Why ‘penalty’ rates?

The government’s back-flip on AWAs, which will prevent ‘unfair’ loss of penalty rates, led to stories in the media about those who think they were hard-done-by under the previous WorkChoices rules, such as this one in The Age about about four schoolgirls who:

have worked for franchised food retailers in shopping malls, and all were signed up to WorkChoices agreements that stripped away penalty rates in return for small hourly pay increases

Politically, it no doubt makes sense to minimise the number of ‘losers’ in a reform. But as a matter of policy, it is far from clear why there should be mandated higher rates for particular hours of the day or days of the week. Google hasn’t been able to find me a history of penalty rates in Australia, but the standard argument for them is summarised in this speech to the NSW Parliament:

Shift loadings and penalty rates for work in ordinary time on weekends and work outside the normal span of hours are intended to compensate for the inconvenience associated with working unsociable hours. Work after 5.30 p.m. is generally regarded as being in unsociable hours, and has a negative impact on both personal and family wellbeing. …

Employees are less inclined to work on Saturdays and Sundays because they are dominant days for sport, leisure, community activities and religious celebrations. Time off during the week does not compensate for time lost on Saturdays and Sundays. This is the reason workplace arrangements have always recognised and endorsed penalty rates in the form of higher hourly payments for these days.

The very term ‘penalty rates’ is revealing. The higher wages are not to reward the employee for turning up at an inconvenient time, but to punish the employer for transgressing a prescriptive form of familism, which sets out what families must do at which times. This is an old-fashioned view of the family, the one found in the (in)famous Harvester Judgment of a man working full-time, with a wife at home to do all the cooking and shopping, minimising the need for paid workers to offer those services at ‘unsociable’ hours. It makes John Howard’s black and white TV era ideas seem modern.

The logic of penalty rates no longer works. How is work outside normal hours inconvenient for schoolgirls? School holidays aside, it is the only time they can turn up for paid work. As a student myself (many years ago…) I gladly pocketed penalty rate money, but I thought it absurd – it was when they asked me to work during the week that I faced inconvenience, not on Saturday afternoon.

Nor is the penalty-rate regime these days necessarily family friendly. While penalty rates may deter some employers from operating during ‘unsociable’ hours, for the very large number who do now open outside 9am to 5.30pm Monday to Friday the higher rates encourage workers to take those hours compared to those during the ‘sociable’ times, because they can take home more pay on the same number of hours worked. A more equal distribution of hourly rates would remove this incentive, leaving the ‘unsociable’ hours for those workers for whom the hours don’t cause any family problems. More equal rates would probably assist ‘fairness’ too, as those whose family commitments or preferences do prevent them from regularly working outside ‘normal’ hours would receive higher pay than now.

I am not arguing against all higher hourly rates at particular times. While in low-skill service industries there are many people for whom evening and weekend work fits well with their other activities (such as school or university), that is not necessarily the case in industries relying on higher-skilled occupations. The workers who take those jobs are often older and more likely to have family commitments, and extra money may be a necessary incentive to get them to turn up. But this would be driven by market pressures, not imposed politically as a ‘penalty’ for breaching a particular view of family life.

60 thoughts on “Why ‘penalty’ rates?

  1. I think you’ll find I’m relying on an economist, also a Nobel prize winner, who isn’t an Austrian economist. In addition to Adam Smith, of course, who also wasn’t an Austrian. While I don’t want to detract you from your thesis, you might benefit from read “Cost and Choice“.

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  2. Sinclair, if you look at the standard exposition of market failures, they tend to involve situations where trade doesn’t take place because the expected private benefits to the transacting parties do not exceed the expected private costs to those parties. Only in situations where these expected private benefits and expected private costs aree also the expected social benefits and expected social costs does the invisible hand actually work.

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  3. because the expected private benefits to the transacting parties do not exceed the expected private costs to those parties

    In theory, yes. How do you, as an external observer, know what the private benefits and private costs are?

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  4. So there are other religions out there in addition to Austrian economics!!! Sinclair, perhaps you should go and read some of the mainstream economics literature. Perhaps you could start with the work of John Hicks, Paul Samuelson, Ken Arrow, Gerard Debreu, George Akerlof, Michael Spence, Joe Stiglitz, Jim Mirlees and William Vickrey. Just to mention a few more Nobel laureates.

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  5. Sinclair, ask yourself the following two questions:

    1. Is it possible to build a theory that allows agents to respond to variables or parameters that are not observed by the model builder?

    2. Are there techniques available to handle some of the problems caused for empirical analysis by unobserved variables, even if those techniques are not perfect?

    The answer to both of these questions is yes.

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  6. This may come as a shock to you Damien, but I have read these guys (although not much Debreu). But there is a distinction between reading someone and accepting their premise. So let’s have a look. John Hicks, the man who apologised for IS-LM. Paul Samuelson, the lighthouse man, Ken Arrow on R&D I have written on before, Arrow and Debreu on new welfare economics suggest that the market can accomodate any level of government intervention (but don’t explain why the Soviet Union isn’t the worlds richest economy), Akerlof – I actually like him and use his lemons article to start off my Advanced Corporate Finance class, Mirlees on tax is good fun – the most productive member of society should pay no tax (been saying that for years), Vickrey on road pricing is interesting but there are public choice issues that need be addressed.

    Damien I don’t hold the views I do because I’m ignorant, I hold them because I think for myself. I understand you are unused to that situation. 🙂

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  7. #57. In an econometric sense? Yes. It is possible to construct proxies, instrumental variables, and use natural experiments and the like. In a policy sense for fine-tuning the economy? No.

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  8. As far as I understand it, the labour market has determined that not all hours are equal. One hour worked, say, 3-4pm on a Wednesday is not equal to the same period of time 3-4am on a Saturday. The labour market has used a government instrumentality to impose this cost, but remove it and I’m not sure that a non-mandated “penalty” would find its way into agreements.

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