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Penalty rate cuts are the result of thinking small

David James |  06 March 2017


Witnessing the debate over Sunday penalty rates, the result of which was to cut the remuneration for mostly low wage workers further, an intriguing pattern of thinking emerged. It can be characterised as a microcosm/macrocosm duality.

Sign reads 'closed Sunday'Those arguing for lower Sunday wage rates chose to demonstrate their case by talking about individual businesses, the micro approach. 'Many individual businesses would love to open on a Sunday and if only wage rates were lower then they would,' goes the logic. 'So unleash those businesses and much greater employment will follow.'

Superficially impressive, it does not survive much scrutiny. As economists love to point out when politicians compare government budget deficits to a household budget, systems (the macro level) do not behave in the same way as a household (the micro level).

A similar distinction can be made with wage rates. The effect of progressively lower wages is to lower overall demand in the economy. While an individual business might benefit from cheaper labour, most businesses will be harmed by workers having less to spend.

Needless to say, this is not something that is investigated much — it does not suit the neoliberal assumptions of most modern economics — but the phenomenon is hard to miss, especially with the economic divisions that are emerging in America.

Discussion of productivity suffers from a similarly deceptive duality. From the micro perspective, productivity is treated much the same as profitability. It is seen as a win-lose battle between workers and owners. 'If my workers get paid more, then my cost of production will go up, my productivity will go down and I won't be able to make profits.'

At the macro level, things look very different. For one thing, at least two thirds of productivity gains have been shown to be the result of capital investments rather than improvements in labour efficiency.

This makes sense. Even in labour-intensive businesses, wages growth can only be influenced to a small degree. Even if workers wages can be cut, it will not be by much. On the other hand, very large efficiency improvements can be achieved through capital investment, such as robotics, digital distribution systems, enhanced computerisation and online innovations, to name a few possibilities.


"International competitiveness is a function of many factors, such as being good at what you do. Which is why global Scandinavian businesses can compete despite having to operate in a high tax environment. Australia's lazy oligopolies are nowhere near that level."


That is why local industries that are exposed to global competition should not base their competitiveness on cheap wages. They will inevitably lose because wages are so much cheaper elsewhere. It is better for those businesses and the national economy if they are forced to operate in a high wage environment, because it will encourage them to position themselves at the higher value end of the market and pursue high levels of productivity that are not based on cheap labour.

A similar micro-line is routinely taken with tax: 'Businesses must have lower taxes so they can invest more, create more employment and compete internationally.'

This involves some heroic assumptions. Most Australian public companies aggressively farm out their profits as dividends rather than re-invest them. Nor do they have much interest in employing more. There is no better way for Australian public companies to get their share price up than to have a round of redundancies. (In America, profits have been used mainly for share buybacks. There, too, there has been negligible interest in employing more.)

As for international competitiveness, that is a function of many factors, such as being good at what you do. Which is why global Scandinavian businesses have persistently shown they can compete despite having to operate in a high tax environment. Australia's lazy oligopolies are nowhere near that level.

There is also very good evidence, at the macro level, that countries with efficient tax systems greatly outperform those with weak tax systems — for the simple reason that it means the government is not broke. For example, this is one of the key differences between India (which has poor tax collection) and China (which aggressively collects tax).

Australia is showing signs of contracting the American disease of rising inequality, which will ultimately spill over into low growth, especially when the effect of high household indebtedness has its inevitable dampening effect. In the last quarter of 2016 GDP growth was strong and corporate profits jumped 20.1 per cent. But wages and salaries actually went down 0.5 per cent on a seasonally adjusted basis.

To those who like to think small, the micro-types, this may look like a more 'efficient' economy. In fact, it is an economy, and a society, that is getting sicker.


David JamesDavid James is the managing editor of businessadvantagepng.com



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Submitted comments

Perhaps the wage cuts should be industry specific David. For instance restaurants earn most of their revenue on the weekends yet very little on Mondays and Tuesdays. I dont think they should be required to pay double wages on Sunday when that is their peak time.

francis Armstrong 07 March 2017

Once again, a concise and informative piece from David James. Thanks, David, for enabling me to have some rational argument to accompany my turkey-gobbling of outrage against this latest decision by the Fair Work Commission. No-one will benefit long term.

Joan Seymour 07 March 2017

“The effect of progressively lower wages is to lower overall demand in the economy. While an individual business might benefit from cheaper labour, most businesses will be harmed by workers having less to spend.” This cannot be an argument for Sunday loading. Sunday trading exists because almost all workers, earnings based almost exclusively at weekday rates, are locked up in their offices Monday to Friday and can only come out to buy things on the weekend. Could Sunday workers who buy things on their weekdays off be paying more than they need to if Coles or Bunnings have incorporated their weekend costs into products sold Monday to Friday? However, the quote is an argument that high wages overall (which still mainly means weekday wages) should be maintained by Australia becoming as smart as Scandinavia, or smarter.

Roy Chen Yee 08 March 2017

As an emergency teacher,I can imagine that the cut in Sunday penalty rates will eventually flow to all casual workers,such as emergency teachers.Meanwhile,salaries of management grow fatter.

Anne Ramsay 09 March 2017

Thanks, David. Tax cuts and lower wages do not necessarily mean greater activity. Telstra, AGL and CSL are all involved in share buybacks. Tax cuts may help fund that as those companies will only invest when they can see good returns. Hence our governments may have to build new power stations at the taxpayers expense and risk.

Kim 09 March 2017

The joke is that the basis for the Productivity Commission's recommendation to align weekend Penalty Rates was based on a simplistic survey of 'perceived inconvenience' to workers of working weekdays versus weekends. How is this justification to 'inconvenience' the ability to bring home a moderate wage to feed and house our children? Seriously struggling to feed and educate my kids at the moment!! There is no point stimulating competition if we can't raise the next generation of young Australians. Again - short term capitalist thinking that targets those who can least afford it. So sad. Not sure why my ancestors went to war to fight and die for this country anymore? They held different values to those expressed today - they believed in the next generation and had the guts to stand up for them.

Belinda 09 March 2017

Well argued David. The fact is that businesses cutting their worker's Sunday rates are shooting themselves in the foot. Unless their staff are desperate, they simply will not work Sundays - so no workers, no business! Two questions. Will business remove the Sunday surcharge?. Will businesses continue to pay their loyal workers penalty rates?

Gavin 09 March 2017

China seems to have done very well in the global market in the face of very low wages for its manufacturing work force!

john frawley 09 March 2017

By your own argument David, you are quite right at the macro-level, but wrong at this particular micro-level. We re talking bout coffee shops the cannot afford to open and employ students needing bit of a financial top up.

Eugene 09 March 2017

While I don't contest what John Frawley writes, Switzerland has higher wages and a thriving manufacturing sector. Wages are a factor but not the only factor in the equation.

Kim 09 March 2017

It's all predicated on the "right" (almost "Divine Right") of the Owners of Capital, without any acknowledgement of the Owners of Labour, to make profits, as the key force driving society. What's sick, as Capitalism, per se.

Anthony Grimes 09 March 2017

Eugene, Your comment about Coffee shops makes me wonder how many coffees a nation of just under 25 million people can consume on a daily basis. I live in a Canberra suburb of some 3,000 people and we have 6 coffee outlets! Surely, they cannot all expect to operate profitably especially when surrounding suburbs are also well endowed with coffee shops. I can just hear Treasurer Morrison issuing a variation on Treasurer Costello’s rallying cry for a higher birth rate: “Have one coffee for yourself, one for your spouse and one for your country”.

Dimity Blue 09 March 2017

stop wingeing accept the umpire's decision

BERNIE TRESTON 10 March 2017

Kim. Some say that high wages have destroyed Australian manufacturing, caused local unemployment and forced other Australian manufacturers to outsource their processes to China in order to remain in business. We already pay unsustainably high wages in this country and are awash with more easily affordable Chinese manufactured goods in the face of much dearer Australian manufactured goods. Perhaps we could thus reduce current wage levels and maintain our living standards. Self indulgence would no doubt suffer, however, if we were to do that.

john frawley 10 March 2017

+ David James Incredibly, and sadly, classical neo-liberalism is dominating our world. In spite of the best economic theory available that could produce a fairer and more equitable world, egos and greed prevail. JM Keynes's "The General Theory ..." of 1936 seems to be completely lost as those with some power aggregate more, and more, and more, for their own ends, at the expense of not just of those present least powerful producers of economic activity, but also of the inheritors of the system. Of course, the powerful work hard to protect and preserve the status quo they build by building strong walls around 'the fortune' so that 'the lineage' shall never want. The strongest wall built is the 'right to exploitation' which is a very human condition that encompasses all of our endeavours, mind, body and soul. Where is the antidote? I suggest Robert Liddy expressed it well (ES on Feb 8) when commenting on what Trump will do for Globalisation (Trumpalisation ?). Re a discourse on power ? See The Beatitudes ( Latin noun beatitudo, - "happiness"). I feel like a meerkat; "simple".

MichCook 10 March 2017

Dimity, you are quite right. Small coffee/foodie outlets are highly competitive with narrow margins. That`s why they close rather than pay double time on Sundays. So "daily" coffee (and breakfast/lunch etc) become Monday-Saturday only. So, bad for the trader, and bad for the consumer, and very bad for those who want the work

Eugene 10 March 2017

Great article! Sundays should be devoted to families and the designated day of rest. Greed has ruined society. Spreading consumer spend more thinly over 7 days doesn't mean businesses will be profitable even if labour rates fall by a few $ per hour.

Cam BEAR 10 March 2017

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