Monday, August 10, 2015
The received wisdom was well expressed by Anna McPhee, of the Retail Council: "The rebalancing of penalty rates to reflect the needs of the modern economy will mean retailers can create jobs to meet increased consumer demand, which in turn will benefit the economy more broadly."
She was responding, of course, to the proposal in the Productivity Commission's draft report on Australia's Workplace Relations Framework that Sunday penalty rates in the hospitality, entertainment, retailing, restaurant and cafe industries be cut to the same level as Saturday penalty rates.
Even the commission goes along with the received wisdom: "Excessive penalty rates for Sundays reduce hours worked, mean unemployment is higher than it needs to be, and reduce options for businesses and consumers. Trading hours are likely to be lower and capital under-utilised."
But I believe such thinking rests on a fallacy of composition, that what's true for the individual must be true for the whole.
It's not hard to see why particular business people, thinking only of the circumstances of their own business, see lower penalty rates leading to more sales, higher profits and, as a pleasant side-effect, more not-so-well-paid casual employees.
There would be some, of course, who looked no further than benefit of the lower wage rates they'd be paying even if they didn't bother opening their business for more days or longer hours than they are at present.
And, indeed, since they'd now be earning more than they were, that might be enough for some.
But let's assume the owners of the affected businesses really did want to open longer, sell more and profit more. Their fixed costs would now be spread over more sales, while their main variable cost – wages – would be lower per hour.
Question is: where would all these extra sales come from? From rivals that didn't bother opening on Sundays? That advantage isn't likely to last.
From businesses in other industries that now sold less during the week because their customers were seizing the opportunity to spend more on the weekend?
Of course, even if that were true it need be of no concern to any business person confident of being able to sell more. Their motive is to make more money and that's all a market economy expects of them.
But here's my point: just because some businesses can make more and employ more, this doesn't do much for the economy overall if their success comes at the expense of other businesses that make less and employ fewer.
When the advocates of lower penalty rates tell us that many extra jobs will be created, they're surely expecting us to take that as meaning more jobs overall, not just more jobs in some industries but fewer in others.
So let's switch to a macro or, as the commission likes to say, "economy-wide" perspective. We're told it will be great because, with more businesses open on the weekend, consumers will spend more and it's this extra spending that will create more jobs.
But how much the nation's consumers spend is ultimately constrained by their income. Are we expecting that consumers will spend more by saving less? Why would this be a good thing?
Why are we compelling employees to save 9.5 per cent of their wages if we really don't care about people saving much? (And don't mind being more reliant on foreign investment as a consequence.)
Maybe so as to spend more on weekend entertainment the nation's consumers might borrow more – on their credit cards or however. Would this be good for the economy? In any case, borrowing to boost your consumption is not something the nation's consumers can go on doing for long.
I don't believe there is much scope for us to be consuming a lot more than we are already – certainly not over the medium term. If so, then a lot of the businesses that sell more will be taking sales from other businesses.
And there's another possibility, one I suspect is quite likely: those businesses that open for longer on the weekend will sell more at the weekend, but less during the week.
To the extent that businesses achieve nothing more than spreading essentially the same amount of sales over longer opening hours – which I think is quite likely – they're likely to be worse off rather than better. The economy-wide benefits will be small, as will the net gain in employment.