The penalty rate dilemmas

Poor Malcolm Turnbull. All the issues he faces seem so complex. And everyone wants yes/no answers.

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Take the Penalty Rates issue for instance.

I’m reminded of the story of the Judgement of Solomon and the two women who both laid claim to the same baby. 1 Kings 3:16-28

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All Malcolm would have been able to do would have been to say that he liked babies.

The Penalty Rates issue is a fundamentally complex issue reflecting economic and social changes that reach across our society.

For most of my lifetime and certainly that of my parents and grandparents, the week was divided into two parts. The part where you worked (Monday to Friday) and the part where you didn’t  (Saturday and Sunday).

When I was a kid in New Zealand, it was pretty much unacceptable to mow your lawns on a Sunday.  You couldn’t buy petrol over the weekend and no shops were open.

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There was some work done over the weekend: on the wharves but normally only only on Saturday mornings and in wool stores work seven days a week when the wool clip was being sold.  The country desperately needed exports.

Since the 1950s, the need for weekend work and hence overtime increased and this was during the time of labour shortages and the union movement was able to extract exceptionally high concessions for people who were prepared to work during what were traditional leisure times: Saturdays and Sundays. These rates were often the time and a half and double-time rates.

There were three important economic and social changes that occurred during this time.

The first was that work on Saturdays and Sundays became increasingly common as the working week extended into the weekend with shops being open seven days a week.

The second change was that overtime rates became an essential part of the weekly take-home pay for many breadwinners. Overtime was no longer a nice little bonus every now and then, it became an essential part of the pay packet.

The third is the casualisation of the workforce. Many people, by choice or by circumstances, work less than a 40 hour week. For some, this is a very convenient way of balancing work and family responsibilities. For many of these people, being able to work when they are paid penalty rates makes it possible to balance the family budget. Changes to penalty rates has a disproportionate effect on the earning capacity of this section of the community.

All this was complicated by a massive increase in competition in the retail market.

Massive competitive changes in the commodities market market have led to increasing downward pressure on prices and on the ability of retailers to pay penalty rates during times when they are unable to increase the price of the goods i.e. they can’t charge more for their goods over the weekend when they’re paying their staff more.

Given that small businesses and retailers represent a significant proportion of the employers in Australia, it’s necessary to find a solution to this problem. It doesn’t look as if the one we have at the moment is going to work.

So the Fair Work decision really highlights the collision of some fairly large social forces.

The march towards a seven day working week will not be stopped so there will be a need to regularise wages across a 7-day working week.

It is necessary to recognise that wages for many working Australians include penalty rates for overtime and that these penalty rates are essential for maintaining their standard of living. In other words, the wages of Australians need to be considered as package, the base rate plus penalty rates. It’s naïve to think that cutting penalty rates won’t be seen as delivering a pay cut to a significant section of the community.

It’s a complex problem. The solution to the problem is most certainly not simply cutting the wages of working Australians. But the answer is also not maintaining wage rates that small businesses are no longer able to sustain.

One aspect of the problem that no one has talked about his role that the Universities play in the labour market. There has been no discussion of what proportion of labour market who are earning penalty wage rates are university students who are obliged to work over the weekend because that’s when they don’t have to go to lectures. Now that’s probably an oversimplification but as a general rule that probably applies.

So what if universities delivered lectures seven days a week and freed up their students to work on days other than Saturdays and Sundays. And also delivered lectures 48 weeks a year.

Which brings us to  the crux of the matter.

It is probably time get the penalty rate system to work differently.  We need to reward people who work more than a given period, say 40 hours a week and who work more than eight hours in a given day. We need to reward people who give up time with their families.

But we also need to look carefully at how much cost a business can bear and it’s probably time to stop saying we will pay somebody twice as much simply because they happen to be working on a Sunday. But we may have to pay them more for working on the other days as compensation.

It is a dilemma with particularly sharp horns.

Poor Malcolm Turnbull.

 

 

One man’s Currency Manipulation is another man’s Quantitative Easing

One of Donald Trump’s more frightening election campaign promises was to declare China a currency manipulator and instigate punitive tariffs against Chinese imports to America.

Now, I’m not an economist (my Masters degree in Economics at the University of New England was awarded by mistake) but to me, this particular threat is perhaps one of the most scary that he has made.

One of the more bizarre aspects about Donald Trump is that he does not understand all actions have equal and opposite reactions. In Systems Theory, we called this feedback. The Trumpster does not believe in feedback. He believes that he can do what he likes and there will be no consequences.

Unfortunately, the result of the US presidential elections will only have reinforced this view.

Nonetheless, instigating tariffs against Chinese imports will produce a reaction from China and, knowing the Chinese, probably a disproportionately strong reaction. It will also create reactions all round the world, the consequences of which Trump probably does not understand and much less considered.

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 Donald Trump indicates his understanding of international trade and economics

 In recent years, the US Administration and Federal Reserve have engaged in what is known as  “Quantitative Easing”  which is a monetary policy that effectively devalues country’s currency against that of its trading partners.

An article Quantitative Easing vs. Currency ManipulationInvestopedia on Facebook  explains the difference (or lack thereof).

If making exports more competitive through a devaluation of the currency is evidence of currency manipulation, then you could level a similar criticism against the United States for lowering the federal funds rate and the subsequent quantitative easing programs following the 2008 global financial crisis. Both tactics put downward pressure on the dollar and consequently the exchange rate, making U.S. exports more attractive against international competitors.

The effect is to make the quantitative easer’s exports less expensive while making their trading partners more expensive. Effectively, it means that  large, economically powerful countries like the US can solve their financial problems by making other people pay for them.

This is what China and the US have both been doing. There is a difference in that the Chinese yuan is not floated like the $US and the $A. Many market analysts believe that the Chinese actions are simply bringing the currency back closer to true market value. Levelling the playing field if you like.

Nonetheless and regardless of what you call it, both Quantitative Easing and Currency Manipulation are monetary policies that both China and the US have used and certainly will use in future.

Ranting against the Chinese may go down well with the domestic electorate  but it demonstrates a fundamental lack of understanding about international economics and trade.

A lot has been written about President-elect Trump’s character failings. The worry is that  they pale  into insignificance against his ignorance of economics, fiscal and monetary policy.

Why is Mediabank’s profit good news?

The Age reports: Tough new hospital contracts and better claims management underpinned a 58 per cent jump in Medibank Private’s interim profit to $227 million ahead of the insurer’s unveiling of a new chief executive.

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Smiles all round. A nice healthy dividend for shareholders.

But hold on.

Why is this windfall profit not being returned to policyholders?

Because that’s the point of privatisation. Someone makes a profit out of the premiums that ordinary Australians pay to ensure that they have adequate health cover. And that’s on top of the Medicare levy and the income tax  that all Australians pay.

Every time we privatise a government owned business, we reinforce the inequalities of wealth in this country. The profits from privatisation go to the people with money to buy shares. So the rich, get richer, at the expense of the not so rich.

Writing in The Age, Gareth Hutchens cites an International Monetary Fund report, called Causes and Consequences of Income Inequality: A Global Perspective, that argues “that income inequality and income distribution both matter for economic growth.   

It said widening income inequality had become so bad in advanced economies that policymakers need to focus on ‘‘the poor and the middle class’’ if they want to boost economic growth globally.

It said reducing tax expenditures that benefit high-income groups the most, and removing tax relief – such as low taxation of capital gains – would ‘‘increase equity and allow a growth-enhancing cut in marginal labour income tax rates in some countries’’.”

Yet, Treasurer Scott Morrison is arguing for tax cuts to avoid the problems of bracket creep. In a sign so typical of the Turnbull government, Finance Minister Mathias Cormann said that wages growth was the lowest since 1960, so bracket creep wasn’t a problem.

The  first problem for the Turnbull government is that all the viable solutions for solving the deficit problem involve decreasing tax concessions to the wealthy, their natural constituency.

A little bird has said that when it comes to ideas of tax reform, the question that is asked in the corridors of power is “How would this affect Malcolm?”  If the answer is “badly” then the idea is dropped.

The second problem is that the Labor Party and Bill Shorten have capitalised on the Government’s inertia and captured the high ground in the tax debate. Any action now by the Turnbull Government on will look as if it is adopting Labor’s’ policies.

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Treasurer Scott Morrison: both hands empty on tax reform  (photo  Andrew Meares)

You are not better off renting.

The Age headline “The RBA says you’re probably better off renting” is misleading. Without having read the whole report and relying on what was printed in the paper, it would appear that the headline should have been “Under some circumstances you might be better off renting.” Owners break even with renters if the real growth rate in house prices is slightly below 2.5% and it has been above that for the last 60 years.

What the calculations do not appear to have included is what happens to renters when they retire. If they are able to retire on their final average salary then the financial position will be unchanged and presumably they can continue to pay the rent. If however, their superannuation/pension is less than their working salary, they could be in trouble.

Let’s assume a lifetime inner-city renter is paying $500 a week rent in today’s prices. That’s $25,000 a year. To cover the rent, they would need a superannuation investment of around $300,000 (assuming an 8% return on the stock market).

While figures on superannuation balances vary immensely depending on methodology, the ABS estimates that people who are about to retire have on average around $150,000 in their superannuation accounts. An 8% return on this investment is $12,000 a year. Not enough to pay the rent.

Fortunately, most people do not take the advice that is implied in this particular article. Over 75% of all retirees have paid off their mortgage and are essentially debt free and rent free.

Unfortunately, the vast bulk of these people will not have not invested superannuation to live comfortably. A 2013 Deloitte report indicated that to “live comfortably” and individual needs around $600,000 invested in superannuation which is well short of the current average balance.