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The ‘Fair Work’ Commission recently announced a 2.5% increase to minimum wage, effective from 1 July 2015. This may be old news to you, but the misguided nature of this decision cannot go without comment. The increase creates issues at many levels, some of them strategic, with long-term consequences.

Retail Directions provides software and professional services. Everyone in our organisation earns more than minimum wage, so on the surface the ‘Fair Work’ Commission’s decision doesn’t affect us. But, the outcome for our team translates into their current real remuneration becoming effectively 2.5% less. If you consider tax scales, the percentage can be as high as 3-4%. Let me explain the maths.

Milton Friedman, renowned American economist, statistician and writer, once provided this insight: a helicopter flies over a village at night distributing money. In the morning, everyone finds that the cash in their wallets has doubled. Friedman asserted that in 3-6 months the price of everything in the community will double too.

Essentially, sweeping handouts will lead to additional inflation. In this case, the handout wasn’t universal but if you give money to some and not to others, you make matters even worse. The value to the recipients will be lost to inflation and you punish those who miss out. The most important economic link between value and price starts to lose its meaning.

You may think that I’m exaggerating, but there’s a hint of communist ideology in the actions of The ‘Fair Work’ Commission. In it’s purest form, the core operating principle of communism has always been “everyone contributes to the best of their ability and gets rewarded according to their needs”.

The 2.5% pay increase to approximately 1.5 million people had nothing to do with any improved contribution made by these employees ‐ it has been justified purely on a basis of their needs. So, higher pay itself doesn’t concern me, but the fact that the employers won’t get any extra value in return.

Here’s the fallout for retail. Over the last two decades the retail industry has been increasingly burdened by high labour costs, penalty rates, high rental, invasive regulations and price-inflating GST.

The latter needs a special mention, as retailers who sell to Australia from overseas aren’t required to charge GST.  This means that local retailers have to stay competitive with the handicap of being forced to charge 10% more for practically everything they sell.

In the current uncertain economic climate, adding 2.5% to their wages bill cannot be defended – there will undoubtedly be causalities with more retailers folding under the additional pressure.

In a recent comment on Retail Directions’ social media it was mentioned how retailers increasingly source their stock overseas and export Australian jobs as a result.

In my experience the vast majority of retailers would prefer to source locally – it’s more convenient: there’s less handling, insurance and transport.  There’s less risk too.  They source overseas because they have been forced to.

The government has pushed retailers to buy offshore through continual wage increases resulting in inventory prices in Australia being twice as high as overseas, if not more. Retailers have little choice as their customers won’t tolerate overpriced goods.

The centralised wage increases result in a self-defeating system. But, as long as there’s a group of people who get paid for taking money from one part of the community and handing it out to another, we have to endure it.

The most practical advice I can give is to stop complaining about jobs going overseas. Given current government policies and the behaviour of the UnFair Work Commission it would be illogical to expect anything else. Being anti-business may be winning some votes for the government, but it will gradually make us all destitute.

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Andrew Gorecki, MD of Retail Directions, has worked with the retail industry since 1985. Industry insiders appreciate his strategic advice and insights, as he lives and breathes for the industry. Andrew received a nomination for the Australian Entrepreneur of the Year Award in 2010.
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