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The commission acknowledged that there was a link between penalty rates and employment. Business groups are now likely to all for more sweeping changes to entitlements for working weekends or nights. Restaurant and Catering Australia say that the decision makes opening on a Sunday more viable. Government policy impacts upon supply and demand. The main policy that the article discusses is related to the laws around penalty rates. Current legislation on this issue is contained in the Fair Work Act 2009. The Act sets expectations that lead to cooperative and productive workplaces (Fair Work Act 2009).
The Fair Work Commission is the Australian workplace relation’s tribunal that was set up to enforce the provisions of the Fair Work Act 2009, including making decisions on penalty rates (Australian Government 2014). As a result of the reduction in Sunday penalty rates business owners are now likely to reconsider whether they can See benefit in Sunday trading (Department of Commerce 2014). Some restaurant owners indicate that prior to the reduction in Sunday penalty rates many establishments were reluctant to trade on Sundays without surcharges because of high labor costs on Sundays (Keen 2014). Sing economic models and examples, which assume coteries Paramus, we will examine the main economic issues that arise from the article. These are: Effects of government intervention on the Supply/Demand model Willingness of employees to work and Restaurants to open on Sundays Impact Sunday trade will have upon profitability and access to goods and services Wider implications for the economy The basic supply and demand model says that the price of a good or service is determined by the price mechanism. An assumption is that producers and consumers are driven to act by the concept of opportunity cost (Crampon 2014).
The Commission’s decision, as described in the article, changes the variables around opportunity cost. The equilibrium price and quantity prior o the reduction in penalty rates are shown as Pl and IQ in Figure 1 below. Following the reduction in penalty rates in the short term there will be a shift to the right of the supply curve as demonstrated by the movement of the supply curve from SSL to SO in Figure 1. This is a result off non-price factor movement I. E. The reduction in the cost of labor as a factor of production.
As labor becomes less expensive the supplier or business owners are more likely to be prepared to increase their supply by opening on Sundays. This will result in a new equilibrium price and quantity at PA and SQ. Figure 1 . The willingness of a business to open on a Sunday following a reduction in penalty rates. The economic situation is more complex than this as penalty rates act as a price floor. In the labor market, a regulated minimum Wage is a price floor which is a government regulation that places a lower limit on the price at which labor can be exchanged (Bade and Parking 2012).
The debate on minimum wages needs to balance the conflicting interests of suppliers (employees) and consumers (firms). In a competitive market where the factors of supply and demand are free to reach equilibrium, the quantity of Barbour supplied matches the quantity of labor demand. This is called economic efficiency. Figure 2. Labor Market Supply/Demand without Minimum Wage or Penalty Ra test Figure 2 highlights where supply and demand is at equilibrium. The consumer surplus (firm) is the value the consumer gets from buying labor, less its price.
This is the area in pink below the demand curve and above the price. The producer surplus (worker) is the value the worker sells the labor for less the cost of producing it. This is the green area below the price but above the supply line. These two areas are maximized at market equilibrium. The theory behind the introduction of penalty rates states that wages set above the market equilibrium lead to an over-supply of labor and a reduction in labor demanded by firms. This is demonstrated in Figure 3 where market equilibrium is at the point where the Supply Line (S) and the Demand Line (D) intersect.
This means that current market equilibrium wage is at Pl and that IQ is the equilibrium quantity of hours of labor provided. The current 75% penalty rate for casual employees is represented by PA. At PA the current supply for labor is SQ, but the demand for labor is only SQ. The difference between SQ and SQ represents unemployment. Figure 3. Penalty Rates at current Sunday rate (175%) With the current level of penalty rates set at 175% of the standard hour wage this creates a distortion in the market.
As in figure 3, when firms (restaurants) purchase labor above the cost of free market rate this results in a decreased consumer surplus (green). Penalty rates advantage workers as they receive a higher level of income than they would otherwise. For the unemployed, they lose potential income due to limited hours of work being available and must bear the cost of searching for work (yellow). The economic activity which may have occurred is prevented because penalty rates result in a dead weight loss (grey). The combination of the deadweight loss and the additional time spent searching for work is the full economic loss.
McGrath et a’, (2013) suggest that these inefficiencies in the labor market lead to: Higher costs to firms unemployment – The quantity of labor demanded is less than the quantity willing to be supplied Increased demand on welfare Potential for ‘black market’ economy of people working for wages below minimum wage Figure 4. Penalty Rates at new Sunday rate (150%) Figure 4 shows the reduction to newer penalty rates and shifts the market closer to equilibrium. With the reduction in penalty rates, both firms and workers are increasing their surplus, which results in lower deadweight loss and loss from job searching.
The distance between SQ and SQ representing unemployment has also been reduced. While this details the industry and market as a whole, further analysis of the firm is required to demonstrate how penalty wage reductions may impact on its operating decisions. From the firms perspective labor represents a variable cost of production. To demonstrate how movement in penalty rates would impact upon the price mechanism there is a hypothetical example showing the effects of penalty rate change on a burger kiosk outlined in Table 1 below.
In this example assume fixed costs of $200 a week, including rent, start-up costs and other fixed fees. These must be recouped from the revenue of any production that occurs. The more production that occurs the more these costs will be distributed over each unit produced. The decrease in penalty rates shown by the example increases possible working or production during the week, and hush allows any fixed costs to be averaged across more units produced. Production is facilitated by labor, and a reduction in the cost of labor allows more units to be produced for less. Table 1.
An example of how penalty rates impact firms over the weekend between 25% on Saturday, 75% Sunday (current penalty rate), and the new 50% Sunday penalty. Labor cost variations must be considered when a firm is deciding whether to open or close on Sundays. Table 1 demonstrates that in order for businesses to operate effectively, there must be sufficient access to consumers, and that there is no financial benefit in Opening for trade on Sunday whilst 75% penalty rates exist. Not only does a 75% penalty rate limit production, it also increases the Average Total Cost (TACT) and limits access to additional hours of work for employees.
Figures AAA, b and c below, show the table in graphical format, demonstrating the possibility of the firm earning super profits. It is obvious from these graphs that the starting point of Average Variable Cost (PVC) highlights the effect of penalty rates on costs. With reduced penalty rates and a competitive market, it would be expected that additional competition would enter the market and take advantage of he situation until equilibrium is reached again. This results in more firms creating increased employment opportunities, leading to market expansion.
As income increases, the purchase Of more normal goods and services may occur (Forester 2014). Figure AAA. Graphical Representation of Saturday Trade. Figure b. Graphical Representation of Sunday Trade with 75% Penalties. Figure Sc. Graphical Representation of Sunday Trade with 50% Penalties. Concerns are raised in the article by employee unions about the impact on employment conditions. The hypothetical example indicates that more employment opportunities may become available with increased trade.
A combination of increased employment hours and higher income then poses the issue where employees must decide about working on Sundays or participate in recreation time. As ‘time’ is essentially a normal good, the more money people have, the more recreation time they’ll desire (Gooses University n. D. ). This article analysis and discussion leads us to a number of conclusions. We believe the immediate effects will be increased profit to firms and wider access for consumers. Long term the free market theory would indicate that rises will fall for consumers – resulting in downwards movement along the demand curve.
Government intervention through penalty rates will artificially influence the free market and limit production and employment opportunities. If limitations such as penalty rates were removed or further reduced, more restaurants would consider open on Sundays creating jobs and invite further competition to the sector as the market settles at equilibrium (Keen 2014). Sunday trade, following a reduction in penalties, will spread fixed costs throughout the week, increase profitability of firms and give wider access to goods and services to consumers.