Australia’s Fair Work Commission recently decided to scrap/ reduce penalty rates on Sunday for certain industries, and it got me thinking. I have written previously on the notion of a universal basic income (UBI), and several countries already trialling such programs. I think the idea of penalty rates is quite relevant to this discussion.
What if Australia were to scrap all penalty rates, minimum wages, etc. and replace them with something arguably much simpler – a UBI?
There is evidence that some small businesses simply can’t afford to open on Sundays (or if they can, only for limited hours) because of the cost of hiring workers at these penalty rates. At the same time, many workers depend on them to make ends meet, such as students who have no other option but to work weekends. So I wouldn’t suggest taking away workers’ penalty rates without replacing it with something equivalent – or better.
And that’s what I think a UBI (or just free government services) is. Without necessarily requiring any additional taxes to be collected from the economy, government should be responsible for making sure everyone has the means and the resources to survive – food, water, shelter, clothing, basic health care and education – via a tax system that redistributes from top to bottom, rather than outsourcing it to the private sector in the form of penalty rates.
Is this not the point of government? To step in where the private sector fails (refuses) to do something important? The government should not be required to meet private sector financial objectives. So why is the private sector being forced to meet the government’s social objectives? The private sector exists to make money and indirectly serve society, while the government exists to step in when these two goals don’t coincide, not force the private sector to achieve their social objectives via unprofitable means.
I don’t believe a UBI will destroy people’s incentives to work. I’m not talking about giving everyone a free no-questions-asked life of luxury here. I’m talking about keeping people alive and healthy, no questions asked. There are so many wonderful things in this world that cost money – 70-inch TVs, the latest iPhone 50 (or whatever number they’re up to now), overseas holidays, restaurant meals, expensive cars, beach-front holiday homes. These alone will continue to provide people with an incentive to work and earn, so that they can afford more than just the basics. We don’t need to add the threat of hunger and homelessness to create this incentive. So giving people the basics of life for free (which Australia virtually already does, just a little inefficiently) won’t destroy incentives. And even if there are a few individuals with no ambition or desire to better themselves, and are just happy to survive on this welfare and nothing more, so what? A few people gaming the system should not be enough to completely re-write the system itself and ruin it for the rest of us. And I wouldn’t be surprised if the savings in administration and interrogation of welfare recipients to determine what they ‘deserve’ would more than offset the cost of the occasional ‘bludger’.
So again, this is not about taking away from workers. And it is not about taxing society more than it already is. It’s not about how much tax we pay as a society, it’s about who pays it.
At the moment, business and industry is forced to pay this tax in the form of penalty rates, thereby distorting their usual economic decision-making. But if penalty rates and minimum wages were removed, business and industry could pay their workers only for the value of their labour, not the cost of their lives. More businesses would be able to open/ expand, the economy would grow, and naturally, government would enjoy more tax revenue. The example I gave in my earlier blog was of McDonalds – without the minimum wage, McDonalds may be able to hire more burger-flippers during busy times, and maybe even open up entirely new branches in currently-low demand areas.
And any gap that was remaining between a workers’ (potentially lower) wage and their reasonable cost of living would be covered by government support. And some industries may choose to continue to pay workers at these penalty rates anyway, if that is the only way to get them to work on weekends – which is fine. If businesses can’t afford to pay workers at the rate required to attract and retain them, perhaps they shouldn’t be in business – this is demand and supply at work. The difference is, if businesses chose to continue to pay these rates, it should be because their private incentives demand it, not because it was forced upon them legislatively at a rate that the government probably isn’t best positioned to estimate.
It may seem that this simply constitutes swapping one wage (penalty rates) for another (government support), but there is logic to it. Instead of business and industry being forced to pay the entire penalty rate, it is spread more thinly across all members of society (businesses, customers, households, etc.). Is this not fairer and more efficient – everyone contributing a little rather than a few contributing a lot? Furthermore, it will allow business and industry to more closely focus on what they are supposed to – their profitability – thereby reducing distortions on, and allowing for efficiency gains in, the private sector.
Again, the removal of penalty rates, minimum wages, etc. is only acceptable if something replaces it to allow everyone a basic standard of living – surely that should be a basic key performance indicator for any society. Is that not the whole point of society? To act as a collective, as well as individuals? If we only wanted to act as individuals, surely we should just go back to the cave.
And while the benefits may not be monumental – swapping penalty rates for a UBI is after all more of a transfer of responsibilities rather than a fresh injection – there would still be very real and worthwhile efficiency gains if it focuses our attention towards what we want to achieve, and who is best positioned to achieve it. The private sector would focus more closely on its financial objectives and the government would have a simpler and smaller number of tools with which to more directly achieve its social objectives.
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