A free kick to retailers and a drag on the economy
It doesn’t take an economist to work out that the reduction in Sunday penalty rates will cause an overall reduction in total wages paid even after allowing for increased employment. This will, in turn, most likely result in a net reduction in economic activity.
Much has been written about the recent decision by the Fair Work Commission to reduce Sunday penalty rates from 200% to 150% (a reduction of 25% of the Sunday rate). Some decry the impact on earnings of existing Sunday workers and the flow on effect to the economy. Others assert that more retailers will open on Sunday, thereby offsetting the negative impacts. It seems pretty easy to mathematically prove which side is most likely to be right.
Firstly, we need to ascertain what proportion of retailers are already open on Sundays. These are the ones that get a free kick of 25% of Sunday wages. They include all the large retailers in the major categories: supermarkets, department stores, clothing, electrical, hardware. The level of concentration (the proportion represented by the top 5 players) varies significantly between categories, from 100% (department stores) to 17% (clothing). For food and liquor it is 85%. Overlay on this the concentration of retailing into shopping centres, all of which seem to be open on Sundays. (Admittedly this is a major metro perspective.) For argument’s sake, let’s say retailers representing 90% of employees already trade on Sundays.
Then we need to estimate how many new positions will be created on Sunday due to the lower wages. For the sake of the argument, let’s assume for the time being that half of those retailers that previously didn’t trade on Sunday, decide to trade on Sunday. So the Sunday workforce increases from 90% to 95%.
Without much maths at all it’s obvious that total wages paid to employees will decline. The 5.6% increase in the workforce doesn’t go anywhere near offsetting the 25% reduction in wages. Even if 100% of retailers opened (an 11.1% increase in the workforce) total wages paid would decline significantly.
In fact an increase in the size of the workforce of 33% is required to offset a 25% reduction in wages. That’s just not conceivable in the Australian retail environment. It seems highly likely therefore that total wages paid by retailers will decline.
Which is better for the economy, $1 increased profit of a retailer or $1 in the hand of an employee? Of the $1 in the hands of the retailer, some may be returned to consumers by way of lower prices, some may be returned to shareholders via dividends or share buybacks, some may be appropriated by senior management pursuant to profit based incentive schemes, some may be invested in growing the business. The $1 in the hands of the employee will be saved or spent. It seems likely that the bulk of the $1 will be spent and fairly quickly at that, so taking a $1 out of the hands of an employee is likely to lead to a greater reduction in economic activity than the increase in activity caused by putting $1 into the hands of a retailer.
In summary, the reduction in Sunday penalty rates seems likely to cause an overall reduction in total wages paid, even after allowing for increased employment. This will, in turn, most likely result in a net reduction in economic activity.
Disclosure: I do have a horse in this race. My daughter is a university student and part-time retail employee.
#retailing #fairworkcommission #penaltyrates #economics