Inception

3.3.1 Various approaches to defining low pay

What is meant by ‘low pay’? As there is no objective measure, many different definitions and ways of characterizing low pay are used in the international empirical literature. The chosen approach depends greatly on the aim and extent of the undertaken research, the data available and the policy implications relating to the country or countries studied.

Webb, Kemp and Millar (1996) suggest there are two main conceptual frameworks used in studies of low pay. First, low pay can be considered as a labour market issue relating to the remuneration for work done for each individual. Under this framework, the issues that are important relate to fairness and equity in the labour market for the individual. Another way of considering low pay relates to the issue of needs and the ability of a person to remain above some subsistence level of income. This framework is generally used to investigate issues of poverty among individuals and takes into account the household circumstances of those under study.

The analyses undertaken in this thesis relate to the labour market concept of low pay. In the international empirical literature, there are three main approaches used to define low pay. The absolute wage approach defines low pay relative to some arbitrarily chosen rate of pay. The relative wage approach ties the definition of low pay to some arbitrary percentage of the wage distribution and the third approach uses some other related individual characteristics to define the low paid group.

The absolute wage approach defines low paid workers as those who earn below some chosen threshold wage level. In many international studies, the threshold level has often been chosen to reflect some poverty or subsistence level of wages. In Australia, the absolute wage approach has been used in a number of studies including Mitchell (1999), Harding and Richardson (1998) and Richardson and Harding (1999), but has been chosen in consideration of Australia’s system of minimum wages to reflect a low wage and not

necessarily to specify some level of subsistence wage. For the UK, Webb, Kemp and Millar (1996) have also used this approach to define low pay.

The relative wage approach defines low pay relative to some chosen threshold level in the earnings distribution. For example, a common definition used in studies is that a worker is low paid if they are earning below the 20th percentile in the earnings distribution. This approach has been used by Gregory and Elias (1994) for UK workers and Contini, Filippi and Villosio (1998) for Italy. It however does not allow for any change in the percentage of persons regarded as low paid over time. Another common relative wage approach which overcomes this problem defines the low paid group relative to the median or mean of the earnings distribution. This has the advantage of moving the low pay threshold over time in line with changes in the distribution of earnings.

Examples of the relative wage approach are particularly common to international comparisons of low pay where the most used threshold is two thirds of the median of the hourly earnings distribution. Studies that have used this approach include Eardley (1998) for Australia and Keese, Puymoyen and Swaim (1998) in an international comparison and Sloane and Theodossiou (1998) for UK workers.

Another approach used in empirical work identifies the low pay group according to some other closely related variable or variables. Some studies investigate the experiences of those who have the lowest education levels or those who are in the lowest skilled occupations. For example, in US studies, low paid workers have been defined as those whose highest education is a high school degree or less (Gladden and Taber 1999). Another example is a study by McKnight (1998) who defines low pay for the United Kingdom as those who work in particular low skilled occupations. A limitation of this definition is the heterogeneous nature of the group under study. Whereas many low paid workers have low education levels, they may also be persons who have acquired other labour market skills (such as on-the-job training) and would not be considered as low paid or of interest in terms of policy.

Regardless of the approach, an important issue that arises in defining low pay relates to the choice of earnings measure. Earnings can be measured by the hour, week or even annually. Weekly and annual earnings are the product of an hourly pay rate and weekly hours worked. Changes in weekly earnings over time therefore may reflect changes in hours worked and/or changes in the hourly pay rate. Most studies therefore define low pay in terms of hourly pay rates. The hourly pay rate reflects the level of remuneration for skill, training, productivity and risks undertaken in a job.

In summary, there have been many different definitions used in the literature to define low pay and each in some sense is arbitrary. While no one definition of low pay can be considered as the correct approach, it is also true that there is substantial correlation between the various measures of low pay.

3.3.2 The definition of low pay

In this thesis, low pay is defined using an absolute wage approach. Adults are defined as being low paid if their gross hourly rate of pay was less than or equal to $10 at September 1994.5 The level is maintained relative to the earnings distribution for both full-time and part-time wage and salary earners, by indexing the threshold according to the change in the average weekly total earnings for all employees over the survey period (Australian Bureau of Statistics, cat. no. 6302 1994, 1996).6

Table 3.2 presents the hourly pay thresholds for September 1995 to September 1997. As the average weekly total earnings rose by 7 per cent during the survey period, the low pay threshold increased to $10.12 at September 1995 and reached $10.76 by September 1997.

For comparative purposes, the defined low pay threshold is also presented in Table 3.2 in equivalent weekly and annual earnings. For an individual working 38 hours per week, the low pay cutoff is equivalent to a weekly pay of around $400 or an annual wage income of

5

Sensitivity tests using different low pay thresholds - $9.50 and $10.50 - have been conducted. The broad conclusions presented in this thesis also held for the tested low pay thresholds.

6

Borland and Kennedy (1998) find that changes in the distribution of hourly wages were similar to the changes that occurred in the weekly wage distribution.

between $20000 to $21300. If an individual worked full-time for 38 hours per week, the weekly amount would be approximately 55 per cent of the average weekly ordinary time earnings of full- time adult employees in the labour force. Over the period, the low pay threshold represented about 73 per cent of the median hourly earnings for all full- time and part-time workers in Australia.

Table 3.2: The Defined Low Pay Threshold - 1995 to 1997

1995 1996 1997

Gross Hourly Rate $10.12 $10.47 $10.76

Per cent of median of estimated hourly earnings

distribution for all workers 73 72 73

Australian Industrial Relations Commission

minimum wage rate ($ per hour) a $9.46

Threshold expressed as weekly earnings $384.56 $397.86 $408.88

(calculated at 38 hours per week)

Average weekly full-time adult earnings b $691.20 $717.20 $746.10

Threshold as per cent of average weekly earnings 56 55 55

Threshold expressed as annual earnings $19997.12 $20688.72 $21261.76

(for a person working full year, full time)

a. Based on the weekly minimum wage of $359.40 divided by 38. b. Average weekly earnings, states and Australia, ABS Cat no. 6302.0.

The choice of the low pay threshold is based on a number of considerations. First, an important component of Australia’s wage determination system is the protection of it’s lowest paid workers via the setting of a minimum wage which identifies the lowest rate of pay that any worker can earn for full- time work. From this base, an award wage structure sets wage rates across many different industries and occupations. Hence, the wages of

many low paid workers and the distribution of earnings across all workers are influenced by this structure of relative wages and the level of minimum wage set. The chosen low pay threshold includes workers who are on or just above the minimum wage level set by the Australian Industrial Relations Commission (AIRC) (Australian Industrial Relations Commission 1997), workers who would be most affected by changes to the minimum wage.

Second, consideration in the choice of low pay threshold was given to the level chosen by other researchers who have investigated issues of low pay in Australia. Richardson and Harding (1999) define the low pay threshold of $10 per hour for wage and salary earning adults in 1994/95. Harding and Richardson (1998) uses the same threshold in 1995/96. Mitchell (1999) uses a weekly rate of $400.00, chosen to capture those who were earning at or under $10.00 per hour. As Eardley (1998) is concerned with international comparisons, he uses a relative wage approach defining low paid workers to be those earning under two thirds of the median wage for all wage and salary earners.

Third, consideration was also given to the sample size restrictions. The threshold needed to be a level where there was a reasonable number of observations to allow meaningful analysis.

3.3.3 Pay rates for casual earners

The hourly pay rate was imputed by dividing usual weekly earnings from all wage and salary jobs by usual hours worked in all wage and salary jobs.7 This made it important to distinguish between workers on permanent and casual work arrangements. In many cases, the rates of pay of workers who work casually are augmented by a loading or premium. This premium should not be regarded as an additional wage but merely a compensation for loss of entitlements such as sick leave and holiday leave provided to permanent employees. With an imputed hourly pay rate measure, however, a worker on casua l

7

For some individuals, earnings data was imputed by the ABS from their responses in previous years or from individuals with similar characteristics. Also, for 1995, hours worked data were derived from the episode information. For a small number, a reasonable match between the information provided at the

employment arrangements could be seen to have a higher hourly pay rate than another who is doing exactly the same job but as a permanent employee. The casual employee, however, must take leave without pay when ill and for holidays whereas the permanent employee can draw on sick leave and annual leave benefits.

For each episode of work, respondents in SEUP were asked if they were entitled to paid annual leave or sick leave. Those who were not entitled to these benefits were identified as casual workers. A premium of 20 per cent was assumed to apply to the pay rates of respondents who were identified as casually employed. The figure of 20 per cent is based on work undertaken by Dawkins and Norris (1990). They estimate that a casual premium of 19.5 per cent represents the amount required to offset casual workers for loss of holiday pay and sick leave entitlements (page 158). Hence, to directly compare hourly pay rates of workers under these different work arrangements, the hourly pay rates of casual workers were deflated to account for the premium.

interview date about current employment arrangements and the daily labour market history could not be obtained. These data were discarded.