Industrial Relations Commission of New South Wales CITATION: State Wage Case 2006 (No. 6) [2006] NSWIRComm 204 APPLICANT Unions New South Wales RESPONDENTS Australian Business Industrial and affiliated associations Australian Industry Group, New South Wales Branch PARTIES: Australian Retailers Association Catholic Commission for Employment Relations Employers First Local Government and Shires Association of New South Wales Minister for Industrial Relations Motor Traders' Association of New South Wales Public Employment Office FILE NUMBER(S): IRC 5778 of 2005 CORAM: Wright J President; Walton J Vice-President; Harrison DP; Boland J; Bishop C; Stanton C CATCHWORDS: State Wage Case - Application by State Peak Council for employees for a State decision setting general wage-fixing principles - Claim for increase in minimum award wages and allowances of 4 per cent - Absence of National decision - Consideration whether any decision would be a State decision - Reasons for not delaying any decision pending determination by Australian Fair Pay Commission - The legislative framework in which State decision to be made - Assessment of the national economy - Assessment of the New South Wales economy - Characteristics of low paid employment - Issues faced by low paid workers - The needs of vulnerable workers - Unincorporated employers - Employment effects of the application - Cost of the claim - Flat or percentage increase - Amount of increase - Increase of $20 granted - Wage fixing principles determined - Orders made Industrial Relations Act 1996 Superannuation (Resolution of Complaints) Act 1993 (Cth) LEGISLATION CITED: Superannuation Guarantee (Administration) Act 1992 (Cth) Superannuation Industry (Supervision) Act 1993 (Cth) Workplace Relations Act 1996 (Cth) Workplace Relations Amendment (Workchoices) Act 2005 (Cth) Capral Aluminium Limited v WorkCover Authority of New South Wales (2000) 49 NSWLR 610 Fox v GIO Australia Ltd (2002) 56 NSWLR 512 Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 Safety Net Review - Wages - 2003 (2003) 121 IR 367 Safety Net Review - Wages - June 2005 (2005) 142 IR 1 CASES CITED: Safety Net Review - Wages - May 2004 (2004) 129 IR 389 Secure Employment Test Case (2006) 150 IR 38 State Wage Case 1989 (1990) 35 IR 183 State Wage Case 2005 (2005) 142 IR 337 State Wage Case 2005 (Statement and Orders) (2005) 142 IR 335 State Wage Case 2006 (No5) [2006] NSWIRComm 190 State Wage Case 2006 [2006] NSWIRComm 67 HEARING DATES: 05/06/06, 06/06/06, 07/06/06, 14/06/06 DATE OF JUDGMENT: 06/26/2006 Mr M Thistlethwaite Unions NSW Mr J V Murphy of counsel Minister for Industrial Relations and Public Employment Office Mr E Leahy Catholic Commission for Employment Relations Mr T McDonald Employers First LEGAL REPRESENTATIVES: Australian Retailers Association Mr T Abrams Printing and Allied Trades Employers Association of New South Wales Mr M Moir Australian Business Industrial Australian Industry Group, New South Wales Branch and affiliated associations Ms D Talbot Local Government and Shires Association of New South Wales JUDGMENT: INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES FULL BENCH CORAM: Wright J, President Walton J, Vice President Harrison DP Boland J Bishop C Stanton C Monday, 26 June 2006 Matter No IRC 5778 of 2005 STATE WAGE CASE 2006 Application by Unions New South Wales for a State Decision - State Wage Case 2006 under s 51 of the Industrial Relations Act 1996 DECISION OF THE COMMISSION [2006] NSWIRComm 204 TABLE OF CONTENTS INTRODUCTION THE CLAIM SUMMARY OF RESPONSES TO THE CLAIM Minister for Industrial Relations Local Government Association of NSW and Shires Association of NSW Catholic Commission for Employment Relations Employers First Australian Business Industrial and Australian Industry Group Printing and Allied Trades Employers Association Commonwealth Minister for Employment and Workplace Relations THE LEGISLATIVE FRAMEWORK PARTIES' APPROACH TO PROCEEDINGS AN OVERVIEW OF THE NATIONAL ECONOMY Domestic growth Consumption Dwelling Investment Business investment Profits Outlook for international economy Exports Terms of Trade Current Account Labour market/Unemployment Issues Wages Inflation Productivity Unit Labour Costs Conclusions on the state of the national economy THE NEW SOUTH WALES ECONOMY LOW PAID WORKERS Income and living costs Wage dispersion and income inequality Issues faced by low paid workers The needs of vulnerable workers UNINCORPORATED EMPLOYERS General Retail and hospitality industries Social and community based employers and not for profit child care employers Manufacturing Other EMPLOYMENT EFFECTS OF THE APPLICATION COST OF THE CLAIM FLAT OR PERCENTAGE INCREASE AMOUNT OF INCREASE WAGE FIXING PRINCIPLES ORDERS APPENDIX A APPENDIX B APPENDIX C APPENDIX D List of Tables Table 1 Domestic Economic Forecasts Table 2 Economic Parameters used in Budget Table 3 International GDP growth forecasts Table 4 State's economic performance and outlook 2006-07 Table 5 Household characteristics by gross household income quintile of households where principal source of income is wages and salaries Table 6 Broad expenditure groups by gross household income quintile of households where principal source of income is is wages and salaries Table 7 Expenditure on necessities: first quintile households proportion of total goods and services expenditure Table 8 Minimum Wage as a percentage of Median Earnings for full time workers Table 9 Minimum Wage and Average Weekly Ordinary Time Earnings Table 10 Increases in Full-time Weekly Total Earnings of Non- Managerial Employees by Distribution of Earnings: 1998-2004 Table 11 Employees of unincorporated businesses Table 12 Weighted increase for New South Wales Award only employees Table 13 Calculating the addition to Total Ordinary Time Earnings Table 14 The economic impact of 4 % increase (award only employees) Table 15 Impact of Various Award Rate Increases on Economy Wide Earnings (Award only employees) List of Charts Chart 1 Contributions to Gross Domestic Product growth Chart 2 Growth in new business investment Chart 3 Wage and profit share from total factor income Chart 4 Pre-tax company profits Appendices Appendix A Wage Fixing Principles Appendix B List of studies concerning the impact of increases in minimum wages on employment considered by the Australian Industrial Relations Commission in the Safety Net Review - Wages June 2005 Case Appendix C References in extract from "The impact of the Introduction of the U.K. Minimum Wage on Low Wage Workers", M. Stewart, Journal of the European Economics Association, March 2004 at 68 Appendix D References in extract from OECD Employment Outlook: Boosting Jobs and Incomes, 2006 at 86-88 INTRODUCTION 1 By its application of 10 November 2005, Unions New South Wales, the State Peak Council for employees, sought a State decision pursuant to s 51(1) of the Industrial Relations Act 1996 ("the Act") setting general wage-fixing principles through which, inter alia, upon application the rates of pay and allowances in awards may be increased by 4 per cent from the twelve-month anniversary date of adjustments to wages and allowances made under the State Wage Case 2005 (2005) 142 IR 337. 2 In the result, for the first time under the Act, the Commission is required to consider an application to set wage-fixing principles in the absence of a National decision (as defined in s 48 of the Act) triggering the operation of s 50 of the Act. 3 The circumstances by which this has come about - essentially the advent of the Workplace Relations Amendment (Workchoices) Act 2005 - are explained in the interlocutory decision of the Full Bench in Re State Wage Case 2006 [2006] NSWIRComm 67. In that decision, the Full Bench resolved two threshold matters: first, that a decision of the Commission on the present application could properly be described as a "State decision" within the meaning of the Act (so that the Commission had jurisdiction to grant the application); and secondly, that the Commission should not grant the application of the Commonwealth Minister for Employment and Workplace Relations ("the Commonwealth"), and a number of employer interests, to adjourn the application by Unions NSW until the question of adjustments to minimum wages had been dealt with at the federal level by the Australian Fair Pay Commission ("AFPC") and the Australian Industrial Relations Commission ("AIRC") sometime later this year or early in 2007. For different reasons, both of these issues have resurfaced and require some further comment before we consider the application proper. 4 At the substantive hearing, Employers First made fresh submissions based on factual material adduced during the hearing to the effect that a decision of the Commission on the present application would not be a "State decision" for the purposes of s 48 of the Act. In brief, Mr T McDonald for Employers First submitted that the application seeks to affect "award-dependant" employees within the jurisdiction only and as such employees do not exceed 40 per cent of employees within the jurisdiction, the majority of employees within the jurisdiction will not be affected. Hence, any decision will not affect, or be likely to generally affect, the conditions of employment of employees in New South Wales who are subject to the jurisdiction of the Full Bench. 5 This submission is fundamentally misconceived. The application is not an application for a general order for a 4 per cent wage increase; it is an application for general wage-fixing principles in accordance with which wages may be varied under the relevant statutory provision. The Commission is specifically empowered to set such principles by virtue of ss 51(1) and 51(4), which by their very nature apply to every employee subject to the Commission's jurisdiction. Although the practical effect of these principles will vary (depending upon different applications and the different circumstances of various groups of employees), there is no doubt that the general principles will apply to every employee. Thus, whilst it is correct to note that the combined operation of the principles may (upon further application) result in a wage increase of 4 per cent for a proportion of the employees only within the Commission's jurisdiction (predominantly those employees working under awards in unincorporated private businesses: 40 per cent on Mr McDonald's analysis, but an even lesser percentage if one included Crown employees, as one should), the limited operative scope of one facet of the general principles cannot form the basis to restrict the Commission's jurisdiction. In contrast, the Special Case Principle will apply to all employees (governmental and otherwise) within the Commission's jurisdiction. 6 This is not a mere function of the form of the application. The principles sought in this case are, by and large, a replication of those enunciated by the Commission in the State Wage Case 2005 (2005) 142 IR 337. Then, as now, they perform the function of establishing the broad parameters by which applications to make or vary awards or to establish or vary terms or conditions of employment, will be considered by members of the Commission. They are set in accordance with the objects of the Act and after a consideration of the range of adjustments to wages and conditions that are commensurate with notions of equity and fairness and economically sustainable outcomes. 7 In tandem with his submission discussed above, Mr McDonald submitted that the matter is comparable to our decision in Re State Wage Case 2006 [2006] NSWIRComm 67 that a decision by the AIRC in relation to safety net wages would not be a National decision. However, as we explained in detail in that case, the two issues are not comparable. While the AIRC retains jurisdiction over federal awards and the employees covered by them, the proportion of those employees in New South Wales that may be affected by any decision of the AIRC fixing safety net wages will be extremely limited. This is because the AIRC's function in setting the federal minimum wage has - except as it relates to "transitional employees" - been vested in the AFPC (and then further limited by the operation of s 511 of the Workplace Relations Act 1996 (Cth) ("WR Act")). 8 As a final observation relating to the application of the principles (not the Commission's jurisdiction), we note that although there was some debate on this issue no one ultimately submitted that we should limit any increase, if granted, to those employees falling within the Commission's jurisdiction at the time of any decision. In the event the WorkChoices legislation, or relevant parts of it, is found to be invalid as a consequence of the challenge in the High Court (the details of that challenge are referred to in Re State Wage Case 2006 at [27]), any decision increasing minimum wages, based on the claim by Unions NSW, will have general practical application. Depending upon the operative date of the variation to the relevant award, any increase would apply to employees of constitutional corporations (or a class of employee otherwise remaining in this jurisdiction by dint of the High Court's judgment). 9 Notwithstanding that the decision in Re State Wage Case 2006 was conclusive on the subject of delay, submissions urging delay have been repeated. Ordinarily, it would be sufficient to dispose of the issue in this judgment by a recitation of that history and a chastening of those parties against any prospect of cavilling with decisions given by the Commission. However, we consider that it is important, given the repeated insistence on comity by Employers First, Australian Business Industrial and Australian Industry Group ("the Joint Employers") and Printing and Allied Trades Employers Association that we elaborate on our earlier conclusion at [45] of Re State Wage Case 2006 that the strength of the contention that comity should be maintained is significantly weakened. 10 We do not propose to repeat all the observations we made in our interlocutory decision of 6 March 2006. It is sufficient to point to one singular, significant factor. By the passage of the Workplace Relations Amendment (Work Choices) Act 2005, the legislative scheme for wage fixation in the Federal industrial system under the WR Act so dramatically diverged from the requirements of the legislation governing our jurisdiction, in both its objects and provisions governing wage-fixing, as would render a deferral of our decision-making in favour of the AFPC a failure to properly discharge our statutory functions. 11 A core consideration in this respect is the fact that the AFPC conducts proceedings that are not required to be conducted in a judicial and transparent manner resulting in an administrative decision deriving from wage setting parameters that are not consistent with those required of this Commission under the statute that governs our powers and proceedings. 12 Take, for example, the central consideration of fairness in wage-fixing. Section 10 of the Act makes that factor the centrepiece of any award-making function exercised by the Commission. No such criterion is expressly found in s 23 of the WR Act, or elsewhere in that Act. 13 The respondent employer parties argued strenuously, however, that fairness did form part of those criteria, by the operation of s 23(c) of that Act, which is in the following terms: The objective of the AFPC in performing its wage-setting function is to promote the economic prosperity of the people of Australia having regard to the following: … … (c) providing a safety net for the low paid; … 14 We consider the employers' contentions are unsustainable for the following reasons: 1. Recourse was no doubt had to s 23(c) of the WR Act because no other aspect of s 23, or other provisions governing the AFPC (including the objects of the WR Act), establishes any criteria that have even a remote resemblance to the criterion of fairness. 2. This consideration alone has a significant impact upon the construction of s 23(c). In other words, the proposed interpretation of that sub-section strains against the general tenor of the other provisions of s 23 and the objects of the Act. Further, as a matter of construction, the reference to "a safety net for the low paid" in s 23(c) needs to be read in conjunction with the objects of the WR Act. Those objects condition the construction of the words appearing in s 23(c). Section 3(c) identifies the following objects: "providing an economically sustainable safety net of minimum wages and conditions for those whose employment is regulated by this Act". In our view, this conveys the true meaning of the legislature in relation to s 23(c) by indicating that the safety net for the low paid needs to be judged against purely economic considerations and not broader considerations of justice and equity which are encompassed within the concept of fairness. 3. This conclusion is amply supported by the now standard purposive approach to statutory construction. The Federal legislature has expressed a clear intention by the Workplace Relations (Work Choices) Amendment Act to remove the concept of fairness from the criteria to be applied in the establishment of a safety net. There has been removed from the former Act: · Reference to a "safety net of fair and enforceable minimum wages and conditions of employment" from s 3(d)(ii); · Reference to "a safety net of fair minimum wages and conditions of employment" which appeared in s 88A "Objects of Part VI - Dispute Prevention and Settlement"; and, · Reference to "a safety net of fair minimum wages and conditions of employment" appearing in the preamble to s 88B(2) (describing the Commission's functions in establishing a safety net). These references are specifically omitted in the counterpart provisions of the current Federal legislation in, for example, ss 3(c), 510(a) and 511 and there is not found elsewhere in the WR Act any similar criteria for wage fixation. 4. At a broader level, it is clear from the scheme of the federal Act that the legislature has intended that attention be shifted from broader considerations of fairness and equity in wage-setting to purely economic considerations, such as those described in s 23, as underpinning the AFPC's wage setting parameters. An important illustration is the reference in s 23(d)(ii) which relates to the revision of minimum wages for junior employees, employees to whom training arrangements apply and employees with disabilities. Nowhere is it stated in the wage fixing parameters for that group that fairness is to be a criterion but, rather, the singular parameter the AFPC is to have regard to is ensuring "those employees are competitive in the labour market". The legislature could have easily incorporated a requirement as to fairness in the provisions but did not do so. The absence of any provision dealing with such vulnerable employees is conspicuous. 15 We refer to these considerations at some length because, in our view, the persistent contentions advanced in favour of a comity of approach were plainly untenable, in particular the submissions by reference to the concept in its title that the AFPC is required to fix fair rates of pay. THE CLAIM 16 The claim by Unions NSW, filed on 10 November 2005, was expressed in the following terms: The making of a State Wage Case 2006 decision in the following terms: (a) 4% increase in rates of pay in certain awards in accordance with the State Wage Fixing Principles. (b) 4% increase in existing allowances which relate to work or conditions which have not changed, including shift allowances expressed as monetary amounts and service increments in certain awards in accordance with the State Wage Fixing Principles. (c) The variations apply to respective awards 12 months from the date of increases to wages and allowances made under the State Wage Case 2005 [2005] NSWIRComm 213 (sic - (2005) 142 IR 337). 17 The grounds of the application and the submissions of Unions NSW put by Mr M Thistlethwaite revealed the following essential bases of the claim: 1.1 Unions NSW seeks a State decision setting principles for the State Wage Case 2006 including the availability of a 4 percent increase in rates of pay and allowances under NSW State awards. 1.2 Unions NSW estimate that the application will affect 9 percent of all employees in NSW. These employees predominantly work in unincorporated private businesses. 1.3 The application for a 4 percent increase in wages and allowances is moderate, justified and sustainable. The application seeks to maintain the relative and real value of award wages in NSW. 1.4 The application for a 4 percent increase in wages and allowances is based on recent Wage Price Index (WPI) figures for the NSW and National economy. The Wage Price Index is the best measure of the increase in the cost of labour as it measures the cost of purchasing the same quality and quantity of labour and is not affected by compositional change in the workforce. 1.5 The application is consistent with average annual wage increases being achieved under enterprise agreements at both a State and National level. The application will not discourage enterprise bargaining in NSW. 1.6 The application seeks to ensure the maintenance of fair wages and conditions in NSW awards and is consistent with the objects of the Industrial Relations Act 1996 , particularly the objects contained in section 3 (a), (e) and (h). The application principally affects award wage workers who lack bargaining capacity in their workplaces. Unions NSW submit that these workers have the right to maintain the real value of their income to ensure that they can participate in society. The Commission is obliged to ensure fair and reasonable wages and conditions in NSW awards. 1.7 Both the NSW and national economies are well positioned to embrace a 4 percent increase to award wages and allowances in NSW. Both economies have been growing, business investment and employment figures have been strong, and inflation is contained within Reserve Bank limits. Forecasts for a number of important economic indicators in both economies in the short to medium term are positive. 1.8 The economic impact of a 4 percent increase in wages and allowances in NSW awards on ordinary time earnings and inflation in NSW is statistically negligible. There will be no undesirable economic impacts should the Commission grant the application sought by Unions NSW. 18 In support of its claim, Unions NSW tendered affidavits from: Dr Barry Hughes, an economist; Dr John Buchanan, Acting Director of the Workplace Research Centre; Richard Watts, senior industrial officer with the Australian Council of Trade Unions; and, Gerard Dwyer, Branch Secretary-Treasurer of the Shop, Distributive and Allied Employees' Association, New South Wales Branch. A number of witness statements were also tendered. The statements were made by: Derek Burns, hairdresser; Michelle Doan, disability care worker; Claire Cremer, organiser employed by the Australian Workers' Union, Newcastle, Central Coast and Northern Regions Branch; and Lurline Comerford, organiser employed by the Australian Services Union. The only persons required for cross-examination were Dr Hughes and Mr Dwyer. SUMMARY OF RESPONSES TO THE CLAIM 19 Before we review the particular positions adopted by the parties, we would note that no party (other than PATEA) opposed the setting of wage fixing principles which largely replicated the principles adopted by the Commission in the State Wage Case 2005 (although various parties adopted different views as to wage outcomes). Minister for Industrial Relations 20 The Minister's submissions provided an overview of the state of the Australian and New South Wales economies; detailed the cost of the claim and the capacity of the economy to absorb it; examined the impact of the claim on labour force participation; examined the impact of the claim on employment; analysed the impact of the claim on productivity; addressed the needs of the low paid by examining income and expenditure characteristics of low paid workers and households; and, looked at the needs of vulnerable workers including women, indigenous people, migrants, young people and disabled workers. 21 In brief, the Minister for Industrial Relations submitted that a $20 increase to the minimum wage in New South Wales was an economically sustainable and responsible increase. It submitted that, notwithstanding the importance of maintaining wage relativities in awards, a flat increase was preferable to a percentage increase because it would increase the minimum wage at a slightly faster rate for the lowest paid workers (who have less bargaining power). Further, the increase would directly benefit the lowest paid workers in the workforce with a negligible impact on employment and productivity, and would be likely to promote increased participation. 22 The Minister submitted there were approximately 508,000 employees of unincorporated entities in the private sector of New South Wales who remained in the New South Wales industrial relations system. Of these it was said between 194,000 and 255,000 were reliant on minimum award rates and would receive a direct benefit from an increase to the minimum wage in New South Wales. Mr J V Murphy of counsel for the Minister acknowledged, however, that depending upon the outcome of the High Court proceedings the effect of granting the claim in whole or in part could be that any increase would flow to employees of constitutional corporations. Mr Murphy indicated that such a possibility made no difference to the Minister's position supporting a $20 increase to minimum award wages. Local Government Association of NSW and Shires Association of NSW 23 The Local Government Association of NSW and Shires Association of NSW ("the Associations") supported the claim. Catholic Commission for Employment Relations 24 The Catholic Commission for Employment Relations ("CCER") supported a flat increase of at least $20 to the Award Review Classification Rate (currently $484.40) on the following grounds: · a flat dollar increase provides the greatest assistance to the low paid; · a flat dollar increase has been adopted by the Industrial Relations Commission of NSW in its State Wage Case Decisions in recent years; · it will assist to protect the poor and the vulnerable by maintaining the real value of their income; · it will lower inequality which leads to healthier, more cohesive families and communities; · it is consistent with the objects of the Act to provide a framework for the conduct of industrial relations that are fair and just; and · based on the economic evidence provided by Unions NSW and the NSW Government, it is justifiable and sustainable. Employers First 25 As mentioned earlier, Mr McDonald submitted that the appropriate course of action was for this Full Bench to defer a decision on the application by Unions NSW until it had the opportunity to consider the deliberations and decision of the AFPC expected in Spring 2006. Mr McDonald further submitted: (1) Any decision granting the claim in whole or in part will only flow to employees of unincorporated businesses whose terms and conditions of employment are covered by State awards. Unions NSW had not made out a case on the evidence for a wage increase for such employees of unincorporated businesses. In this respect the Commission should also have regard to the state of the New South Wales economy. (2) The Commission could not be satisfied that a decision pursuant to s 51 of the Act granting increases to employees of unincorporated businesses would be consistent with the objects of the Act or that there are good reasons for doing so. Moreover, there is the possibility there could be adverse consequences arising out of increases to such employees having regard to the state of the New South Wales economy, which is lagging behind the national economy and behind the performance of other States. 26 In support of its case in opposition to the claim, Employers First tendered the affidavit of Dru Anthony Gillan, Manager, Workplace Relations Department, Restaurant & Catering Industry Association (NSW) whose evidence went to the levels of incorporation and award reliance in the accommodation, cafe and catering industry and the vulnerability of the industry to "minimum wage adjustment which causes disparate wage outcomes." Also tendered was the affidavit of Julie Anne Owen, New South Wales Employee Relations Manager for the Australian Retailers' Association, who described the employer profile in the retail industry and the impact of wage increases on small retailers. Both of these deponents were required for cross-examination. 27 Mr McDonald made it clear that the case for Employers First was not one based on economic sustainability having regard to the state of the national economy or the New South Wales economy, although he submitted that the New South Wales economy was lagging behind the national economy and the economies of other States. Employers First had intended to rely on the evidence of Mr Raymond Bennett, an economist and business consultant, regarding the state of the national and New South Wales economies but, by leave, withdrew that material. Australian Business Industrial and Australian Industry Group 28 The Joint Employers opposed the claim. It was submitted that the Commission should not determine the claim pending the first minimum wage determination of the AFPC. 29 In the alternative, the Joint Employers submitted that the claim was "clearly excessive and unsustainable, having regard to economic circumstances and the likely economic effects of the claim. The claim should be rejected." Further, that: (a) It [the claim] ignores the fact that the economy is slowing, productivity performance is weaker and capacity constraints are emerging; (b) The claim comes at a time when many businesses are endeavouring to cope with very significant increases in input prices (e.g., steel, fuel) and other cost pressures; (c) The claim would have a disproportionately negative impact on small businesses and regional employers (via their unincorporated status); (d) The claim, if granted, would only add to already significant wages and inflationary pressures, thereby increasing the risk of further interest rate rises, which low paid workers with mortgages, personal loans and credit card debts can ill-afford. Printing and Allied Trades Employers Association 30 The Printing and Allied Trades Employers Association ("PATEA") opposed the claim. PATEA submitted in light of the difficult trading conditions facing printing companies in New South Wales, no increase be granted. Commonwealth Minister for Employment and Workplace Relations 31 The Commonwealth Minister for Employment and Workplace Relations had sought leave to intervene in the proceedings. This was granted, on terms to be decided. Subsequently however, the Minister sought leave to withdraw from the proceedings. Leave was granted: see Re State Wage Case 2006 (No5) [2006] NSWIRComm 190. THE LEGISLATIVE FRAMEWORK 32 Since 1996 the legislative basis for adjusting minimum wages and allowances in New South Wales State Awards on an annual basis has been a combination of ss 48, 50 and 52 of the Act. That is to say, having considered national wage cases, and more latterly, safety net review decisions of the AIRC, this Commission has adopted those decisions with any amendment the Commission has considered necessary or appropriate given its statutory charter. On most occasions, however, any departure from the National decision has not been significant. 33 As we have already discussed, with the commencement of the WorkChoices legislation, there has been such a divergence of purpose between the Commonwealth and New South Wales industrial relations legislation that this Commission is now unable to adopt the pattern of the past for the reasons elucidated in our earlier decision. Consequently, in the absence of a National decision, the making of a State decision must be guided by other considerations, principally the terms of s 51 and secondly, criteria generally imposed by the Act. 34 Section 51(1) itself imposes two criteria: first, the making of a State decision must be consistent with the objects of the Act; and secondly, there must be good reasons for doing so. 35 The objects of the Act are to (inter alia) provide a framework for the conduct of industrial relations that is fair and just; to promote efficiency and productivity in the economy of the State; to encourage participation in industrial relations by representative bodies of employees and employers and to encourage responsible management and democratic control of those bodies; to facilitate appropriate regulation of employment through awards, enterprise agreements and other industrial instruments; and to encourage and facilitate co-operative workplace reform and equitable, innovative and productive workplace relations. 36 In addition to the broad considerations contained within the objects of the Act expressly imported by s 51(1), the section must be construed within the context of the Act as a whole so that it is consistent with the language and purpose of all the provisions of the statute: see for example Project Blue Sky Inc v Australian Broadcasting Authority (1998) 194 CLR 355 at 381; Capral Aluminium Limited v WorkCover Authority of New South Wales (2000) 49 NSWLR 610 at [42] and [43] and Fox v GIO Australia Ltd (2002) 56 NSWLR 512 at [42]. 37 Thus, regard must be had to s 146(2), which requires the Commission, in the exercise of its functions, to take into account the public interest and (in addition to the objects of the Act) the state of the economy of New South Wales and the likely effect of its decisions on that economy. 38 Regard must also be had to s 10, which governs the Commission's award-making power. Section 10 provides that the Commission may make an award setting fair and reasonable conditions of employment for employees. It must follow that any general principles that precede the making or variation of an award (such as those embodied in a State decision) must be capable of setting fair and reasonable conditions of employment for employees. Not only is this consonant with first object of the Act; if the Commission did not, in the context of s 51, take into consideration whether general principles, would, upon application, result in fair and reasonable conditions of employment, the principles would have no utility for it would be beyond the Commission's power to embody them in any award. 39 Finally, it is appropriate to note the expansive manner in which s 51 has been drafted. The principles referred to in ss 51(1) and 51(4) include State Wage Principles, such as those embodied in the State Wage Case 2005 (2005) 142 IR 335. The word "provisions" may mean many things, but at the very least encompasses the alteration of the terms of an award by a decision, such as the decision in Secure Employment Test Case (2006) 150 IR 38. Although sub-section (3) does not fall to be scrutinised in this case, it is important to note that it contains a particularly broad reference to "other matters under this Act". Without needing to delineate the boundaries of that phrase, it must include "industrial matters" as defined under s 6 of the Act. 40 With that broad approach to s 51 in mind, we turn to consider in more detail the parties' approach to the proceedings and the economic evidence before the Commission. PARTIES' APPROACH TO PROCEEDINGS 41 We must express some dissatisfaction with the approach taken by some of the parties to what are, unquestionably, important proceedings. 42 As we have already made clear, what was less than helpful was the position taken by the employers who focused much of their energy on attempting to re-run arguments unsuccessfully put in earlier interlocutory proceedings that we should delay any decision we might make until the AFPC had announced its position. As a consequence, important issues were not given all of the attention they deserved by those parties in their own interests. 43 What motivated the employers to, in effect, seek to resurrect submissions that had earlier been ruled against, is not clear. There was nothing new in substance that was put and there could not have been a genuine expectation that the Full Bench would alter its earlier decision. 44 In any event, in the result the applicant, in support of its claim, put a comprehensive economic case, with very substantial support being provided by the Minister for Industrial Relations' material. The employers' challenge to the applicant's case was not a strong one nor was their own economic case opposing the claim. Indeed, much of the applicant's economic case was not challenged at all. 45 Whilst Employers First had originally intended to rely on the evidence of Mr Bennett in support of its economic case, during the course of the proceedings that evidence was withdrawn. Subject to some slight degree of challenge in cross-examination to Dr Hughes' evidence about the affordability of the Unions NSW claim in respect of unincorporated businesses, Employers First did not seek to challenge any of Dr Hughes' evidence about the state of the national or New South Wales economy except to submit that in respect of the latter, the material tendered by the Minister for Industrial Relations in relation to its 2006-07 Budget painted a "slightly less rosy picture" of that economy than suggested by Dr Hughes. No material was tendered by Employers First as to why it was the NSW Budget papers painted a less rosy picture than that of Dr Hughes. Nor did Employers First challenge other economic material tendered by the applicant and took no issue with the assessment of the national economy contained in the 2006-07 Commonwealth Budget Papers. 46 Employers First relied on the evidence of Mr Gillan of the Restaurant and Catering Industry Association (NSW). We shall refer to that evidence in greater detail later in this decision. Similarly so in respect of the affidavit of Ms Owen of the Australian Retailers' Association. That material went largely to the proposition that the retail and hospitality sectors were vulnerable industries and granting the applicant's claim would be economically detrimental. 47 The Joint Employers tendered extensive economic material but in the light of the material contained in the Commonwealth and New South Wales Budget papers much of the Joint Employers' material was rendered out of date. No worthwhile attempt was made by the Joint Employers to come to terms with the up to date material in the Budget papers; no reference was made to the Reserve Bank's recent Statement on Monetary Policy issued on 5 May 2006 - a useful source of up to date economic information; there was no cross-examination of Dr Hughes; and, there was no acknowledgement at all by the Joint Employers of the overwhelmingly positive features of the national economy, or what Dr Hughes described as what was self-evidently the "longest sustained expansion for decades resulting in unemployment falling to levels not seen since the 1970s" in the national and New South Wales economies and the "favourable influences emanating from global developments which tend to dominate Australian, and in turn New South Wales conditions." 48 The Joint Employers' submissions tended to direct attention to speculative risks associated with the national economy without adequately, and in a balanced way, acknowledging the strengths of the national economy which otherwise received acknowledgement from every relevant source. 49 The Joint Employers submitted documentary material regarding the New South Wales economy and the outlook for manufacturing. The case in respect of the New South Wales economy, however, was limited to the following proposition: The NSW economy continues to under-perform relative to the Australian average and all other states… In 2004/05, the economy (as measured by gross state product in volume terms) grew by only 1.1%, compared to the national average of 2.3%. NSW was the only state to record growth below the national average, with the next nearest state, Victoria, growing at almost double that of NSW. 50 In relation to manufacturing much more substantial material was presented, although more from a national perspective than with a New South Wales focus. It was submitted that despite other parts of the economy experiencing moderate growth conditions, manufacturing was experiencing the effects of a significant cyclical slowdown in activity, as well as significant restructuring arising from global competition. Reliance was placed on National Account data for the December quarter 2005. 51 It was further submitted in relation to manufacturing: · While the economy grew overall by 0.5% in the December quarter (and 2.7% in annual terms), the manufacturing sector declined by 1.7% in seasonally adjusted terms. On an annual basis, the sector grew by only 0.4%, the fourth weakest of all sectors measured in the National Accounts. · The Ai Group/PricewaterhouseCoopers' Australian Performance of Manufacturing Index (PMI), which provides a monthly measure of business activity, shows that the weakness of the manufacturing sector has continued into the early part of 2006. March saw an improvement in manufacturing activity across Australia (after a poor January and February), with the Australian PMI rising to 53.2 points. Nevertheless, conditions remain well below the peak of late 2004 and early 2005. · The Ai Group forecast for Australian manufacturing in 2006 is that overall sales will increase by the order of 3.7%, largely made up of movements in selling prices, leading to the prospect for a decline in the volume of sales (that is, in real terms) for the second consecutive year. · This situation is compounded by the substantial restructuring being experienced by industry. This restructuring process is seeing many companies downsizing their number of employees, becoming more capital intensive, moving production offshore, and looking to use more imported materials in domestic production. This restructuring is an outcome of the impact of globalisation, a strong Australian currency, a faster pace of import competition, and the emergence of China. · The higher Australian dollar has been doubly felt by manufacturing through its impact on import penetration. Australian manufacturing in 2005 faced much stronger global competition than it did almost a decade ago. Imports of manufactured goods have grown, equivalent to about 44% of manufacturing sales in 2005 compared with 27% a decade ago. · In August 2004 Ai Group released a report examining the implications of China on Australian manufacturing, titled Australian Manufacturing: Opportunities and Challenges. The study found over 68% of firms surveyed had been affected by China in either customer or supplier markets. While some had benefited from China's emergence as an export market and as a source of low cost inputs, China was having an overall negative net impact on activity and profits through its competitiveness in the domestic and export markets of Australian firms. It was estimated that the net financial loss to manufacturers was in the order of $560 million in 2004. · In an environment where companies are rapidly making adjustments to respond to heightened global competition, considerable care is needed in determining wage outcome. Excessive wage adjustments could force employers to make deeper adjustments, resulting in greater cuts to domestic activity and jobs. · Ai Group is forecasting that manufacturing employment will fall by 3.9% in 2006. This forecast is premised on further tight conditions in 2006. 52 Whilst the material relating to manufacturing industry was helpful in understanding the economic and competitive pressures on the industry, and it must be acknowledged that manufacturing industry is facing significant challenges, there was no information provided by the Joint Employers as to the effect that an adjustment in minimum award wages might have on employment in that industry in New South Wales other than in a very general sense. For instance, we do not know with any certainty whether an increase would have any implications for employers who are members of the two organizations constituting the Joint Employers: are any of their members still within this Commission's jurisdiction; if so, do they pay overaward payments, as is commonly the case in manufacturing; have they negotiated enterprise agreements? None of this information was provided. This is very significant as common experience in industrial relations would indicate that these factors might well operate to eliminate any impact of the granting of the claim in this sector. 53 As we earlier noted, PATEA claimed that business conditions in the printing industry had deteriorated in the March quarter 2006. PATEA relied on an internal report. The report, however, was not tendered into evidence and provided no opportunity for the applicant or any other party to test the contents of the report or its conclusions. 54 To a significant - although by no means exclusive - degree, Unions NSW relied on the evidence of Dr Hughes to underpin its economic case for an increase in minimum award wages. Dr Hughes may be accepted as an expert in his field. He holds a PhD from Princeton University and was engaged in a distinguished academic career from 1965 to 1996. Between 1987 and 1996 Dr Hughes was Professor of Economics at Newcastle University. He has also been an economics correspondent for national and regional daily newspapers, a senior economic adviser to State and Commonwealth governments as well as being an economic consultant for large consulting and financial firms. 55 The Minister for Industrial Relations relied on documentary material to support its economic case for a $20 increase in minimum award wages and a witness statement of Peter Horn, Director Fiscal Strategy with the New South Wales Treasury. Mr Horn's statement went, essentially, to the recent economic performance of the New South Wales economy. Mr Horn relied extensively on the Treasurer's Budget speech and Budget Paper No 2 of the Budget Statement. We will come to this evidence in more detail in the context of our consideration of the New South Wales economy. AN OVERVIEW OF THE NATIONAL ECONOMY 56 Whilst our focus in these proceedings from an economic viewpoint must, as a legislative imperative, be on the state of the New South Wales economy, we cannot proceed in a vacuum to deal only with that economy. We have remarked in previous State Wage Case decisions on the interrelationship and interdependence between the New South Wales and national economies and it is fundamental to any consideration of the claim in these proceedings that we are satisfied that if any increase is to be awarded it may be done so knowing that there is nothing associated with the state of the national economy or its future prospects that would preclude us from doing so. 57 Whilst there was strong reliance by Unions NSW on the evidence of Dr Hughes, in relation to the state of the national economy the applicant also relied on the assessments and forecasts in the Commonwealth Government's 2006-07 Budget Papers, being the latest and most authoritative material available. 58 In considering the national economy, it is appropriate to start with the latest forecasts, which come from the Commonwealth Government's 2006-07 Budget Papers. The table below sets out the domestic economic forecasts: (a) Percentage change on preceding year unless otherwise indicated. (b) Calculated using original data. (c) Chain volume measures. (d) Excluding transfers of second-hand assets between the public and private sectors. (e) Percentage point contribution to growth in GDP. (f) For presentational purposes, inventories held by privatised marketing authorities are included with the inventories of the farm sector and public marketing authorities. (g) The estimates in the final column are the forecast rates in the June quarter 2007. Source: Australian Bureau of Statistics (ABS) cat. no. 5206.0, 5302.0, 6202.0, 6345.0, 6401.0, unpublished ABS data and Treasury . 59 In Budget Paper No. 1, Statement 1 concerning the Economic Outlook, it was stated: Prospects for Australian economic growth remain sound, particularly with strong growth anticipated for the world economy. Global growth is driving robust demand for Australian commodities and producing high commodity prices. This is generating a significant boost to the economy, with business investment set to grow strongly over 2006-07 and export growth likely to improve markedly. These developments are benefiting Australian businesses and households by supporting growth in national income. Australia's GDP is forecast to increase by 3¼ per cent in 2006-07, up from 2½ per cent in 2005-06. Moderate inflation, low unemployment and an expansion in Australia's productive capacity will provide a sound basis for sustained economic growth. 60 The following table, extracted from Statement No. 1 concerning the Economic Outlook, presents the major economic parameters used in preparing the Budget. The parameters for 2005-06 and 2006-07 are forecasts while those for 2007-08, 2008-09 and 2009-10 are projections. 61 Whilst there are some risks to the economy, which we will refer to shortly, the forecasts for the domestic economy and the degree of confidence expressed by Treasury in the Economic Outlook, very much favour the case for a reasonable increase in minimum award wages. In this respect, we consider the national economy in 2006 is better placed to sustain an increase in wages, particularly in relation to employment levels, than the economy was in 2005 when the AIRC awarded a safety net adjustment of $17 per week. Domestic growth 62 In its Statement on Monetary Policy of 5 May 2006, which in substance updates and confirms the material before us, the Reserve Bank expressed the view at p 2 that: The net effect of these factors is that domestic demand has continued to grow at a solid pace over the past couple of years, though down from the unsustainably high rates seen earlier in the decade. GDP growth has been below trend recently but appears likely to pick up, given the continued growth in domestic spending, the stimulus from Australia's rising terms of trade, and the likelihood of a recovery in export volumes. Overall, the Bank's assessment is that demand and output growth over the next year or two are likely to converge to a pace broadly in line with the growth of the economy's productive capacity. This outlook implies that the economy will continue operating at a relatively high level of capacity utilisation, although strong business investment will undoubtedly contribute to capacity expansion over time. 63 In his affidavit evidence, dated 30 March 2006, Dr Hughes stated: Australian GDP growth has been continuously positive in every annual comparison since March 1992, posting a compound annual rate of gain of 3.64 percent in the interim. The current expansion is already more than a year older than its longest counterpart on the modern record, the 12½-year upswing ending in late 1974. GDP growth has been a little slower in recent quarters, partly because of drought-influenced sluggishness of rural output. Whereas GDP is presently estimated by the ABS to have grown 2.7 percent over the year to December 2005, the corresponding non-farm GDP gain is put at 2.9 percent. This latter figure is marginally less than the 3 to 3¼ percent rate normally taken as the growth rate of potential GDP, the slight gap being reflected also in the stabilisation and possibly temporary slight increase in the trend of national unemployment. … Terms of trade gains … have been significant against potential GDP growth rates of around 3 to 3¼ percent. Australia has been showered with gifts by foreigners, the spending of which has contributed no small part to extending the longevity of the present cycle. Since global growth remains firm and the immediate past terms of trade gains have been large it would take a very substantial obstacle to prevent the Australian economy continuing on its growth path awhile yet. 64 It was observed in the Budget Papers that household consumption is expected to grow at slightly below trend rates, following several years of strong growth. Dwelling investment experienced a mild downturn in 2005, and is forecast to remain weak for a while longer. In contrast, it was said, a favourable business environment and strong global demand should see business investment record its largest contribution to GDP growth in two decades in 2005-06, and further growth is forecast for 2006-07 (see Chart 1) 65 The Joint Employers took a more pessimistic view of forecast growth, although we note the material relied upon was outdated. It was submitted that if GDP growth were to continue at 0.5 per cent per quarter (the increase for the December quarter 2005) in 2006-2007, the Australian economy would grow by only 2.0 per cent for the year. 66 The Joint Employers identified the following risks to economic growth: · The housing market may fall further. · Businesses are facing capacity constraints – particularly from the labour market, but also from infrastructure. · The exchange rate may begin to fall, helping exporters and import competitors, but putting upwards pressure on domestic prices. · The Reserve Bank of Australia may increase interest rates in response to rising prices. · The current account deficit is at high levels. This may cause the exchange rate to fall or constrain future economic growth. · Large US Budget deficits are of concern since it may mean that the US dollar may fall further, causing further appreciation in the Australian dollar, cutting net exports. This risk will be exacerbated if the Chinese Yuan is maintained at low levels against the US dollar. · Movements in oil prices are still unclear. Global demand is high and political uncertainties are continuing to put upwards pressure on prices. · China is facing capacity constraints in infrastructure, which may limit its ability to grow. 67 Each of the foregoing risks identified by the Joint Employers was put no higher than they "may" occur. There was no attempt to analyse how proximate the risks were or what impact they would have if they were to eventuate. To submit, for example, that the exchange rate might fall and assist exporters but at the same time put upward pressure on domestic prices, on one view of it suggests that the exchange rate should remain where it is; the Joint Employers seemed to welcome a fall in the exchange rate but at the same time were fearful of what that might do to domestic prices. This example highlights the unhelpfulness of aspects of the Joint Employers' submissions. 68 Undoubtedly, though, there are risks to continued economic growth. The Budget Papers refer particularly to: · Consumption may also be more vulnerable to adverse movements in external factors such as a further increase in oil prices or even a shock that affects confidence, such as a health or security concern. · There is a risk that strong wage growth in the mining, construction, health and education sectors over the past year may continue and lead to more widespread wage pressures. · A risk that higher fuel prices, combined with solid wage outcomes, will feed into higher prices for other goods and services. 69 Nevertheless, it is reasonable to draw the conclusion from the material we have before us that there is a high level of confidence in the national economy and in its prospects for the near and medium term. The risks cited by the Joint Employers were also identified by the Commonwealth and employers before the AIRC in the 2005 Safety Net Adjustment Case. It does not appear to us that the risks have increased to any marked degree, if at all. Indeed, it is our assessment on the economic material available to us that the national economy is even stronger than it was 12 months ago. Consumption 70 Household consumption growth is expected to be a little below trend at 2¾ per cent in 2005-06 and is forecast to strengthen to 3 per cent in 2006-07. The Budget Papers note that this growth would deliver an increase in per capita consumption of around 1¾ per cent annually, but it would still represent a substantial slowing from the growth rates seen in 2003-04 and 2004-05. It was further noted that: While the household sector in aggregate is expected to maintain near-trend consumption growth through 2006-07 despite higher debt servicing, some households are carrying considerably more debt as a proportion of their income than the average. The consumption decisions of these households will be especially sensitive to changes in labour market conditions and interest rates, and to adverse external shocks such as a further increase in world oil prices. 71 In his submissions, the Minister for Industrial Relations stated: With slower employment growth, the rise in household consumption is expected to slow to about 2 ¾ per cent in 2005-06 from 4¼ per cent the previous year. Due to a flattening in house prices, higher debt servicing payments and the higher price of petrol, household consumption in the first half of the current financial year was up just 2¾ per cent on a year earlier. In the three months to February growth of retail sales, which make up about 40 per cent of household consumption, accelerated but that is not expected to continue. Dwelling construction fell by 1½ per cent in 2004-05, a slightly better result than had been forecast. The downturn deepened, however, in the first half of the current financial year and it now appears that the result for 2005-06 will be a bigger fall than had been forecast. A recovery is now expected in 2006-07. 72 The Reserve Bank's Statement on Monetary Policy in May 2006 stated in relation to the Household Sector at p 24: More recently, there were signs of a strengthening in spending in early 2006, with retail sales up by 1.6 per cent in the three months to February and 4.6 per cent higher over the year… Motor vehicle sales increased by 1.2 per cent in the March quarter compared with the December quarter. Consumer sentiment, as measured by the Westpac-Melbourne Institute survey, has also risen in recent months and is currently above its long-run average level. 73 Dr Hughes' evidence regarding domestic spending was in the following terms: Though domestic spending remains strong overall… vitality in some components making significant contributions earlier this decade has been reduced (household consumer spending) or disappeared (new housing). Housing demand, in Australia as elsewhere, benefited from greater percentages of the population being priced into potential ownership categories by lower interest rates. Again in common with many other parts of the globe, expansion of the market quickly led to an investment or speculative boom and a rapid rise in land prices eroding the initial affordability advantage. Owner-occupied demand expanded and then shrank, leaving only speculative demand to sustain the market. The latter is unsustainable in the absence of underlying demand, and so it proved. In terms of dwelling work done the peak rate of expansion occurred as far back as the year to June 2002, while the national house price boom peaked in late 2003, though price rises continue in parts of the country, especially Perth. Nationally, housing work done declined 2.1 percent over the year to December 2005. Earlier fears of a rout have not been realised and some signs of stabilisation are now apparent. Aided by wealth generated by sharply higher prices for the housing stock and by furnishing demand to fit out its expanded and altered state, consumer spending also grew at unsustainable rates earlier in the decade. At the peak first-half 2004 rates private consumption was growing at around double the 3 to 3¼ percent underlying potential pace of the entire economy. Since consumer spending accounts for 60 percent of the economy the laws of arithmetic do not allow such gross disparities to exist for long. Long before mechanical arithmetic projections would have consumption eating the entire cake the overall economy would overheat under the spending pressure. The consumer pace was unsustainable, so that the slowdown to 2.9 percent over the year to December of households' own volition has been a welcome development. 74 The Joint Employers referred to the Mid Year Economic and Fiscal Outlook (MYEFO) forecast for private household consumption for 2005-06 and for 2006-07 as being 2.75 percent. The publication was quoted as stating: Household consumption is forecast to grow by 2¾ per cent in both 2005-06 and 2006-07, significantly slower than the 4.3 per cent growth recorded in 2004-05. A slowing in household consumption was evident through the year to the September quarter 2005, suggesting that the combined impact of lower growth in housing wealth, higher debt servicing ratios and higher petrol prices are affecting households' consumption decisions. 75 The Joint Employers submitted that: [A] wage claim may not support consumption growth: · With slow GDP growth, the focus of economic policy should be on growing production rather than consumption. · There is no guarantee that consumption growth will be spent domestically – it could all go towards increasing imports. · Higher consumption growth detracts from saving and can increase the current account deficit. Household consumption may not be used for spending that will increase the sustainable growth rate of the economy. 76 The sensitivity of household consumption to interest rates, the current pressures on interest rates and external influences such as oil prices are moderating factors in any consideration of what might be an appropriate wage adjustment. Dwelling Investment 77 The Commonwealth Treasury expected that dwelling investment would fall by 1 per cent in 2006-07, following two years of small declines. It was noted in the Budget Papers that the downturn in the current housing cycle was mild by historical standards, and the risk of a sharp fall in house prices appeared to have largely abated. Underlying demand for new dwellings was expected to remain stable over the forecast period, with dwelling completions moving broadly in line with demand. 78 Treasury also noted that there has been substantial variation in the housing market by State: The Western Australia housing market has been markedly stronger, while the New South Wales housing market has been weak. 79 The Reserve Bank's observations in May 2006 at p 25 regarding dwelling investment were that: [T]he data continue to suggest that the current downturn has been comparatively mild by historical standards and dwelling investment as a share of GDP has remained high... This reflects both the increase in the relative price of housing construction over recent years and shifts towards larger and higher-quality dwellings, with a one-quarter increase in the average size of new houses and a rise in the importance of expenditure on alterations and additions to existing dwellings over the past decade. 80 In New South Wales the rate of decline in dwelling investment is expected to ease but housing investment has been one of the principal factors slowing State economic growth. The short-term outlook for dwelling investment in the State is subdued. Business investment 81 In his evidence relating to business investment, Dr Hughes stated: With demand, profitability and financial influences all favourable it is not surprising that business investment continued to be strong over 2005, annual growth now having been around 10 percent or better for 3½ years (chart 12). Total business investment grew 14.8 percent in the year to December quarter 2005, paced by an exceptionally strong 29.8 percent expansion of investment in engineering construction (or infrastructure). New investment in machinery and equipment grew 15.8 percent, while non-residential building (in offices, shops, hotels and the like) advanced sluggishly (4.6 percent) after a strong phase earlier in the decade. 82 Treasury stated in the Budget Papers that: Business investment has been strong for a number of years, growing by 75 per cent over the past four years. This is set to continue, with new business investment forecast to increase by 14 per cent in 2005-06, before moderating to 8 per cent in 2006-07. Business conditions remain favourable. Profits are strong, capacity utilisation is high, the cost of capital and corporate debt levels remain low and ongoing demand for Australian commodities is stimulating investment in the resource sector. 83 Chart 2 (Chart 6, Budget Paper No 1, Statement 3) shows the growth in new business investment: 84 In relation to forecasts for investment it was the Joint Employers' submission that: High investment levels are likely to be a response to the significant capacity constraints facing the economy. Investment is essential to ensure such constraints are minimised. However this investment may be at risk: · Unaffordable increases in award wages will reduce profits, providing fewer funds for investment; and · For resources, other countries with resources are experiencing capacity constraints and are investing strongly. If they bring investment on line more quickly than Australia, world supply will increase, prices will fall and Australia will miss the benefits of higher world prices. 85 However, the Reserve Bank in its May 2006 Statement expressed the following view at p 26 regarding the outlook for business investment: The outlook for business investment is favourable, given the good prospects for growth in the domestic and world economies. Although the December quarter capital expenditure (Capex) survey suggested a relatively subdued outlook for the period ahead, recent experience has been that the profile presented in the Capex survey has been significantly upgraded as the year has progressed. Accordingly, machinery & equipment investment growth is likely to be solid, but possibly slower than the pace recorded in 2005. The latest Rabobank survey suggests that investment intentions for farm equipment (which are not covered in the Capex survey) remain strong, at close to their pre-drought levels. Forward-looking indicators of non-residential construction also suggest a high level of activity over coming quarters, following the upswing over the past year. Nonresidential building commencements increased in the December quarter, and the amount of work approved continues to run well above the current level of work done. Engineering construction activity has been supported by the large amount of resource-related work underway, particularly in Western Australia. 86 The Reserve Bank noted, however, that conditions in the manufacturing sector continued to be weaker than in the rest of the economy but that there were indications that activity in the services sector had been especially strong, particularly in industries supplying services to businesses. 87 The Minister for Industrial Relations submitted: Private business investment rose by 12 per cent in 2004-05 on the back of an increase of almost 17 per cent in business spending on machinery and equipment and a 7 per cent rise in non-residential construction. After such rapid growth, a significant slow down had been expected in 2005-06. In the first half of financial year, however, the growth of spending on equipment slowed a little but there was a marked acceleration in non-residential construction. It now appears that growth of business investment this year will be only a little lower than in 2004-05. 88 Investment levels are currently strong and as a factor in the overall mix of economic considerations, favours the granting of a reasonable wage increase. Profits 89 Dr Hughes deposed that: Business confidence has been helped by profits taking a steadily increasing share of overall incomes... Recent levels of the profit share are the highest in the 46-year history of the quarterly national accounts, surpassing in the aggregate even the strong results obtained in the late 1960s. It has to be acknowledged that historical comparisons are difficult to make with precision due to the spate of privatisations especially during the 1990s. However, the wage share is not influenced by these developments. It has fallen over 2 percentage points so far this decade (from 56.1 percent in December 1999 to 53.8 percent six years later). Current wage shares are amongst the lowest since the late 1960s. 90 Extracted from Dr Hughes' evidence is a chart showing the wage and profit shares from total factor income: 91 Dr Hughes rejected the notion that recent company profits data have been distorted by the huge returns gained recently by mining companies (see Chart 4): 92 The Joint Employers offered no material on profit growth other than to submit: Investment levels in the economy are currently strong; the trend of private business investment is currently at 4.4 percent per quarter. This is (at least partly) in response to the capacity constraints being faced by the economy. Reductions in profit will put this investment at risk, by cutting the returns to investment as well as the funds available for investment. Investment opportunities do not wait. There are other countries facing capacity constraints that are investing strongly – if investment in these countries occurs before Australian investment, Australia will miss out on opportunities. 93 Any adjustment to minimum wages in New South Wales is likely to have little effect on the wage/profit share ratio but there is no doubt the profit share is high and could easily sustain some adjustment in favour of wages without inhibiting investment. Outlook for international economy 94 The Budget Papers noted that the world economy grew by 4.8 per cent in 2005, slightly below the 5.3 per cent recorded in 2004 (a 30-year high). Treasury forecasts were that: World GDP growth is forecast to continue to expand at a strong rate, by 5 per cent in 2006 and 4¾ per cent in 2007... Following growth of 4.4 per cent in 2005, growth in Australia's major trading partners is expected to remain strong at 4½ per cent in 2006 and 4¼ per cent in 2007. 95 The following table, extracted from Budget Paper No 1, Statement 3, shows international GDP growth forecasts: 96 The Reserve Bank, in its May 2006 Statement on Monetary Policy, also stated: [T]he IMF's latest forecasts, from the April 2006 World Economic Outlook (WEO), are for world growth to maintain its well-above-average pace in 2006 and 2007... Growth in 2006 is forecast to be among the strongest rates in the past 30 years. 97 Dr Hughes observed that the global backdrop sets an important tone for the domestic economy. He stated that while the correlations were not exact, "knowledge of the global result would have to come close to being the best single predictor of Australian outcomes. Prospects for further good global outcomes are thus important beneficial factors towards sustaining Australia's prosperity." 98 In relation to the United States economy the Budget Papers (Statement 3) contained the following observations: Economic growth has remained solid in the United States , despite the effects of natural disasters, tightening monetary policy and higher oil prices. Excess capacity continues to diminish, with capacity utilisation reaching its highest level in more than five years, and employment growth continuing at a solid pace. The outlook for domestic demand in the United States remains positive, with business investment expected to be the key driver, supported in the United States by strong corporate profits and benign financial market conditions. A soft landing looks most probable, but a crucial issue in determining whether the United States economy slows to a sustainable pace remains the speed of the housing slowdown. While the housing market is expected to continue to slow, due to rising mortgage interest rates and a moderation in price growth…, continuing solid employment growth is likely to prevent a sharp slowdown. Consumption growth is also expected to slow, with the impact of a weaker housing market, higher debt servicing costs and high energy prices expected to offset positive momentum from growth in employment and wages. Higher government spending is anticipated, due to rebuilding in the aftermath of the hurricanes and the continuing costs of military activities in Iraq and Afghanistan. Headline inflation has picked up in the United States during the last six months, reflecting the effects of higher energy prices. The labour market has tightened which, combined with slower productivity growth, may lead to upward pressure on wages and unit labour costs. However, to date underlying measures of inflation have remained in check and inflation expectations remain well-anchored. 99 We noted earlier that Treasury identified a number of uncertainties associated with the outlook for the world economy. The main risks to the global outlook were: global imbalances; high oil prices; increasing financial vulnerability; and, a possible influenza pandemic: In terms of the world economy, the outlook remains positive, though a number of potential risks remain. These risks include global imbalances, high oil prices, increased financial vulnerability and a possible influenza pandemic. Current account imbalances have continued to widen despite favourable conditions for policy makers to undertake reforms. While these imbalances may persist for some time without significant adverse consequences, they increase the vulnerability of the world economy to destabilising changes in financing flows. 100 In assessing the international outlook, the Joint Employers confined their attention to the United States economy and oil prices. In relation to the US, concern was expressed to the effect that "very large deficits could trigger a severe adjustment should confidence in the US economy falter and may require much higher rates of interest to be imposed on the economy." 101 In relation to oil, the Joint Employers submitted, "Oil is an input into most production processes, so higher oil prices are likely to drive up business costs and reduce profits." 102 It is apparent that the outlook for the global economy is very favourable although there are potential risks that would impact on the Australian economy if they were to be realised. Any adjustment to minimum wages would need to be at a level that did not add to any potential for destabilisation of the economy. Exports 103 Treasury expects net exports to subtract one percentage point from GDP growth in 2005-06 and ½ of a percentage point in 2006-07. The forecast for export growth is an increase of 7 per cent in 2006-07. 104 Treasury noted that export growth has been relatively weak since 2001-02, and remains significantly lower than the rates of growth recorded in the 1990s. However, it was expected most categories of exports would strengthen into 2006-07, especially non-rural commodities. 105 In commenting on recent export performance, Treasury stated: Export volumes have grown at an annual average rate of 0.6 per cent since 2000-01, well below the 20-year average growth rate of 5.9 per cent. There have been a number of contributing factors to the slowdown in exports, which have tended to play out sequentially over the last five years. Exports were first affected by a slowdown in world economic activity around the turn of the decade. The terrorist attacks on the World Trade Centre and SARS added to the effects of the global downturn and depressed the global travel industry. This had particularly adverse effects on exports of services. The drought of 2002-03, one of the worst on record, reduced rural exports significantly in the years that followed. The effects of the drought have gradually eased and favourable seasonal conditions since mid-2005 should support a recovery in rural exports. The Australian dollar appreciated by more than 20 per cent over the course of 2003, and has remained at a relatively high level. This has constrained exports, particularly of services and elaborately transformed manufactures (ETMs), which are yet to recover. Furthermore, ETM exports have been adversely affected by the global shift of manufacturing to emerging lower cost economies, particularly China. Looking ahead, this trend is likely to continue to affect ETM export growth. 106 Dr Hughes commented, "[T]here is concern that Australian exporters have not been able to take more advantage of the global spending strength of recent years. In fact export volumes have been unexpectedly sluggish". Dr Hughes opined: Apart from climate-induced swings in rural volumes what is most striking about the chart is the strong contrast between the vibrant performance of the 1990s (the "Asian crisis" period apart) and the sluggishness this decade. Double-digit annual volume growth was normal in the 1990s. Now it is a rarity, even in a minerals and energy sector blessed by good fortune. Australia has lost a significant share of its export markets. With hindsight explanations abound ranging from a high commodity-price-induced currency (affecting services and ETM volumes), new low-cost competitors (ETM), epidemics and terrorism (services), capacity constraints (minerals and energy) and the running down of Bass Strait oil production. For more than three years senior policymakers have been expecting export volumes to regain their former vitality. They remain expectant but are still awaiting realisation of their hopes. 107 On a somewhat more optimistic note in relation to resource, service and rural exports, the Reserve Bank in its May 2006 Statement has commented that: · Strong world demand and expansions in production capacity make for a positive growth outlook for resource export volumes over the remainder of 2006. · Earnings from manufactured exports increased by around 8 per cent over 2005, mostly reflecting solid growth in volumes in the middle of the year. More recently, export volumes appeared to have been relatively soft in early 2006. Strong global demand for raw materials has benefited resource related manufactured exports, but reduced competitiveness with imports has encouraged some firms in the automotive sector to shift manufacturing operations offshore. · Rural export earnings fell by around 3 per cent over 2005, as higher prices only partly offset broad-based falls in export volumes. The overall outlook for rural exports in 2006 is nonetheless positive, given above-average global prices, the large winter crop harvest in late 2005, and early indications of a large increase in summer crop production in 2006. · The value of services exports increased solidly in January and February, to be 5 per cent higher over the year. 108 The overall performance of manufacturing industry is reflected in its export achievements, which in turn reflects a lack of international competitiveness. Terms of Trade 109 Treasury noted that the terms of trade reached their highest level in three decades in 2005. Non-rural commodity export prices are expected to be flat in aggregate in 2006-07 after increasing by around 25 per cent per annum in 2004-05 and 2005-06. Consequently, the terms of trade were forecast to settle near their current high level. 110 The Joint Employers submitted: Australia's terms of trade are at high levels. However, it should be noted that: · This is mostly benefiting a small number of mining commodities. The mining sector is largely award-free, and hence the effects of the terms of trade on profits are largely irrelevant to this case. · The higher terms of trade is keeping the exchange rate high, making all exporters less competitive. · Higher commodity prices mean higher input costs into production. This is probably reflected in substantial increases in producer prices... This makes manufacturers less competitive, reducing their profit and their ability to pay increases in award wages. · High commodity prices are caused by high world demand, particularly from China. This demand could dry up. · The terms of trade are increasing for other resource exporting countries. If they are able to expand production faster than Australia, we will be left behind. This is why high investment rates are needed in Australia right now. · Expanding production by Australia and/or other resource exporters will drive commodity prices down, meaning our terms of trade will fall. 111 The Reserve Bank predicted in relation to the terms of trade that: The terms of trade are likely to remain strong over the coming year. In the June quarter, expected increases in iron ore contract prices, as well as the sharp increases in metals and fuel prices through April, are likely to more than offset falls in contract prices for coal. Further ahead, expansion in global supply capacity for resources will probably, over time, tend to put downward pressure on their prices. Together with moderate growth in import prices, this is likely to result in some cyclical weakening in the terms of trade in due course. However, for at least the next year or so, the terms of trade are expected to remain at exceptionally high levels. Current Account The Budget papers indicate that the current account deficit (CAD) is expected to be around 6 per cent of GDP in 2005-06, and 6¼ per cent of GDP in 2006-07. Treasury expected that the trade deficit would narrow to 1¾ per cent of GDP in 2005-06 and 2006-07. 112 The Joint Employers submitted that a high CAD can be an indicator of underlying problems, such as: · Industries are internationally uncompetitive. · The exchange rate is too high. If the exchange rate falls, this will increase inflation. Access Economics argues that the Australian Dollar is already overvalued by 10-20 percent. · Supply constraints (in labour and infrastructure markets). · Domestic demand outstripping GDP. 113 It was further submitted that an unaffordable increase in the minimum wage would not assist in addressing these problems (and is likely to hinder). In particular, it was submitted, "a minimum (wage) that is amongst the highest in the developed world will mean Australian business has a competitive disadvantage with our trading partners." This proposition was not expanded upon. Is it suggested that the Australian minimum wage needs to match that of China? Probably not, but a bare statement of the nature put by the Joint Employers is less than helpful. 114 We note again that the Joint Employers did not suggest that the economy was unable to sustain any wage increase notwithstanding the difficulties confronting manufacturing, particularly on the export front, but rather that any wage increase had to be affordable. The Joint Employers, however, declined to state a position on what they considered to be an affordable increase. We further note that in 2005 the Australian Industry Group proposed to the AIRC in the Safety Net Adjustment Case that a safety net adjustment of $11 per week in all award rates would assist the low paid while not damaging the economy. The concerns expressed by that organisation regarding the economy in 2005 were very similar to those expressed to this Full Bench in these proceedings. Labour market/Unemployment Issues 115 Australia's unemployment rate was a seasonally adjusted 4.9 per cent in May 2006, compared with an unrevised 5.1 per cent in April. This is the first time unemployment has fallen below 5.0 per cent since 1976. Total employment rose 56,000 to 10.142 million, adjusted. Of this, full time employment increased by 55,800 to 7.254 million and part-time employment rose slightly to 2.888 million. Employment is expected to grow by 1¼ per cent through the year to the June quarter 2007. 116 In his submission, the Minister for Industrial Relations noted that: In 2004-05 employment growth was strongest in the mining industry which increased the size of its workforce by more than 10 per cent. Employment in construction grew by almost 8 per cent, in the hospitality industry – accommodation, cafes and restaurants – by almost 7 per cent, and in finance and insurance by 3½ per cent. In the first three quarters of 2005-06 employment in the mining industry accelerated but in most other industries it slowed. In some instances that might reflect a fall in demand but in some industries it seems to be due to a shortage of labour. For example, employment in the hospitality industry in the first eight months of this financial year was 2½ per cent lower than a year earlier but in the same period sales were up 5½ per cent. Employment in finance and insurance was also down in the first eight months of this year, although all the evidence suggests the industry is booming. 117 The Reserve Bank in its May 2006 Statement observed: Over the year to the March quarter [2006], employment growth was mainly concentrated in the construction and services sectors, with growth in the property and business services sector particularly strong. Employment growth in the wholesale, retail and manufacturing industries was weaker. Labour market conditions are favourable across all states, and unemployment rates are generally close to the national average. 118 The Bank also noted, however, that surveys showed an: [I]ncrease in the proportion of firms having difficulty finding suitable labour, and employers note that this difficulty remains a key factor constraining their output. 119 The Joint Employers submitted there were significant risks to the unemployment and labour market outlook: · Lower economic growth means lower demand for employees. · An interest rate increase would have a significant effect on employment. · Continuing sluggishness in exports will reduce employment by exporters. If import demand continues, this will reduce domestic employment opportunities. · Increasing capacity constraints (for both infrastructure and skilled labour) will reduce the ability of firms to put on new workers. · Wages pressures are building. · The lower the rate of unemployment, the harder it is for further reductions particularly when unskilled people are being priced out of the labour market by high award wages. The Joint Employers also referred to skill shortages and the pressure this was placing on wages. However, given the nature of the industries and classes of employees we are principally concerned with here, skill shortages would not appear to be an issue. The submission was quite unbalanced and gave no acknowledgement to the strong gains that have been made in the employment area. 120 The employment gains speak for themselves. Notwithstanding the expressions of concern by the Commonwealth and employers in the 2005 Safety Net Adjustment Case about the impact on employment growth of wage increases, those fears have not been realised, despite the fact that an increase of $17 was awarded by the AIRC and by this Commission. We note what the Australian Commission said at [410]: In light of the growth in employment over the last eight years and the fact that employment has declined to its lowest level in 28 years, it would be difficult to accept that the Commission's safety net adjustments have been excessive even if employment was the only matter the Commission had to take into account in maintaining the safety net. Of course employment is not the only matter we are required to consider. While it has been pointed out in previous decisions that there is a likelihood of some negative employment effects from safety net adjustments, this risk must be balanced against other factors such as the potential benefit to award-reliant employees, estimated by some to number 1.6 million, in the context of the Commission's obligation to ensure that a safety net of fair minimum wages and conditions is maintained. Acknowledgment of the need to balance these matters does not mean that the Commission prefers the interests of those in employment to those who are unemployed or under-employed. On the case advanced by the opponents of the ACTU's claim, any increase in the safety net, including of course the increase they advanced, will have negative employment effects. It must be accepted that their proposals involve a balance of considerations, just as the ACTU's claim does. The Commission's task is to find the right balance. In so far as they are relevant to these proceedings, we endorse the comments made by the AIRC. 121 We propose to say more on the question of the effect of minimum wage movements on employment later in this decision. Wages 122 The Treasury's view in the Budget papers was that: The Wage Price Index is forecast to increase by 4 per cent in 2006-07, similar to the growth expected for 2005-06. Businesses continue to report skill shortages, but to date this has not led to significant generalised wage pressures. Strong labour demand in the mining and mining-related sectors may see wages grow temporarily faster in those areas, but they are unlikely to have a noticeable impact on aggregate wage outcomes given the relatively low share of the mining sector in total employment. There is a risk that strong wage growth in the mining, construction, health and education sectors over the past year may continue and lead to more widespread wage pressures. 123 In the Reserve Bank's Monetary Statement it was observed that: More recently, business surveys and the Bank's liaison with businesses point to continued tight labour market conditions and shortages of skilled labour. The NAB survey suggests that labour scarcity remains a greater constraint on activity than the more traditional concerns about lack of demand… Firms across a wide range of private-sector industries are using non-wage forms of remuneration that are not fully captured in the standard wage measures, such as bonus payments and more flexible working arrangements, to attract and retain employees. Wage and non-wage cost pressures are most pronounced in industries facing strong labour demand and acute skill shortages, such as mining and non-residential construction, although solid labour costs growth is evident in most industries. 124 As we earlier noted, the Joint Employers contended that there are significant wage pressures building in the economy. 125 Whilst acknowledging a rising trend in the wage price index (4.2 per cent over the year to December 2005) Dr Hughes observed that the increase was still within the Reserve Bank's 4.5 per cent "line in the sand". This "line in the sand" was explained by Dr Hughes as follows: For over a decade the Reserve Bank of Australia has maintained the view that general wage movements beyond around 4.5 per cent a year are inconsistent with its conduct of monetary policy. The bank is charged by the Commonwealth government with maintaining overall CPI inflation within an annual range of 2 to 3 percent on average over the course of the business cycle. While a range of forces influence the general price level from time to time, the prime ongoing factor is unit labour costs (or "labour cost per unit of output). The bank's 4.5 per cent wages "line in the sand" is easily understood from unit labour cost arithmetic. Growth in unit labour costs is simply the difference between the pace of wage gains and the offset from labour productivity growth. With the trend in underlying, non-cyclical, labour productivity growth thought to be around 2 per cent a year a wage pace around 4.5 per cent would leave unit labour costs growth around the middle of the inflation target range. Any higher wage pace would push unit labour costs growth towards the high end and eventually beyond the target range and would require fortuitous developments in other price-forming influences to render wage fixing consistent with the Reserve Bank's obligations. As such a 4 per cent award rise, if granted, would be consistent with the bank's riding instructions from the Commonwealth government, leading to consumer price inflation around the low end of the target range unless offset by other, non-wage influences. The bank can be presumed to provide sufficient liquidity and other monetary support to accommodate inflation within its 2 to 3 per cent target range. Unions NSW claim is thus consistent with Reserve Bank macroeconomic control of the economy, and is in this sense an affordable claim. 126 Dr Hughes contended that the quarterly pattern of the wage price index did not suggest at this stage an ongoing rising tide of wage inflation. The witness stated: In fact the December overall quarterly increase (0.94 percent) was the lowest of the four corresponding results for 2005 (the others being 1.07, 1.05 and 1.04 percent in chronological order), with the same result obtained also in the private sector data. 127 Dr Hughes said a second reason for being cautious about any fear that wage inflation might occur was: [P]rovided by the industrial pattern of private sector outcomes. 12 of the 15 listed industries experienced faster wage rate gains over the course of 2005 than over the course of 2004. Only three (electricity, gas and water, construction and education) went backwards in terms of their rate increases, and all three had had stellar 2004 outcomes of nearly 5 percent or more. By contrast, of the 12 industries experiencing faster 2005 gains five (accommodation, transport and storage, communications services, property and business services, and personal and other services) merely went from gains in the 2 percent to the 3 percent range. Another three went from 2004 gains in the low 3 percent range to close to or just above 4 percent (retail trade, wholesale trade and manufacturing). Only the remaining four pushed to the higher end of the pack (mining from 3.81 in 2004 to 4.34 percent in 2005, health and community services from 3.6 to 4.7 percent, finance and insurance from 4.02 to 4.34 percent and culture and recreation from 3.31 to 4.57 percent). The industrial details look more like an evening up of the pack in the wage gain league than any new push upward. 128 We propose to say more about the impact of minimum wage adjustments on employment later in this decision. However, at this stage we note the evidence makes it clear the present trend in wages is not threatening the key indicators of growth and inflation, particularly in relation to wages for the low paid. Inflation 129 In the Budget Papers, Treasury forecast inflation to remain moderate, "despite a cyclical upturn in unit labour costs and further increases in fuel prices." The expectation was that the Consumer Price Index would increase by 2¾ per cent in 2006-07, lower than the increase for 2005-06. Inflation was forecast to be around 2½ per cent in the year to June 2006. 130 The Budget Papers also noted: The pressure on inflation from unit labour costs is expected to dissipate with a cyclical upswing in productivity, which now appears to be underway. In contrast, with oil prices trading at record levels, fuel prices are expected to be a significant contributor to inflation in the near term. Fuel prices are forecast to contribute around ¾ of a percentage point to inflation in the year to June quarter 2006. In 2006-07, with oil prices assumed to remain steady, fuel prices are expected to have less effect on inflation. Oil related increases in the price of some goods and services have already occurred (such as for airfares) but, to date, the indirect effects of higher oil prices on inflation have been mild. Nonetheless, with oil prices currently trading at record nominal levels, there is a risk of more widespread pass through of these costs to consumers. This has increased the likelihood of more significant second-round inflationary effects. The key risk to the outlook for inflation is the extent to which retailers can continue to absorb higher input costs into their profit margins. So far, the increased cost of labour, oil and raw materials has not resulted in any marked increase in retail consumer prices. Tradables inflation is forecast to remain low, with the downward trend in the price of some tradable items, such as motor vehicles and computing equipment, expected to continue. Non-tradables inflation is expected to continue to decelerate, reflecting robust retail competition and the recent softening in consumer spending. After a prolonged period of strong growth, house purchase prices (project homes) are forecast to slow, in line with the expected moderation in unit labour costs and modest falls in new dwelling investment. House purchase is the largest component of the CPI, representing around 8 per cent of the basket. 131 In considering the outlook for inflation the Reserve Bank, in its May 2006 Monetary Statement, expressed the following views: Headline CPI inflation rose to 3.0 per cent in the year to the March quarter, and underlying inflation is estimated to have increased to around 2¾ per cent after an extended period when it was close to 2½ per cent. This increase provides evidence that the modest pick-up in underlying inflation that has been forecast for some time is now starting to occur. The factors affecting the inflation forecast are broadly as discussed in previous Statements . With a tight labour market, an economy close to full capacity and rising commodity prices, there are a number of forces contributing to domestic inflation. At the same time, the prices of imported manufactured goods are holding down inflation. Furthermore, domestic wage outcomes have remained more contained than would have been expected in the past, given the tight labour market. And profit margins in a broad range of sectors appear quite healthy providing some scope for businesses to absorb cost pressures without the need to raise prices. The inflation forecast presented in the February Statement envisaged that underlying inflation would remain in the 2½–3 per cent range over the forecast period to end 2007, with a central forecast that underlying inflation would rise to 2¾ per cent in the second half of 2006 and stay around this level in 2007. The March quarter outcome, which was higher than expected, together with the recent run-up in commodity prices and other domestic and international data, suggested that the risks to the earlier forecast had shifted to the upside. However, taking into account the expected impact of the May policy tightening, the forecast for underlying inflation through 2007 is broadly unchanged. The Bank's revised forecasts are based on the assumption that oil prices and the tradeweighted index of the exchange rate remain broadly around current levels, at US$70 per barrel and 63, respectively. GDP growth is forecast to accelerate to an annual rate of 3–3½ per cent over the forecast period to the end of 2007, helped by stronger export growth. The unemployment rate is forecast to stay around its recent low level, and wage growth is likely to remain firm, but is not expected to accelerate further. Underlying inflation should remain in the 2½–3 per cent range. Headline CPI inflation is likely to be above 3 per cent in the near term, affected by higher petrol prices, but also reflecting some effect from Cyclone Larry on fruit and vegetable prices. In due course, CPI inflation would be expected to decline gradually, back to 2½–3 per cent. However, for the realisation of this forecast, it will be important that inflation expectations remain anchored through a period when higher petrol prices are likely to substantially boost headline CPI inflation. 132 It is sufficient to observe that against the background of a forecast increase in the wage price index of 4 per cent in 2006-07, the inflation forecast is for moderate rises and within the Reserve Bank's target range of 2 - 3 per cent. This is despite a tight labour market, an economy close to full capacity and rising commodity prices. A fair and reasonable increase in minimum award wages does not, in our view, pose an inflationary threat but on the other hand, it will assist the low paid. Productivity 133 On productivity, Dr Hughes' evidence was that: Wage increases place pressure on price inflation only to the extent that the rise exceeds the offset from labour productivity growth. One of the beneficial features of the Australian economy over the 1990s was a revival of productivity growth after a dismal performance in the previous one and a half decades. It would be common ground amongst economists that the revival has been a factor assisting containment of inflation over the period. But now there are fears that the underlying strength of productivity growth is on the wane with adverse consequences for inflation control as well as growth in living standards. It is next to impossible to detect economy-wide changes in productivity growth trends as they happen. Productivity growth is strongly cyclical about its underlying trend, a complication that is added to by the volatile (or "noisy") behaviour of individual quarterly outcomes. Volatility is partly due to productivity being calculated as a residual measure subject to measurement errors in both its component parts of output and labour input (aggregate hours). … [T]he current recorded annual growth rate (of the "market sector" to December 2005) is a respectable 1.9 percent, more than all of which occurred in the December quarter [2005]. A further consideration is that any deterioration in the underlying productivity trends should have consequences elsewhere, especially in an inflation outcome on the high side of expectations formed by an assumption of ongoing constancy of the underlying productivity trajectory. In fact the recent CPI was lower than expected, causing, as noted earlier, the Reserve Bank amongst others to lower their inflation expectations. At this stage the only verdict that can be given on charges of a diminished productivity trend is the Scottish judgement of "not proven", pending further evidence we might add. 134 The Joint Employers submitted that productivity remains low after falling in the first half of 2005. Further, that the low productivity figures indicated labour costs are increasing since wages have accelerated at a greater rate than has productivity. It was submitted businesses are able to afford wage rises if productivity increases; so low productivity can make even small pay increases unaffordable. 135 However, these submissions must be seen in the light of the evidence of Dr Hughes, which contradicted assertions as to adverse productivity conditions upon the basis that they were "not proven". Unit Labour Costs 136 Treasury has forecast that unit labour costs will increase in 2004-05, reflecting a cyclical slowing in productivity growth and a slight increase in wage growth. It was said, "While this will put some upward pressure on inflation, businesses are expected to look through some of the cyclical slowing in productivity growth in order to ameliorate volatility in retail prices." Conclusions on the state of the national economy 137 The national economy and its outlook are presently characterised by the following positive features: (1) Strong global growth, which is driving robust demand for Australian commodities and producing high commodity prices. (2) Business investment, which is set to grow strongly over 2006-07. (3) GDP that is forecast to increase by 3¼ per cent in 2006-07, up from 2½ per cent in 2005-06. (4) Moderate inflation, to be contained within the Reserve Bank's target range of 2 - 3 per cent. (5) A shift away from unsustainable levels of consumer spending to a position where household consumption growth is expected to be a little below trend at 2¾ per cent in 2005-06 and is forecast to strengthen somewhat to 3 per cent in 2006-07. (6) From a business perspective, a high profit share from total factor incomes compared to the wages share. (7) Levels of unemployment that are the lowest for 30 years. Employment growth is continuing. (8) Sustainable wage increases. 138 There are risks, also, to the economy and these must be taken into account in any decision to adjust minimum award wages. However, the risks are not so proximate that they represent such an immediate threat to economic security as to preclude wage increases to low paid workers and the risks that have been identified by the Joint Employers in these proceedings need to be balanced against the current and predicted strength of the national economy. 139 The conclusion is irresistible that in the context of the national economy a wage increase at the high end of the moderate range for low paid workers is sustainable. To deny low paid workers a fair and reasonable increase in the present economic environment would be inconsistent with any reasonable notion of fairness or equity for reasons we shall later develop. THE NEW SOUTH WALES ECONOMY 140 The relationship between the national economy and the New South Wales economy is perhaps best summed up in Dr Hughes' evidence: Everything written above about the national economy could have been written about the New South Wales economy save that recently the state outcomes on both overall activity and inflation have been a little softer. While the differences that exist are grist for the political mills, the dominant impression … is the similarity between national results and those in its leading component. What will happen to the national economy ahead will be reflected almost certainly in New South Wales results, albeit in a paler or slightly more vibrant version. 141 It was Dr Hughes' evidence that annual growth in final demand (economy-wide real sales) for New South Wales lagged those for Australia as a whole in recent times. This, he said, was not a new experience nor was the size of the present gap novel. Dr Hughes pointed out that over the past 15 years New South Wales has exhibited weaker than national outcomes more often than not. He further stated that: Persistent under-performance of the national average is nothing to be worried about. Its existence simply reflects the presence in the national aggregate of the two faster-growing "resources" states of Queensland and Western Australia. Over the past two decades the Queensland share of national spending has risen by 2.9 percentage points and that of Western Australia by 2.2 percentage points. The laws of arithmetic require net reductions elsewhere to accommodate these 5.1 percentage point additional slices. New South Wales as the pre-existing largest state would be expected to give up the biggest element, and so it did to the extent of 3.4 percentage points. That is slightly larger than the theoretical 2.4 percentage points in share that the state would have lost had it performed in line with the other non-resources states, more than all of the difference occurring in the past five years. Explanations of the decline this decade in the New South Wales share are not hard to find. Firstly, the base at the start of the decade was unsustainably high due to spending associated with staging of the September 2000 Olympic games. Secondly, the state's industrial structure has not suited the recent turn in the demand wheel as much as some others. Notwithstanding the importance of coalmining and other minerals activity to various parts of the state, New South Wales has a disproportionately low share of national mining activity, by income to only about 37 percent of the national average. It has not benefited directly as much as the average from the present resources boom. Moreover, the indirect effects have been diluted by an offsetting impact of commodity-currency-induced rises in the dollar on the competitiveness of the manufacturing, tourism and education industries where the state has an average or above-average share. Thirdly, housing affordability constraints appear to have hit harder in the Sydney region, the most expensive part of the nation, than elsewhere. The downturn occurred earlier and has been sharper than elsewhere... Housing construction is especially important to local incomes since higher-than-average shares of components (bricks, tiles, concrete, glass, etc.) are sourced locally. No doubt there are other influences, but these appear to be the main three. 142 In his evidence regarding the New South Wales economy, Dr Hughes also stated: · Private consumer spending has under-performed its national counterpart lately. As noted earlier the national spending boom reached unsustainable heights in early 2004 and is now back to more realistic levels. The New South Wales equivalent never reached these heights, so that the generally more subdued recent conditions represent less of a change for local retailers than their interstate counterparts. · Business investment in the state has been very strong, stronger indeed than the nation until the very last quarter of 2005. In annual average terms real business investment was up 16.2 percent in 2005 following very similar growth (16.4 percent) in 2004. In what is a volatile series due in part to the lumpy nature of investment growth NSW business investment rose 7.4 percent over the latest four quarters to December 2005. · Global and Australian activity outlooks for the year ahead look encouraging, setting a favourable backdrop for state growth. But as always there are risks attaching to the outlook. One of these is an exchange rate that has had a negative impact on the state's manufacturing and services base in recent years. At the time of writing (March 2006) the dollar was well off its earlier peak levels. If these lower exchange rates were to be sustained, and especially if the currency were to move lower still, New South Wales' growth prospects would improve materially. · Little difference exists between the inflation record of Sydney and the eight capitals as a whole. Despite appearances to the contrary produced by the narrower range of the scales, this relative similarity extends to wage movements. · The consensus outlook for both the global and national economies is encouraging with predictions of further firm growth accompanied by modest inflation. With this backdrop New South Wales should continue to see employment grow. 143 Peter Horn, Director Fiscal Strategy with the New South Wales Treasury, provided an uncontested Statement regarding the State's recent economic performance and the outlook for 2006-07. Mr Horn referred to the table reproduced below, which presents the Budget forecasts for the NSW economy in 2006-07: 144 In respect of the outlook for 2006-07, Mr Horn, reflecting what was in the Budget Papers, said in his Statement: NSW economic activity is expected to strengthen in 2006-07, with a larger contribution from net exports. Business investment will continue to grow and will remain at record levels. The unemployment rate will be steady. Inflation will be stable. The NSW economy has expanded at a more moderate rate than the national average for several years. But the growth gap between New South Wales and the rest of Australia should narrow in 2006-07. The cyclical extremes of 2005-06 will start to unwind in 2006-07 as the economy moves closer to longer-term trend growth rates. The dwelling sector downturn of the past two years will come nearer to an end. But prospects of a near-term turnaround in the dwelling cycle were put on hold by the interest rate rise announced on 3 May 2006. After several years of very strong expansion, business investment growth is predicted to moderate in 2006-07, although it will remain historically high in level terms and as a share of state final demand. 145 Chapter 6 of Budget Paper No. 2 provided the following summary of the economic situation in New South Wales and the outlook: Economic Situation and Outlook NSW economic activity will strengthen in 2006-07, with a larger contribution from net exports. Business investment will continue to grow and will remain at record levels. The unemployment rate will be steady. Inflation will be stable. · The NSW economy has expanded at a more moderate rate than the national average for several years. But the growth gap between New South Wales and the rest of Australia should narrow in 2006-07. · The cyclical extremes of 2005-06 will start to unwind in 2006-07 as the economy moves closer to longer-term trend growth rates: • The dwelling sector downturn of the past two years will come nearer to an end. But prospects of a near-term turnaround in the dwelling cycle were put on hold by the interest rate rise announced on 3 May 2006. • After several years of very strong expansion, business investment growth is predicted to moderate in 2006-07, although it will remain historically high in level terms and as a share of state final demand. 146 The Budget Papers also acknowledged a number of risks to the forecast outcomes: The Budget is sensitive to variations between actual and expected outcomes for the economy. Some of the most salient risks to the economic outlook include: · World capacity constraints, which are increasing global vulnerability to supply shocks, and adding to the risk of higher than forecast inflation and interest rates. · Further RBA rate rises that would severely impact households and the economy. · Growing world payments imbalances that are contributing to protectionism, and increasing the risk of global financial disruptions and economic downturn. · Higher and more volatile oil prices, feeding inflation and disrupting activity. Budget estimates are framed on the basis of no change in government policy and other parameters. Factors which might affect Budget outcomes include need for drought relief, public sector wage and work value claims, realisation of contingent liabilities, and change to Commonwealth policy on intergovernmental financial arrangements. 147 In relation to a number of the more significant indicators, Budget Paper No. 2 provided the following commentary: Consumer spending growth slowed for a second year in 2005-06. This reflected falling dwelling construction (which reduced demand for household goods), declining house prices and the rising cost of petrol (which constrained budgets). These factors appeared to outweigh household gains from higher wages and employment, booming equities, lower taxes and higher real purchasing power after adjustment for the terms of trade. Retail sales trends through March 2006 suggest that the pace of consumption growth may have regained some momentum as the year progressed. Dwelling construction continued to decline through 2005-06, gradually dissipating the remnants of the dwelling bubble that had formed in the early 2000s. While trends in first homeowner loan approvals and general housing finance to early 2006 are encouraging, dwelling approvals are trending lower (usually the most dependable short-run leading indicator). The Reserve Bank of Australia's (RBA) interest rate increase on 3 May 2006 has cast a further shadow of uncertainty over dwelling sector trends. Business investment continued to strengthen in 2005-06 from an already solid base, buoyed by strong profits, high capacity utilisation and robust global economic conditions. Trends for components suggested a slight refocus away from plant and equipment toward construction. The share of business investment in state final demand averaged a record high 13 per cent during the four quarters to December 2005 – double the ratio a decade earlier. Strong business investment limited the impact on 2005-06 state final demand growth from slower consumption growth and declining dwelling investment. State final demand is estimated to have increased by 2½ per cent in 2005-06 compared to 3½ per cent in the previous year. As a major gateway for national imports, but a comparatively modest supplier of national exports, New South Wales usually records a net deficit on overseas trade . In 2005-06 NSW manufactured and service exports were weighed down by the higher exchange rate, while imports were boosted by the strength of business investment. As a result, overseas trade (plus interstate trade, inventory and other balancing items) detracted around ¾ of a percentage point from gross state product , which is estimated to have increased by about 1¾ per cent in 2005-06. The labour market made further gains, with NSW employment growth increasing to 1½ per cent and the unemployment rate remaining steady at 5¼ per cent [the unemployment rate in New South Wales for May 2006 fell by 0.5 per cent to 5.1 per cent in seasonally adjusted terms]. In year average terms, employment growth to the March quarter 2006 was strongest in communication services, finance and insurance, cultural and recreational services, and property and business services. Inflationary pressures edged higher in 2005-06 in response to rising world commodity prices (particularly oil) and solid domestic economic conditions. Growth in the consumer price index moved to the top of the RBA's 2 to 3 per cent target range. Wage pressures increased somewhat during 2005-06 in response to skilled labour shortages in faster-growing sectors and to arbitrated public sector wage decisions. Annual average wage growth in New South Wales increased from 3.5 per cent in March 2005 to 4.1 per cent in March 2006. Wage growth averaged 5.2 per cent in the public sector and 3.7 per cent in the private sector in the year to March 2006. Monetary policy remained on hold from 2 March 2005 until 3 May 2006 when the cash rate was increased from 5½ to 5¾ per cent. In announcing the rate increase the RBA commented that pressures from above-average world growth, solid domestic spending and a pick-up in household credit growth had added to inflationary pressures in an economy with limited capacity and low unemployment; and that inflationary risks had increased sufficiently to warrant an increase in the cash rate. 148 As we earlier indicated, those opposing the applicant's claim did not take any real issue with the various assessments of the state of the New South Wales economy except to submit it was lagging States such as Queensland and Western Australia, and the national economy, in its economic performance. As Dr Hughes stated, however, there was nothing intrinsically disturbing about this; it has been the case for a number of years and in those years employers in New South Wales have generally accepted it has been appropriate to flow on safety net adjustments granted by the AIRC following its consideration of the national economy. 149 The economic fundamentals of the New South Wales economy are, as Unions NSW submitted, "strong and positive" and whilst it should be accepted that the State's economy is a paler reflection of the national economy, no party has taken issue with the proposition that a moderate increase is sustainable. It is simply that the employers have contended the amount of that increase should be determined by the AFPC and not this Full Bench, notwithstanding the legislative imperative under which we are required to act. 150 We would observe that the New South Wales Budget Statement deals frankly with the risks to the Treasury's economic outlook. The relative vulnerability to competitive pressures of the manufacturing sector in New South Wales, together with the implications for households and dwelling construction of further interest rate rises, are particular considerations that need to be factored in to any decision in these proceedings. LOW PAID WORKERS 151 Both Unions NSW and the Minister for Industrial Relations submitted extensive material relating to the income and living costs of award-reliant workers, wage dispersion and income inequality, characteristics of low paid employment, and the issues faced by low paid workers. Unions NSW also tendered Statements by Derek Burns, a hairdresser in full time employment and Michelle Doan, a disability care worker. There was no challenge to any of this material. 152 There were also submissions by CCER supporting the claim by Unions NSW and made particular reference to the difficulties experienced by low paid employees. We will return to those submissions shortly. Income and living costs 153 Unions NSW commissioned unpublished data from an Australian Bureau of Statistics publication: '2003-04 Household Expenditure Survey' (HES). The Survey was published in September 2004, and due to minor amendment reissued in February 2006. The 2003-04 HES collected information on the expenditure, income and other characteristics of a sample of 6,957 households resident in private dwellings throughout Australia. 154 The applicant's purpose in commissioning the data was to provide an indicator of the standards of living of the population 'Households whose principal source of household income is wages and salaries'. The data was provided for quintile groups, which represent 20 per cent groupings of the estimated population when households are ranked in ascending order according to each household's total gross weekly income. 155 Household characteristics for households whose principal source of household income is wages and salaries are detailed in Table 5: 156 The foregoing table demonstrates that for 2003-04 the first quintile comprised households with income up to $850.00 per week. The average household income in this quintile was $643.00, 89.9 per cent of which was sourced from wages and salaries. The number of employed persons was, on average, 1.2 persons, 46.2 per cent of the households being Lone Person. It is noted that the average number of dependent children in the first quintile households is only 0.4, the same as the number of persons under 18 years of age. 157 Unions NSW also commissioned data from the 2003-04 HES on the Detailed Expenditure Items for Households whose principal source of household income was wages and salaries. That information is set out in the following table: Table 6: Broad expenditure groups by gross household income quintile of households where principal source of income is wages and salaries Quintile 1 Quintile 2 Quintile 3 Quintile 4 Quintile 5 Total Upper boundary of income quintile ($) 850 1150 1490 1993 Mean gross household income per week ($) 643 1000 1310 1717 2782 1490 Broad expenditure group $ $ $ $ $ $ Current housing costs (selected dwelling) 137.63 156.92 165.57 199.43 238.46 179.58 Domestic fuel & power 19.96 23.44 24.71 27.74 33.67 25.90 Food & non-alcoholic beverages 109.60 144.07 175.45 202.76 268.10 179.96 Alcoholic beverages 17.85 22.96 27.46 32.19 48.25 29.73 Tobacco products 11.77 12.83 14.26 13.09 12.99 12.99 Clothing & footwear 21.10 31.60 49.55 49.50 74.67 45.27 Household furnishings and equipment 39.11 49.43 60.68 66.68 91.24 61.42 Household services and operation 41.33 53.89 59.92 74.65 88.21 63.59 Medical care and health expenses 28.83 40.74 45.18 58.22 82.14 51.01 Transport 100.63 148.16 184.98 179.94 256.50 174.01 Recreation 71.48 105.02 132.50 167.31 237.41 142.71 Personal care 10.22 16.72 20.68 25.32 33.88 21.36 Miscellaneous goods and services 54.92 76.08 96.79 137.15 154.76 103.91 Total goods and services expenditure 664.44 881.87 1057.73 1233.97 1620.27 1091.44 Source: Unpublished data ABS Household Expenditure Survey 2003-04 158 Defining necessities as housing, utilities, food, clothing and transport, it was submitted the unpublished data obtained from the ABS indicated the following percentages of total goods and services expenditure expended on necessities per week: Table 7: Expenditure on necessities: first quintile households – proportion of total goods and services expenditure First Quintile- Expend. per week Housing $137.63 Fuel/power $ 19.96 Food $109.60 Clothing $ 21.10 Transport $100.63 % on necessities 58.5% Source: Unpublished data ABS Household Expenditure Survey 2003-04 159 It was submitted by Unions NSW that the foregoing table provided evidence that expenditure of low paid, low-income households was focussed on necessities. The evidence of Mr Burns and Ms Doan, it was submitted, supported this. Whilst the Statements of Mr Burns and Ms Doan could not be correlated directly with the ABS data our general impression was that expenditure on necessities consumed the major portion of the respective incomes. 160 Further analyses undertaken by Unions NSW produced the following propositions: · The largest expenditure item for first quintile households, comprising 20.7 per cent of total goods and services expenditure is housing. The cost of housing, as measured by the Sydney CPI has increased at a faster rate than the CPI since the June quarter 2004, and over the last twelve months. While the Sydney CPI has increased by 3.8 per cent since June Quarter 2004, and by 2.5 per cent over the last twelve months, the cost of housing has increased by 5.5 per cent and 3.0 per cent, respectively. · The second largest component of first quintile household's expenditure on goods and services is expenditure on Food, comprising 16.5 per cent of total expenditure. The cost of food has increased at a faster rate than the Sydney CPI over the last twelve months, and since June quarter 2004. While the Sydney CPI has increased by 3.8 per cent since June Quarter 2004, and by 2.5 per cent over the last twelve months, the cost of food has increased by 4.7 per cent and 3.7 per cent, respectively. · The third largest expenditure item for first quintile households, comprising 15.1 per cent of total goods and services expenditure is transportation. The cost of transportation over those periods also has increased at a faster rate than Sydney CPI. Again Sydney CPI increases of 3.8 per cent and 2.5 per cent compare with transportation increases of 5.8 per cent and 3.2 per cent. Together housing, food and transportation comprise 52.3 per cent of first quintile average expenditure per week. Areas of highest expenditure for the low-income wage households reflect expenditure groups for which costs have increased at rates higher than the Sydney CPI rate. 161 The Minister for Industrial Relations undertook similar analyses of household income and expenditure. In addition, it was submitted: · In New South Wales the mean net household worth of the lowest household quintile is $24,681. Of this quintile, 94.2 per cent are renters: Australian Bureau of Statistics 2006, Household Expenditure Survey, cat. no. 6530.0, ABS, Canberra. The most disadvantaged households are households with people in the bottom income quintile with no housing equity. · In 2002, just over half of the households in the lowest quintile reported that they could not, in an emergency, raise $2,000 in a week, compared to 15 per cent of all Australian households who could not. Non-homeowners in the bottom income bracket were much more likely to have been unable to pay a household bill on time and to have had to pawn or sell an item to raise money: Australian Bureau of Statistics 2004, Australian Social Trends, cat. no. 4102.0, ABS, Canberra. Raising the minimum wage helps to ameliorate the pressures low income earners face when meeting the costs of their utility bills. 162 In its submissions, CCER stated: CCER submits that a living wage should be sufficient to support a worker and his or her family without experiencing financial distress. Some indicators of financial distress include being unable to afford to take holidays, unable to pay bills on time, going without meals and being unable to afford new clothing: Buchanan, J., 2006 'Low Paid Project: A brief statistical profile', Workplace Research Centre, University of Sydney. Many award dependent workers and their families currently struggle to make ends meet. Research from the Centre for Work and Life, University of South Australia and the Centre for Applied Social Research, RMIT published in 2006 provides insight into the real-life experiences of workers on low pay. " These experiences reveal that low pay costs them a great deal: in gnawing worry, persistent anxiety about bills, ill-health, concern for their children and denial of participation in the kinds of activities that many Australians take for granted: sport, visiting friends, training, job search, the prospect of secure housing and hope for retirement without poverty. For these workers, low pay narrows and constricts their social circles, restricts travel, and affects children's access to school excursions and basic health - including dental - services. Working poverty is associated with the deferral of family formation and relationship tensions around money in some households ". (Masterman-Smith, H., May, R., and Pocock, B., 2006 " Living Low Paid: Some Experiences of Australian Childcare Workers and Cleaners ", Centre for Work and Life, University of South Australia and the Centre for Applied Social Research, RMIT). 163 In the 2005 Safety Net Adjustment Review the AIRC considered an extensive amount of material relating to the needs of the low paid. The Australian Commission observed at [359]: [I]t is generally acknowledged 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. Many live week-to-week and struggle to make ends meet. 164 The evidence in these proceedings only serves to reinforce that observation of the AIRC. And in relation to the importance of maintaining an appropriate award safety net the Australian Commission further observed at [413]: We turn now to some of the research into the needs of the low paid. As we indicated earlier, we agree with the Commonwealth that HILDA and NATSEM research indicates that less than a quarter of low-paid employees are in the lowest quintile of household incomes. While this research suggests that there is a less than perfect correlation between low pay and needs, it cannot be assumed that low-paid employees who are not in low-income households are therefore not in need. No party submitted that only those low-paid employees who are in low-income households have unmet needs. We also agree with the Commonwealth that the research shows that the proportion of full-time workers in poverty who are adult award-reliant employees is likely to be very small, perhaps insignificant, and that only 2 per cent of those whose main source of income is wages and salaries are in poverty. While it is clear that low-paid employees who are not in poverty may nevertheless have needs which we should take into account, the research tends to indicate that the safety net is, by and large, an effective one so far as the low paid are concerned. On the limited data available , it might be concluded that without the adjustments of recent years the number of full-time award-reliant employees in poverty would be significantly greater (our emphasis) . Wage dispersion and income inequality 165 The Minister for Industrial Relations submitted that although the award system and annual safety net adjustments have moderated the wage inequality which has grown as a result of fragmentation and decentralisation in the bargaining system (Briggs, C 2005, Federal IR Reform: The Shape of Things to Come, ACIRRT, University of Sydney, p 71) the minimum wage compared with median earnings and Average Weekly Ordinary Time Earnings (AWOTE) for full-time employees has steadily declined. This it was submitted, was reflected in the following two tables (Tables 8 and 9): 166 The Minister for Industrial Relations submitted that whilst real wages growth has accelerated since 2002, it has come at the expense of higher wage inequality. 167 The following table reproduced from the Minister's submissions illustrates changes in the average weekly ordinary time earnings for non-managers between 1998 and 2004. For the bottom 20 per cent of wage earners incomes increased by only 1.2 per cent in real terms. It was submitted these figures fall well short of the 16.8 per cent real wage increases cited by the federal government. 168 It was further submitted that the incidence of low pay for wage earners increased from 14 per cent of the labour force in the mid-1990s to 20 per cent in 2003. This, it was contended, represents an additional 600,000 Australians earning around $14 an hour, or less than $28,000 a year: Masterman-Smith, H, May, R, and Pocock, B 2006, Living Low Paid: Some Experiences of Australian Childcare Workers and Cleaners, p. 13 (From a project funded by the Australian Research Council and the Brotherhood of St Laurence, Liquor Hospitality and Miscellaneous Workers Union (LHMU), SA Unions, Unions NSW and the Victorian Trades Hall Council). 169 We should reiterate that none of the material going to wage inequality was challenged by the employers. Nevertheless, given the material was not tested in the usual way we will proceed to treat it cautiously. However, it is plainly the fact that there is a growing wages disparity, even with the benefit of regular adjustments to the safety net. In the absence of such adjustments it could only be expected the gap would widen. Characteristics of low paid employment 170 The Minister for Industrial Relations cited a number of characteristics of low paid employment. In particular, we note the following: (1) Low paid employment is concentrated in the hospitality, retail and service based industries. These same industries also have the highest proportions of award-reliant employees: Buchanan, J 2006, Low paid employment- a brief statistical profile, Overheads prepared for press conference on LHMU- Uni of South Aust- ARC, Project on low paid service sector employment, Workplace Research Centre, University of Sydney. (2) More than half of workers earning less than $500 a week rely on awards, as do a third of those who earn between $500 and $700 per week: Buchanan, J 2006, Low paid employment- a brief statistical profile, Overheads prepared for press conference on LHMU- Uni of South Aust- ARC, Project on low paid service sector employment, Workplace Research Centre, University of Sydney. (3) Awards are the primary source of determining pay for 24 per cent of all female employees: Submission to the Inquiry of the Senate Employment, Workplace Relations and Education Committee into the Workplace Relations Amendment (Work Choices) Bill 2005 on behalf of the Governments of New South Wales, Queensland, Western Australia, South Australia, Tasmania, The Australian Capital Territory, The Northern Territory, 9 November 2005, p. 56. And by occupation, industry, and employment status, women are most likely to be concentrated in jobs affected by minimum wage regulation: Rubery, J, Grimshaw, D and Figueiredo, H 2002, 'The Gender Pay Gap and Gender Mainstreaming Pay Policy', presented at the European Work and Employment Research Centre, UMIST, Manchester, cited in Research Evidence About the Effects of the 'Work Choices' Bill A Submission to the Inquiry into the Workplace Relations Amendment (Work Choices) Bill 2005, authored by A Group of One Hundred and Fifty Australian Industrial Relations, Labour Market, and Legal Academics, November 2005, p. 33. 171 It is the retail trade, hospitality and service based sectors that the employers in these proceedings have contended have the least capacity to pay. It is these sectors where, the Minister for Industrial Relations contends, the low paid are concentrated. We will address these industry sectors in more detail later in this decision. Issues faced by low paid workers 172 The Minister for Industrial Relations submitted that the State's minimum wage decision would be made against a background of changes in the welfare system. It was submitted: Commonwealth Welfare to Work policies target people with disabilities, single parents, the long-term unemployed and the mature aged jobless, obliging them to take up part-time work. With little or no bargaining power, the risk of losing pension benefits will force these groups into work with potentially sub-standard conditions, reducing their capacity to manage their illnesses or caring responsibilities. Welfare and industrial relations reforms will forcibly generate a labour supply for low pay jobs which undercut existing wage and employment standards: Briggs, C 2005, Federal IR Reform: The Shape of Things to Come, acirrt, University of Sydney, p.76. Raising the minimum wage for unincorporated businesses will create a barrier against these effects. The groups targeted by these changes will not find it easy to secure employment. Around 60 per cent of people with a disability and jobless single parents have ten or less years of schooling. Further, many pension recipients live in regional areas where rent is cheaper, but there are fewer jobs: Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 13. Single parents receiving Parenting Payments required to find and participate in part-time work or take up study under the Welfare to Work proposals, will suffer a loss of income: Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 18. Additionally, single parents who take up full-time study will lose their Pensioner Concession Cards, Pharmaceutical Allowance, and Telephone Allowance: Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 16. By raising the minimum wage, these workers will be better able to meet their additional costs as a result of their changed labour market status. 173 In the absence of a contradictor, we are necessarily cautious about accepting the Minister's submissions regarding the Commonwealth Welfare to Work policies at face value. But the issues raised are of significance and should be taken into account. The needs of vulnerable workers 174 The Minister for Industrial Relations identified those workers most likely to be low paid as females, indigenous, migrant, young, non-unionised workers, those employed in small firms, and workers with a disability: Human Rights and Equal Opportunity Commission, Submission to the Inquiry of the Senate Employment, Workplace Relations and Education Legislation Committee into the Workplace Relations Amendment (Work Choices) Bill 2005, p 43. 175 It was also submitted by the Minister that by occupation, elementary clerical, sales and service workers are the most highly casualised, where 56.2 per cent of workers have no leave benefits. Adequate minimum wages, it was submitted, are critical in maintaining a decent standard of living for the increasing number of part-time and casual employees. Further, that: The gender differential in labour force participation rates emerges early; students and prime-age women returning to work are potential substitutes in the part-time workforce, and are potentially in competition with each other for marginal jobs, typically located in female dominated industries: Hakim, C 1998, Social change and innovation in the labour market, Oxford University Press: New York, p.174. The gendered dimension of low paid employment exemplifies the importance of redressing wage dispersion through moderate, consistent minimum wage adjustments. Many forms of non-standard employment lead to low pay and women are most likely to be employed in these forms: Buchanan, J and Watson, I 1997, A Profile of Low Wage Employees , acirrt, University of Sydney, pp. 10-11. Of all women employed in New South Wales, 43.6 per cent were employed on a part-time basis and women occupy over 70 per cent of part time positions: Australian Bureau of Statistics, 2005, Australian Social Trends, cat. no. 4102.0, ABS, Canberra. In May 2005 Australian women's labour force participation rate was 57.1 per cent; lower than most OECD countries, but the proportion working in non standard forms of employment was higher than many others in the OECD: Organisation for Economic Co-operation and Development, Economics Department, Female Labour Force Participation: Past Trends and Main Determinants in OECD Countries , May 2004. Casual and part-time forms of employment are often associated with low pay. There is a widening diversity in the social groups taking up part-time and casual jobs. While part-time or casual work may be a preference for some full-time students and women balancing paid work and family responsibilities, the evidence shows that a significant number of non full-time workers do seek additional hours and are underemployed. In New South Wales at July 2005, 26.8 per cent of part-time workers sought full-time jobs: Australian Bureau of Statistics 2005, Australian Social Trends, cat. no. 4102.0, ABS, Canberra. Women are more likely than men to trade off wages against conditions which help them meet their disproportionate caring, family and household responsibilities. These trade-offs have obvious implications not only for gendered wage dispersion, but they also inform women's fertility decisions and affect their economic security, especially in single parent households: Human Rights and Equal Opportunity Commission, Submission to the Inquiry of the Senate Employment, Workplace Relations and Education Legislation Committee into the Workplace Relations Amendment (Work Choices) Bill 2005, p. 29. 176 The Minister for Industrial Relations drew attention to an analysis by ACIRRT of a random sample of 500 Australian Workplace Agreements (AWAs) in 2004, looking at the inclusion of family friendly provisions including paid maternity leave. It was submitted that: The statistics show that the percentage of sample AWAs which contained paid maternity leave was only 8 per cent in 2002/2003 and just 2 per cent in 2004. This compares unfavourably with statistics provided by the Department of Employment and Workplace Relations (DEWR) from the December 2005 quarter where it was shown over 46 per cent of federal certified agreements contained paid maternity leave provisions. … The increasing growth in non-standard forms of employment is often a method whereby employers are accessing 'permanent' employment yet avoiding the obligations and conditions normally associated with such employment arrangements. In a working environment without annual leave, sick leave and many other entitlements regular adjustments to hourly rates of pay under state awards are the only compensation for such employees. These employees should not be denied moderate award wage increases because of their employment status. Low paid jobs will likely increase in the federal system under Work Choices as award-dependant employees with low bargaining power are transferred to, or new employees are offered, AWAs or non-union collective agreements or contractor status: Briggs, C 2005, Federal IR Reform – the Shape of Things to Come, commissioned by Unions NSW cited in Watts, M and Mitchell, W 2006, Wages and Wages determination in Australia 2005, Working Paper No. 06-01, Centre for Full Employment and Equity, University of Newcastle, Callaghan NSW, p.16. The New South Wales Government submits these outcomes are undesirable in the New South Wales system. 177 We do not consider there can be much doubt that with the removal of the no disadvantage test in relation to AWAs and other changes relating to awards and individual agreements under the Workplace Relations Act, there is the heightened potential for a downward shift in wages and employment conditions in the federal sphere. But that is not the case in the New South Wales jurisdiction where the 'no net detriment' test applies to enterprise agreements (s 35(1)(b)) and where the legislative requirement is that awards must set fair and reasonable conditions of employment for employees (s 10). 178 The Minister noted that young and inexperienced workers were highly concentrated in the retail trade and accommodation and cafe and restaurant industries: Australian Bureau of Statistics, Employee Earnings and Hours, Australia, Preliminary, cat. no. 6305.0.55.001; Labour Force, Australia, Detailed - Electronic Delivery January 2006, cat. no. 6291.0.55.001; Australian Social Trends, 2005, cat. no. 4102.0, ABS, Canberra. It was submitted young people were most likely to be casual and reliant on awards and minimum wage increases. It was further, submitted young workers generally fall outside of the bargaining stream and were less likely to hold the bargaining power to achieve above award pay and conditions, or conditions which assist them to balance their other responsibilities such as study. 179 In respect of Australia's indigenous people it was submitted they are highly concentrated in low skilled work; 25 per cent of jobs held by indigenous people are unskilled compared to 9 per cent across the population. 180 Migrant workers, it was submitted, particularly outworkers, were also over-represented in sectors with low pay and limited security. The Minister submitted many migrant workers were employed in non-unionised workplaces and were consequently deprived of opportunities to secure improved working conditions through enterprise bargaining. 181 The Minister also submitted the WorkChoices legislation was complemented by tighter welfare reforms that will increase pressure on workers to accept poorly paid jobs rather than risk loss of benefits. As of October 2005, people with disabilities had a high relative unemployment rate of 16.3 per cent: Watts, M and Mitchell, W, 2006, Wages and Wages determination in Australia 2005, Working Paper No. 06-01, Centre for Full Employment and Equity, University of Newcastle, Callaghan NSW, p. 15. It was submitted that a combination of tougher welfare measures interacting with industrial legislation that explicitly undermined award wages and conditions would create a ready labour supply for low paid jobs. 182 It was further submitted in relation to persons with a disability: New recipients of income support from July 2006, will receive between $29 and $166 per week less than existing recipients. Differences in the indexation of pensions and allowances mean these reductions will increase over time. The potential losses in disposable income for single adults with a disability obliged to look for and undertake work NATSEM estimates that workers who move onto the Newstart Allowance or Austudy Payment from the pension will be financially worse off unless they can find full-time work with gross income of at least $700 per week: Harding, A et al 2005, The Distributional Impact of the Proposed Welfare-to-Work Reforms Upon Sole Parents , Report to the National Foundation for Australian Women, 25 August 2005; Harding, A et al 2005, The Distributional Impact of the Proposed Welfare-to-Work Reforms Upon Australians With Disabilities, National Centre for Social and Economic Modelling, University of Canberra, cited in Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 19. Under the proposed Welfare to Work provisions, single adults with disabilities will lose up to $122 a week in 2006-07. Those same adults with no private income apart from their social security payment will receive $46 a week less under the new system, representing around a fifth of total income. The take-home incomes of people with disabilities and private incomes of $145-405 a week will fall by at least a quarter: Disabled lose up to $122 pw in welfare to work reforms, Media Release, 13 September 2005, National Centre for Social and Economic Modelling, University of Canberra, cited in What Women Want Consortium Submission to Senate Employment, Workplace Relations and Education Legislation Committee Inquiry into the Workplace Relations Amendment (Work Choices) Bill 2005. In New South Wales, over 23,000 people with a disability will be worse off financially under the Welfare to Work scheme: Based on 'official' estimates of the numbers of people affected by the original policy announced in the 2005 Budget, from answers to Senate Estimates questions in August 2005 cited in Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 33. The people worst affected will be those who attempt to improve their financial situation by undertaking part-time work given the high marginal tax rates imposed on Newstart recipients, and those who take up full-time study who will lose their Pensioner Concession Cards, Pensioner Education Supplement and possibly also Rent Assistance: Australian Council of Social Service, Submission to the Senate Community Affairs Committee Inquiry into The Employment and Workplace Relations (Welfare to Work) Bill 2005, November 2005, p. 18. Positive adjustment to the minimum wage will go some way to redressing this. 183 Whether or not the Minister's criticism of the Commonwealth's welfare to work programs is soundly based, we are in no position to determine in the absence of a contradictor. We do, however, accept that there are vulnerable workers, including the disabled, females, young people, migrants and our indigenous people. We also accept the need for an appropriate safety net in the form of a fair and reasonable minimum award wage to ensure the adequate protection of the living standards of those vulnerable members of the workforce. The Minister for Industrial Relations' submissions and the statistical data that has been provided regarding vulnerable workers, have served to sharpen our perspective on the importance of an award safety net wage. UNINCORPORATED EMPLOYERS 184 The main impact of any decision we might make increasing minimum award wages would be, at least in the immediate term, on employers in New South Wales that are unincorporated and who employ employees under State awards. Employers First contended that: This is a Case about awarding increases to a very small minority of the NSW workforce. Whether an employer has to pay a wage increase will turn solely on their legal status (ie. not being constitutional corporations) and the industrial jurisdiction (ie. State) which covers them. If successful, the Unions NSW application would compel such employers to pay higher wage rates than those paid by the vast majority of employers in this State which are constitutional corporations. 185 This contention was in support of the main submission by Employers First that, in the interests of comity, this Commission should not increase wages ahead of the AFPC. However, some of the evidence relied upon by Employers First in support of its submission to delay, appeared to be that unincorporated employers, at least in some industry sectors, did not have the capacity to pay any wage increase at all, regardless of the timing. For instance, it was Ms Owen's evidence in relation to small unincorporated businesses in the retail sector that: These small shopkeepers pay Award rates and over award payments are rare. The small shopkeepers are very cost sensitive and cannot afford any cost increases. 186 Later in her evidence, however, Ms Owen was less dogmatic and stated that "They [small shopkeepers] will be hard hit by increases in Award rates that their competitors do not have to pay", which was consistent with Mr McDonald's submission that if the unincorporated businesses were required to pay increases ahead of their large competitors, most of whom were covered by federal awards, those businesses would be put at a competitive disadvantage. 187 Mr Gillan's evidence was to the effect that a 4 per cent increase in minimum award wages would be economically detrimental to unincorporated businesses under State awards in the hospitality industry. 188 We interpret the position of Employers First in relation to unincorporated employers as being one of opposition to the claim of 4 per cent and opposition to any increase being granted in respect of employees of unincorporated employers before the AFPC makes its determination. We do not understand Employers First to be adopting the position that there is a general incapacity amongst unincorporated businesses to pay any increase that might be awarded except that it was contended an increase of 4 per cent was excessive and unsustainable. 189 The Joint Employers' position was similar to that of Employers First except that it was made clear by Mr M Moir of counsel for the Joint Employers that whilst his clients considered an increase of 4 per cent was excessive and unsustainable they conceded a moderate increase was sustainable. 190 We have made it quite clear that we do not intend to wait for any determination by the AFPC. Consequently, in light of our overall conclusion that an increase in minimum award wages is sustainable and appropriate, we need to consider whether economic and/or other circumstances peculiar to unincorporated employers precludes any increase in minimum award wages, or a lesser increase than otherwise would be the case, being granted to their employees under State awards. General 191 The more reliable data describing the private unincorporated business sector was provided by the Minister for Industrial Relations. In summary form, the relevant features of the sector are as follows: · There are approximately 500,000 private sector employing entities based in New South Wales. Of these, 200,000 or almost 40 per cent, are unincorporated. · 255,000 persons reliant on awards are employed by unincorporated entities within the private sector. · Approximately 24 per cent of award reliant employees in New South Wales are employed under federal awards. Consequently the actual number of employees who are reliant upon the state wage case for an increase in their weekly rates of pay is estimated to be between 194,000 and 255,000 employees. · Female employees comprise 66 per cent of the total number of award reliant employees employed by unincorporated entities in New South Wales. · Part-time female employees represent 46 per cent of the total number of award-reliant employees employed by unincorporated employers who would benefit from an increase to the minimum wage. · Male employees comprise a smaller but still significant proportion of award-reliant employees employed by unincorporated entities, representing 34 per cent of the total number of award reliant employees, and with part time male employees representing 19 per cent of the total. · Of all unincorporated employers in New South Wales, 58 per cent are in regional centres, with 42 per cent in the Sydney metropolitan area. · Award workers in unincorporated businesses are predominantly concentrated in low skill occupations of intermediate clerical, sales and service (37.3 per cent); elementary clerical, sales and service (26.2 per cent); and labourers and related workers (14.6 per cent). · The average weekly ordinary time earnings for adult non-managerial employees in New South Wales employed within private sector unincorporated businesses is $682.92 for full-time employees and $423.23 for all employees. Average hourly ordinary time earnings are $17.58 for all employees and $18.11 for full-time employees. · A $20 a week increase for 200,000 employees would add around $208 million to the wages bill of private sector employers in New South Wales. As the private sector wage bill in New South Wales in 2005 was in the order of $135 billion, the proposed increase would add less than 0.2 per cent to the wages bill. · The following table (Table 11) shows the industry breakdown of employees of unincorporated businesses in New South Wales: Retail and hospitality industries 192 Mr Gillan and Ms Owen provided other informative material in relation to the retail trade and accommodation, cafes and restaurants sector, the latter that we shall refer to as the hospitality industry. It seemed to be accepted by all parties that the concentration of employees who might benefit from any decision in this case is to be found in these two industries. It was Ms Owen's evidence that: § The retail industry consists of a few large retailers who employ large numbers of people, and many small retailers who each employ a couple of employees. § At present 83% of our members [members of the Australian Retailers Association] employ 5 employees or less. Only 1.5% of our members employ more than 25 people. § Small shopkeepers pay Award rates and over award payments are rare. The small shopkeepers are very cost sensitive and cannot afford any cost increases. The small shopkeepers compete with larger retailers, most of whom do not operate within the jurisdiction of the NSWIRC. The small shopkeepers compete not only in the sale of goods but are at a disadvantage in negotiating set-up and running costs such as rent in shopping centres. In addition, the competitiveness and therefore viability of the small shops is affected by the economies of scale in terms of buying power, transport costs etc that are employed by the larger retailers. § The failure rate amongst these small businesses is high. Each year around 10% of our small members go out of business, in recent years it has been closer to 15%. They will be hard hit by increases in Award rates that their competitors do not have to pay. § The ABS Retail Trade figures for February 2006 show that retail sales growth has been slower in NSW over the year to February 2006 (3.2%) lagging behind the national average of 4.6%. Clothing and soft good retailing have been in decline for six months, and department stores have had weak trend growth for two months. These figures are consistent with the feedback we receive from members. § The retail businesses which will be impacted by the State Wage Case are those which can least afford a wage increase. 193 In response to certain aspects of Ms Owen's evidence, Mr Dwyer stated: I note that the alleged business and trading constraints referred to [in Ms Owen's affidavit] are not matters which would have varied to any significant degree during the operation of wage fixing principles made under the NSW Industrial Relations Act 1996. Retail businesses have generally both competed and operated successfully over the past decade whilst paying an additional $143 per week for employees covered by the Shop Employees' (State) Award since March 1996. The retail industry has grown significantly over the last decade. "Total retail turnover (in chain volume terms) increased by 58% between 1993/94 and 2004/2005, representing an annual growth rate of 4%." (ABS 2006 Year Book Australia, p 519) which demonstrates robust growth over the last decade. Any "softness" in retail spending in recent months identified in Ms Owen's affidavit should be fairly considered against this backdrop and noting that this growth has vastly outstripped wage increases for shop assistants paid under the Award during that same period. … Ms Owen's reference to "weak trend growth for two months" in department stores does not affect the matters in consideration in these proceedings given that the employers operating all "department stores" and discount department stores of which I am familiar are trading or financial corporations (e.g. Myer, David Jones, Big W, Target, Kmart, Harris Scarfe and Allens). 194 In relation to the hospitality industry, Mr Gillan's evidence was: (1) According to the Australian Bureau of Statistics, Employee Earnings and Hours (EEH) survey (Cat No 6306.0) ("EHH Survey"): (a) Of all the accommodation, café and restaurant industry employees in NSW in May 2004, 69.1 per cent were employed in incorporated businesses and 30.9 per cent were employed in unincorporated businesses. (b) The highest concentration of award-reliant employees is found in the accommodation, café and restaurant industry. 70.5 per cent of employees are award-reliant. (c) The proportion of NSW award reliant workers who were employed in incorporated businesses in May 2004 was 69.4 per cent and in unincorporated businesses it was 30.6 per cent. 195 Consequently, Mr Gillan deposed that a 4 per cent increase in award wages for employees in the New South Wales jurisdiction would result in the employers being subject to a competitive disadvantage relative to similar businesses in the national system. 196 Relying on relevant statistics, Mr Gillan also stated that: (1) A feature of the NSW restaurant industry in particular is the prevalence of restaurants operating out of hotel or accommodation establishments, and thereby being subject to federal awards like the Hospitality Industry & Accommodation, Hotels, Resorts & Gaming Award 1998 and the Motels, Accommodation & Resorts Award 1998. Those restaurants compete with, and currently enjoy many advantages over, restaurants operating in a stand-alone fashion. As a result of their federal award respondency their competitive edge is set to increase if the NSWIRC grant the Unions NSW application, and consequently stand alone restaurants will be disadvantaged even further. (2) The majority (63.4 per cent) of businesses in café and restaurant services employed less than 10 persons. Given their small size, then it follows that the vast majority of businesses in the NSW restaurant and catering industry are highly vulnerable to any minimum wage adjustment which causes disparate wage outcomes. (3) Over the financial year ending 30 June 2004, labour costs were the second highest expense item for café & restaurant businesses at 35.7 per cent, following purchases at 39 per cent of all costs. For catering businesses, labour costs were the highest expense at 42.6 per cent of all costs. (4) Income for café & restaurant businesses grew at 7.1 per cent per annum since 1998-99, however expenses grew at a higher rate of 7.4 per cent per annum. Labour costs had the highest growth rate of all selected expenses rising by 10.5 per cent per annum between 1999 & 2004 (5) The accommodation, café and restaurant industry had the largest exit rate in both financial years 2002-03 and 2003-04, accounting for 7.9 per cent of all exits. (6) The accommodation, café and restaurant industry had one of the lowest first year survival rates in the financial year 2003/04 of 88.3 per cent. (7) The accommodation, café and restaurant industry had one of the lowest second year survival rates in the financial year 2003/04 of 80.7 per cent. 197 Employers First made a general submission, but particularly in relation to the retail and hospitality sectors, that in having to pay a wage increase before their competitors in the federal system, unincorporated employers subject to State award coverage in New South Wales would be placed at a competitive disadvantage. That is to say, if unincorporated employers were required to pay an increase some four months before the obligation arose for employers in the federal system (assuming the AFPC determination was made by November 2006), it would be an unfair impost on employers who remain under New South Wales awards. We do not consider there is much substance to this submission. Wage movements in federal and New South Wales awards, even in the same industry, have rarely moved in lockstep with each other. Moreover, the timing of increases under enterprise agreements, made by employers against whom unincorporated employers under New South Wales awards would be competing, would in any one year precede award based movements and in other years, follow them. 198 We note Mr Dwyer's evidence that employees under the Shop Employees' (State) Award are paid less than employees of large retailers under federal agreements: The base wage under the NSW Shop Employees' (State) Award for a full-time adult shop assistant is currently $542.80 per week for a 38 hour week. By comparison the base wage for a Service Assistant under the Coles Supermarkets Australia Pty Ltd Retail Agreement 2005 is currently $602.20 per week and the base wage for a Retail Employee Grade 2 under the Woolworths Supermarkets NSW / ACT Agreement 2004 is $600.37. 199 Mr Dwyer also provided a chart that showed a comparison of the base wage movements for employees engaged under the terms of the Shop Employees' (State) Award as compared to employees working in Woolworths Supermarkets and Coles Supermarkets under agreements since March 1996. The rates payable to employees under the State Award were consistently below those provided for employees of the large retailers and the gap widened over the period 1996 to 2006. 200 Also provided by Mr Dwyer was a selection of wage increase schedules payable for a number of large and medium sized retailers. The schedules showed that the majority of retailers involved in enterprise agreement negotiations with the Mr Dwyer's Union over the last two years had entered into certified agreements that provide wage increases equal to or in excess of State Wage Case decision adjustments. 201 We consider that where any unfairness would lie would not be so much with the employers but if this Full Bench were to delay any decision until after the AFPC made its decision, it could be 2007 before workers in New South Wales received any increase. As we noted in our earlier interlocutory decision in March 2006, this could mean low paid workers in New South Wales would be waiting up to two years for any adjustment to their minimum award wage. 202 Ms Owen stated in her evidence that unincorporated small shopkeepers under New South Wales awards "will be hard hit by increases in Award rates that their competitors do not have to pay." This appears to assume that no increase will emerge from the AFPC's deliberations and that competitors will not negotiate wage increases in their enterprise bargaining. Such speculation does not provide a proper basis for declining to increase minimum award wages for low paid workers. 203 What Ms Owen's proposition amounts to, putting aside the question of increases arising from enterprise bargaining, is that this Commission should not increase minimum award wages unless and until the AFPC increases wages under the relevant federal instrument because retailers under New South Wales will be disadvantaged. Thus, the determinant for fixing wages under New South Wales becomes the AFPC and not the terms of Industrial Relations Act. The effect of the proposition only has to be stated for its unacceptability to be realised. The proposition is directly contrary to the statute, which is binding on the Commission (we will deal further with the question of survival and exit rates when dealing specifically with employment effects). 204 A further objection to a 4 per cent adjustment to award wages in the retail and hospitality sectors was that the cost of meeting the claim was likely to have an adverse effect on the survival of small businesses. The essence of the contention was that the businesses concerned were very small, employing in many cases only one employee, and they were particularly susceptible to cost increases. It was submitted by Mr McDonald: [G]iven that a small minority of employment in the State is in the non-farm sector of employers which are non-constitutional corporations it is not surprising that the cost of the increase in terms of the whole economy would not be large. However, it is really of no consequence to such an employer that the increase it has to pay constitutes a relatively small cost to the economy as a whole. For that employer the cost is significant and, to exacerbate the problem, it is not a cost borne by that employer's competitors who are probably larger and more resilient. 205 According to Unions NSW, the net impact of the 4 per cent claim for award-based workers in the unincorporated private sector on total Ordinary Time Earnings in NSW is 0.06 per cent. Further, the impact on the wages share of total factor income measured through the Consumer Price Index is 0.03 per cent. According to the evidence, the bulk of the employees affected are employed in the retail and hospitality sector. The net impact of the claim on the retail and hospitality sector, and indeed those employers who remain bound by State awards, may properly be regarded as very small. 206 Whilst Mr McDonald contended that the cost for an individual employer was significant, the opportunity exists for that individual employer to use the provisions of the economic incapacity principle. If it be said that employers are reluctant to use that principle because the onus is too high or for other reasons, no employer party sought to change the principle, despite it being an opportune time to address the efficacy or relevance of the principles generally. We note that PATEA submitted the wage fixing principles should be reviewed but made no submission as to in what fashion. 207 There were some submissions, faintly put, intimating that wage increases flowing from last year's State Wage Case decision may have been the cause of a decline in full time and part time employment in the retail and hospitality sectors. The inference seemed to be that further wage increases in 2006 would exacerbate this trend. We deal later in this decision with the effects of minimum wage adjustments on employment generally and we do not propose to repeat what we have said. But to emphasise a point under the later discussion on employment effects, in relation to the data relied upon by Employers First in relation to the retail and hospitality sector, it showed that full time and part time employment in the sector declined by various degrees (depending upon industry and type of employment), in only one 12 monthly period, namely, February 2005 to February 2006. The total decline was said to be 6.8 per cent in respect of the hospitality industry and 4.4 per cent in respect of retail. The unreliability of the data is proven by the fact that when one takes the May quarter 2006 figures, retail increased by nearly 15 per cent over the previous quarter and hospitality increased by over 10 per cent. 208 In any event, the data says nothing about the causes of the decline, which may have had no connection with increases to minimum wages. There was no other evidence that the increase granted in the 2005 State Wage Case caused employers to shed labour. 209 We consider no case has been made out in respect of the retail and hospitality industries that they should be afforded any concession or discount in assessing the amount of any increase to minimum award wages, other than by continuing principles restraining further wage adjustments and providing for exemptions. Social and community based employers and not for profit child care employers 210 In addition to the concern of Employers First regarding the any impact of wage increases on unincorporated businesses in the retail trade and hospitality sectors a similar concern was expressed in relation to social and community based employers and not for profit child care employers. 211 In respect of social and community based employers and not for profit child care employers, Mr McDonald acknowledged any decision increasing minimum award wages would not apply to the "vast majority" of employees in these industries by virtue of principle 8(g) of the proposed principles given that increases exceeding State Wage Case increases have already been awarded. His concern was that the odd employee (eg, a clerical employee) might be eligible to be paid the increase whereas an incorporated childcare centre in the private sector would not have to pay an increase. He considered this to be an unfair outcome. 212 The difficulty with this submission by Employers First is that it was based on assumptions and not on any concrete evidence. It was assumed that: (1) Any increase would apply to the occasional employee; (2) An employer in the federal jurisdiction would not have to pay an increase. 213 We do not consider that we should deny an increase to employees on the minimum award wage on the assumption that unincorporated employers might have to pay a wage increase to the occasional employee, whereas employers in the federal jurisdiction may not. Moreover, the employers' submission overlooks the opportunity for employers to present a case to the Commission that they do not have the capacity to pay any award increase, including for reasons that it would make them uncompetitive and threaten employment. Manufacturing 214 In so far as unincorporated employers in the manufacturing sector are concerned, no attempt was made to distinguish them from other employers in the context of affordability of any wage increase. Certainly, it was put that the manufacturing sector is experiencing difficult business conditions at the present time with severe competitive pressures, high fuel costs and a relatively high exchange rate but Mr Moir did not seek to make a distinction between incorporated and unincorporated employers and properly so, in our view, given the high probability there are very few, if any, unincorporated employers in manufacturing who are members of the Joint Employers. Moreover, whilst Mr Moir was not prepared to nominate an amount of increase, his position was that a moderate adjustment was sustainable. 215 We referred earlier to the submission made by PATEA that no increase could be justified in respect of the printing industry. It was submitted that: The latest economic research conducted by PATEA and reflected in the March 2006 quarter Printing Industry Trends Report shows that business conditions deteriorated in the printing industry during the March 2006 quarter. The following represent the key March 2006 quarter developments: · Reduced orders and production; · Reduced sales and net profits; · Reduced employment and overtime levels; · Reduced selling prices; · Reported increased investment in plant and machinery; · Finance reported easier to obtain: · Labour reported harder to obtain; · Reduced levels of material stocks; · Reported increases across all cost categories; and · Increased number of outstanding debtors. The March 2006 quarter results show that 56.8 per cent of respondents were operating at capacity levels of 70.0 per cent or over. This time last year the corresponding percentage was 60.3 per cent. So there has been a reported deterioration in capacity utilisation rates. 216 There could have been no legitimate expectation on the part of PATEA that on the strength of a submission from the bar table, without any supporting evidence, the Full Bench would be satisfied that no increase in minimum award wages should flow to the printing industry. The Report referred to in PATEA's submissions was not tabled; the submission did not proceed beyond generalities. Other 217 In relation to Agriculture, Forestry and Fishing it seems to have generally been accepted that federal awards would cover most employees of unincorporated businesses. In relation to Property and Business Services, Construction, Transport and Storage and Personal and Other Services, we have nothing to indicate that unincorporated employers in these industries should be given special consideration as to their capacity to sustain any increase in minimum award wages other than via the general submissions of Employers First and the Joint Employers, although none of these organisations advised the Full Bench that they had members in these industries who were unincorporated. EMPLOYMENT EFFECTS OF THE APPLICATION 218 In Safety Net Review - Wages, June 2005 (2005) 142 IR 1 at [159-280] a Full Bench of the AIRC considered submissions advanced by the Commonwealth of Australia and other interests resisting the then application by the Australian Council of Trade Unions for a safety net adjustment in wages upon the basis that the grant of the claim would have a negative impact on employment. The AIRC had considered similar contentions based on theoretical economic propositions and empirical studies in the two previous safety net decisions: Safety Net Review - Wages - 2003 (2003) 121 IR 367 at [147 -177] and Safety Net Review - Wages - May 2004 (2004) 129 IR 389 at [150-167] and [168-254]. 219 In the 2005 decision the AIRC had regard to some fifty overseas and ten Australian studies concerning the impact of increases in minimum wages on employment which had been presented by the Commonwealth together with some recent empirical work on that subject. We have listed in Appendix B those studies which received detailed consideration by the AIRC so as to illustrate the scope and diversity of its examination (without, of course, recording its reasoning as to each publication). It should also be noted in this respect that the AIRC repeated its request in this decision for the development of high quality research which would adequately delve into the specific question as to the historical effects of a safety net adjustment upon employment (the Commonwealth had undertaken some research for the 2005 proceedings which the Commission commented upon adversely). 220 After the consideration of all of this material (and in the light of its previous two decisions as to the employment effects of safety net adjustments), the AIRC reached the following conclusions: 5.9 Conclusion on the Effects of Safety Net Adjustments [279] The material to which we have been referred does not undermine the conclusion expressed by the Commission in the May 2003 decision that there is a continuing controversy amongst academics and researchers about the employment effects of minimum wage improvements. [95] There is nothing before the Commission to indicate that the controversy has been resolved. Substantial safety net adjustments may have some negative effects on employment in those sectors of the economy in which a high proportion of the workers are award-reliant. [280] The material brought to the Commission's attention does not establish an empirical basis for affording greater importance to concerns about employment effects than to other considerations to which we must have regard. Having considered the material, our assessment is that, under current economic conditions, the adjustment we have decided on of itself, will do little or nothing to diminish job prospects. 221 It will be observed from this description of the proceedings before the AIRC in the last three Safety Net Adjustment proceedings that the particular focus of the decision was the 'disemployment' effects of minimum wage adjustments rather than the effects on unemployment. In other words, the AIRC focused upon contentions that an increase in a minimum wage may lower the rate of employment growth rather than necessarily leading to an actual decline in the number employed or a rise in unemployment. This may reflect the fact that studies that find 'disemployment' effects in particular employment sectors (of varying degrees of significance) often find little or no unemployment impacts for the same subject group: see, for example, Brown, C, Gilroy, C, Cohen, A "The Effect of the Minimum Wage on Employment and Unemployment" (1982) 20 Journal of Economic Literature 488 at (505 and 508) and Brown, C "Minimum Wages, Employment and the Distribution of Income" in Ashenfelter, O & Card D (eds) Handbook of Labour Economics (3rd ed.) Elsevier, Netherlands 1999 at 2103. These conclusions regarding unemployment may simply reflect the fact that, as may be expected in this case, the macroeconomic effects arising from a minimum rate adjustment on unemployment may well be negligible: Adams, G "Increasing the Minimum Wage: The Macroeconomic Impacts" in Economic Policy Institute, Briefing Paper (1987). 222 It is also worth repeating the observations of the AIRC (with which we agree) that much of the academic literature concerned the employment effects of a single statutory minimum wage usually for a particular sector of the labour market such as teenage employment rather than attention being relevantly directed to the economic effects of a safety net adjustment in the Australian context: Safety Net Review - Wages, June 2005 at [165]. 223 In this matter, we have received no submission that argued specifically that the grant of the application by Unions NSW would produce a negative impact upon employment, whether by way of the discouragement of employment growth or an actual decline of employment. 224 As we earlier discussed, it was submitted that the business sector likely to be affected by the applications was "vulnerable" in the sense that it was constituted by smaller operators who could, in the submission of Employers First "least afford" the increases sought (in the case of social and community and childcare employers) or lacked financial resilience. It was also submitted, that retail and hospitality employers had relatively low survival rates. However, the closest that any of these submissions came to linking any wage adjustment to adverse employment effects was the rather offhand remark in the written submissions of Employers First that wage increases "can cost jobs". No study, data or research was put before the Commission by any employer party to demonstrate that the particular nature of the industries or areas of employment effected by the grant of an application would experience a significant adverse employment effect from the grant of the application. 225 The mere enunciation of the size of the businesses, the particular industry in which they operate or the labelling of them as 'vulnerable' does little to assist in properly analysing the employment effects of a wage adjustment in that sector. Nor does information referring to the 'exit rate' or 'survival rates' (based on ABS statistics) for these particular businesses. Nowhere was it demonstrated by Employers First that the exit rate or survival rate had increased or decreased as a result of safety net adjustment increases that had been awarded over time. The information merely demonstrated that the industry had a particular characteristic in this respect relative to other industries, not that it was any more or less vulnerable to minimum rate adjustments for those remaining in the sector or that those adjustments had any particular impact upon the rate of survival or exit of particular businesses from industry sectors. Nor was it suggested that the absolute level of wages in those sectors was responsible for the failure of particular businesses. 226 The reasons why a particular business might fail are multi-factorial and we do not consider mere statements that business in a particular industry may have higher exit rates or lower survival rates of itself (without further time-series or trend information and a comparative analysis with wages) is conclusive of any likely effect of an increase in minimum wages upon employment or for that matter the viability of those businesses. At best, it may indicate, in a broad sense, the need for a cautious approach to wage adjustments in the area, but in a non-specific way in the absence of a more comprehensive study. 227 Thus, in the defence of the proceedings by employer organisations there appears to be no relevant issue arising in relation to employment impacts. The tangential references to that topic by Employers First do not adequately and relevantly address the issue of employment. However, we do not propose to rest the issue on that basis, particularly bearing in mind the requirements of s 146 of the Act. We will shortly deal with the evidence of Dr Hughes in this respect (which we note was the subject of some limited challenge in cross-examination). Before doing so, however, we should acknowledge the fact we have referred to OECD and some other material that only came to our attention since the hearing of submissions in this matter concluded. That material is discussed in the paragraphs that follow. 228 We have considered it appropriate to take the rare step of referring to this material because of the public interest requirements of s 146 and because it confirms the conclusions we had otherwise reached based on the material before us, including the conclusion that the impact of moderate adjustments in minimum wages are sustainable without significant adverse employment effects having regard to the state of the national and State economies. 229 There has been much discussion in economic literature about the effects of increases in minimum wages on employment and whether empirical research confirms the theoretical position stated in the classical economic model. That theory has been stated in many ways but for present purposes was usefully described by Charles Brown in his 1999 paper (at 2103) as follows: The simplest model of the effects of the minimum wage is one with complete coverage, homogeneous labor, and a competitive labor market. Instead of the familiar equilibrium where the demand for labor D(w) is equal to the supply of labor S(w) at equilibrium wage w* and employment E* , a binding minimum wage ( wm w* ) leads to demand-determined employment Em = D(wm) and an excess supply of labor S(wm). Since we are simply moving back along the demand curve, the employment loss 1n( Em) depends only on the elasticity of demand for labor and the gap between the minimum wage and the competitive wage. Whether this excess supply of workers is counted as unemployed or as "discouraged" workers depends on whether they report searching (unsuccessfully) for work, so one needs further assumptions about labor force participation (in the presence of unemployment) to say much about the effects on unemployment. One plausible assumption is that workers decide whether to participate in the labor force based on the probability of being employed ( Dwm)/S(wm)) and the wage if successful ( wm) , perhaps on their product, the expected wage. The increase in measured unemployment seems a poor indicator of the minimum wage; the effect on unemployment will be small if workers are easily discouraged and withdraw from the labor force. 230 On this theory, the magnitude of any aggregate reduction in employment will depend upon the wage rises required to comply with the minimum wage adjustment, and the slope of the labour demand schedule at a relevant point. 231 It should be noted that this theoretical model operates on the assumption that the employers minimise costs both before and after the minimum wage adjustment, and that workers' skills and level of effort are identical and given exogenously (Brown et al. 1982 at 488). It also proceeds upon the assumption that all workers in the market are covered by the minimum wage. The model has been expanded over time to take in additional considerations or assumptions such as the effect of monopsony, shock effects (in terms of productivity) and two sector models (in which the coverage of the minimum wage is incomplete or where there is queuing for covered-sector jobs). There has also been a theoretical development of the effect of introducing heterogeneous workers into the equation. Doubt has been cast, even at a theoretical level, as to whether labour markets reach a general equilibrium and, if they do, if all parts of the labour force participate (see the discussion of imperfect or segmented labour markets: Gerard Adams, (1987) at 10). 232 These theoretical constructs have been tested over time by empirical studies which, as the AIRC identified, are often directed to the analysis of particular sectors or occupational groups. The empirical studies are directed to testing the conventional proposition that an increase in the minimum wage moves equilibrium backwards along the demand curve for labour (depending upon elasticity for employment) thus potentially reducing the employment of workers affected by the minimum wage adjustment. Nowhere has there been such empirical research undertaken directly on the effect of safety net adjustment changes in the Australian context, let alone an adjustment of the kind sought in this case which may be confined to unincorporated bodies or non-constitutional corporations. 233 As the AIRC has noted in its safety net adjustment decisions for 2003 to 2005, the studies have produced some mixed results which have led to some quite strenuously contested policy questions in economics. It is not without significance that the accepted view of the impact of minimum wages on employment has shifted over time depending upon the development of this empirical research and the academic discussion that is derived from it. A useful snapshot of some of the literature is given by Mark Stewart in his paper "The Impact of the Introduction of the U.K. Minimum Wage on the Employment Probabilities of Low-Wage Workers", Journal of the European Economics Association, March 2004 (at 68) as follows: A consensus seemed to have emerged by the 1980's that the effect of minimum wages on employment in the United States was negative although probably fairly small. Most of the evidence was based on time-series estimation and much of it on teenage employment, where the effects were felt to be largest. Research findings in the 1990s have blown this consensus apart. On the one hand a growing body of research finds zero or positive employment effects (e.g., Card and Krueger (1994, 1995, 2000) for the United States, the U.S. results in Abowd et al. (2000) and Machin and Manning (1994) and Dickens et al. (1999) for the United Kingdom). On the other hand there is also a body of recent research that finds significant (both statistically and numerically) negative effects (e.g., Kim and Taylor (1995), Currie and Fallick (1996), Burkhauser et al. (2000), Neumark and Wascher (2000), and Neumark et al. (2000) for the United States, the French results in Abowd et al. (2000) and Machin et al. (2003) for the United Kingdom). Thus the employment effect of minimum wages remains a highly contentious issue. 234 We have set out the full references given in that extract (which we have reviewed) in Appendix C. This is not to suggest that the references given by Stewart are exhaustive of the literature on the topic. For example, Charles Brown (1999, at 2154) suggests that a reading of the "new and old evidence" indicates that the short term effect of the minimum wage on teenage employment is small with time-series estimates that centred on elasticity of -0.10 moving closer to zero in samples that included the 1980s. He suggests that one possible reason for this outcome is that the demand for low-wage labour is "just not terribly elastic in the short term" (2157) although some studies do show more significant adverse effects for this group. 235 For his part Stewart made the following conclusions as to the lack of impact of the introduction of the U.K. minimum wage in April 1999: This paper uses individual-level longitudinal data from matched Labor Force Surveys, the British Household Panel Survey, and the New Earnings Survey panel to estimate the impact of the introduction of the U.K. minimum wage in April 1999 on the conditional probability of subsequent employment among those whose wages would have to be raised to comply with the new minimum. A difference-in-differences estimator is employed using individuals from slightly higher up the wage distribution as the comparison group. The estimated impact of the introduction of the minimum wage on the probability of remaining in employment is insignificantly different from zero for all four demographic groups (male and female adults and youths) and all three datasets. This finding is robust to an extensive range of modifications considered. The estimated effect is also found to be positive (although insignificant) for both male groups and for young women in all cases. The estimated effect is negative (although insignificant) for adult women in the LFS, but this depends on the construction of the hourly wage rate using usual hours, and is no longer the case if actual hours in the reference week are used. It is also negative for this group in the NES, although even less significant. In the BHPS the estimated effect is positive for this group (but insignificantly different from zero). These findings too are robust to the modifications considered. In summary, the evidence presented in this paper indicates no significant adverse employment effects of the introduction of the U.K. minimum wage in any of the four demographic groups considered or in any of the three datasets examined. 236 As Stewart acknowledges, those conclusions (and, for example, those of Brown (1999)) may be contrasted with yet other studies of recent times which have come to contrary conclusions showing more significant employment impacts of minimum wage adjustments, for example, see the paper by Taylor, L and Kim, T "The Employment Effect in Retail Trade in California's 1988 Minimum Wage Increase" Institute for Research on Poverty, September 1993. 237 Butler, J in "Minimum Wage Laws and Wage Regulation: Do Changes to a Minimum Wage Affect Employment Levels?" (2006) 29 (1) UNSW Law Journal 181 discusses minimum wage impacts in the context of the establishment of the Australian Fair Pay Commission and the Workplace Relations Amendment (Work Choices) Act. Much of the discussion in the paper focuses upon the prospect of decreasing minimum wages (in both real and absolute terms). Despite the appearance of down playing controversy over the impacts of increases in minimum wages the paper, in fact, describes the range of differing views on the topic but concludes, particularly in relation to more vulnerable workers such as teenagers, that significant negative outcomes will be found. The paper does not deal with most of the articles referred to in Appendices B, C and D of this decision and whilst acknowledging components of the AIRC's 2005 Safety Net decision (as to the comparative position of minimum wages and median wages) does not deal with the discussion by the AIRC of academic studies on the impact of minimum wage adjustments. The paper does, however, acknowledge some factors that we would highlight: 1 In classical economic theory, an increase in the minimum wage will only result in disemployment if the resultant wage is greater than the marginal product of the work in question. It is difficult to know to what extent low paid workers in Australia are above the market clearing rate (at 199). 2 In Australia, the coverage of the minimum wage may be heterogeneous. If a minimum wage rises in a particular sector, then economic theory indicates that jobs will be higher in that sector (although there may be some levelling out of the system as a whole (at 194). 3 The greatest controversy lies in the degree of any impact in minimum wage movements on employment. 4 Other labour market regulation measures will have an impact on the effect of minimum wage adjustments, as will general high levels of economic growth or low levels of unemployment in an economy mute any negative effects of the minimum wage adjustment on employment. In this respect, it should be noted that the paper was written before the recent OECD study we shall refer to below which discusses the effects of labour market programs on employment growth, identifies the ongoing controversy over minimum wage effects on employment and suggests a contrary view as to the significance of those adjustments on employment. 238 The most recent discussion of the topic was undertaken by the OECD in its publication OECD Employment Outlook: Boosting Jobs and Incomes 2006. In that publication the OECD reviewed its policy recommendations to reduce unemployment, raise employment and increase prosperity given in its 1994 publication OECD Job Study (see The OECD Job Study: Facts, Analysis, Strategies, Paris, 1994; The OECD Job Study: Evidence and Explanations, Part 1: Labour Market Trends and Underlying Forces of Change, Paris, 1994, and The OECD Job Study: Evidence and Explanations, Part II: The Adjustments Potential of the Labour Market, Paris, 1994. In particular, the OECD adjusted its conclusion in relation to the economic effect of minimum wage adjustment. 239 The OECD first concluded in relation to "in work benefits" programmes that, under certain conditions, a minimum wage, set at an appropriate level, can be one of the options to prevent employers from pocketing the earnings' subsidy introduced by "in work benefits". Secondly, and more significantly, the OECD concluded that the evidence concerning the impact of minimum wages on employment was ambiguous; that the impact of minimum wages on employment may be modest or non-existent, depending upon the level set; and that minimum wages could, in certain circumstances, encourage higher participation in the workforce. There was particular caution expressed about the setting of minimum wages for young employees. The relevant conclusions of the OECD are as follows (at 86-88): Minimum wages. Simple economic reasoning indicates that a statutory minimum wage or labour costs set at too high a level will become a barrier to employment for low-productivity workers, reducing national output while also frustrating the equity goals motivating these measures. However, pinning down the size of the employment losses that result from minimum wages has proven to be difficult and there is considerable uncertainty concerning how many jobs might be lost due to minimum wages set at the levels actually observed in different countries. Indeed, the empirical evidence concerning a negative impact of minimum wages on employment is mixed, with some studies finding evidence of significant effects, particularly for youth (Neumark and Wascher, 1999; OECD, 1998, Chapter 2), while others do not detect any effects (Card and Krueger, 1995; Dolado et al., 1996; Elmeskov et al., 1998). In Bassanini and Duval (2006), no significant impact of the minimum wage on the aggregate unemployment rate is found. However, some evidence does emerge that higher minimum wages may lower the employment rate of youth ( i.e. the 20-24 age group). The ambiguous evidence concerning the impact of minimum wages on employment means that it is important for governments making use of a statutory minimum wage to monitor closely whether it is resulting in significant job losses. The fact that a considerable number of studies have found that the adverse impact of minimum wages on employment is modest or non-existent, also suggests that there may be scope to use minimum wages as one part of employment-centred social policy, intended to mitigate poverty while fostering high employment rates (OECD, 1998, Chapter 2 and 2003a, Chapter3). A minimum wage could encourage higher participation, by helping to make work pay for the low skilled. But it probably can only play a supporting role in a broader anti-poverty programme, due to the need to avoid setting it at too high a level. Another important limitation is that a substantial proportion of the workers in minimum-wage jobs are not poor ( e.g. because other family members have earnings). In-work benefits can be much more tightly targeted on low-income families than can a minimum wage, but have other drawbacks ( e.g. their budgetary cost and possible stigma effects). Furthermore, as emphasised in Sub-section 2.2, a modestly set minimum wage may be a useful supplement to in-work benefits, since it limits the extent to which employers can appropriate that benefit by lowering pay levels (Gregg, 2000; OECD, 2005d). An important consideration in setting the level of the minimum wage is how it interacts with the tax system, since there is evidence that an overly high minimum wage magnifies the negative impact of the labour tax wedge on employment (see Sub-section 3.2). An employer considering hiring a low-skilled or inexperienced worker is likely to compare the worker's expected productivity with the sum of the minimum wage and employer-paid social security contributions. Table 3.10 shows that the minimum cost of labour, as a percentage of labour costs for the average employee, differs significantly across countries with statutory minima, ranging from under 20% in Mexico in 2004 to over 50% in Australia, Turkey and three EU countries. In most cases, the relative cost of employing a minimum wage worker did not change much between 1997 and 2004. ... Lessons Recent experience confirms the importance of policies to assure that wages adjust flexibly in response to supply- and demand-side pressures, so as to support high levels of employment in a constantly changing economic environment. The detailed policy recommendations for reforming wage-setting institutions remain largely valid, but there appear to be grounds for introducing some modifications: ... Minimum wages. Recent experience suggests that a moderate minimum wage generally is not a problem, but that adequate allowance for sub-minima for youth and possibly other vulnerable groups is essential. Another insight is the potential for a well designed minimum wage to contribute to a broader strategy to foster higher employment by guaranteeing that work pays better than remaining on social benefits. However, the danger posed by negative policy interactions has also been confirmed, particularly that between a too-high minimum wage and high rates of labour taxation. 240 We have set out in Appendix D the references referred to in this quotation that have not otherwise been listed in Appendix B. 241 In addition to the theoretical and empirical works we have referred to, we have also had regard to the evidence of Dr Hughes on the question of employment effects. His evidence was given at both the macroeconomic and microeconomic level. At a macroeconomic level, Dr Hughes gave evidence that the claim by Unions NSW was affordable having regard to Reserve Bank of Australia policy. He also concluded that, from a microeconomic viewpoint, the claim was affordable and that no adverse consequences would likely eventuate from the grant of the claim in full. 242 As to the first proposition, Dr Hughes gave evidence that, for over a decade, the Reserve Bank has maintained the view that general wage movements beyond around 4.5 percent a year were inconsistent with its conduct of monetary policy (consistently with an overall CPI inflation within an annual range of 2 to 3 percent on average over the course of the business cycle). He based this conclusion upon a unit labour cost arithmetic, with the trend in underlying non-cyclical labour productivity growth lying at around 2 per cent per year. Thus, a "wage pace" around 4.5 percent would leave unit labour cost growth around the middle of the inflation range. Any higher "wage pace" would push unit labour cost growth towards the high end and eventually beyond the target range. 243 Dr Hughes thereby concluded that a 4 per cent wage rise would be consistent with the Reserve Bank's "instructions from the Commonwealth Government" leading to a consumer price inflation around the low end of the target range unless offset by other non-wage influences. He contended that " the bank can be presumed to provide sufficient liquidity in other monetary support to accommodate inflation within a 2 to 3 percent target range and therefore the Unions NSW claim was consistent with Reserve Bank macroeconomic control of the economy ". 244 The cross-examination of the witness on this aspect of his evidence was essentially to suggest, erroneously in our view, that his statements as to the policy and position of the Reserve Bank could not be substantiated either in writing or otherwise. His evidence, in this respect, should be accepted. 245 His microeconomic analysis was more controversial. Dr Hughes addressed squarely the issue that, by the wage claim, workers " might be pricing themselves out of the market". He described that issue in this way: "If substantially higher than average wage gains were to be awarded it is possible that consequent relative price changes for the products they produced might lead to a lessened consumer interest and the decline in demand for their services". However, Dr Hughes rejected that outcome for the present proceedings as he considered that the claim sat " right in the middle of a very narrow range within which wage fixing has been occurring". In this he was referring to the latest wage price index (ABS Cat No.6345), which showed that the Australia- wide private sector wage rates gained 4 percent over the year to the March quarter 2006. He concluded that unlike periods of higher unemployment earlier in the decade there has recently been a " considerable evening up in the pace of wage increases. Thus over the year to the March quarter 2006 the lowest increase amongst the 15 industry groups into which the private sector index is disaggregated was 3.01 percent (personal and other services). The largest gain was 5.0 percent in the construction industry ". 246 Dr Hughes then expressed why this outcome would support his conclusion that there would be no adverse microeconomic consequences as follows: Among private sector industrial groupings suggested by the Commonwealth government as most likely to be affected by the outcome of this case the retail trade wage index grew 4.05 per cent, that for the hospitality activities of accommodation, cafes and restaurants by 3.19 per cent, property and business services by 3.96 per cent, health and community services by 4.29 per cent, education by 4.05 per cent and manufacturing by 3.94 per cent. Thus the 4 per cent claim appears unlikely to disturb industrial wage relativities being extremely close to the centre of the concentrated distribution of wage gains now underway. 247 The primary thesis developed by Dr Hughes was that the economic discussion of the impact of the minimum wage adjustments to employment had concentrated upon relative changes in the price of labour or wages and not as he contended would occur in the present circumstances where, because of shifts in the wage price index, the grant of the claim would produce no relative price adjustment. 248 The essential contradiction proposed in cross-examination of Dr Hughes' evidence and in submissions put by Employers First was that the wage adjustments reflected in the wage price index for the relevant period merely reflected the safety net adjustments that had been awarded by the Commission in the previous period. Thus, there would be a relative wage or price movement. 249 We propose to set out part of the cross-examination of Dr Hughes to illustrate the approach taken: Q. Having regard to that, you would agree at least part of the percentages you refer to there take into account the wage increases awarded by the state or Federal Commission over the year? A. Part of those increases indeed would be reflecting arbitrated increases and my understanding is however the arbitrated increases from the safety net minimum wage changes were very much in the minority. It remains to be seen where we will go in the future but I think a figure in the orders of 20 to 25 percent although it would vary from industry to industry. Q. When you say it is close to the centre at paragraph 12 the 4 percent claim is close to the centre of the concentrated distribution and those wage gains in part audio those wage gains at least are wage gains from the decision of the Commission in the last safety net review or stage wage case? A. In part but in small part in my view. I think the market is targeting a figure of around 4 percent. Q. I suggest in the order of 3 to three and a half percent in the hospitality activities of restaurants cafes etc and in relation to retail trade? A. The retail figure was 4. The hospitality figure shown here was 3.19 if you do the year from December it was from memory about 3.4 so 3 or 3 and a half, that is where that has been tracking but, what is interesting is as the economy generally not just NSW, but generally, the national economy has picked up. There has been an evening up of the wages increases and that not surprising. I remember way back in my lecturer at University telling me of the theories of Melvin Reder at Colombia University who argued that when unemployment came down there would indeed be an evening up of wage increases because of the unskilled or who had little skill were now empowered. Skilled workers always have some power, although true, they have more power when unemployment falls, when demand picks up, but in a relative sense, the reduction in unemployment relatively favours the unskilled and semi-skilled and I see that happening in terms of the industry, private sector industry data from the wage price index. ... Q. Back to my point about the last safety net review with increase 3 to 3 and a half percent in retail and hospitality. I suggest the wage gains that you talked about that are now under way, if one takes away what the Commission has awarded in the last review or state wage case, is in the order of half a percent in retail and virtually nil in relation to hospitality? A. It is true on the evidence of the Commonwealth submissions on this case, that the… Q. The Commonwealth submission is not - PRESIDENT: I think the witness has to be allowed to answer the question. WITNESS: It is true on the basis of the evidence I have seen that the hospitality sector has a greater percentage of unincorporated enterprises than most other industries. The extent to which unincorporated enterprises are represented in non-hospitality industries varies, tailing down to some small levels in for example manufacturing. Now in no case however is the instance of unincorporated enterprises 100 percent total and if you told me the increase was 3 or 3 and a half, you told me that 100 percent of hospitality gets in this case 3.19 and in the year to December 3.4, you are basically telling me proof positive that there is something else going on in the hospitality industry other than the safety net. Unless unincorporated enterprises form 100 per cent of coverage and they don't, on the evidence, then you cannot get an aggregate figure of 3 to 3 and a half from the safety net wage increase of 3 to 3 and a half, which applies to only a proportion. There must be other things going on, because hospitality has probably the highest wait of the unincorporated sectors when you move to other industries, retail for example, the force in my point gets stronger and stronger. Q. I put to you the information contained in paragraph 11 and 12, does no more than, in large part, simply refer to the increases arising from the safety net review decision of the Australian Commission or the state wage case decision in this Commission of last year? A. You could argue that and I would dispute as I have, it is not in relation to hospitality but you have figures of 4.05 for retail trade, 3.96 for property and business services, 4.29 percent for health and community services and 3.94 for manufacturing. Bearing in mind two things, one you referred to the increases of the safety net of 3 and a half, even if all of them, even if the coverage had been 100 percent, there has to be something else going on; you cannot get 4 out of 3 and a half. Secondly the safety net coverage is way below 100 percent. I wouldn't give you chapter and verse for all the industries off the top of my head but I would have thought that coverage would have been very much in the minority. In which case it leaves when you weight it up you have a very large gap to explain what is going on elsewhere. 250 The witness, plainly, did not accept the propositions advanced to him and no countervailing evidence was called by Employers First or any other party opposing the application. On one view, the matter may rest there, but we propose to briefly identify some further reasons as to why we do not propose to accept the submission by Employers First that the evidence of Dr Hughes should be rejected. Those reasons are as follows: 1. The cross-examination relied upon the "Commentary" section of the Labour Price Index publication of the Australian Bureau of Statistics for the December quarter 2005 (Catalogue no. 6345.0). That commentary referred to the Safety Net Review decision of the AIRC decision given on 7 June 2005 and the adoption of that decision by all States and Territories. It then indicated that, despite a variance in the date of the respective decisions, some part of those increases had been reflected in the September quarter 2005 Wage Index as well as the December quarter 2005 Index. The first significant difficulty for the proposition advanced by Employers First was the caveat contained in the commentary as follows: It is not possible for the ABS to determine the relative contribution of the SNR to the increase in the Wage Price Index in either the September or December quarters 2005. 2. As reflected in that observation by the ABS, the Wage Price Index contains a time-series analysis. In the March 2005 Quarter publication of the Labour Price Index it is clearly indicated that in past years of this statistical survey the flow-on effect of the safety net adjustments into the indices has primarily occurred in the September and December quarters of the Wage Price Index. That pattern has obviously been repeated in the December quarter figures for 2005, but plainly indicates that the year-to-year changes contained within the data (whether on a financial year basis or from year quarter to year quarter) will not be wholly based upon the effect of the State Wage Case increases. That conclusion is even stronger when consideration is given to the fact that, as Dr Hughes suggested, there has, in recent years, developed circumstances whereby wage increases have occurred in a relatively narrow band reflecting both those industries or sectors which are the recipients of the safety net review adjustments and those which are not (for example, those which are excluded because of the absorption principle under the wage fixing principles). In other words, there are general trends of wage movements around 4 per cent change in the Wage Price Index shown for the yearly period for the March quarter 2005 to the March quarter 2006. The data is thus reflecting partially some safety net adjustments but also, as Dr Hughes gave evidence, reflecting a strengthening in demand in lower paid sectors resulting in a narrowing of the band of the potential wage price adjustments at any period in modern times. It should be further observed, in this respect, that safety net review adjustments are usually awarded in the light of wage movements which have already occurred and, as Unions NSW correctly pointed out, take into account general wage cost movements as reflected in the Wage Price Index. 3. A further flaw in the proposition advanced by Employers First was that its submissions depended upon the commentary provided by the ABS for the Labour Price Index for the December quarter 2005, whereas Dr Hughes' evidence in his affidavit in reply was based upon the Wage Price Index produced by the ABS for the March quarter 2006. This is not merely a matter of semantics. It has some particular significance given that we are here considering time-series data. The quarterly figures tend to confirm the theory advanced by Dr Hughes in terms of the year-to-year outcomes. Furthermore, the commentary attached to the March quarter 2006 information is in the following terms: Of those jobs reporting a pay increase in March quarter 2006, over half were paid under collective agreements or enterprise agreements. This is plainly consistent with Dr Hughes' evidence, the limitations contained within the December quarter 2005 commentary and the notion that a substantial component of the Wage Price Index will not be reflective of merely safety net review adjustments. 251 We do not, therefore, consider that the contention by Employers First has been made out that Dr Hughes' microeconomic theory is flawed because he has examined Wage Price Index data which merely reflect, in a circular way, previous safety net adjustments. 252 No party to these proceedings has advanced a contention that the grant of the application by Unions NSW or the acceptance of the contention by the Minister for Industrial Relations for a flat wage adjustment would have an adverse effect on employment growth or result in some deterioration of unemployment outcomes either generally or in the subject industries or sectors. 253 This would no doubt account for the relative absence of material from the employer parties on this important topic. However, we have taken the view that we should, nonetheless, review the question of employment effects of the application in the light of the requirements of s 146 of the Act so that we may satisfy ourselves as to any relevant matters arising in the public interest. 254 The topic of the impact of minimum wage adjustments (and, in particular, safety net adjustments) upon employment growth (as opposed to unemployment) remains somewhat contentious. Some part of that controversy will, no doubt, be alleviated or resolved by the recent authoritative announcement by the OECD, which we have referred to in this section of our decision. The OECD study plainly indicates that there is scope for moderate minimum rate adjustments without significantly affecting employment growth in an adverse way (provided some tempering of the adjustment in wages is undertaken for particular groups such as teenage workers). 255 On the other hand, Dr Hughes' evidence would suggest that no adverse microeconomic employment impacts would arise from the granting of the current application. Nothing put to us in this case would suggest that his analysis is in any way flawed. 256 We consider that a balance should be struck in determining the present application between recognition being given to the recurrence in economic literature of findings which would suggest some negative impact in employment growth from minimum rates adjustments (particularly in relation to some sectors referred to in the studies which may intersect with the employment areas considered in this case) and the evidence before us (both at a macroeconomic and microeconomic level) which suggests that the increases sought are by and large sustainable. In the final analysis we have reached a similar conclusion to the AIRC in Safety Net Review - Wages, June 2005 decision. There is no basis on economic grounds relating to employment growth to displace an outcome otherwise warranted under s 10 of the Act. However, it will be appropriate to temper our conclusion as to the amount of adjustment so as to minimise or eliminate any potential adverse employment impacts. COST OF THE CLAIM 257 Unions NSW analysed the cost of a 4 per cent increase in award wages on aggregate wages, ordinary times earnings and the Consumer Price Index. The costings and costing methodology were based on the material and approach provided in the affidavit of Richard Watts, Senior Industrial Officer with the Australian Council of Trade Unions. Mr Watts has been responsible for the preparation of the ACTU's costing methodology in previous Safety Net Review cases before the AIRC. 258 It was submitted that should the application be granted in full there would be: · A net impact on aggregate wages in New South Wales of 0.06 percent; · A maximum addition to total ordinary time earnings in New South Wales of 0.19 percent, and; · An impact on CPI of 0.03 per cent. It was further submitted, "The economic impact can be properly described as negligible." 259 In relation to the costing methodology, Mr Thistlethwaite submitted: The costing methodology measures the total increase in ordinary time earnings for all employees attributable to the proposed increase in award rates. The costings are based on unpublished data from ABS Cat. 6306.0 Survey of Employee Earnings and Hours, May 2004. The methodology used by Unions NSW is very similar to the costing methodology utilised by the ACTU in recent National Wage Cases (See pages 77 – 84 of the ACTU's written submissions to the 2005 Safety Net Review of Wages and pp 99-101 Decision Safety Net Review of Wages June 2005 AIRC Print PR002005). In past National Wage cases employers have criticised the ACTU's methodology on a number of grounds. These included the ACTU's discounting of the costs of the claim to allow for non-compliance and the existence of arbitrated agreements in the form of s170 MX awards. This discounting has been held to valid by the AIRC. Notwithstanding this Unions NSW has not adopted this approach at a State level and assumes that 100 per cent of all eligible award dependent employees in New South Wales will immediately receive the full amount claimed. Whilst this will undoubtedly result in an overestimation, in the absence of appropriate state data dealing with compliance issues no discounting has been applied to the costing. The costing of the claim is based on New South Wales specific data from the EEH survey, including the number of award dependent employees within the NSW jurisdiction. The total number of award dependent employees in NSW working within the private sector within an unincorporated business is estimated to be 9.06 per cent. As the ABS EEH Survey does not differentiate between State and Federal Award coverage, this figure includes all award dependent employees State and Federal. It is believed that the vast majority of workers within unincorporated businesses will fall within the NSW Commission's jurisdiction. A small number of 'transitional employees' will be within the Federal jurisdiction and will be the subject of a minimum wage case some time in the future. 260 Unions NSW explained that the cost of the claim was calculated utilising the available ABS data for New South Wales private sector award dependent employees employed within unincorporated businesses. Starting with unpublished percentile data for the hourly ordinary time earnings (HOTE) for adult non-managerial award only employees from the ABS EEH survey, adjustments were made to the figures to account for the 2004 and 2005 Safety Net adjustments. The data was then converted to a weekly amount and the amount of the claim, 4 per cent, was added to obtain a weighted average increase in award wages per week of $25.36. This data was then weighed to account for different types of employment in NSW. The weighted increase in award wages per week is $17.18. 261 The weighted dollar amount of $17.18 was then multiplied by the proportion of NSW private sector employees in the unincorporated sector who are award dependent, and divided by estimated AWOTE for May 2006 ($803.20) to give the maximum addition to total ordinary times earnings in NSW. This figure was 0.19 per cent. 262 The same process was then undertaken in respect of the 2005 State Wage Case adjustment to allow the calculation of the net impact on Total Ordinary Time Earnings: See Tables 12 and 13 263 The figures of 0.19 per cent and 0.14 per cent for the 2005 Addition to Ordinary Time Earnings were then used to calculate the net impact of the increase on total ordinary time earnings and the CPI as detailed in Table 14: 264 Unions NSW also provided the net and gross impacts to economy wide earnings for wage adjustments at a range of alternative dollar outcomes in Table 15: 265 The Minister for Industrial Relations submitted that a $20 a week increase for 200,000 employees would add around $208 million to the wages bill of private sector employers in New South Wales. As the private sector wage bill in New South Wales in 2005 was in the order of $135 billion, the proposed increase would add less than 0.2 per cent to the wages bill. However, it was noted that around 65 per cent of workers who would benefit from the claim were not full-time employees, and accordingly the economic cost would be significantly lower. 266 The Minister also submitted: In broad terms a 0.2 per cent increase in private sector business costs would be unlikely to have a major impact on the State's economy. That is, the macroeconomic impact of a $20 per week increase is likely to be small in terms of its impact on employment. The New South Wales economy has grown at modest rates in recent years, notably due to a downturn in the housing construction sector. Looking ahead, growth is expected to lift as a modest recovery begins in the housing sector, while growth in consumer and business spending remains firm. A $20 per week increase for the lowest award rate would equate to a 4.1 per cent increase. In 2005, the ABS Wage Price Index for all employees rose by 4.1 per cent nationally in year average terms and by 4.0 per cent in New South Wales. Thus a 4.1 per cent increase for the lowest award rate is broadly in line with average wage increases across the entire economy. Data is not published at a state level by industry, but at a national level there were divergences in increases in the Wage Price Index by industry in 2005 in year average terms, with increases ranging from a low of 3.2 per cent in the accommodation, cafes and restaurants sector, a 3.6 per cent increase in the retail sector, a 4.9 per cent increase in the construction sector and a high of a 5.0 per cent increase in the education sector. 267 In relation to the public sector, the Minister submitted: The only major group in the New South Wales public sector that are dependent on SWC adjustments for pay increases are trainees covered by the Crown Employees (Public Service Training Wage) Award 2005. These temporary employees undertake traineeships ranging from 12 months to 2 years. During the 2004-05 financial year, 1434 trainees commenced employment in the public sector. From previous experience SWC increases for this group have not had a significant affect on agency budgets. In addition to these trainees, a small number of Government employees are paid under common rule awards and also receive their pay increases through SWC adjustments. In particular, the Department of Education / TAFE have some classifications that receive SWC increases such as childcare workers, nursery cooks, school canteen staff, and shop assistants. As at 31 March 2006 the number of non-trainee public sector staff currently employed under common rule awards is approximately 330. Past State Wage Cases have had only a limited impact on public sector employment. It is anticipated that the cost impact of any SWC decision on wages and salary levels in the New South Wales Government in 2006 will be marginal. 268 There was no attempt by the employer parties to cost the impact of the claim nor did they contest the costings of either Unions NSW or the Minister for Industrial Relations. 269 On any assessment, however, even if this Full Bench were to award the 4 per cent claim in full, its impact on the New South Wales economy would be quite small. FLAT OR PERCENTAGE INCREASE 270 Unions NSW submitted that the application for a 4 per cent increase in award wages was consistent with the recent wage price index figures of 4.2 per cent nationally and 3.5 per cent in New South Wales. It was submitted that a percentage outcome, rather than a flat dollar amount increase was desirable on this occasion to avoid a further compression of the skills relativities in classification structures in awards and the subsequent undermining of the properly established skilled based career structures within awards. 271 The Minister for Industrial Relations submitted that a flat $20 increase was appropriate because it would directly benefit the lowest paid workers in the workforce with a negligible impact on employment and productivity, and was likely to promote increased participation. 272 There is substance in Unions NSW submission supporting a percentage increase in award rates. Over the past decade, overwhelmingly any increase to award rates in State Wage Cases has been by way of a flat increase. This has had the effect of compressing relativities within and between awards adversely affecting the integrity of skill based career structures. By way of example, the rate of pay for a C13 classification in the Metal, Engineering and Associated Industries (State) Award in 1997 was 83.36 per cent of the benchmark C10 rate. In 2005 it was 86.66 per cent. 273 We expect that in a number of industries the problem of compressed relativities can be overcome at the enterprise level through overaward payments or enterprise agreements. But we are concerned that if flat increases are to continue as the method of adjusting wage rates in State Wage Cases, the question of award based relativities may develop into an industrial issue in some industries. 274 Nevertheless, we consider on this occasion any increase should be a flat increase. Our reasons for this lie with our concern for low paid workers who often may not have the skills or the opportunity to follow a career path and who receive no overaward payments. Moreover, we note, in particular, the evidence regarding the increasing divergence in earnings in Tables 8, 9 and 10. There is also the fact that tax cuts will be implemented from 1 July 2006 and they will tend to favour those on higher incomes. For example, the tax cut for employees earning less than $25,000 per annum will be less than the cut for employees earning more than $25,000. 275 Whilst the adjustment on this occasion will be a flat increase, we should make it clear that in any State Wage Case proceedings in 2007 the parties will be required to address the issue why any increase granted should not be on a percentage basis. AMOUNT OF INCREASE 276 Unions NSW claim is for a 4 per cent increase in minimum wages. The rationale for the figure of 4 per cent was explained in the applicant's written submissions: Awarding the application will ensure that the wages of award dependent workers increase in a way that is comparable to increases for others in the community. This is because the application is based on the Wage Price Index (WPI) as the measure of general wage movements. The WPI is an index measuring the changes in wage movements rather than levels and in does not include non-wage costs. It is constructed by measuring the cost of purchasing the same quality and quantity of labour input. Therefore, it is analogous in its construction to that of the Consumer Price Index (CPI). The advantage of the WPI over most of the other measures of wage growth such as the Average Weekly Ordinary Time Earnings (AWOTE) and Average Weekly Earnings (AWE) is that it does not incorporate compositional change in the workforce, such as, for example, people moving from full-time to part-time work, or promotions. The WPI measures changes in the price paid for a particular job over time. Moreover, unlike the Average Earnings on a National Accounts basis (AENA) the WPI excludes major non-wage costs such as superannuation, pay-roll tax, workers compensation and annual and public holiday leave. In previous federal Safety Net Review decisions, the AIRC highlighted the benefits of the WPI as compared to other measures of wage movements as an indicator of wage movements for the purpose of the determining the Safety Net Review decision. It is accepted that the AWE and AWOTE data are affected by compositional changes in the workforce. While the AENA and WCI [the WCI (Wage Cost Index) was the name previously given to the WPI. The ABS changed the name in 2004] data both record the increase in wages for a given job, and therefore are not affected by compositional change, AENA includes some non-wage costs such as superannuation, redundancy payments and workers' compensation payments. We agree with the Commonwealth that the WCI data are the most direct measure of changes in wage costs for a particular position and therefore the most useful indicator for our purposes (AIRC Safety Net Review decision, May 2004 at [132]). It is for these reasons the WPI is the appropriate indicator to use for measuring the fairness and economic impact of Unions NSW application. By awarding the application, which is based on the WPI, the Commission can ensure that award dependent workers do not fall further behind others in the community. The application reflects the national WPI. The application is based on the national WPI because Unions NSW is making an identical application to the claim made in other state wage cases. In any event the application for an increase in award wages of 4 per cent is consistent with recent outcomes for the WPI in NSW and the forecast figure over the coming year. The claim, at 4 per cent, is conservative being less than the current rate of the WPI, which is 4.2 per cent for the December quarter 2005 at a national level. The NSW WPI forecast for 2005-06 is 4.25 per cent [revised to 4.0 per cent]. The claim, being based on the WPI to ensure maintenance of the relative position of award wages, is not an ambit claim. To maintain the relative position of award workers the application must be granted in full. 277 The Award Review Classification Rate is currently $484.40. This is the rate below which no full-time adult employee (excluding trainees, apprentices and employees on a supported wage or on a probationary rate) should be paid under the relevant award. A 4 per cent increase in the Award Review Classification Rate translates into an increase of $19.40 per week. For the benchmark tradesperson rate of $578.20, 4 per cent would mean an increase of $23.10 per week. The average increase based on 4 per cent for, say, the Metal, Engineering and Associated Industries (State) Award would be $25.60 per week (non-weighted). 278 A $20 increase would represent a 4.1 per cent increase on the Award Review Classification Rate. 279 The WPI for 2005-06 in New South Wales is forecast to be 4.0 per cent and the same figure has been nominated at the national level. The Consumer Price Index for the national economy for 2005-06 is estimated to be 3.0 per cent, whereas the CPI for Sydney is estimated to be 2¾ per cent for 2005-06. 280 It is evident from the material provided by the Minister for Industrial Relations, and referred to earlier in this decision, that the minimum wage compared with median earnings and Average Weekly Ordinary Time Earnings (AWOTE) for full-time employees has steadily declined over the period 1996 to 2005. Award-reliant employees who are dependent on adjustments to minimum award levels for increases in wages have experienced a significant loss of relativity. 281 In relation to casual employment, we note the submission by the Minister for Industrial Relations that: Current data indicate 27 per cent of Australians in their main job were casual at August 2005. Of these workers, 65 per cent were part-time, 54 per cent were female and 26 per cent worked in the retail trade industry, 23 per cent worked in clerical, sales and service, 20 per cent were aged 15-19 and 30 per cent earned less than $200 per week in their main job. Average earnings from full-time casual and part-time permanent or casual jobs have declined relative to full-time permanent earnings: Australian Bureau of Statistics 2005, Employee Earnings, Benefits and Trade Union Membership, cat. no. 6310.0, ABS, Canberra. 282 We consider that Unions NSW has established a substantial case for the grant of its application under s 51 of the Act. We shall make principles which permit, upon an application consistent with those principles, an increase in minimum rates under State awards. The primary reason for that conclusion is that the applicant has established on the evidence that there are "good reasons" for the purposes of s 51(1) of the Act to warrant that outcome. Having regard to the basis for safety net adjustments in modern times, the applicant was entitled to rely upon, subject to countervailing economic considerations, movements in wage costs as reflected in the wage price index and the erosion of the purchasing power of wages within the relevant period to establish a case for a general adjustment in wages. The claim is in conformity with those criteria. More significantly, and having regard to the requirements of the Commission to set fair and reasonable conditions of employment for employees under s 10 of the Act (see also s 3(a)), we consider that a powerful case has been established by Unions NSW and the Minister for Industrial Relations for the adjustment of wages of the low paid, having regard to the economic position of those workers, including their income and living costs, and questions of wage dispersion and income inequality. These workers have little or no bargaining power so as to engage in enterprise bargaining (and employers have not engaged in enterprise bargaining in this area), and have a reduced capacity to sustain themselves and their families at an acceptable standard upon the present levels of minimum wages. We have discussed these issues at some length in our decision. 283 We do not consider that there is any proper basis, having regard to the state of the national or NSW economies, to alter this conclusion. There is a strong national economy. Risks attending upon the continued successful operation of that economy should not be overstated, particularly for the period 2006/2007. The NSW economy has not performed as well as the national economy but there is nothing in its performance which would indicate that we should adopt any different approach in this State than would be appropriate if one had regard to the national economy alone. That is because the fundamental economic indicators in NSW plainly indicate, as the NSW Government has submitted, there is a capacity to sustain the claim. We have given consideration to the potential for "disemployment" effects arising from an adjustment in minimum rates, but we do not think that any evidence has been presented in this case which would warrant a conclusion that any determination we make should be tempered on this basis. We are mindful that granting other than moderate minimum rates adjustments may have the potential, although inconclusively so on the present state of empirical studies, for some adverse employment effects the dimensions of which may vary considerably. However, we do not consider such adverse employment effects have been demonstrated in this case. We have identified in our decision the approach we propose to adopt in this respect but consider that moderate adjustments in minimum wages are sustainable without significant adverse employment effects having regard to the state of the national and State economies. 284 We have decided that an increase of $20 per week is appropriate. In doing so, we would observe that the decision we make, if applied to the relevant amounts relating to the minimum wage and AWOTE in Table 9, would result in only the maintenance of the latest relativity. It would certainly not return the relativities to the levels of the 1990s. The Award Classification Review Rate shall be increased by $20 to $504.40 per week. Relevant allowances shall be increased by 4 per cent. We would observe, in establishing that increase in rates of pay, we have had regard to the failure by Employers First and the Joint Employers to identify any position in the proceedings as to wage adjustments other than contending for no wage increase at this time. In that respect, we adopt for the present proceedings the following observations of the Full Bench in Health Employees Pharmacists (State) Award and other Awards (2003) 132 IR 244 at [5]: [5] Whilst the HAC ultimately adjourned its cross claim for the inclusion of certain conditions of employment provisions and did offer in a very limited way alternative definitions for some employment classifications caught by the application, it essentially engaged in a blanket repudiation of the application by resisting outright any substantial reclassification, redefinition of classifications or adjustment to rates of pay. We consider that that approach (of essentially outright opposition) to be quite unsatisfactory in this matter for three reasons: 1. We refer to the recent observations of a Full Bench of this Commission in Re Health and Community Employees Psychologists (State) Award (2001) 109 IR 458 at [61]: 61 In reaching our conclusion, we are not unmindful of the traditional rigidities in public service structures which are no doubt reflected in the psychologist's scale as set over 30 years ago. Such a scale, in our view, does not meet the new demands and wholly different nature of the work of public hospital psychologists as we have identified. That issue was not dissimilar to that discussed by a Full Bench of the Commission in Re Public Hospital Social Workers Award (unreported, Full Bench, 86/264, 20 December 1988) where the Industrial Commission in reviewing the salary scale for social workers commented (at pp8-9): Historically, traditional rigidities in the public service structure have resulted in salary scales which have had to satisfy two different functions, firstly to provide a management and supervisory hierarchy to satisfy the requirement of control and secondly to provide appropriate salaries reflecting skill and responsibility. In this case, however, whilst there would appear to be deficiencies in the structure the employer has not sought to put forward by constructive submissions as to how the difficulties might best be overcome from the employer's point of view. Clearly, society, the employer and the social workers themselves consider that social work and social worker roles have progressed from adjuncts to the provision of medical and hospital services to an integral and professional service provided not only to the individual patients but also the other health professionals. Stresses which modern society has placed upon the individual within that society have led to a greater range of professional work than has been necessary or desirable in the past. We consider similar comments are apposite in the present case. The respondent's position was to oppose any change in the classification structure or any increase in salaries; it proposed no alternative to the applicant's claims. As unfortunate as that approach may be in not providing the Commission with an arguable alternative, we have to say it has compelled us to accept more forcefully than we might otherwise have done the evidence led in these respects by the applicant. These remarks are apposite in the present matter. ... 3. In the result, the Commission was left without any real assistance by the opponent to the primary application as to the appropriate resolution of the issues raised by it, in circumstances where it was reasonably clear that at least some alternative to the form of existing awards would be required. One consequence of this approach, as was observed by the Full Bench in the Psychologists case, is that, where there is a clear indication in the proceedings that some wage or classification adjustments are appropriate (in accordance with the wage fixing principles) the Full Bench is left without any 'arguable alternatives' from the HAC as to the form of the award, that is, the actual adjustments to the award which may be appropriate. Thus, we have been compelled, where classification and wage adjustments have been found to be warranted under the wage fixing principles in relation to a particular aspect of the application, as in the Psychologists case, to "accept more forcefully than we might otherwise have done," the position advanced (on the evidence) by the HSU. WAGE FIXING PRINCIPLES 285 Whilst PATEA proposed a review of the Commission's Wage Fixing Principles (without indicating any position as to what changes were needed) no other party proposed any change other than those that are a necessary consequence of our decision in these proceedings. We will make the necessary consequential changes to the existing Principles, including deleting reference to counterpart awards, such reference for the reasons earlier given now being obsolete. We also place the parties on notice that in any State Wage Case proceedings in 2007 the parties will be required to make submissions as to the form, content and relevance of the various Principles. 286 The Principles we adopt are set out in Appendix A. ORDERS 287 We make the following orders: 1. Pursuant to s 51(1) of the Industrial Relations Act 1996 the Full Bench of the Industrial Relations Commission of New South Wales orders that the Commission's Wage Fixing Principles shall be as set out in Appendix A to this decision. 2. Pursuant to s 52 of the Act, the Commission orders that awards which do not contain wage increases awarded since 29 May 1991, other than safety net, State Wage Case and minimum rates adjustments, may be varied in accordance with the Commission's Wage Fixing Principles upon application to include a State Wage Case adjustment of $20 per week. At the hearing of any such application, the Commission may, in its discretion, award the whole or part of the amounts referred to in the Principles or determine that no amount should be awarded. 3. Pursuant to s 52 of the Act, the Commission orders that the following rates may be increased by 4 per cent upon application in accordance with the Commission's Wage Fixing Principles: (i) Existing allowances which relate to work or conditions which have not changed, including shift allowances expressed as monetary amounts and service increments; and (ii) Junior rates expressed as monetary amounts. 4. These orders shall operate on and from today until further order of the Commission. APPENDIX A INDUSTRIAL RELATIONS COMMISSION OF NEW SOUTH WALES STATE WAGE CASE 2006 WAGE FIXING PRINCIPLES 1. Preamble These principles have been developed with the aim of providing for their period of operation, a framework under which all concerned - employers, workers and their unions, governments and tribunals - can co-operate to ensure that measures to meet the competitive requirements of enterprises and industry are positively examined and implemented in the interests of management, workers and, ultimately, Australian and New South Wales society. In exercising its powers and obligations under the Industrial Relations Act 1996 ('the Act'), the Commission will continue to apply structural efficiency considerations including minimum rates adjustment provisions. Movements in wages and conditions must fall within the following principles. 2. When an Award may be Varied or Another Award Made Without the Claim Requiring Consideration as a Special Case In the following circumstances an award may, on application, be varied or another award made without the application requiring consideration as a special case: (a) to include previous State Wage Case increases in accordance with Principle 3; (b) to incorporate test case standards in accordance with Principle 4; (c) to adjust allowances and service increments in accordance with Principle 5; (d) to adjust wages pursuant to work value changes in accordance with Principle 6; (e) where the application is consented to by the parties it will be dealt with in terms of the Act; (f) to adjust wages for the State Wage Case 2006 in accordance with Principle 8; (g) to approve of an enterprise arrangement reached in accordance with Principle 11; and (h) to adjust wages pursuant to an application claiming that work has been undervalued on a gender basis in accordance with Principle 14. 3. Previous State Wage Case Increases Applications for increases available under previous State Wage Case decisions will be determined in accordance with the relevant principles contained in those decisions. 4. Test Case Standards Test case standards established and/or revised by a Full Bench of the Commission may be incorporated into an award in accordance with the Act. Where disagreement exists as to whether a claim involves a test case standard, those asserting that it does must make an application for a special case. 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) Existing allowances which relate to work or conditions which have not changed, including shift allowances expressed as monetary amounts and service increments, may be increased by 4 per cent for the State Wage Case 2006 adjustment. (c) 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 these principles. (d) New allowances to compensate for the reimbursement of expenses incurred may be awarded where appropriate having regard to such expenses. (e) 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 these principles. The relevant principles in this context may be Work Value Changes or First Award and Extension to an Existing Award. (f) 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 provisions of the Work Value Changes principle of these 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 classification 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. (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 State Wage Case 1989 . (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 money 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 these 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. Claims for reduction in standard weekly hours below 38 will not be allowed. 8. State Wage Case Adjustments In accordance with the State Wage Case 2006 decision awards may, on application, be varied to include a State Wage Case adjustment of $20 per week, 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 twelve months have elapsed since the rates in the award were increased in accordance with the State Wage Case 2005 decision. (c) In awards where the variation for a safety net adjustment arising from the 1999, 2000, 2001, 2002, 2003, 2004, 2005 or 2006 State Wage Case 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 State Wage Case adjustment (or a proportionate amount in the cases of part-time and casual employees, juniors, trainees, apprentices, employees on a probationary rate, employees on a supported wage or with permits under s125 of the Act), 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 adjustment to the extent of: (i) any equivalent overaward payments, and/or (ii) award wage increases since 29 May 1991 other than safety net, State Wage Case, and minimum rates adjustments. (e) The following clause must be inserted in the award: 'The rates of pay in this award include the adjustments payable under the State Wage Case 2006 . These adjustments may be offset against: (i) any equivalent overaward payments, and/or (ii) award wage increases since 29 May 1991 other than safety net, State Wage Case, and minimum rates adjustments.' The above clause will replace the offsetting clause inserted into awards pursuant to the Principles determined in the State Wage Case 2005 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 State Wage Case adjustment will only be available where the rates in the award have not been increased, other than by safety net or State Wage Case adjustments, or as a result of the application of the Minimum Rates Adjustment principle, since 29 May 1991. 9. Award Review Classification Rate The Award Review Classification Rate of $504.40 shall be the rate below which no full-time adult employee (excluding trainees, apprentices and employees on a supported wage or on a probationary rate) should be paid under the relevant award. Where a classification in an award is below the Award Review Classification Rate the following process will apply on application: (a) The award will be listed for a mention at which the parties will report as to: (i) how the Award Review Classification Rate will be achieved, or (ii) whether the award is obsolete. The Commission may direct the parties to confer in order to set a program for an updating of the award to reflect the Award Review Classification Rate. (b) If the parties to the award do not appear at this mention, the Commission shall request the parties to the award to show cause why the award should not be considered obsolete, and rescinded under s 17(3) of the Act. (c) Where no agreement is reached with respect to (a) above, the Commission shall re-list the matter in order to conciliate the issues in dispute. (d) If the attempt at conciliation is unsuccessful the Commission shall arbitrate any outstanding issue. 10. Special Case Except for the flow on of test case provisions, any claim for increases in wages and salaries, or changes in conditions in awards, other than those allowed elsewhere in the principles, will be processed as a special case before a Full Bench of the Commission, unless otherwise allocated by the President. This principle does not apply to applications for awards consented to by the parties, which will be dealt with in the terms of the Act, or to enterprise arrangements, which will be dealt with in accordance with the Enterprise Arrangements principle. 11. Enterprise Arrangements (a) The Commission may approve of enterprise arrangements reached in accordance with this principle and the provisions of the Act. (b) Industrial unions of employees and industrial unions of employers, or industrial unions of employees and employers, or employees and employers may negotiate enterprise arrangements which, subject to the following provisions, shall prevail over the provision of any award or order of the Commission that deals with the same matters in so far as they purport to apply to parties bound by the arrangements, provided that where the arrangement is between employees and an employer a majority of employees affected by the arrangement genuinely agree. (c) An enterprise arrangement shall be an agreed arrangement for an enterprise, or discrete section of an enterprise, being a business, undertaking or project, involving parties set out in paragraph (b). (d) Enterprise arrangements shall be for a fixed term and there shall be no further adjustments of wages or other conditions of employment during this term other than where contained in the arrangement itself. Subject to the terms of the arrangement, however, such arrangement shall continue in force until varied or rescinded in accordance with the Act. (e) For the purposes of seeking the approval of the Commission, and in accordance with the provisions of the Act, a party shall file with the Industrial Registrar an application to the Commission to either: (i) vary an award in accordance with the Act; or (ii) make a new award in accordance with the Act. (f) On a hearing for the approval of an enterprise arrangement, the Commission will consider in addition to the industrial merits of the case under the State Wage Case principles: (i) ensuring the arrangement does not involve a reduction in ordinary time earnings and does not depart from Commission standards of hours of work, annual leave with pay or long service leave with pay; and (ii) whether the proposed award or variation is consistent with the continuing implementation at enterprise level of structural efficiency considerations. (g) The Commission is available to assist the parties to negotiations for an enterprise arrangement by means of conciliation and, in accordance with these principles and the Act, by means of arbitration. If any party to such negotiations seeks arbitration of a matter relating to an enterprise arrangement such arbitration shall be as a last resort. (h) Enterprise arrangements entered into directly between employees and employers shall be processed as follows, subject to the Commission being satisfied in a particular case that departure from these requirements is justified: (i) All employees will be provided with the current prescriptions (e.g. award, industrial agreement or enterprise agreement) that apply at the place of work. (ii) The arrangement shall be committed to writing and signed by the employer, or the employer's duly authorised representative, with whom agreement was reached. (iii) Before any arrangement is signed and processed in accordance with this principle, details of such arrangement shall be forwarded in writing to the union or unions with members in that enterprise affected by the changes and the employer association, if any, of which the employer is a member. (iv) A union or employer association may, within 14 days thereof, notify the employer in writing of any objection to the proposed arrangements, including the reasons for such objection and in such circumstances the parties are to confer in an effort to resolve the issue. (v) Where an arrangement is objected to by a union or employer association and the objection is not resolved, an employer may make application to the Commission to vary an award or create a new award to give effect to the arrangement. (vi) A union and/or employer association shall not unreasonably withhold consent to the arrangements agreed upon by the parties. (vii) If no party objects to the arrangement, then a consent application shall be made to the Commission to have the matter approved in accordance with paragraph (e) of this principle. (viii) Such arrangement once approved shall be displayed on a notice board at each enterprise affected. 12. Superannuation (a) An application to make or to vary a minimum rates or paid rates award which: (i) seeks a greater quantum of employer contributions than required by the Superannuation Guarantee (Administration) Act 1992 (Cth) ('the SGA Act'); or (ii) seeks employer contributions to be paid in respect of a category of employee in respect of which the SGA Act does not require contributions to be paid; shall be referred to a Full Bench for consideration as a special case, unless otherwise allocated by the President. Exceptions to this process are applications which fall within the Enterprise Arrangements and First Awards and Extensions to Existing Awards principles. (b) If an application is made that does not fall within paragraph (a), the Commission will, subject to paragraph (c): (i) make or vary an award by inserting a clause stating: 'Superannuation Legislation - The subject of superannuation is dealt with extensively by federal legislation including the Superannuation Guarantee (Administration) Act 1992 (Cth) , the Superannuation Industry (Supervision) Act 1993 (Cth); the Superannuation (Resolution of Complaints) Act 1993 (Cth) and s124 of the Industrial Relations Act 1996 . This legislation, as varied from time to time, governs the superannuation rights and obligations of the parties'. (ii) if appropriate, ensure that the award contains specification of an employee's earnings (e.g. 'ordinary time earnings') which, for the purposes of the SGA Act, will operate to provide a 'notional earnings base', and (iii) if the award is to continue to prescribe a 'flat dollar' amount of employer contribution, ensure that appropriate amounts are inserted so as to give effect to the levels of contribution required from time to time under the SGA Act. (c) The Commission may award provisions which differ from those in paragraph (b): (i) by consent; or (ii) in the absence of consent, by arbitration, provided the Commission is satisfied that there are particular factors warranting the awarding of different provisions. Such factors may include: (A) the wishes of the parties; (B) the nature of the particular industry or enterprise; (C) the history of the existing award provisions; (D) relevant decisions of the Commission establishing superannuation principles; and (E) relevant statutory provisions. (d) Before any different provisions are awarded under paragraph (c), either by consent or arbitration, the Commission must be satisfied, on expert evidence, that the award to be made will not contain requirements that would result in an employer not meeting the requirements imposed by the SGA Act. (e) Subject to s124 of the Act, any specification of a fund will carry with it the obligation for an employer to pay contributions at such intervals as are required by the fund. (f) In determining applications as to specification of fund, the Commission will, as appropriate: (i) ensure that any fund specified by it is one into which payment will meet the employer's obligations under the SGA Act; (ii) have regard to the Superannuation Industry (Supervision) Act 1993 (Cth) ('the Supervision Act') which provides for the prudent management of certain superannuation funds and for their supervision by the Insurance and Superannuation Commissioner. In particular, the requirement with respect to equal representation of employers and members on what are called 'standard employer-sponsored funds' (Pt 9 of the Supervision Act) should be noted; (iii) have regard to previous decisions of the Commission with respect to the specification of a fund or funds; and (iv) have regard to relevant statutory provisions. (g) Due to the variety of existing award superannuation provisions and the impact and complexity of the SGA Act, all applications to the Commission may not be capable of being dealt with in accordance with the approach set out above. In any such case it may be appropriate for the application to be dealt with as a special case. 13. First Award and Extension to an Existing Award Any first award or an extension to an existing award must be consistent with the Commission's obligations under Part 1 Chapter 2 of the Act. In determining the content of a first award the Commission will have particular regard to: (a) relevant wage rates in other awards, provided the rates have been adjusted for previous State Wage Case decisions and are consistent with the decision of the State Wage Case 1989; (b) the need for any alterations to wage relativities between awards to be based on skill, responsibility and the conditions under which the work is performed; (c) for conditions of employment, other than wage rates, prima facie the existing conditions of employment; (d) that the award would comply with the requirements of section 19 of the Act. 14. Equal Remuneration and Other Conditions (a) Claims may be made in accordance with the requirements of this principle for an alteration in wage rates or other conditions of employment on the basis that the work, skill and responsibility required, or the conditions under which the work is performed, have been undervalued on a gender basis. (b) The assessment of the work, skill and responsibility required under this principle is to be approached on a gender neutral basis and in the absence of assumptions based on gender. (c) Where the under-valuations is sought to be demonstrated by reference to any comparator awards or classifications, the assessment is not to have regard to factors incorporated in the rates of such other awards which do not reflect the value of work, such as labour market attraction or retention rates or productivity factors. (d) The application of any formula, which is inconsistent with proper consideration of the value of the work performed, is inappropriate to the implementation of this principle. (e) The assessment of wage rates and other conditions of employment under this principle is to have regard to the history of the award concerned. (f) Any change in wage relativities which may result from any adjustments under this principle, not only within the award in question but also against external classifications to which the award structure is related, must occur in such a way as to ensure there is no likelihood of wage leapfrogging arising out of changes in relative positions. (g) In applying this principle, the Commission will ensure that any alternative to wage relativities is based upon the work, skill and responsibility required, including the conditions under which the work is performed. (h) Where the requirements of this principle have been satisfied, an assessment shall be made as to how the undervaluation should be addressed in money terms or by other changes in conditions of employment, such as reclassification of the work, establishment of new career paths or changes in incremental scales. Such assessments will reflect the wages and conditions of employment previously fixed for the work and the nature and extent of the undervaluation established. (i) Any changes made to the award as the result of this assessment may be phased in and any increase in wages may be absorbed in individual employees' overaward payments. (j) Care should be taken to ensure that work, skill and responsibility which have been taken into account in any previous work value adjustments or structural efficiency exercises are not again considered under this principle, except to the extent of any undervaluation established. (k) Where undervaluation is established only in respect of some persons covered by a particular classification, the undervaluation may be addressed by the creation of a new classification and not by increasing the rates for the classification as a whole. (l) The expression 'the conditions under which the work is performed' has the same meaning as in Principle 6, Work Value Change. (m) The Commission will guard against contrived classification and over classification of jobs. It will also consider: (i) the state of the economy of New South Wales and the likely effect of its decision on the economy; (ii) the likely effect of its decision on the industry and/or the employers affected by the decision; and (iii) the likely effect of its decision on employment. (n) Claims under this principle will be processed before a Full Bench of the Commission, unless otherwise allocated by the President. (o) Equal remuneration shall not be achieved by reducing any current wage rates or other conditions of employment. 15. Economic incapacity Any employer or group of employers bound by an award may apply to, temporarily or otherwise, reduce, postpone and/or phase in the application of any increase in labour costs determined under the principles on the ground of very serious or extreme economic adversity. The merit of such application shall be determined in the light of the particular circumstances of each case and any material relating thereto shall be vigorously tested. Significant unemployment or other serious consequences for the employees and employers concerned are significant factors to be taken into account in assessing the merit of any application. Such an application shall be processed according to the Special Case principle. Any decision to temporarily reduce or postpone an increase will be subject to a further review, the date of which will be determined by the Commission at the time it decides any application under this principle. 16. Duration These principles will operate until further order of the Commission. ______________________________________ APPENDIX B STATE WAGE CASE 2006 - IRC 5778 OF 2005 Reference: Safety Net Review - Wages, June 2005 (2005) 142 IR 1 at [159-180] Leigh, Andrew, December 2003, "Employment Effects of Minimum Wages: Evidence from a Quasi-Experiment", The Australian Economic Review, Vol. 36, No. 4; Commonwealth of Australia, "Minimum Wages in Australia: an analysis of the impact on small and medium size businesses (the minimum wages report)"; Dixon, PB, Madden, JR and Rimmer, M T, March 2005, "The Effects on the Australian Economy of the Sustained Increase in Award Wage Rates: Results from the MONASH Model", a report to the Department of Employment and Workplace Relations; Debelle, G & Vickery, J, 1998, The Macro Economics of Australian Employment, Reserve Bank of Australia Annual Conference, Vol. 1998, 15; Gindling TH & Terrell, K, May 2004, The Effects of Multiple Minimum Wages Throughout the Labour Market, IZA Discussion Paper, No. 1159. International Monetary Fund, Australia, November 2004, Staff Report for the 2004 Article IV Consultation; OECD 1997, OECD Submission to the Irish Minimum Wage Commission, Economics Department Working Papers; OECD, June 1998, "Making the Most of the Minimum: Statutory Minimum Wages, Employment and Poverty", OECD Employment Outlook; OECD Employment Outlook 2004; OECD, February 2005, Economic Survey of Australia; OECD, March 2005, Economic Policy Reforms: Going for Growth; Puhani, P, A text of the Krugman Hypothesis of the United States, Britain and Western Germany, IZA Discussion Paper, No. 764; Yuen, T, 2003, "The Effects of Minimum Wages on Youth Employment in Canada: A panel study", The Journal of Human Resources, Vol.38 No. 3 APPENDIX C STATE WAGE CASE 2006 - IRC 5778 OF 2005 Reference: Stewart (2004) (Where the reference appears in our decision the short form is given) Abowd, John M., Francis Kramarz, David N. Margolis, and Thomas Philippon (2000), "A Tale of Two Countries: Minimum Wages and Employment in France and the United States," Working paper, CREST, Paris. Brown, Charles (1999) "Minimum Wages, Employment and the Distribution of Income" in Ashenfelter, O & Card D (eds) Handbook of Labour Economics (3rd ed.) Elsevier, Netherlands 1999 Burkhauser, Richard V., Couch, Kenneth A. and Wittenburg, David C. (2000), "A Reassessment of the New Economics of the Minimum Wage Literature with Monthly Data from the Current Population Survey," Journal of Labor Economics, 18, 653-680. Card, David and Krueger, Alan B. (1994), "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania." American Economic Review, 84, 772-793. Card, David and Krueger, Alan B. (1995), Myth and Measurement: The New Economics of the Minimum Wage, Princeton University Press. Card, David and Krueger, Alan B. (2000), "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Reply," American Economic Review, 90 (5), 1397-1420. Currie, Janet and Fallick, Bruce C (1996), "The Minimum Wage and the Employment of Youth: Evidence from the NLSY," Journal of Human Resources, 31, 404-428. Dickens, Richard, Machin, Stephen and Manning, Alan (1999), "The Effects of Minimum Wages on Employment: Theory and Evidence from Britain," Journal of Labor Economics, 17, 1-22. Kim, Taeil and Taylor, Lowell J. (1995), "The Employment Effect in Retail Trade of California's 1988 Minimum Wage Increase," Journal of Business and Economic Statistics, 13, 175-182. Machin, Stephen and Manning, Alan (1994), "The Effects of Minimum Wages on Wage Dispersion and Employment: Evidence from UK Wages Councils," Industrial and Labor Relations Review, 47, 319-329. Machin, Stephen, Manning, Alan and Rahman, Lupin (2003), "Care Home Workers and the Introduction of the UK National Minimum Wage," Journal of the European Economic Association, 1, 154-180. Neumark, David, Schweitzer, Mark and Wascher, William (2000), "The Effects of Minimum Wages Throughout the Wage Distribution." NBER Working Paper 7519. Neumark, David and Wascher, William (2000), "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania: Comment," American Economic Review, 90 (5), 1362-1396. APPENDIX D STATE WAGE CASE 2006 - IRC 5778 OF 2005 Reference: OECD Employment Outlook: Boosting Jobs and Incomes (2006) Bassanini, A. and Duval, R. (2006), "Employment Patterns in OECD Countries: reassessing the role of policies and institutions", OECD Social, Employment and Migration Working Paper, No. 35, and OECD Economics Department Working Paper, No. 486, Paris. Dolado, J.J., Kramarz, F., Machin, S., Manning, A., Margolis D. and Teulings, C. (1996), "The Economic Impact of Minimum Wages in Europe", Economic Policy, pp. 319-370. Elmeskov, J., Martin, J. and Scarpetta, S. (1998), "Key Lessons for Labour Market Reforms: evidence from OECD countries' experiences", Swedish Economic Policy Review, Vol. 5, No. 2. Gregg, P. (2000), "The Use of Wage Floors as Policy Tools", OECD Economic Studies, No. 31, OECD, Paris, pp. 133-146. OECD (1998), OECD Employment Outlook, Paris. OECD (2005), Extending Opportunities: how active social policy can benefit us all, Paris. DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated.