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What Australia’s minimum wage raise means for small businesses

Australia’s decision to raise the minimum wage by 2.5% has sparked concerns among many mid-sized and small businesses. In a much-anticipated move, the Fair Work Commission last week increased the minimum wage to $20.33 per hour or $772.60 per week for adults, based on a 38-hour week.

While union leaders are convinced that the wage hike will immediately boost living conditions for many, others have warned that the decision could pose a significant threat to business and jobs. 

The Australian Chamber of Commerce and Industry (ACCI)estimated that the hike in wages — which also applies to casual junior employees and apprenticeships — will cost businesses $3.6 billion per year.

Staggered approach

Following the last year’s tradition, the commission has decided to take a staggered approach over several months for specific industries hit hard due to the COVID-19 pandemic.  While most will see the increase take effect from July 1st, 2021, general retail will be delayed until the first full pay period on or after September 1st, 2021. 

Similarly, workers in over 20 industries, including tourism, hospitality, restaurants, fitness, hair and beauty, and aviation, will not see a rise in pay until after November 1st.

Here’s the complete list of the modern awards with their operative dates:

“There will again be some delay in wage increases coming into effect in some industries, which is some acknowledgement of the ongoing risks to small businesses and jobs,” ACCI said in a statement.

“However, the staggered dates are very limited, and with just six months between increases in the retail and nine in the hospitality industries, some employers and jobs are going to be placed at unnecessary risk in what remains a highly uncertain environment.” 

Employsure, a workplace relations adviser that offers employment relations advice to small businesses voiced concerns over implementing the new law: “The staggered approach to increasing the minimum wage across specific industries may confuse employers.

“With international borders still closed for the foreseeable future, and snap lockdowns still clearly well on the cards, employers must use this time to try and preserve as much cash as they can until the COVID-19 vaccine fully rolls out and overseas travellers can enter,” Employsure said.

Scope of Impact

A 2019 report by the Australian Small Business and Family Enterprise Ombudsman found that most small businesses have net income well below the average Australian wage.

To put the SME ecosystem in context: 

  • Nearly 52% of small business owners registered with the taxation office (ATO) were individuals earning between $0 and $25,000 per annum
  • Small business and family enterprise in Australia, classified as businesses with less than 20 employees, accounted for almost 98% of businesses
  • Of the 877,744 total employing businesses, 823,551 were small businesses which constitute 93.8% of all employing businesses, and of those businesses, 627,932 were micro-businesses that employed only one to four people

The Australian Chamber of Commerce’s acting Chief executive Jenny Lambert said: “This is a bitter pill to swallow for the approximately 230,000 small and family-owned businesses which dominate these particular sectors. 

“Australians who have managed to battle on through, keep their business afloat and keep people in work now face a highly risky hike in wages – always their highest cost.”

Unfair to the unfortunate  

Mr Lambert also asserted that while a handful of businesses in certain industry sectors may be doing well, the same cannot be said for all industries.

“While our national economy has recovered well in the last few months, this bird’s-eye view does not represent what’s happening on the ground in some sectors and states,” he said.

“We face a multi-speed economy. Not only are some industries doing better than others, but some businesses in the same sector are also recovering better than others. 

“But yet again, this minimum wage decision imposes a one-size-fits-all outcome for the 625,000 businesses that are award reliant.”

The major challenge with a nationwide increase in wage is the unevenness and inconsistency, according to ACCI’s first Annual wage review report, dated March 2021. 

“When the rest of the country is open or opening, venues and hospitality businesses remain closed, international travel dependent industries and regions are facing massive economic and employment adversity, and businesses and jobs continue to be lost.” 

“It is critical that the panel continue to reject attempts to fundamentally misuse minimum wage rises to stimulate wage growth or consumption. 

“Not only will this not work, but it will also kill off jobs and businesses, and turn the multiple risks which surround this review into an actual detriment.”

Potential insolvency

Experts believe that even though the country is not facing the heat of the immediate crisis it met in 2020, far more jobs and businesses face existential threats in 2021. To make matters worse, last year’s safety measures – that constrained creditors’ ability to force a debtor company into insolvency quickly has ended.

The ACCI study finds that with the previous bankruptcy rules restored, creditors can now apply for a bankruptcy notice against a business when outstanding debts reach $10,000. The number of insolvencies has increased by 61% since February 2021.

“There are massive unknowns for jobs and small businesses, particularly in industries most directly impacted by increases in wages. 

“This includes substantial threats of insolvencies,” the study said. 

Human vs automation

Opponents of raising the minimum wage argue that the burden of small businesses with increased labour costs may prompt employers to replace low-income workers with machines.

A UK-based study by Economists Grace Lordan of the London School of Economics and David Neumark found that increasing the minimum wage significantly decreases the share of automatable employment held by low-skilled workers.

The automatable jobs include positions like supermarket checkout clerks, who can be replaced by self-service checkout cashiers, and assembly-line workers in manufacturing plants, who robotic arms can replace. 

“We find that a significant number of individuals who were previously in automatable employment are unemployed in the period following a minimum wage increase,” the study noted.

A living wage

 The Australian Chamber of Commerce and Industry review panel also found that it’s unlikely that any moderate adjustment to the minimum wage would have any discernible effect upon wealth inequality. 

“ACCI maintains that minimum wage fixation is not an effective way of addressing the needs of lower-income households.

“There is no significant work for this review to do on living standards and employee needs, save for supporting businesses and jobs.

“The tax and transfer system is far better targeted to address the actual circumstances of lower-income households and is a superior means to provide the necessary support. 

“The working illustration of two-thirds of median earnings as an illustrative proxy for a poverty line should be reviewed, and greater consideration should be given to non-wage transfers and supports. 

“Budget standards cannot in themselves be determinative of the minimum wage or an uprating of minimum award rates. 

“This remains a valid conclusion and should weigh in favour of caution and moderation in considering any further increase or increases in 2021,” ACCI concluded.

Also read: Australia’s underpayment ‘epidemic’ raises alarm for SMEs

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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