Managing wage risk

In a now almost ritualised gnashing of teeth, business lobbyists descended on Canberra again last week to hear the results of their latest efforts to influence the Fair Work Australia minimum wage determination.

A quick read of the report makes it clear that Fair Work Australia is really quite unsympathetic to demands for corporate welfare. It is hard to imagine a more scathing dissection of the demands put forward by the retail and hospitality industries.

Responding to the report the Australian Retailers Association and the Australian Hotels Association effectively declared war, claiming that the new minimum hourly pay rate of $15.96 will drive their industries out of business. It does however seem quite ironic that industry lobbyists are paid to talk down the people they represent, painting them as an economic basket case.

Unfortunately for retailers, Fair Work crunched the latest ABS figures, finding no link between wage rates and the widely documented structural change being forced upon Australian retailers by the Internet. Solid profits in the hospitality sector certainly didn’t add credibility to their demand for special treatment.

Choosing different battle tactics, the ACCI announced that they were disappointed that the wage increase wasn’t smaller, taking the opportunity to remind us all that the carbon tax will smash Australian businesses in 2012. Perhaps the well funded lobbyists at the ACCI have uncovered some new meaning in some ancient Mayan prophecies.

In Australian cities, market rates apply for wages. In an era of full employment, offering the minimum wage to attract skilled labour is laughable. The minimum wage is a mirage.

There are many specialist job roles which already struggle to fill positions even when wages are offered well above market rates. In these situations lengthy expensive searches for skilled migrant workers are required, using contentious 457 visa arrangements.

Adopting a rock bottom wages strategy not only limits your ability to fill a vacant position quickly, it is a poor strategy to choose when building a productive workforce.

It is also worth considering how productive your employees will be if they are struggling to feed their families and pay basic bills. The Fair Work report details the reality of the minimum wage, indicating that government welfare and tax concessions already provide a significant portion of the income received for people on the minimum rate. Without that subsidy, market pressure on wages would be higher.

On an economy wide basis, one of the most interesting observations in the Fair Work report is the changing balance between corporate profits and wages income within the economy.

Across the entire economy in December 2011, total income from wages was 53.1% of all income, while corporate profit was 28.5%. In 2001, the corresponding figures were 54.6% for wages and 25% for corporate profit.

Perhaps this simply reflects improved productivity, but it could also be due to the popularity of outsourced labour arrangements. Using these strategies to reduce wage costs does create some major new business risks, as has been seen recently by the construction and mining industries, which rely heavily on workforce “subcontract” arrangements.

The sudden collapse of the Hastie Group is an example, as the firm was a key skilled workforce supplier to many large organisations. The unexpected collapse left their clients without specialist workers, leading to a desperate scramble by their clients to directly hire Hastie employees.

Recent events have also shown that the structuring of outsourcing arrangements is also coming under more government scrutiny. The legal costs faced by Coles are likely to end up dwarfing the pittance they saved by outsourcing trolley collection at a few stores in Adelaide.

Leaders should consider carefully how they balance productivity and wage expenses, and the levels of operational risk they are willing to take to reduce wages expense. Outsourcing and subcontracting arrangements can greatly improve your workforce flexibility, but savings can quickly evaporate when skills are in short supply.