showed an inverse relationship between industry award coverage and productivity. Although the comparison, on its face, suggests such a negative relationship, the regression exercise would seem to mask differing underlying capacities for labour productivity between sectors.

[182] In our view, there is no necessary association between award coverage, safety net increases and productivity growth. We think the proposition that safety net increases will prevent productivity improvement is not sound. As noted in past decisions, there is material which suggests that sectors characterised by high award reliance, such as the wholesale and retail sector and the hospitality sector, have contributed to the improved productivity growth of the past decade.⁵⁷ The UK Low Pay Commission found no significant effect, positive or negative, of the minimum wage on productivity, productivity gains have been made in most low-paying sectors and that some firms had implemented innovative measures to deal with labour cost increases arising from minimum wage adjustments.⁵⁸

[183] Further, we note that if, as the Commonwealth suggests, bargaining is conducive to productivity improvement, the continuing spread of bargaining⁵⁹ supports a conclusion that safety net adjustments have not diminished the scope for bargaining and any associated productivity improvement.

[184] In conclusion, the strong productivity growth enjoyed over recent years does not suggest to us that safety net increases awarded since 1997 have been detrimental to aggregate productivity growth. In our view the safety net adjustments awarded will not constrain productivity growth.

Conclusion on Economic Considerations

[185] As we have concluded earlier, over the past year the Australian economy has continued to grow strongly, notwithstanding a moderation in growth resulting from the effects of the drought on rural production. The non-farm sector has continued to grow at 4 per cent per annum. Historically high productivity growth has continued. Labour market performance has improved and private sector investment has been exceptionally strong. Net export performance has been weak.

[186] The immediate economic outlook, reflected in official forecasts, remains positive. Those forecasts suggest the continuation of strong, non-inflationary growth. There are, however, some uncertainties which present risks, most notably any delay in the passing of drought conditions and possible further weakening in the global economy, with uncertainty as to the impact of the Iraq conflict. Whilst we think it inappropriate to assume the worst possible outcome in respect of these uncertainties and risks, we have given weight to those uncertainties amongst other matters in determining the ACTU's claim.

[187] The aggregate cost of the ACTU's claim will be less than that arising from its claim in 2002 because the dollar increase sought is smaller, the dollar increase applies to a higher level of award wages and the proportion of employees reliant on award increases is smaller as a result of the continuing spread of bargaining. The gross direct aggregate addition to labour costs of the ACTU's claim would be in the order of 0.4 to 0.5 percentage points and the net impact, having regard to the continuing effect of the 2002 safety net adjustment, is in the order of 0.1 percentage points. Any indirect cost will be limited. Any impact of our decision will be less than that associated with the ACTU's claim.

[188] A broad assessment of employment data, including a focus on more heavily award reliant sectors, does not disclose any basis to suggest significant adverse employment effects of past safety net adjustments. The modelling undertaken by the Commonwealth suggests the ACTU's claim would have a very limited impact on economic growth and employment.

[189] However, we recognise that safety net increases will impact differently on different sectors of the economy and on different enterprises. The likelihood of some adverse effect of award increases on some employers is a relevant consideration to be balanced within the range of considerations relevant to the determination of the claims before us.

[190] The limited addition to aggregate wages costs associated with our decision will not have a significant real wages effect. In the context of strong productivity growth, and in the absence of any factor share imbalances, we think it is unlikely to have adverse aggregate employment effects. In our view, the Australian economy can accommodate further reasonable improvements in the safety net of minimum wages of the level we determine in this decision.

NEEDS OF THE LOW PAID AND LIVING STANDARDS GENERALLY

[191] The needs of the low paid and living standards generally prevailing in the Australian community are among a range of prescribed considerations to which the Commission must have regard. The objects of Part VI of the Act (s.88A) include the following:

"The objects of this Part are to ensure that:

(a) wages and conditions of employment are protected by a system of enforceable awards established and maintained by the Commission; and

(b) awards act as a safety net of fair minimum wages and conditions of employment . . ."

[192] Section 88B(2) requires the Commission to establish and maintain a safety net having regard to:

"(a) the need to provide fair minimum standards for employees in the context of living standards generally prevailing in the Australian community;

(b) economic factors, including levels of productivity and inflation, and the desirability of attaining a high level of employment;

(c) when adjusting the safety net, the needs of the low paid."

[193] Section 90(b) requires the Commission in performing its functions to take account of the public interest and for that purpose to have regard to:

"(b) the state of the national economy and the likely effects on the national economy of any award or order that the Commission is considering, or is proposing to make, with special reference to likely effects on the level of employment and on inflation."

[194] As in previous cases the ACTU relied on statements from employees in a range of occupations to demonstrate the difficulties those employees had in affording basic necessities. Those opposing the ACTU's claim did not seek to cross examine any of the employees who provided statements.

[195] For its part ACCI accepted that "the distribution of incomes in the Australian labour market does encompass persons who experience financial adversity, including employees on award rates of pay".⁶⁰ But it argued that there are "fundamental problems" with the witness statements relied on by the ACTU which rendered them irrelevant to the Commission's determinative task in these proceedings.

[196] In particular ACCI submitted that the lack of commonality among the witnesses in terms of their household income and expenditure meant that it could not be concluded that the experience of the witnesses was indicative of the needs of the low paid. It was argued that the witness evidence presented was so diverse and contradictory as to preclude any proper consideration of the material, under s.88B(2)(c).

[197] It is apparent from their evidence that the witnesses struggled to make ends meet. A significant proportion of their expenditure is on necessities and unexpected expenditures are difficult to finance. There were a number of things which the witnesses went without, for example:

• regular holidays;



• social outings;



• repairing/replacing household appliances;



• new clothes;



• insurance; and



• dental treatment.

[198] Many of the witnesses live week to week and find it difficult to save. For example, Mr Crouch said:

"Because of the level of my wage, I do not have any savings. I live quite a simple life but at the end of each week I have nothing left over. I live week to week. This means I have to pay everything I can by instalment."⁶¹

[199] In relation to ACCI's arguments about the limitations of the witness evidence we note that in its reply submission the ACTU argued that ACCI's analysis contained a significant number of errors. We agree that there are errors in ACCI's detailed analysis of the witness statements. But we think that there is some substance in ACCI's contentions as to the limitations inherent in the witness evidence.

[200] It seems to us that this evidence is, at best, illustrative in a general qualitative sense, of some of the difficulties encountered by some low paid employees. It is not reasonable to extrapolate such material and draw general conclusions about the needs of the low paid. Indeed the ACTU did not ask us to do so.

[201] It is generally acknowledged, and we accept, that many low paid employees experience difficulties in making ends meet and are unable to afford what are regarded as necessities by the broader Australian community. But our assessment of the needs of the low paid in this case has been constrained by the absence of any detailed reference to empirical studies of those needs. We return to this issue later in our decision when we deal with the submissions seeking a general inquiry into the needs of the low paid.

[202] In addition to the evidence of individual employees, the ACTU relied on a paper by Professor Sue Richardson entitled Low Wage Jobs & Pathways to Better Outcomes⁶² and a National Centre for Social and Economic Modelling (NATSEM) analysis of the incidence of Effective Marginal Tax Rates (EMTR) for individuals with earnings.

[203] In her paper Professor Richardson reviews the current state of knowledge on the role played by low wage jobs in providing access to and progression in employment for lower skilled workers.

[204] From a review of the evidence on wage/earnings mobility Professor Richardson concludes that:

• "Measures of mobility are sensitive to how low wage is defined and whether movement into non-employment and part-time employment is included:

- The stricter is the definition of low wage, the greater the mobility.

- The inclusion of movement into non or part-time employment substantially reduces the degree of upward mobility.

• Quite a large fraction of low wage workers cycle between low wage jobs and no jobs.



• Mobility is higher, the longer the time interval considered.



• Youth have higher levels of upward mobility than do older workers.



• Upward mobility is higher for men than for women, and for more educated workers.



• Thus, for older, less educated and female workers, low wages are likely to be a trap rather than the first step on the ladder."⁶³

[205] Professor Richardson notes that these conclusions are based on evidence in the period up to the mid 1990s, and that since that time a strong economy has assisted upward mobility but this has been offset by the substantial trend towards declining mobility as inequality in the cross-section wage distribution has risen. On this issue Professor Richardson concludes:

"Low wage jobs are concentrated in particular occupations and industries. They are prevalent in service industry jobs . . . These include child care, elder care, non-qualified nursing care, cleaning, food preparation and serving. These types of jobs are not part of any sort of career path and workers in them can expect a pay rise only if they move to some different job/industry. Truck driving and labouring are comparable jobs for men.

The industries in which the low wage jobs are predominantly found are similar across countries. They include retail, hospitality, personal services and business services . . . There is evidence that some firms operate a high turnover, low wage policy, which discourages both firm and worker from investing in skills related to the job. Indeed, high turnover industries/firms are likely to provide poor opportunities for upward wage mobility. First, high turnover discourages investment in skills. Second, workers who lose their jobs systematically are forced to accept lower wages in their replacement job. Indeed, the wage loss from involuntary job change often lasts for many years, if not the rest of the working life."⁶⁴

[206] In relation to the NATSEM analysis of EMTR, the ACTU contended that the analysis shows:

• the majority of individuals with earnings (52 per cent) face an effective marginal tax rate of between 20 and 40 per cent;



• more than three-quarters of individuals with earnings, categorised by decile of family income, in each of the first four deciles of the income distribution, with average gross family income up to $729 per week, face effective marginal tax rates not exceeding 40 per cent; and



• a majority of full-time employees (59 per cent) and more than three-quarters of part-time employees (77 per cent) face effective marginal tax rates of less than or equal to 40 per cent.

[207] The ACTU argued that these results rebut the assertion (by the AiG) that most workers receive little if any benefit from safety net adjustments because of the operation of the tax transfer system.

[208] The States and Territories generally support the ACTU's position and contend that the results of the EEH Survey are illustrative of the disparity in pay of award reliant workers and those who benefit from bargaining.⁶⁵

[209] The survey results show that the average weekly total earnings for full-time adult non-managerial employees who had the main part of their pay set by awards ($639.90) was 30 per cent less than that of those employees whose pay was set by collective agreements ($914.30).

[210] The pay disparity referred to by the States and Territories is to some extent reflected in data on earnings dispersion. In this regard we note that earnings dispersion has been increasing for some time, as shown by Chart 5 below:

Chart 5: Australian Real Total Weekly Earning, By Percentile, from 1975-2002 for Full-Time Adult Non-Managerial Employees

[Source: Exhibit Commonwealth 1 Figure 9.1 at p. 86.]

[211] ACCER submitted that the present level of the federal minimum wage is "manifestly inadequate" and that it must be reviewed as a matter of urgency. As an interim measure it supports an increase in the federal minimum wage of $24.60 to $456 per week or $12 per hour.

[212] ACCER also submitted that the Commission should conduct an investigation or inquiry into the needs of the low paid and review the federal minimum wage and establish a benchmark against which the federal minimum wage should be set. Similarly, ACOSS proposed an inquiry to "ascertain an appropriate benchmark for the adequacy of minimum wages". The Commonwealth, ACCI and AiG did not see the need for an inquiry of the type proposed.

[213] ACOSS also submitted that in the short-term the Commission should increase minimum wages so as to ensure that they do not fall any further behind movements in average wage rates. It contended that the establishment and maintenance of a fair safety net of minimum wages and conditions of employment is critically important to prevent an increase in poverty and widening income inequalities, and to preserve work incentive for jobless people. ACOSS advanced a number of points in support of this proposition including:

• since the mid 1970s the distribution of private income has become substantially more unequal and wage dispersion is a key part of this trend;



• the most recent data from the NATSEM published by the Smith Family indicates that in 2000, among households whose main source of income was wages, 365,000 people lived in poverty;



• while it is true that Government transfer payments can be more precisely targeted towards low-income households at risk of poverty, decent minimum wages provide a critical floor for the incomes of many low-income households;



• the rejection of suggestions that low paid workers should bear a disproportionate burden of wage restraint as they are the least able to cope with a decline in their living standards; and



• inadequate minimum wages raise important gender equity issues. The majority of low paid workers are women, many of whom rely totally on award wage increases.

[214] AiG submitted that the role of the income support system in delivering increases in disposable income should be taken into account in determining safety net wage increases. It argued that for many low-income households wage increases granted by the Commission are "diluted" due to features of the income tax system, the income support system and by the interaction between these two systems. AiG urged the Commission to consider three implications of this interaction:

• "Safety net wage increases represent a very poor `bang for the buck' as far as low-income households are concerned.



• The income support system is much more effective in addressing the needs of low-income households and the Commission should take into account the impacts of changes to income support arrangements.



• In weighing the costs and benefits of any potential award wage increase, full account should be taken of the dilution of benefits actually received relative to the full costs to employers and the implications of these extra costs on the employment opportunities for members of low-income households."⁶⁶

[215] ACCI contended that the "needs of the low paid" must be seen in the context of what can be afforded. In this regard it is submitted that the consideration in s.88B(2)(c) is not pre-eminent. It is but one matter to be balanced against the others in s.88B and against the Act more generally.

[216] The Commonwealth submitted that addressing the "needs of the low paid" must include having regard to the employment prospects of the low paid. In this context it is said that the needs of the low paid include the need for employment, which is the key source of financial security.

[217] In this context the Commonwealth also submitted that unemployment is a key cause of inequality and hence employment creation rather than increasing the incomes of those in work is needed to reduce income inequality in Australia.

[218] Further, the Commonwealth submitted that in having regard to "living standards generally prevailing in the Australian community" (s.88B(2)(a)) the Commission cannot focus on the living standards of wage and salary earners to the exclusion of the unemployed, retirees and other members of the Australian community.

[219] In terms of assessing the relative living standards of low paid employees the Commonwealth contended that the low paid are not restricted to the bottom half of the family income distribution. On this basis it is argued that granting the ACTU's claim will not necessarily lead to an improvement in the living standards of those on the lowest incomes who do not have wage and salary earners in their households.

Conclusion

[220] In having regard to the "needs of the low paid" we reiterate the observations made in the Safety Net Review - Wages April 1999 decision⁶⁷ and Safety Net Review - Wages May 2001 decision (May 2001 decision),⁶⁸ that the expression "the low paid" in s.88B(2)(c) is intended to refer to persons who are in employment. We also acknowledge that we are required by ss.88B(2)(b) and 90(b) to have regard to the likely effects of our decision on the level of employment and on the desirability of attaining a high level of employment, and we have done so.

[221] We have given consideration to the proposals by ACCER and ACOSS that the Commission conduct an inquiry into the needs of the low paid in order to ascertain an appropriate benchmark for the adequacy of the federal minimum wage, but we have decided not to take this course. We note that the call for an inquiry of the type proposed by ACCER and ACOSS was not supported by any party in the proceedings.

[222] Our rejection of the proposals for an inquiry should not be taken as a rejection of the utility of empirically determined "benchmarks" such as the poverty line. Indeed, it seems to us that the use of such measures is relevant to an assessment of the needs of the low paid. In this context we also note that in their oral submissions ACCER argued that the Commission must ensure the minimum rates it sets (and in particular the federal minimum wage) do not fall below the poverty line. It was put that this task involved determining questions such as "what are needs, who are the low paid, what is the poverty line, what is living in poverty and how does the federal minimum wage compare to the poverty line?" We acknowledge the relevance of the questions posed by ACCER and would be assisted by submissions and material directed to them. As we have already noted empirical studies dealing with these matters would be of more assistance to the Commission in addressing the specific matters mentioned in the Act than the type of illustrative evidence adduced by the ACTU in these proceedings. There is no impediment to ACOSS and ACCER, or any other party, bringing forward such material in any future safety net review. It is not, however, desirable for the Commission to establish a separate inquiry for that purpose particularly in view of the absence of any support for the proposal from any other party or intervener.

[223] Further, the Senate Community Affairs References Committee is currently conducting an inquiry into poverty. The Senate referred the following matters to the committee for inquiry:

"1. (a) the extent, nature and financial cost of:

(i) poverty and inequality in Australia,

(ii) poverty amongst working Australians,

(iii) child poverty in Australia, and

(iv) poverty in Australian communities and regions;

(b) the social and economic impact of changes in the distribution of work, the level of remuneration from work and the impact of under-employment and unemployment;

(c) the effectiveness of income-support payments in protecting individuals and households from poverty; and

(d) the effectiveness of other programs and supports in reducing cost pressures on individual and household budgets, and building their capacity to be financially self-sufficient.

2. That, in undertaking its inquiry, the committee also examine:

(a) the impact of changing industrial conditions on the availability, quality and reward for work; and

(b) current efforts and new ideas, in both Australia and other countries, to identify and address poverty amongst working and non-working individuals and households."⁶⁹

[224] The role of the tax-transfer system (generally referred to as the social wage) in reducing inequality and assisting the low paid was also a feature of a number of the submissions in these proceedings, as was the case in last year's proceedings. In this context the social wage encompasses the system of cash transfer payments, the taxation system and the provisions of indirect benefits such as Medicare and the education system.

[225] In the May 2002 decision the Commission addressed these issues in the following terms:

"[144] It appears to us that there is general agreement amongst the major parties that minimum award wages and the social wage are complementary and inter-related mechanisms for addressing the needs of the low paid.

[145] Inevitably the wages system interacts with both the social security and taxation systems. Safety net adjustments will be, to a certain extent, offset by higher taxes and/or lower social security payments.

. . .

[147] We agree with the proposition that the tax-transfer system can provide more targeted assistance.

[148] This is not to suggest that safety net increases do not assist in meeting the needs of the low paid.

[149] Further, in the May 2000 decision the Commission considered similar arguments and concluded:

`As a result of societal change it is often the case that there are two wage earners (sometimes more) within a family unit. It is not surprising that it is no longer as simple as it once may have been to view the income of an employee as an indicator of household income. It may be that safety net wage increases intended to assist the low paid will supplement the income of some households of relatively high means. We accept that safety net adjustments are not perfectly targeted to meeting the needs of the low paid. They do, however, assist in meeting those needs.'"

[226] Nothing in the material presented on this occasion leads us to alter the views expressed in last year's decision. We acknowledge that safety net increases are an imperfect and partial mechanism for addressing the needs of the low paid.

[227] The evidence adduced by AiG demonstrates that the net benefit of a given wage rise to federal award employees can be as low as 20 per cent and is in the order of 50 to 60 per cent for most persons at the lower pay levels. That is, for every additional dollar paid by an employer the net amount received by the employee can be as low as 20 cents and will usually be 50 cents or less. In addition, any increase in wages involves the employer paying not only the full amount of the increase but also the increased on-costs which are a function of the quantum of wages (e.g. workers compensation insurance, superannuation and long service leave contributions). Thus, the cost to employers of wage increases awarded by the Commission is disproportionately greater than the benefit such increases deliver to their employees. From the perspective of the national economy, it may be that equivalent benefits can be delivered to the low paid (and better targeted to low income households) far more efficiently by the use of a combination of mechanisms such as increases to the award safety net and targeted assistance to the low paid through the social safety net.⁷⁰

[228] We also note AiG's submission that the Commission should accord greater recognition of the interrelationship between wages and the broader social safety net. We reiterate what was said in the May 2002 decision about this issue:

"[153] For our part, we accept that significant adjustments in the social safety net may be relevant to the determination of the level of the award safety net. We note that there is no proposal on this occasion that we should adjust the amount that we would otherwise award because of a particular change in the social safety net."

[229] We note that on this occasion there are again no specific proposals to make significant adjustments to the social safety net.

[230] The requirement on the Commission is to maintain a "safety net of fair minimum wages". The variation of awards to provide wage increases is the only tool available to the Commission to address the "needs of the low paid" in the "context of living standards generally prevailing in the Australian community" and having regard to economic considerations. Accordingly, and subject to proper consideration of the matters specified in the Act, the Commission must utilise that tool from time to time notwithstanding the fact that it is an imperfect and partial mechanism for addressing the needs of the low paid. If the Commission was presented with alternative proposals that more effectively addressed the needs of the low paid this may enable the object of maintaining a safety net of fair minimum wages to be achieved in a way that better balances meeting the needs of the low paid with the economic considerations and is more beneficial to the national economy.

DEAC AND SECTION 88B(3)(C)

[231] DEAC raised a number of concerns regarding enterprise bargaining in the disability sector. The particular issues raised relate to:

• the legal capacity of some of the employees concerned to consent to an agreement; and



• the fact that a significant number of the most commonly used federal awards do not include the model supported wage clause.

[232] It contended that as a consequence of these considerations, workers with a disability are being discriminated against by the failure to provide minimum standards.

[233] In order to address the concerns raised, DEAC sought, amongst other things, the establishment of principles relating to enterprise bargaining in the disability sector, the variation of all federal awards to include the supported wage model clause and its extension to the business services sector (formerly known as sheltered workshops). Whilst initially DEAC requested that we review the level of the supported wage in this decision we do not understand it to have persisted with that proposal. In the alternative it is submitted that an industry consultative council be established pursuant to s.133 of the Act.

[234] A number of witness statements were tendered in support of the submissions put.

[235] The ACTU, ACCI and the Commonwealth acknowledged that the issues raised by DEAC are matters of real concern, but argued that these proceedings are not the appropriate forum for the consideration of these matters. Whilst we agree in principle with that approach, the issues raised by DEAC are significant and ought to be addressed. In particular we are concerned that there appear to be a significant number of federal awards which do not include the supported wage model clause. The model clause deals with an allowable award matter.⁷¹ In performing its functions under Part VI of the Act the Commission is directed to have regard to "the need to provide a supported wage system for people with disabilities" (s.88B(3)(c)).

[236] Further, s.143(1C)(e) provides that:

"The Commission must ensure that a decision or determination . . .

(e) where appropriate, provides support to training arrangements through appropriate trainee wages and a supported wage system for people with disabilities."

[237] The supported wage system is also a matter to be taken into account in the award simplification process.⁷²

[238] We think it is appropriate that during the hearing of applications for the implementation of the safety net adjustment provided for in this decision, parties give consideration to the inclusion of the model supported wage clause in the award. If the award already includes the model clause the level should be checked and if necessary varied to reflect the existing level of the supported wage - $56. DEAC submitted that at present a certified agreement is a precondition to the provision of Commonwealth funding in the disability sector. Whether this is so or not, one of the requirements for an agreement to be certified is that a "valid majority" of employees must "genuinely approve" or "genuinely make" an agreement before it may be certified (ss.170LT(5) and (6)). Such requirements may be problematic where there is an issue as to the legal capacity of the employees concerned to give such consent. Indeed it may be that enterprise bargaining is not appropriate in this sector. However, as we have not had the benefit of any detailed submissions from the Commonwealth or other parties, we express no concluded view on this point.

[239] We note that discussions are to occur between DEAC and ACCI in the near future. It may be that those discussions will lead to progress on some of these matters.

[240] We have brought these issues to the attention of the relevant Panel Head with a view to a meeting being convened of all relevant organisations in the near future to provide a forum in which the matters raised by DEAC, including the establishment of an industry consultative council (s.133), may be canvassed.

DECISION ON THE ACTU'S CLAIM

[241] The ACTU sought an adjustment of $24.60 per week in all award rates. ACCI, supported by a number of other employer bodies, opposed any increase. The remaining parties and interveners took intermediate positions. The States and Territories supported an increase of $18 in all award rates. The AiG proposed an increase of $11 in all award rates. The Commonwealth did not oppose an increase not exceeding $12 in all award rates up to and including the equivalent of the tradesperson's rate in the Metal Industries Award - currently $525.50 per week. There were a number of other proposals including some alternative proposals. No party or intervener suggested that we should apply a percentage adjustment.

[242] We have surveyed the indicators of recent economic activity in some detail earlier in this decision. Growth in non-farm GDP has been at satisfactory levels and for the calendar year just ended was 4 per cent. Growth in total GDP was almost a full one per cent lower at 3.2 per cent due to the severe impact of the drought on farm production which declined by 19.1 per cent over the year. Private investment has grown strongly during 2002. Export performance weakened, in part because of the impact of the drought on agricultural exports, while imports grew strongly and accordingly net exports were negative. Inflation as measured by the CPI was around 3 per cent for the 12 months to December 2002. The labour market strengthened considerably during 2002, despite the impact of the drought conditions. Growth in both full and part-time employment was relatively strong, with unemployment moderating to just above 6 per cent in the first quarter of this year. Productivity continued to grow strongly. GDP per hour worked in the market sector increased by 3.8 per cent in the calendar year. Profits also continued to grow and the share of GDP going to profit remains at the historically high levels of the last decade of 23 to 24 per cent.

[243] The various measures of earnings growth indicate substantial movement throughout 2002. Wages under current agreements increased by 3.8 per cent. Average weekly ordinary time earnings rose by 4.7 per cent and the wage cost index (which, unlike the ordinary time earnings measure, is not influenced by workforce compositional change) grew by 3.3 per cent. Given the growth in earnings generally and generally favourable economic conditions we reject those submissions which contend that no increase at all should be awarded. The requirement on the Commission to provide fair minimum standards for employees in the context of living standards generally prevailing and the relevant objects of Part VI of the Act, to ensure that awards are maintained, dictate that rejection.

[244] In deciding whether to award the ACTU's claim in full or in part it is necessary to consider the likely economic effects including the aggregate cost of the claim, the economic outlook and the impact of any increase upon the parts of the economy that are most likely to be affected by it.

[245] Official Treasury forecasts suggest that the economy will grow by around 3 per cent in 2002-03 and around 4 per cent in 2003-04. The forecast for 2002-03 includes an expected reduction in growth of around 1 per cent resulting from the impact of the drought. A return to average conditions for the farm sector is expected in 2003-04. Employment growth is expected to be around 1.75 per cent in both years and unemployment is forecast to stabilise at around 6 per cent. Inflation is expected to decline to around the middle of the RBA target range of 2 to 3 per cent.

[246] A number of parties urged us to be cautious in our assessment of the economic prospects for the near term, referring to the possibility of a further deterioration in the global economy, the possibility that some areas might continue to be drought-affected despite the recent encouraging rainfall in many rural areas and the possibility that the expected slowdown in dwelling construction might be more severe than expected. Among other things, reference was made to the state of the international equities market, recent rises in oil prices and the instability associated with the war in Iraq. While the economic prospects are still positive, we agree that there is a need for some caution and we have made some allowance for the present uncertainties in determining the ACTU's claim.

[247] As the Commission indicated in the 2002 Safety Net Review, a substantial safety net adjustment may have some negative effects on employment in those sectors of the economy in which a high proportion of the workers are award reliant. That is an important consideration because in maintaining the award safety net the Commission is to have regard to, among other things, the desirability of attaining a high level of employment. Because safety net increases only apply directly to around 21 per cent of employees it is to be expected that any employment effects would be most likely to occur in those sectors in which award reliance is high. The three industries with the highest proportion of award employees are accommodation, cafes and restaurants, retail and health and community services. These industries also constitute around one-third of regional employment. As a result any negative effects are likely to be amplified in drought-affected areas. While we have already noted the inadequacies in the available data concerning the effect of safety net increases on employment, we think that allowance should be made for the effect of our decision on employment in award reliant sectors including rural industries.

[248] The Commission indicated in its May 2002 decision that in the normal course in reviewing the safety net the Commission should seek to maintain a safety net of fair minimum wages for all award reliant employees.⁷³ Despite the arguments advanced on this occasion by those proposing that any increase should be limited in its application, for example to those on the minimum wage, we are not persuaded that it would be appropriate to do so on economic, equity or any other grounds. We confirm the view expressed in the May 2002 decision and the reasons given for it.

[249] We have decided, however, that in the current circumstances a tiered increase, which will provide a slightly higher increase for employees at the lower levels, is appropriate. On this occasion we have decided to give particular weight to the possible effect of our decision on employment levels. The amounts we have decided upon are:

1. a $17 per week increase in award rates up to and including $731.80 per week; and

2. a $15 per week increase in award rates above $731.80 per week.

The form of the increase gives appropriate emphasis to the needs of the low paid whilst moderating the overall economic impact by providing a lower amount at the higher classification levels. While this tiered approach tends to reduce wage dispersion it also tends to distort relativities. Nevertheless the difference between the two amounts and the point in the salary scales at which the second tier cuts in mean that the effect on relativities, compared with a uniform increase, will be minimal. We turn to the question of operative date.

[250] The Commonwealth submitted that if, contrary to its submission, we were to award an increase of more than $12, the increase should be phased in over 18 months. We have given consideration to that submission and to various other proposals concerning the operative date of any adjustment we decide upon. Safety net reviews are initiated by application and are required to be dealt with in accordance with the Act and the Commission's Rules. Each 12 months since April 1997 the Commission has awarded a safety net adjustment in proceedings initiated by applications filed by unions affiliated with the ACTU. Relevant provisions of the Act contemplate that the award safety net will be reviewed and maintained. An annual review provides an opportunity to give consideration to economic and other developments in a timely way. It also lessens the likelihood that award reliant employees will be unfairly prejudiced in relation to other wage and salary earners. For these reasons an annual review is consistent with the statutory objects governing the adjustment of the safety net. It does not follow that an increase will always be granted or that in appropriate circumstances a review might not be brought forward or postponed. And of course the precise timing of a review in any year must depend not only upon the time at which applications are lodged but also upon a range of other circumstances. For these reasons, except where permitted by the Statement of Principles, the adjustment provided for in this decision will be available from a date no earlier than 12 months after the increase provided for in the May 2002 decision. Out of caution we add that in continuing the practice which has developed over the last six years, and for which there is abundant precedent in earlier years as well, we do not intend to and nor could we establish a binding rule in relation to future safety net reviews.

[251] In a previous part of our decision we have dealt with a proposal that we conduct an inquiry into the needs of the low paid in order to ascertain an appropriate benchmark for the adequacy of the minimum wage. We have decided not to do so. Whilst we shall not repeat what we have already said, in future cases we would be assisted by material which gives greater content to the expression "the needs of the low paid".

[252] Implementation of the adjustment will be subject to the following conditions:

(a) the increase will be fully absorbable against all above-award payments;

(b) except where permitted by the Statement of Principles, the increases will be available from a date no earlier than 12 months after the increases provided for in the May 2002 decision in the award in question;

(c) the commencement of award variations to give effect to this decision will be no earlier than the date on which the award is varied, with phasing-in of increases permissible where circumstances justify it. Any application for phasing-in will be subject to Principle 10;

(d) by consent of all parties, and where the minimum rates adjustment has been completed, award rates may be expressed as hourly rates as well as weekly rates; in the absence of consent, a claim that award rates be so expressed may be determined by arbitration; and

(e) allowances which relate to work or conditions which have not changed and service increments are to be varied; the method of adjustment is to be consistent with the Furnishing and Glass Industries Allowances Decision.⁷⁴

[253] Consistent with our decision the federal minimum wage will be increased by $17 to $448.40 per week. To avoid doubt we emphasise that the level of the supported wage, currently $56, is a matter for separate Full Bench proceedings.

STATEMENT OF PRINCIPLES AND RELATED MATTERS

[254] In this part of our decision we consider the submissions concerning the Statement of Principles and related matters.

[255] None of the parties sought any significant change to the substance of the existing Principles. There were, however, suggested qualifications to the operation of Principle 12 and proposals for the inclusion of statements of clarification in our decision about the intended operation of other principles.

[256] In summary the proposals relating to the Principles are:

• ACCI submitted that, if an increase in the safety net were granted, the Commission's decision should establish a principle to the effect that:




	there will only be consideration of fresh applications for a further safety net review and increase to the extent that it will not have effect prior to 18 months from the date of increases in this matter;
	in any award, no subsequent increase may apply prior to 18 months or, in the alternative, 12 months from the date of any increase arising in this matter;

• AiG submitted that the Commission should include in its decision a statement of clarification in respect of Principle 10, to the effect that delays caused by the business of the Commission do not constitute exceptional circumstances warranting retrospective safety net wage adjustments;



• NFF submitted that, if the Commission grants a wage increase, Principle 12 should be varied so as to include an exclusionary provision to automatically exempt certain classes of enterprises from the application of the safety net adjustments for a period of 12 months;



• WAFFIA submitted that some fundamental change to Principle 12 is necessary to account for the serious economic situation in the farm sector; and



• DEAC proposed that the Commission set principles to regulate the process for certification of agreements in business services enterprises to protect the conditions of workers with disabilities.

[257] The matters raised by ACCI with respect to the period between safety net review decisions and increases seems to suggest a gap of 18 months between both this review and any increase that may be granted and inserted into any award. In other words the next review after the 2003 safety net review should not take place until October 2004. And, if any award is varied to include any increase that may be granted in the 2003 safety net review, it cannot be varied to incorporate any subsequent increases for a period of 18 months.

[258] ACCI's alternative position is for retention of the current 12-month gap between increases in award rates of pay as a result of safety net adjustments.

[259] In support of these proposals ACCI submitted that:

• a six-month extension beyond what has traditionally been the period for increases of this nature would allow for the increase to flow more extensively through the economy before a further increase is contemplated;



• an 18-month period would provide for economic stability at a time of economic uncertainty; and



• there is no presumptive obligation or requirement in the Act which would say that increases of this type ought to occur on an annual basis.

[260] ACCI received some support from the Retail Motor Industry. Like ACCI it opposed any increase. However, it submitted that if an increase was to be granted by the Commission it should not exceed the amount proposed by the Commonwealth and there should be no other safety net increase for 18 months.

[261] The Commonwealth also gave some qualified support to the ACCI proposal for a gap of 18 months between the application of safety net increases. The Commonwealth submitted that, if the Commission, contrary to the Commonwealth's submissions, awarded an increase of more than $12 per week, such an increase should be phased in over a period of not less than 18 months. Otherwise, the Commonwealth submitted that any increase awarded must apply until the next safety net review and be fully absorbed into all above-award payments, including from enterprise agreements and informal overaward payments, with an operative date of the increase in any award being prospective and not less than 12 months from the operative date of the 2002 safety net adjustment in the relevant award.

[262] ACCI's principal proposal ultimately would involve an amendment to Principle 8 requiring a period of 18 months between safety net adjustments. For the present ACCI proposes the following statement for inclusion in our decision:

"Implementation of this adjustment will be subject to the following conditions:

. . .

(b) except where permitted by the Statement of Principles, the increases will be available from a date no earlier than 18 months after the increases provided for in the (May) 2003 decision in the award in question;"

[263] For the reasons set out earlier in this decision, we are not persuaded that any extension of the period between safety net reviews or the application of safety net increases is necessary.⁷⁵ It is always open to ACCI, or any other party opposing an application to vary an award, to apply for an adjournment of the application.

[264] As to the specific issue of extending by six months the gap between the applications of consecutive safety net increases we are not satisfied that present circumstances warrant such a step. As we indicated earlier, we consider that there is sufficient flexibility in the powers and processes of the Commission for it to determine, in each safety net review, whether any prospective date of effect is appropriate in the circumstances of the case at the time.

[265] We do not propose to make any variation to Principle 8. The operative date of the increase should be not less than 12 months from the operative date of the 2002 safety net adjustment in the relevant award.

[266] We next address Principle 10. While AiG generally supported the retention of the set of principles adopted in the May 2002 decision, it submitted that there is a compelling need for us to clarify the operation of Principle 10. The substance of its submission in this regard was that confusion has arisen from conflicting opinions among Members of the Commission about whether delays caused by the business of the Commission are properly to be regarded as exceptional circumstances. AiG does not seek any variation of Principle 10, but rather suggests that a statement be included in our decision to the effect that delays caused by the business of the Commission do not constitute exceptional circumstances warranting an order for retrospective effect of the safety net increase.

[267] ACCI and the Retail Motor Industry supported AiG in its application in this regard. AiG drew our attention to two first instance decisions of Members of the Commission where different conclusions had been reached about whether "delays caused by the ebbs and flows in the workload of the Commission" constituted an exceptional circumstance justifying retrospective application of the 2002 safety net adjustment. ⁷⁶

[268] The Commission amended Principle 10 in the May 2002 decision so as to allow retrospectivity in the application of safety net adjustments in awards in certain circumstances. In its consideration of the application to make provision for retrospectivity the Full Bench noted:

"The circumstances referred to by the ACTU which led to its proposed amendment should be addressed through an application under Principle 10. We will amend that principle so that it refers to applications for an operative date earlier than the date specified in Principle 8(a). We note that whether an application is dealt with by a single member or a Full Bench there is no power to make an award which comes into force on a date earlier than the date of the award unless the Commission is satisfied that there are exceptional circumstances."⁷⁷

[269] More recently a Full Bench of the Commission dealt with an appeal against a decision of a single Member of the Commission refusing retrospectivity in an application to vary an award to implement the May 2002 safety net adjustment.⁷⁸ The Full Bench there considered the approach to be taken when considering applications to vary awards retrospectively, in particular applications to vary awards for safety net adjustments granted in safety net reviews.

[270] In its decision on appeal the Full Bench observed:

"A decision on retrospective operation is a decision involving the exercise of a discretion conditioned by the requirement that exceptional circumstances exist. This is so whether the matter is viewed from the point of view of the Commission's wage-fixing principles or from the statutory source of the relevant power, as we have explained above."⁷⁹

[271] The statutory source of the relevant power is of course s.146 of the Act, about which the Full Bench made the following remarks:

"[6] The starting point in considering the Commission's power to make awards which have retrospective effect is s.146 of the Act. The section provides:

`146 Commencement of awards

(1) An award shall be expressed to come into force on a specified day.

(2) Unless the Commission is satisfied that there are exceptional circumstances, the day specified in an award for the purposes of subsection (1) shall not be earlier than the date of the award.'

[7] Section 146(1) is to be interpreted in light of s.145 which provides that the date of an award is the date on which it was signed. Section 146(2) confers a discretion on the Commission to make an award which comes into force earlier than the date of the award. The discretion is only exercisable if the Commission is satisfied that there are exceptional circumstances. Unless the Commission is so satisfied, it has no power to make an award which operates retrospectively."

[272] The Full Bench then set out the terms of Principle 10 and went on to say:

"[9] This principle deals, among other things, with the manner in which applications for a date of operation of a safety net adjustment earlier than the date of the award may be dealt with. It is plain that the principle cannot alter the effect of s.146 which remains the source of the Commission's power to make a retrospective award and establishes the conditions for the exercise of the power."

[273] We note that whether an application is dealt with by a single Member or a Full Bench there is no power to make an award which comes into force on a date earlier than the date of the award unless the Commission is satisfied that there are exceptional circumstances.

[274] We think it clear enough that, in dealing with any application for the retrospective operation of any award, the Commission must be satisfied that there are exceptional circumstances warranting such a course. However, it remains a matter of statutory discretion for the Member dealing with such an application to determine whether special circumstances have been made out. We do not believe that we should endeavour to circumscribe that discretion in the manner described by AiG.

[275] We now address the NFF and WAFFIA submissions in relation to the operation of Principle 12. In its written submissions NFF proposed that, in the event the Commission grants an increase in the safety net, it should add to Principle 12 the following clause:

"2003 Drought Exemption

A business, that is located in a Commonwealth declared drought area (for the purposes of drought relief) and has been granted Commonwealth Government assistance due to adverse economic circumstances, the business will be automatically accepted by the Commission as satisfying the requirements of this Principle. Upon application, that should include documentation proving that the Commonwealth Government Assistance has been granted, the Commission will grant an application to postpone the introduction of the wage increase arising from the SNR 2003 decision for 12 months, without hearing. A hearing will be required if the material filed does not meet the criteria and/or the application is opposed by another party. The onus will rest with the opposing party to establish reasons why the application should not be granted."⁸⁰

[276] NFF argued that the capacity for business, particularly small business, to develop appropriate material to argue economic incapacity is extraordinarily difficult and time-consuming. Referring to the Commission's practice of declining to grant industry-wide relief in respect of economic incapacity, NFF contended that the exclusionary clause it now proposes is not an industry-wide exemption, but rather a facilitative provision that utilises an existing mechanism that proves that individual businesses are experiencing adverse or extreme economic circumstances.

[277] The following further oral submissions were made:

• the mechanism is limited to a very small number of businesses due to the strict eligibility requirements;



• it is a mechanism that meets the needs of the Commission for an evidentiary basis to prove incapacity; and



• the test that NFF proposes is a rigorous one.

[278] NFF then addressed the particulars of the tests that are applied by the Commonwealth in determining whether a business qualifies for relief in a drought declared area.⁸¹ The NFF submitted that a facilitative process is required to provide ease of access to those who can be readily identified and who are experiencing very serious economic impacts from the drought.

[279] The WAFFIA proposal for amendment to Principle 12 is not as detailed in its content as that of NFF but is to similar effect. The Commonwealth and ACCI supported the NFF proposal.

[280] In its reply the ACTU accepted that:

• there is hardship;



• hardship should be judged according to objective criteria; and



• the Commonwealth schemes for assistance to farmers in drought declared areas provide some basis for determining hardship according to objective criteria.

[281] The appropriate time to determine hardship and economic incapacity however is not now, the ACTU argued, but when there is an application to vary the relevant award. The thrust of the argument in this regard was that there are reasonable prospects of a farm sector bounceback. It may well be that the farm sector and associated small businesses will have economic capacity to meet the demands for safety net increases when the relevant awards are subject to applications for variation.

[282] The NFF proposal has some merit. The ACTU acknowledged the plight of the farming sector and the associated industries and very properly conceded that the test of economic incapacity that the NFF proposed is undoubtedly a useful measure of incapacity for the purpose of assessing a particular enterprise in relation to the application of any increase granted.

[283] The ACTU submitted, however, that Principle 12 ought not be amended to exclude the relevant sectors now. Each case should be dealt with as a special circumstance as and when it is sought to apply an increase to a particular enterprise or enterprises. There is a certain logic to this argument. On the other hand, we have some sympathy for the NFF argument to the effect that, for individual farmers and associated small businesses, mounting an economic incapacity case is a formidable task.

[284] If such an application were made, while defining the class that falls within any exclusion on a collective basis in an award could present practical difficulties, the Commonwealth's test for relief in drought declared areas, on the material before us, would be an effective criterion for determining economic incapacity in the absence of evidence to the contrary.

[285] Taking into account the uncertainties of the time and the fact that any increase granted in this case is unlikely to have any immediate impact on the sectors of industry that would be the beneficiaries of the NFF proposal, we consider that a general exclusion at this time is premature. For the present we are of the view that the question of economic incapacity could be dealt with at the time that any increase is sought to be applied against a particular enterprise or particular enterprises.

[286] We indicate that the test proposed by NFF would certainly be a relevant consideration in determining whether a particular enterprise ought to be excluded from the application of the safety net adjustment. It may well prove to be too rigorous a benchmark in its application to some enterprises. That may be an issue for the Commission in due course.

[287] Before leaving this topic we note the provisions of the Act concerning bargaining. The Act sanctions contracting out of awards in certain circumstances. Parties are free to negotiate, and to have certified, terms and conditions of employment that do not meet the no-disadvantage test under the Act, provided that the Commission is satisfied that certification is not contrary to the public interest. An example of a case that would not be contrary to the public interest is an agreement that is part of a reasonable strategy to deal with a short-term crisis in, and to assist in the revival of, the business.⁸²

[288] Finally, DEAC asked the Commission to set principles to regulate the process for certification of enterprise agreements applying to workers with disabilities.

[289] DEAC submitted that many of the enterprise agreements relating to business services enterprises and the Australian Liquor, Hospitality and Miscellaneous Workers Union Supported Employment (Business Enterprises) Award 2001⁸³ have been certified but fail to meet the safety net standard and therefore the objects of the Act. DEAC contended that the Commission, exercising its powers under s.106(1) of the Act, can make orders to ensure that the making of awards and certification of agreements meet the objects of the Act, the safety net provisions and the equal rights of workers with disabilities.

[290] The ACTU, in its written submissions in reply, acknowledged that the matters raised by DEAC are matters of concern and importance. However, it went on to express the view that the Safety Net Review case is not the forum for such matters. ACTU contended that those matters should be considered in separately constituted proceedings of the Commission.

[291] The Commonwealth expressed doubt about the relevance of the DEAC submissions to the issues at hand. It advocated a meeting of peak bodies to discuss all of the issues that DEAC has raised, with a view to developing an appropriate strategy to deal with the range of issues.

[292] ACCI stated that it has indicated to DEAC, on behalf of employers in this sector, that it is willing to facilitate discussions between DEAC and it and its members on the issues DEAC has raised. ACCI submitted that there is no need for the Commission's involvement in the matter at this time.

[293] We have dealt with this matter and several other matters advanced by DEAC elsewhere in our decision. In light of our conclusions on those matters it is sufficient for us to indicate that we are not inclined to make any determinative statement now about the Commission's role in the development of specific principles for dealing with certification of enterprise agreements covering workers with disabilities.

ORDERS

[294] The orders necessary to give effect to this decision in the awards before us should be drawn up and filed by the applicants. Commissioner Larkin will settle the orders with recourse to the Full Bench.

ATTACHMENT A

STATEMENT OF PRINCIPLES

1. ROLE OF ARBITRATION AND THE AWARD SAFETY NET

Existing wages and conditions in the relevant awards of the Commission constitute the safety net which protects employees who may be unable to reach an enterprise or workplace agreement. The award safety net also provides the benchmark for the no-disadvantage test that the Workplace Relations Act 1996 (the Act) requires be applied before agreements are certified.

As a result of the award simplification process, awards will, where necessary, be varied so that they:

• act as a safety net of fair minimum wages and conditions of employment (s.88A(b));



• are simplified and suited to the efficient performance of work according to the needs of particular workplaces or enterprises (s.88A(c)); and



• encourage the making of agreements between employers and employees at the workplace or enterprise level (s.88A(d)).

This evolving award system will remain the safety net referred to in the Act. It will, and is intended by the legislature to, change in response to economic, social and industrial circumstances.

2. WHEN AN AWARD MAY BE VARIED OR ANOTHER AWARD MADE WITHOUT THE CLAIM BEING REGARDED AS ABOVE OR BELOW THE SAFETY NET

In the following circumstances an award may, on application, be varied or another award made without the application being regarded as a claim for wages and/or conditions above or below the award safety net to:

(a) include previous National Wage Case increases in accordance with Principle 3;

(b) incorporate test case standards in accordance with Principle 4;

(c) adjust allowances and service increments in accordance with Principle 5;

(d) adjust wages pursuant to work value changes in accordance with Principle 6;

(e) reduce standard hours to 38 per week in accordance with Principle 7;

(f) adjust wages for arbitrated safety net adjustments in accordance with Principle 8;

(g) vary an award to include the federal minimum wage in accordance with Principle 9; and to

(h) make orders under Part VIA of the Act.

3. PREVIOUS NATIONAL WAGE CASE INCREASES

Increases available under previous National Wage Case decisions such as structural efficiency adjustments, minimum rates adjustments and previous arbitrated safety net adjustments will, on application, still be accessible.

4. TEST CASE STANDARDS

Test case standards involving allowable award matters (s.89A(2)) established and/or revised by the Commission may be incorporated in an award. Where disagreement exists as to whether a claim involves a test case standard or a non-allowable award matter, a party asserting that it does must make and justify an application pursuant to s.107. It will then be a matter for the President to decide whether the claim should be dealt with by a Full Bench.

5. ADJUSTMENT OF ALLOWANCES AND SERVICE INCREMENTS

(a) Existing allowances which constitute a reimbursement of expenses incurred may be adjusted from time to time where appropriate to reflect relevant changes in the level of such expenses.

(b) Adjustment of existing allowances which relate to work or conditions which have not changed and of service increments for monetary safety net increases will be determined in each case by the Full Bench dealing with the safety net adjustment.

(c) In accordance with the Safety Net Review - Wages May 2003 decision (May 2003 decision) [PR002003] allowances which relate to work or conditions which have not changed and service increments will be adjusted as a result of the arbitrated safety net increase. (The method of adjustment is to be consistent with the Furnishing and Glass Industries Allowances decision [Print M9675, 21 March 1996].)

(d) In circumstances where the Commission has determined that it is appropriate to adjust existing allowances relating to work or conditions which have not changed and service increments for a monetary safety net increase, the method of adjustment should be consistent with the Furnishing and Glass Industries Allowances decision. Such allowances and service increments should be increased by a percentage derived as follows: divide the monetary safety net increase by the rate of pay for the key classification in the relevant award immediately prior to the application of the safety net increase to the award rate and multiply by 100.

(e) Existing allowances for which an increase is claimed because of changes in the work or conditions will be determined in accordance with the relevant provisions of the Work Value Changes Principle of this Statement of Principles.

(f) New allowances to compensate for the reimbursement of expenses incurred may be awarded where appropriate having regard to such expenses.

(g) Where changes in the work have occurred or new work and conditions have arisen, the question of a new allowance, if any, will be determined in accordance with the relevant principles of this Statement of Principles. The relevant principles in this context may be Work Value Changes or First Award and Extension to an Existing Award.

(h) New service increments may only be awarded to compensate for changes in the work and/or conditions and will be determined in accordance with the relevant parts of the Work Value Changes Principle of this Statement of Principles.

6. WORK VALUE CHANGES

(a) Changes in work value may arise from changes in the nature of the work, skill and responsibility required or the conditions under which work is performed. Changes in work by themselves may not lead to a change in wage rates. The strict test for an alteration in wage rates is that the change in the nature of the work should constitute such a significant net addition to work requirements as to warrant the creation of a new classification or upgrading to a higher classification.

In addition to meeting this test a party making a work value application will need to justify any change to wage relativities that might result not only within the relevant internal award structure but also against external classifications to which that structure is related. There must be no likelihood of wage leapfrogging arising out of changes in relative position.

These are the only circumstances in which rates may be altered on the ground of work value and the altered rates may be applied only to employees whose work has changed in accordance with this Principle.

(b) In applying the Work Value Changes Principle, the Commission will have regard to the need for any alterations to wage relativities between awards to be based on skill, responsibility and the conditions under which work is performed (s.88B(3)(a)).

(c) Where new or changed work justifying a higher rate is performed only from time to time by persons covered by a particular classification, or where it is performed only by some of the persons covered by the classification, such new or changed work should be compensated by a special allowance which is payable only when the new or changed work is performed by a particular employee and not by increasing the rate for the classification as a whole.

(d) The time from which work value changes in an award should be measured is the date of operation of the second structural efficiency adjustment allowable under the August 1989 National Wage Case decision (August 1989 National Wage Case) [Print H9100, (1989) 30 IR 81].

(e) Care should be exercised to ensure that changes which were or should have been taken into account in any previous work value adjustments or in a structural efficiency exercise are not included in any work evaluation under this Principle.

(f) Where the tests specified in (a) are met, an assessment will have to be made as to how that alteration should be measured in monetary terms. Such assessment will normally be based on the previous work requirements, the wage previously fixed for the work and the nature and extent of the change in work.

(g) The expression "the conditions under which the work is performed" relates to the environment in which the work is done.

(h) The Commission will guard against contrived classifications and over-classification of jobs.

(i) Any changes in the nature of the work, skill and responsibility required or the conditions under which the work is performed, taken into account in assessing an increase under any other principle of this Statement of Principles, will not be taken into account under this Principle.

7. STANDARD HOURS

In approving any application to reduce the standard hours to 38 per week, the Commission will satisfy itself that the cost impact is minimised.

8. ARBITRATED SAFETY NET ADJUSTMENTS

In accordance with the May 2003 decision awards may, on application, be varied to include an arbitrated safety net adjustment in this decision subject to the following:

(a) The operative date will be no earlier than the date of the variation to the award.

(b) That at least 12 months have elapsed since the rates in the award were increased in accordance with the Safety Net Review - Wages May 2002 decision (May 2002 decision) [PR002002, (2002) 112 IR 411].

(c) In awards where the variation for a safety net adjustment arising from the April 1999, May 2000, May 2001, May 2002 or May 2003 decisions is by consent and does not result in an increase in the wage rates actually paid to employees or increase the wage costs for any employer, any applicable 12 months' delay between variations may be waived.

(d) At the time when the award is to be varied to insert the safety net adjustment, each union party to the award will be required to give a specific commitment as to the absorption of the increase. In particular, the union commitments will involve the acceptance of absorption of the safety net adjustment to the extent of any equivalent amount in rates of pay which are above the wage rates prescribed in the award. Such above-award payments include wages payable pursuant to certified agreements, currently operating enterprise flexibility agreements, Australian workplace agreements, award variations to give effect to enterprise agreements and overaward arrangements. Absorption which is contrary to the terms of an agreement is not required.

(e) The following clause must be inserted in the award:

"The rates of pay in this award include the arbitrated safety net adjustment payable under the Safety Net Review - Wages May 2003 decision [PR002003]. This arbitrated safety net adjustment may be offset against any equivalent amount in rates of pay received by employees whose wages and conditions of employment are regulated by this award which are above the wage rates prescribed in the award. Such above-award payments include wages payable pursuant to certified agreements, currently operating enterprise flexibility agreements, Australian workplace agreements, award variations to give effect to enterprise agreements and overaward arrangements. Absorption which is contrary to the terms of an agreement is not required.

Increases made under previous National Wage Case principles or under the current Statement of Principles, excepting those resulting from enterprise agreements, are not to be used to offset arbitrated safety net adjustments."

The above clause will replace the offsetting clause inserted into awards pursuant to paragraph 8(e) of the Statement of Principles determined in the May 2002 decision.

(f) By consent of all parties to an award, where the minimum rates adjustment has been completed, award rates may be expressed as hourly rates as well as weekly rates. In the absence of consent, a claim that award rates be so expressed may be determined by arbitration.

(g) The safety net adjustment will only be available where the rates in the award have not been increased, other than by safety net adjustments, or as a result of the application of the Minimum Rates Adjustment or Work Value Changes Principles, since November 1991.

(h) The implementation of an arbitrated safety net adjustment in a converted paid rates award is governed by the principles set out in the Paid Rates Review decision [Print Q7661, 20 October 1998].