Topic: Relating 5 economic theories to a case study

Topic: Relating 5 economic theories to a case study
Pages: 8, Double spaced
Sources: 10
Order type: Essay
Subject: Economics
Style: Harvard
Language: English (U.K.)
Order Description
Length and/or format: 1500 words
Purpose: To develop your familiarity with the language and tools of economic analysis and reasoning by critically analysing a contemporary issue.
On 23 February 2017, the Australian Fair Work Commission (AFWC) handed down a decision to vary certain penalty rate provisions in some awards for the hospitality, restaurant and retail industries. Workers in fast food or hospitality will have Sunday penalty rates reduced by 5 per cent this year, and 10 per cent in both 2018 and 2019 bringing the final rate down to 125 and 150 per cent respectively. Retail or pharmacy sector workers will have their take-home Sunday pay cut by 5 per cent this year, but then it will reduce by a further 15 per cent every year until 2020.
Do you believe that this decision will harm or help the Australian economy in general? Use five economic theories you have studied in this unit to justify your answer.
The textbook that needs to be referred to is “Essentials of Economics 3” Hubbard et al. (2016) ISBN: 978-1-4860-2284-7

PENALTY RATES REDUCTION WILL ALLOW LONGER HOURS AND MORE HIRING, EMPLOYERS SAY (http://www.dailytelegraph.com.au/news/nsw/penalty-rates-reduction-will-allow-longer-hours-and-more-hiring-employers-say/news-story/cf7507c6407bd1aede724f56cbb3cc30)
NEARLY one million workers copped a pay cut yesterday as the Fair Work Commission slashed Sunday penalty rates — a landmark ruling that employers praised as making it cheaper for shops, cafes and restaurants to stay open longer and hire more staff.
Retail staff will now be paid time-and-a-half instead of double time to work Sundays, while penalty rates for hospitality employees will drop from 175 per cent to 150 per cent.
The changes will be phased in from July 1.
Unions claim nearly one million workers will lose up to $6000 a year as a result of bringing Sunday penalty rates roughly in line with Saturday rates. But NSW Business Chamber chief executive Stephen Cartwright said bosses would use the savings to create more jobs. For the decision
“The adjustment in penalty rates for Sundays means your favourite local businesses are able to remain open and be fully staffed,’’ he said.
George Kanellos, owner of the Rose Hotel in Chippendale, welcomed the changes.
“As a business owner it means we can hire more staff and have more working on Sundays which works best for customers,” he said.
( my comments : this means that creating new jobs , increasing employment rate , which means increase in GDP,….. Look textbook page 401 ,
“Changes to penalty rates wasn’t something we were (pleading for) for but if it’s happening and working in our favour it’s good.
Nicole Bann-Murray, who owns the Peloton Espresso Bar in Port Macquarie, said high penalty rates forced her to close on Sundays but she could now afford to stay open all weekend.
Michael Newton-Brown, who owns the chain of Leisures Shoe Boutiques, said he opened with a skeleton staff on Sundays — but would now hire more workers.
“Someone will get extra hours, or we’ll be able to bring on an extra person in the middle of the day,” he said.
Australian Chamber of Commerce and Industry chief executive James Pearson said penalty rates meant small businesses “struggled’’ to trade on weekends.

“They’ve been given a green light to offer longer working hours, stay open longer, provide better service to customers and create more jobs,’’ he said.
The Australian Retailers Association said penalty rate cuts would shave 4 per cent to 5 per cent from retailers’ total wage bills.
Harvey Norman boss Gerry Harvey said he doubted he would hire more workers to work on Sunday because “even though the rate has come down it’s still very expensive”.
“It’s not going to make much difference,” Mr Harvey told The Daily Telegraph.
Australian Council of Trade Unions president Ged Kearney said workers would have to make up for the pay cuts by working longer hours or extra shifts.
“We are on the way to seeing a whole class of working poor in this country,” she said.
We do not accept that cutting people’s pay will have any positive benefit to their standard of living or the economy.”
National Union of Students president Sophie Johnston said the penalty rate cuts would put “massive stress and pressure” on university students who rely on weekend work.
“A lot of students are living out of home and trying to support themselves and they are already living below the poverty line,” she said.
University student Georgia Nash, 20, has planned her studies so she can work on weekends to get penalty rates at a Paddington fashion store and has concerns how the changes will affect her bank balance.
“For those to be going down for casual work by 25 per cent it’s not great, it kinds of hurts,” she said.

Delivering the decision, FWC president Iain Ross said the wage cuts were “likely to have some positive employment effects”.
He said high penalty rates had led employers to restrict trading hours, minimise staff levels and reduce customer service.
“Reducing the public holiday penalty rate will increase employment and have a number of positive effects on business,” he said.

Penalty rates will not reduces prices for consumers (http://thenewdaily.com.au/money/2017/02/24/consumers-sunday-penalty-rates-australia/).
Employers admitted the reduction in Sunday penalty rates would not offer consumers lower prices, a crucial clause in the Fair Work Commission’s ruling has revealed.
In paragraph 632 of the FWC’s full decision, it states that the notion of lower wage costs leading to lower prices, increased demand and increased labour was “not supported” by “any” of the employers who presented submissions.
This clause runs contrary to the commission’s argument that the real winners of the decision are the consumers, claiming they would “benefit from more convenient access to services and in some cases lower prices”.
The commission ruled yesterday to reduce Sunday penalty rates for hospitality workers from 175 per cent to 150 per cent, while fast-food workers’ rates will drop from 150 per cent to 125 per cent.
Retail workers face a cut from 200 per cent to 150 per cent for Sunday work.
Workers from the hospitality, retail, fast food and pharmaceutical industries responded with outrage, as for many Sunday staffers the decision meant a pay cut.
Griffith University professor of employment relations David Peetz told The New Daily that when he visited New Zealand a few months ago, a country with no penalty rates, he observed that the younger and less experienced were attracted to Sunday work. ( no penalty rate no skilled workers or no incentive for work)
“Arguably, more senior staff won’t be as attracted to Sunday work with a reduced penalty rate, so I think we will see a higher proportion of younger and lower-skilled workers on Sundays,” Professor Peetz said.
“They’re saying the decision will increase opening hours on a Sunday, but an increase in hours overall would rely on spending overall. I’m not convinced. Nor am I convinced businesses will offer a larger range of services to customers.”
Professor Peetz believed businesses would compensate for any additional hours open on a Sunday, by reducing their opening hours on weekdays such as Mondays.
“Likewise, if people spend more on a Sunday, we might see a reduction in spending on other days of the week,” he said.
But other experts maintain the impact of the penalty rates decision is largely positive.
University of Canberra’s Phil Lewis, director of the Centre for Labour Market Research, said the reduction would enable smaller businesses to take on more employees.
“Some smaller businesses pluck staff right down to the bare minimum on a Sunday or don’t open at all. This will give consumers more choice,” he said.
“Even with the reduction, Sunday rates are still substantially higher than the normal rate. The award rate is well above what should attract people to work on Sundays.”

Wider economic impact
University of Newcastle’s Bill Mitchell, director of the Centre of Full Employment and Equity, told The New Daily the reduced penalty rates could spiral into a rise in individual insolvencies.
The leading economics researcher said the ruling was a “self-defeating strategy” that would lead to less consumer demand and a rise in unemployment.
“I don’t believe for a second that penalty rate cuts will cause prices to drop,” Professor Mitchell said.
“The bottom line is that when you start hacking into people’s wages, they stop spending.
“Most of us have contractual commitments, like mortgage and credit card expenses, and I think what we’ll see is a rise in insolvencies among low-income earners who rely on additional casual shifts to stay afloat.
“They will lose their houses, and the lot.”

Penalty rate cuts are bad for the economy, say 78 experts (http://thenewdaily.com.au/money/work/2017/04/07/penalty-rates-economists-letter/).
Seventy-eight Australian economists have signed an open letter criticising the Fair Work Commission’s decision to slash penalty rates.
The letter, written by Stephen Koukoulas, Jim Stanford and John Quiggin, warned the wage cut will hurt vulnerable groups and be a blow to the economy and government tax revenue, all without any solid evidence of a boost to employment.
Dr Koukoulas, former economic advisor to Julia Gillard, told The New Daily he was surprised by the strong reaction. “It’s really something that’s struck a nerve in the economics profession and in the general community.”
The Commission decided on February 23 to cut penalty rates for Sunday work in the retail, hospitality, fast food and pharmacy industries, where workers do not have an enterprise bargaining agreement (EBA).
The key argument put forward by business groups was that the wage cut would create jobs, which the letter directly contradicted.
“While it is doubtful that lower penalty rates will result in any measureable increase in total employment in the retail and hospitality industries, there is no doubt that this decision will reduce incomes for some of the most insecure and poorly-paid workers in the economy,” the economists wrote.
“Statistical data confirms that the retail and hospitality workforce is disproportionately reliant on women, immigrants, and youth: groups which already earn below-average incomes and are already likely to face precarious, unstable work arrangements.
“By reducing wages for this low-income segment of the workforce, lower penalty rates would incrementally widen income inequality in Australia, and exacerbate its varied economic and social consequences. It would also undermine government fiscal balances, by both reducing tax revenues and increasing welfare payments.”
During their review of the economic literature, Dr Koukoulas and his fellow authors found “no strong link between the level of wages or wage cuts and an improvement in the labour market, which goes to the question: why did they make that decision?”
Instead of boosting jobs in affected sectors, Sunday employment could instead cannibalise working hours from Monday through Saturday. Or workers might simply supply less of their labour, Dr Koukoulas said.
“We consumers only spend X dollars per week. It doesn’t mean we’re going to spend any more.”
One of the big economic problems the Reserve Bank is currently struggling with is that households, which contribute roughly half of Australia’s gross domestic product (GDP), aren’t spending enough, as recent retail data showed. This is reflected in below-target inflation (1.5 per cent), sluggish economic growth (2.4 per cent) and record-low wage growth (1.9 per cent). Important to focus chapter 12 GDP and the main components which one of them householde spending , talk about the economic growth throw GDP increase.
This makes any blow to spending power, via wage cuts in the absence of new jobs, a serious threat to economic growth and government revenue, Dr Koukoulas told The New Daily.
“There’s no two-ways about it. We have had a very soft demand side to the economy, given spending’s been weak, and that’s the lion’s share of the economy.
“We’ve been struggling to get GDP anything above 2.5 per cent. In fact, we haven’t really sustained that for several years now. And wage cuts don’t seem to be the thing that’s going to help that along.”

Penalty rate change: The arguments for and against (http://www.abc.net.au/news/2017-02-23/the-cases-for-and-against-changes-to-penalty-rates/8295872).
Arguments for the change
• It will allow employers to hire more staff
• More hospitality venues will be able to operate on Sundays
• It will provide a better experience for customers with more staff and availability of entertainment and hospitality venues
• Changes in technology and lifestyles mean we now live in a much more 24/7 world, where consumer expectations are greater
• Businesses would make more money from the increased opening hours and increased staff levels
• Prices could come down (not having to pay extra for eating at a restaurant on a Sunday)
• A portion of people who work in hospitality study Monday to Friday, so working on Sunday is not as much of an inconvenience.

Small businesse
Some argue they can’t open on Sundays due to the high cost of wages for employees.
Others say it would allow them to employ more people if the penalty rate was dropped.
Russell Zimmerman from the Australian Retailers Association welcomed the news and said it would ensure there were more jobs available within the retail industry.
“For the people we represent, our retailers have told us quite clearly that they will be employing more people where they are already employing people on a Sunday and where they have shops closed on a Sunday, they will look at reopening the shops on a Sunday to ensure more employment throughout the industry,” he said.

Arguments against
It will take money directly from the pockets of people who work on Sundays, many of whom might already live week to week
There are no guarantees employers will hire more staff
The double pay is fair compensation for missing family events, playing sports and leading a normal social life
Businesses like restaurants and cafes already have a high growth rate
Those who were on double time on Sundays will be less likely to put their pay cheques back into the economy if they have to tighten their belts
Wage cuts reduce income, and therefore, spending
Casual employees with children will have less time at home

Who didn’t want the changes?
Unions:
This morning Australian Council of Trade Unions president Ged Kearney slammed the decision.
“Today we have had a decision from the Fair Work Commission to cut the pay of the lowest paid workers in this country from up to $6,000 a year,” she said.
“Cleaners, hospitality workers, retail workers, people who don’t earn a fortune are going to have their pay … cut off — everyday people.
“This decision will have a massive impact on household budgets of so many families. Nearly a million workers will be affected by this pay cut. Their families and their budgets and their livelihoods.”
Workers:
The changes will mean a pay cut for many workers who work full-time and part-time in the above industries.
It could also lock out some casuals from working on Sundays, as full-time and part-time staff will now be cheaper to employ on those days.

About GDP (http://www.investopedia.com/university/releases/gdp.asp).
The gross domestic product (GDP) is a comprehensive scorecard of the country’s economic health. As an aggregate measure of total economic production for a country, GDP represents the market value of all goods and services produced by the economy during the period measured, including personal consumption, government purchases, private inventories, paid-in construction costs and the foreign trade balance (exports are added, imports are subtracted).
GDP consists of the total value of the nation’s production and is made up of purchases of domestically produced goods and services by individuals, businesses and the government.

The below source: https://mckellinstitute.org.au/app/uploads/McKell-Institute-The-Impact-of-the-Fair-Work-Commission%E2%80%99s-Penalty-Rates-.pdf.

penalty rate changes in the Retail Award
The Fair Work Commission has determined that the Sunday and public holiday penalty rates in the Retail Award change from the first full pay period starting on or after 1 July 2017 (ppc 1 July 2017).
This FWC decision is currently under judicial review in the Federal Court. We will monitor these proceedings and provide updates if any outcomes arising from this review affect these rates of pay.
Public holidays
Full-time and part-time employees
From ppc 1 July 2017, full-time and part-time employees get paid 225% of their base pay rate for work on a public holiday.
Casual employees
From ppc 1 July 2017, casual employees get paid 250% of their base pay rate for work on a public holiday. This rate includes their casual loading.
Public holiday
Full-time and part-time employees
From ppc 1 July 2017, full-time and part-time employees get paid 225% of their base pay rate for work on a public holiday.
Casual employee
From ppc 1 July 2017, casual employees get paid 250% of their base pay rate for work on a public holiday. This rate includes their casual loading.
Sunday work
Full-time and part-time employees

Full-time and part-time employees who aren’t shiftworkers get paid the following percentages of their base pay rate.

Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 195%
1 July 2018 to 30 June 2019 180%
1 July 2019 to 30 June 2020 165%
1 July 2020 onwards 150%
Casual employees

Casual employees who aren’t shiftworkers get paid the following percentages of their base pay rate. These rates include their casual loading.

Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 195%
1 July 2018 to 30 June 2019 185%
1 July 2019 onwards 175%

The Fair Work Commission (FWC) has determined that the Sunday and public holiday penalty rates in the Fast Food Award change from the first full pay period starting on or after 1 July 2017 (ppc 1 July 2017).
Public holidays
Full-time and part-time employees
From ppc 1 July 2017, full-time and part-time employees get paid 225% of their base pay rate for work on a public holiday.
Casual employee

From ppc 1 July 2017, casual employees get paid 250% of their base pay rate for work on a public holiday. This rate includes their casual loading.
Sunday work
Full-time and part-time employee
Level 1 full-time and part-time employees get paid the following percentages of their base pay rate.
Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 145%
1 July 2018 to 30 June 2019 135%
1 July 2019 onwards 125%
Level 2 and Level 3 full-time and part-time employees continue to get paid 150% of their base pay rate for work on Sundays after 1 July 2017.
Casual employees

Level 1 casual employees get paid the following percentages of their base pay. These rates include their casual loading.

Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 170%
1 July 2018 to 30 June 2019 160%
1 July 2019 onwards 150%

Penalty rate changes in the Hospitality Award
Sunday work
Full-time and part-time employees
Full-time and part-time employees get paid the following percentages of their base pay rate.
Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 170%
1 July 2018 to 30 June 2019 160%
1 July 2019 onwards 150%

Penalty rate changes in the Pharmacy Award
Sunday work
Full-time and part-time employees
Full-time and part-time employees working from 7am to 9pm get paid the following percentages of their base pay rate.
Effective period Penalty rate
ppc 1 July 2017 to 30 June 2018 195%
1 July 2018 to 30 June 2019 180%
1 July 2019 to 30 June 2020 165%
1 July 2020 onwards 150%

Penalty rate changes in the Restaurant Award
Full-time and part-time employees
From ppc 1 July 2017, full-time and part-time employees get paid 225% of their base pay rate for work on a public holiday.
Time off in lieu
From ppc 1 July 2017, full-time and part-time employees can agree to get paid 125% of their base pay rate for work on a public holiday instead of the full 225% penalty rate if:
• equivalent time is added to their paid annual leave, or

• they take one day of paid time off in the same week as the public holiday.

Compensating differentials : higher wages that compensate workers for unpleasant aspects of a job.( textbook page 291)

The supply of labour :
https://open.lib.umn.edu/principleseconomics/chapter/12-2-the-supply-of-labor/.

The demand for labor is one determinant of the equilibrium wage and equilibrium quantity of labor in a perfectly competitive market. The supply of labor, of course, is the other.
Economists think of the supply of labor as a problem in which individuals weigh the opportunity cost of various activities that can fill an available amount of time and choose how to allocate it. Everyone has 24 hours in a day. There are lots of uses to which we can put our time: we can raise children, work, sleep, play, or participate in volunteer efforts. To simplify our analysis, let us assume that there are two ways in which an individual can spend his or her time: in work or in leisure. Leisure is a type of consumption good; individuals gain utility directly from it. Work provides income that, in turn, can be used to purchase goods and services that generate utility.
The more work a person does, the greater his or her income, but the smaller the amount of leisure time available. An individual who chooses more leisure time will earn less income than would otherwise be possible. There is thus a tradeoff between leisure and the income that can be earned from work. We can think of the supply of labor as the flip side of the demand for leisure. The more leisure people demand, the less labor they supply.
Two aspects of the demand for leisure play a key role in understanding the supply of labor. First, leisure is a normal good. All other things unchanged, an increase in income will increase the demand for leisure. Second, the opportunity cost or “price” of leisure is the wage an individual can earn. A worker who can earn $10 per hour gives up $10 in income by consuming an extra hour of leisure. The $10 wage is thus the price of an hour of leisure. A worker who can earn $20 an hour faces a higher price of leisure.
Suppose wages rise. The higher wage increases the price of leisure. We saw in the chapter on consumer choice that consumers substitute more of other goods for a good whose price has risen. The substitution effect of a higher wage causes the consumer to substitute labor for leisure. To put it another way, the higher wage induces the individual to supply a greater quantity of labor.
Faced with the inequality in Equation 12.6, an individual will give up some leisure time and spend more time working. As the individual does so, however, the marginal utility of the remaining leisure time rises and the marginal utility of the income earned will fall. The individual will continue to make the substitution until the two sides of the equation are again equal. For a worker, the substitution effect of a wage increase always reduces the amount of leisure time consumed and increases the amount of time spent working. A higher wage thus produces a positive substitution effect on labor supply.
But the higher wage also has an income effect. An increased wage means a higher income, and since leisure is a normal good, the quantity of leisure demanded will go up. And that means a reduction in the quantity of labor supplied.
For labor supply problems, then, the substitution effect is always positive; a higher wage induces a greater quantity of labor supplied. But the income effect is always negative; a higher wage implies a higher income, and a higher income implies a greater demand for leisure, and more leisure means a lower quantity of labor supplied. With the substitution and income effects working in opposite directions, it is not clear whether a wage increase will increase or decrease the quantity of labor supplied—or leave it unchanged.
The figure below illustrates the opposite pull of the substitution and income effects of a wage change facing an individual worker. A janitor, Meredith Wilson, earns $10 per hour. She now works 42 hours per week, on average, earning $420.
Figure 12.7 The Substitution and Income Effects of a Wage Change

Now suppose Ms. Wilson receives a $5 raise to $15 per hour. As shown in Figure 12.7 “The Substitution and Income Effects of a Wage Change”, the substitution effect of the wage change induces her to increase the quantity of labor she supplies; she substitutes some of her leisure time for additional hours of work. But she is richer now; she can afford more leisure. At a wage of $10 per hour, she was earning $420 per week. She could earn that same amount at the higher wage in just 28 hours. With her higher income, she can certainly afford more leisure time. The income effect of the wage change is thus negative; the quantity of labor supplied falls. The effect of the wage increase on the quantity of labor Ms. Wilson actually supplies depends on the relative strength of the substitution and income effects of the wage change. We will see what Ms. Wilson decides to do in the next section.
An increase in income will increase the demand for leisure, reducing the supply of labor. We must be careful here to distinguish movements along the supply curve from shifts of the supply curve itself. An income change resulting from a change in wages is shown by a movement along the curve; it produces the income and substitution effects we already discussed. But suppose income is from some other source: a person marries and has access to a spouse’s income, or receives an inheritance, or wins a lottery. Those nonlabor increases in income are likely to reduce the supply of labor, thereby shifting the supply curve for labor of the recipients to the left.

The Labor Supply (https://sites.hks.harvard.edu/fs/gborjas/publications/books/LE/LEChapter2.pdf) .
The predicted relation between hours of work and the wage rate is called the labor supply curve. Figure 2-11 illustrates how a person’s labor supply curve can be derived from the utility-maximization problem that we solved earlier.

FIGURE 2-11 Deriving a Labor Supply Curve for a Worker The labor supply curve traces out the relationship between the wage rate and hours of work. At wages below the reservation wage ($10), the person does not work. At wages higher than $10, the person enters the labor market. The upward-sloping segment of the labor supply curve implies that substitution effects are stronger initially; the backward-bending segment implies that income effects may dominate eventually

The below source : http://www.abc.net.au/news/2017-02-23/weekend-penalty-rates-fair-work-commission-decision/8295758.

“The immediate implementation of the variations to Sunday penalty rates would inevitably cause some hardship to the employees affected, particularly those who work on Sundays,” Justice Ross said.
“We have concluded that appropriate transitional arrangements are necessary to mitigate the hardship caused to employees who work on Sundays.
“We have not reached a concluded view as to the form of those arrangements.”
Casual workers in the retail and fast-food industries will also see their pay cut but rates for casuals in hospitality will remain the same.
The public holiday penalty cuts will come into effect on 1 July 2017.
The Fair Work Commission has not yet decided when the Sunday rate cuts should come into effect, but indicated it should be within a year.
Russell Zimmerman from the Australian Retailers Association said he was “very happy” with the result and businesses would now be able to employ more weekend staff.
“There are a lot of retailers who don’t open at the moment and it will give them an opportunity to open,” he said.
“Those people who believe they are going to be affected may well find, I believe they will find, they will be offered extended hours.”
The commission noted there was a higher level of “disutility”, or inconvenience, for employees to work on Sundays than Saturdays, but said it was not as bad as in the past.
ACTU president Ged Kearney said Prime Minister Malcolm Turnbull needed to intervene or he would “forever be remembered as the Prime Minister who oversaw an attack on the wages of the lowest-paid people in our economy”.
“How realistic is it to ask a worker to cut their pay by $6,000 a year?” Ms Kearney said.
Opposition Leader Bill Shorten said workers had been “kicked in the guts”.
“We are going to do our best to convince the Fair Work Commission not to implement this decision,” he said.
Employment Minister Michaelia Cash said the decision would help unemployed people find work.
“This will have a positive impact on many of the employers who will now be able to open on a Sunday and offer more employment, in particular to those who are unemployed or underemployed,” she said.
“I am very disappointed that the unions and the Labor Party are already indulging in a scare campaign.”
Greens MP Adam Bandt said the cuts were a “body blow” to people who relied on penalty rates to make ends meet.
“Coffees won’t get any cheaper on Sunday but young people will find it harder to pay the rent,” Mr Bandt said.