Although a cogent argument can be made for having no minimum wage (see, for instance, Moore 2005), realistically this is not a politically acceptable option given the level of support the minimum wage receive from all major political parties. The emphasis in this paper is how the system of setting the minimum wage could be improved. One of the major reasons for the setting up of the AFPC was to increase the clarity and transparency in determining the minimum wage. Unfortunately, this has not occurred and it is hard to argue that the AFPC is an improvement on the process conducted by the AIRC. For instance, a frequent criticism of the AIRC was that it did not adequately explain how it arrived at the specific values for wage adjustments and this has hardly improved with the AFPC.
What is urgently needed in a new system establishing itself as a proper means of adjusting the minimum wage is a framework that others can understand, especially those who are compelled to pay the increase. There needs to be established a series of guidelines such that those who are affected by such decisions are able to forecast outcomes which can then be used in their own budgeting. It is important that a level of certainty be established so that business is not continually faced with an unpredictable change in costs based on a decision-making process for which there are no clear principles.
The lack of clarity is unsatisfactory. More to the point, if increases can be predicted by nothing more than examining past movements in the CPI, then certainty of some kind is being given, but will have its own repercussions on the ability of the labour market to provide jobs for all who seek work.
Conforming to the movement in the CPI will also build in a form of expectation among the workforce so that any increase that is not at least as large as the movement in consumer prices will be instantly dismissed as illegitimate. It is creating a rod for its own back for the system, especially in its early stages, to be giving the impression that the aim is to compensate workers for the rise in prices over the period since the last increase. This is a form of economic addiction that will create industrial disruption over the longer term, especially if inflationary pressures increase. Under such a regime, any increase in the price level, irrespective of the cause (petrol prices and the cost of bananas being recent examples) can become part of the adjustment process.
It would be a serious mistake to consider inflation as a phenomenon of the past. Although Australia’s recent history with respect to inflation has been good, there is a need not to be complacent (Edey 2007). The apparent strength of the Australian economy is raising fears among some commentators of inflationary pressures and the possibility of higher interest rates even given the raises in 2007 and early 2008.
It is generally recognised that Australia’s previous regime of centralised wage bargaining with indexation was a major reason for the perpetuation of inflation in the 1970s and early 1980s (Dwyer and Leong 2002). The success of the Prices and Incomes Accord in reducing inflation was to act as a circuit-breaker in the centralised system, reducing real wages by 10 per cent below what would have been expected under a strict indexation regime (Lewis and Spiers 1990). A major feature of the more decentralised wage-bargaining system, begun under the Hawke/Keating governments and continued under the Coalition, is the decoupling of wages and prices through automatic indexing of wages to inflation, removing a mechanism for the direct transmission of prices to wages and, in turn, wages to prices. For much of the period of centralised wage determination, there was some form of regular indexation of wages to the CPI. In wage bargaining today this does not generally occur. It would therefore be inappropriate for indexation to be the major focus of pay rises for the approximately 20 per cent of workers on awards determined by the AFPC.
Removing the automatic link between wages and prices, minimising flow-on effects of awards and lengthening the period between wage adjustments have been important in the management of inflation in Australia (Dwyer and Leong 2001). Regular adjustment of award wages to the CPI should be seen as a backward step in sensible anti-inflation policy.
The AFPC and its successor must provide a framework such that:
it provides a genuine safety net which does not rigidly keep pace with short-term economic change or which is subject to continuous, unpredictable revision. It should also not proceed from the assumption that strong economic growth automatically provides the rationale for increased minimum wages;
it must allow those who make submissions to understand what the criteria for making decisions are so that these can be addressed in their own submissions; and
any minimum wage increase should apply only to the federal minimum wage; increases above this level should be by workplace bargaining.
The framework must make it clear from the start that its role is to provide a safety net that underpins the system in a way that encourages employees to bargain with their own employers. Wage earners should not come to expect that adjustments in the minimum wage will be equivalent in practice to increases that would otherwise have had to be negotiated with an employer.
Employers should also not have the luxury of allowing the decisions of the AFPC to stand as a proxy for ensuring that the wages paid are sufficiently high to retain their own workforce to meet all of the requirements of their businesses. Being paid according to the award should not be seen by employers as setting a standard so high that workers should under normal circumstances be satisfied with their level of compensation. The minimum wage should be seen by all as a safety net paid only to those who are generally low-skilled and whose productivity contribution is equally low. The decisions of the AFPC should not be part of a process that fuels an inflationary process.