Peter Strong: Why the unions’ proposed wage increase will see job cuts and small business collapses

The Australian Council of Trade Unions (ACTU) thinks it’s still the 1970s. They aren’t aware of the internet or the gig economy or productivity issues or globalisation.

They believe our minimum pay needs a big increase when it is already one of the highest minimum wages in the world. They carry on about wages when ours are in the top 10 of average wages in the world. For small businesses, the wage increase for the last two years has been 6.8% (3.3% and then 3.5%) and CPI has been approximately 4% so wages are increasing ahead of inflation. They claim wages should be 60% of the median wage. If this was the case, every year the median wage would go up, and every year wages would go up substantially to chase the median figure. Inflation would increase to high levels we haven’t seen since the 1970s.

They claim business profits are 40%. We wish. That may relate to the mining sector but not to small businesses. And small businesses and their employees would be hit the hardest by any pay increase.

If the ACTU continues to focus on ideology and emotional scaremongering it will create trouble for our economy. We in small business prefer to focus on reality and practicality for everybody.

So, let’s investigate what a 10.7% pay increase means.

Firstly, it isn’t 10.7%, as there are on-costs that have to be added (including superannuation, leave provisions, long service leave, increased workers compensation provisions and the like). This will add an extra 25% in business expenses, which means the true cost to business will be 13.4% over two years — or about three times the expected CPI for that period.

Given that money doesn’t grow on trees, how does a small business deal with an increase in operating costs?

Well, for many it means they simply can’t. Figures from the Australian Taxation Office tell us about 45% of Australia’s 2.2 million small businesses did not make a profit in the previous financial year. Not all of those businesses employ others but the ones that do will be forced to put off staff or close. There is no other choice.

The remaining small businesses who employ others will need to revisit their business plan and review their cashflow projections. Can the business still continue to be viable or sustainable? For most small business owners, profit margins are extremely minimal and are actually their own wages. What will they be able to take home to the family after paying staff? What will they have left after all their business expenses?

As a simple example, if a business employs, say, five staff, then the increase in costs for the business would be a little over $25,000 a year. There are several options.

The business owner could take a cut of $25,000 in their own take-home pay. If the business owner was a highly successful employer, living high on the hog then maybe they could absorb the increase, but the average income of small-business owners is a little bit more than the average income of Australian workers or less. So, if they took a hit for their employees, that would have a big impact on their own family and their own health. An unhealthy, unhappy business owner isn’t what employees want, is it?

The business owner could cut the hours of the employees. That would equate to cutting 4.5 hours of work per day from the five employees. They either all lose some pay or one of them receives a substantial cut in pay or hours of work. Nearly all employers I know dread telling their employees they are cutting their hours — or worse. Employees also dread being told that sort of bad news — but a cut in hours is better than losing a job.

The business owner could increase the price of the services or goods they sell – which means the increased business costs would be passed onto Australian consumers. But the capacity to pass on these costs varies between industries, with industries such as general retail facing stiff competition from internet retailers and the big retail chains — the result being that any increase in the cost of their goods will make the business less competitive and will steadily kill off the business.

Those small businesses that are fortunate enough to be able to lift their prices to accommodate the wage increase will obviously do so but their customers will be required to pay more for their goods and services — at a rate that is more than three times the annual rise in the cost of living.

So, basically, workers will be paid more but will then have to pay more for the products and services that they purchase from Australian businesses — resulting in a zero benefit.

The ACTU has suggested small business will benefit as the pay rise will send more money into the economy and small businesses would have a cash influx as the consumer spends their new found wealth. But if that was true why stop at a 13.4% increase? Why not go the whole hog and make it 100%?

The answer is simple. This type of economics only works in ideological textbooks — not in the real world. If you increase wage costs then businesses must increase prices, reduce employment, or do both.

The reality is many small businesses simply cannot afford to pay more.

The ACTU’s proposed ‘living wage’ increase is three times the projected CPI increase for the next two years. It will almost certainly result in cost of living increases, a widespread loss of jobs or small business collapses — or more likely, a combination of both.

Our message is writ large: pay rises are okay but they must be sensible. Australia must operate in the real world. The business community and the union movement must work collaboratively to improve labour force productivity and the international competitiveness of Australian businesses, thereby creating fair paying jobs for all Australians. Let’s focus on vocational training for a start.

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