Profiting from poverty

The new federal government has been remarkably silent on the state of the economy since winning office. I suspect most Australian business leaders are now simply relieved that the relentless media reports of “economic crisis” have ceased, and are thankful that the quotes are now being turned back, both economically and nautically.

In this void of economic discussion, the Productivity Commission has released important research into the impact of ageing on the Australian economy and workforce. The Productivity Commission is projecting that labour productivity growth is likely to average 1.5% from FY2013, and that real disposable income growth is likely to be 1.1% per annum, rather than the 2.7% Australia has managed on average over the last 20 years.

Aust Productivity commission report into aging 2013
Australian Productivity Commission report into aging 2013

The reasons are related to population demographics, and the fact that while Australia’s population is growing due to our current high immigration levels, it is not growing anywhere near fast enough to slow down the rapid ageing of our population. Health and welfare cost increases are being projected to require an additional 6% of GDP over the next 50 years, purely as a result this demographic shift.

At the recent annual dinner of the Australian Chamber of Commerce and Industry, Tony Abbott outlined his government’s immediate business priorities, describing his paid maternity leave initiative and 24 x 7 private childcare as key reforms for improving workplace productivity and overcoming the shrinking workforce.

Tony Abbott opened his speech with his economic vision, saying that “You cannot have strong communities without strong economies to sustain them and you can’t have a strong economy without profitable private businesses.” He later claimed that “Almost everything this government does is directed towards making doing business easier – because that leads to more jobs, higher wages and greater prosperity.”

In terms of the scale of the workforce supply challenge that Abbott is claiming to address, the Productivity Commission report indicates that in 2012 approximately 14% of Australians are 65+ years old. In 2050, 20% of the population is projected to be 65+.

According to ABS employment figures for August 2013, the average number of hours worked each week by Australians was 40 hours for males and 31 hours for females. These hours are almost identical to the figures from 1990, and have been steady every year in between. It is worth remembering that modern formal child care arrangements and funding were introduced in 2000, and appear to have had no noticeable effect on hours worked for either females or males.

While the new federal government’s economic policy trajectory is now starting to move beyond three word soundbites and marketing fluff, it is becoming clearer that deflation and economic stagnation are starting to seriously undermine the economic policy foundations of “small government” trickledown economics in other countries.

Japan has faced many years of deflation and economic stagnation while dealing with the social problems caused by a rapidly aging workforce. In many ways, Japan is already experiencing the dire economic scenarios projected by the productivity commission for a rapidly aging Australia.

According to OECD research, the average GDP produced per hour worked in 2012 was $40 USD for Japan, $53 USD for Australia, and $62 USD for the US. To put that into context, Germany achieved $58 USD and France $60 USD.

The economic pain in Japan has finally generated a willingness to address structural economic issues, returning ultra-conservative Shinzo Abe as prime minister to carry out sweeping economic reforms. Those reforms have included large rises in the minimum wage, arm twisting businesses to pay their employees much higher wages instead of hoarding profits, and using quantitative easing and other measures to achieve a huge devaluation of the Yen.

Abe expressed the “conservative” shift in economic policy quite bluntly, saying that “I don’t buy the concept of corporations against individuals. Many people work at companies to make a living. If revenues rise at corporations, they can share it by raising wages”.

The fundamental premise behind Japan’s conservative government policies is simple. Japanese businesses will not hire people or invest when consumer demand is not high enough to generate a return. Higher levels of consumer spending create higher revenues for businesses, and generate more tax revenue to pay down debt and fund government services.

Japan’s situation is particularly interesting because their highly educated workforce has lived with an incredibly low minimum wage for decades, equivalent to roughly $8 AUD per hour. Earlier in 2013, even Thailand increased their minimum wage to roughly $10.50 AUD per hour. The Japanese minimum wage is so low that citizens can earn significantly more than the minimum wage by simply not working.

While workforce poverty is nothing new, it is starting to become embarrassing for a number of G20 nations. It is now becoming quite clear that low US minimum wages have led to sharply increased demand for US government welfare, and that many of the largest US corporations are the direct beneficiaries of that welfare expense.

In a recent Berkeley University research study, it was estimated that roughly 73% of American welfare recipients are members of “working families” whose household income is simply not high enough to cover their basic life needs.

Berkeley University estimates that the US government provides $7b each year in welfare assistance to families of workers in the US fast food industry, because their wages are too low to meet their most basic needs. This is effectively an industry wide wage subsidy to the highly profitable fast food sector, as more than half the families of US fast food industry workers (working 40+ hours per week) currently receive direct government welfare to provide for their most basic needs.

The health impacts of US “food stamp” programs have also been dramatic, with cheap junk food often the most affordable option for welfare recipients, which has been linked to dramatic increases in obesity and diabetes rates amongst working families on the minimum wage.

Bloomberg - US Food Stamp enrollments
Bloomberg – US Food Stamp enrollments

A number of the largest junk and processed food manufacturers are also aggressive lobbyists for the expansion of the US “food stamp” program. Kraft has acknowledged that roughly 12% of their revenue comes from US “food stamps”. Yum foods, who operate KFC and Pizza Hut, have unsuccessfully lobbied for many years to be approved outlets for food stamp spending.

The net effect of these long running US policies has been a shift in costs, from private sector wages to direct government welfare programs, and ultimately to government health programs. Despite the well established nature of these arrangements, they are now starting to generate highly negative social media coverage, and impact on the image of some major US corporations.

Walmart is estimated to receive 18% of all US food stamp spending, which equates to roughly $14b per year, with the average Walmart employee estimated to earn $18k per year – a little more than the US poverty line. One Walmart store recently attracted negative publicity when it was discovered that their employees earn so little that they were unable to afford food for Thanksgiving, and were begging for charity food donations from their colleagues and customers.

McDonalds also recently faced social media ridicule when their HR department advised an employee struggling to pay bills to enrol in government welfare programs and find a second full time job.

Consumer spending makes up roughly 66% of US GDP, and is currently growing at an anaemic 1.5% per annum. Perhaps it shouldn’t be terribly surprising that the US federal government is attempting to lift the minimum US wage to $10 USD per hour, justifying the move based on projected welfare savings and increased consumer spending.

If anything, the last 20 years of government policy in Japan and the US have been the golden years for trickledown economics amongst political parties and business lobbyists, and have enabled the economic analysis of the effect of low minimum wages on national economic performance.

Australian business leaders should be focusing on improving business productivity, rather than simply measuring wages. Our workforce is rapidly aging, and retention and retraining of employees should be a critical priority for many businesses. The lessons from the decades of low minimum wages in Japan and the US are only now becoming clear, with corporate dependence on welfare spending emerging as a very serious political issue.

The double bind of sexism

Sexism is a cultural challenge that is entrenched in many Australian businesses. It is completely counterproductive, as many businesses are currently struggling to attract and retain talented people in a very competitive market.

Women outnumber men in Australia and have high workforce participation rates. The Australian Bureau of Statistics regularly calculates the sex ratio – which measures how many males there are per 100 females. In the most recent reporting period, Sydney and Melbourne’s wealthiest urban areas were shown to have some of the country’s highest proportions of women – with 94 men for every 100 women in North Sydney and Melbourne’s inner south.

Sexism can be overt behaviour by individuals, or embedded in the cultural assumptions and work practices of a business. Whether or not you directly spot it occurring in a workplace, you can certainly measure the outcomes it produces.

2012 Australian Census of Women in Leadership
2012 Australian Census of Women in Leadership
Female Executives within ASX 500 companies

The 2012 Australian Census of Women in Leadership report shows that a mere 9.2% of key management executives at ASX500 companies are women. This compares with 14% for US Fortune 500 companies, and 19% for companies in the New Zealand NZSX100. The ASX500 companies with the highest proportions of female executives are in pharmaceuticals, telecommunications, retail, and transport.

The disparity in achievement within the public sector is striking, with women comprising 35% of all directors across government boards at a federal level. 56% of ASX500 companies have no women at all on their board of directors, and 63% of ASX500 companies do not have any women in key executive roles.

It is quite clear that few Australian businesses are seriously addressing the sexism embedded in their workplace cultures.

One of the most interesting recent academic reports into the underlying factors causing the gender “glass ceiling” was published by Terrance Fitzsimmons from the University of Queensland Business School, titled “Do Australia’s top male and female CEOs differ in how they made it to the top?”. Drawing upon the results of a large number of previous academic studies, Fitzsimmons outlines the “double bind”, a core dilemma faced by female leaders who make it to a position of power.

In a nutshell, female leaders are viewed negatively by their direct reports when they are consultative, and also when they are assertive. In contrast, male leaders are perceived as more competent when exhibiting exactly the same behaviours. These perceptions can be seen played out in the daily media reporting of the federal election battle between Julia Gillard and Tony Abbott.

In response to the failure of the business community to improve female participation at leadership levels, some commentators have started openly demanding legally enforceable gender quotas for businesses. While binding targets are not likely to be introduced by any Australian government in the short term, the federal government have introduced several measures to combat workplace sexism and gender discrimination, with the most noticeable being the Workplace Gender Equality Act 2012. The main thrust of this federal legislation is to promote transparency, equal opportunity and equal pay in the workplace.

Workplace culture has a very significant effect on employee productivity, innovation, and retention. The entire organisation can greatly benefit from a culture that is more cohesive, flexible, and diverse. It is also crucial to remember that women are not the only people facing discrimination when applying for promotions within a business. People with disabilities, members of the LGBTI and Indigenous communities, and even older workers face very serious prejudice in recruitment processes.

Workforce recruitment and retention programs within many ASX500 companies are clearly failing. Business leaders need to lead by example, immediately speak out against sexism when it occurs, and take personal steps to ensure they hire, mentor, and promote a diverse range of people within their teams.

The demographic disaster facing public sector budgets

By and large, we expect to pay taxes, elect politicians, and abide by the laws of the day. In return we expect governments to deliver the services we want. Things like easy access to good quality education, inexpensive medical services, reliable water, transport, and help when floods or fires affect our communities.

Which are all made more challenging by a simple fact – many Australians have chosen to live in places which are difficult and expensive to service.

Photo: AFP
Photo: AFP

Areas of incredibly low population density cover huge portions of Queensland, the Northern Territory, Western Australia and South Australia. Providing any level of service to citizens living in these low density areas can be disastrous for government budgets, and private businesses have little incentive to operate in these areas without government intervention.

So while geography poses many challenges today, understanding the future cost of delivering government services requires public sector leaders to project where Australia is heading demographically.

Today roughly 64% of our entire population live in the state capital cities, and that proportion has been stable since 1976. The working age population of 15-64 year olds makes up a roughly stable 67.0% of the total population.

The official population projections put together by the Australian Bureau of Statistics show an expanding population which is aging rapidly. The age group projected to grow fastest is the one for people over 85 years of age. The projections are based on assumptions of significant immigration and birth rates, and there is no reason yet to believe the projections are flawed.

Life expectancy is the reason public sector budgets will face disaster, as Australian life expectancy is projected to be 85 years for men and 88 years for women by 2056.

ABS Projections for population changes by 2056.
ABS Projections for population changes by 2056.

So without a massive increase in immigration levels, our available workforce will shrink significantly as a proportion of the population, and the elderly will start to dominate the economy.

The ABS is effectively projecting that Australia will soon be facing the same disastrous stagnation that has crippled Japan for the last 10 years. An economy faced with a shrinking workforce, rising demand for government assistance, and shrinking consumer spending.

European economies are currently projected to face even worse demographic shifts over the same timeframes.

Queensland is effectively ground zero for the demographic disaster facing the Australian public sector. Queensland not only has a very rapidly aging population, it already has very high concentrations of the elderly in the regional areas surrounding  Brisbane.

Economist - European Demographic Projections 2050
Economist – European Demographic Projections 2050

The median age in Queensland has jumped significantly in the last 10 years, and is now 36.6 years. To put that into context, New South Wales has a median age of 37.7 years, and agribusiness dominated Tasmania now has the highest median age of 40.4 years.

While Queensland has for many years benefitted significantly from net migration from other states, the bulk of those interstate migrants have been settling in the south east corner of the state. Within Queensland itself, a large proportion of young people already relocate to find work and education opportunities, with many migrating to the greater Brisbane area. These workforce age people could just as easily relocate interstate.

This clustering of the elderly will of course help the Queensland government to achieve some economies of scale, and offer the potential for significant private sector participation in service delivery. It will be counterbalanced by the need to also deliver services to communities located in sparsely populated areas, where in many cases the elderly could soon make up the largest group in the electorate.

While the adoption of shared services models and one-stop shops is quite fashionable at the moment amongst public sector leaders, they are just the tip of the iceberg of the changes needed to cope with the demographic challenges of the future.

New technologies will clearly help, with high speed Internet services offering the possibility of long term reductions in service delivery costs in regional and remote areas. The potential for savings does however depend on a willingness to invest substantially, shutting down large parts of the “branch office” network, and for consumers to adopt “self-service” models and online service delivery.

Government needs to go through the same transition that banking did in the 80s and 90s, which saw the large scale closure of branches, and the shift to ATMs and online transactions.

QLD Public Sector EmploymentPercentage of workforce 2011
QLD Public Administration and Safety Employment
Percentage of workforce 2011

I think it is a very safe bet that politicians in regional areas and the usual cast of lobbyists will ensure that these changes will not happen quickly, or easily – regardless of the political stripes of the governments involved.

This map of employment demographics illustrates why Queensland will face intense challenges. There are many regional electorates where direct  government employment makes up a huge proportion of the total workforce, and government wages and welfare are the basis for much of the economic activity in an electorate’s economy.

Poorly implemented public sector efficiency measures could potentially remove an enormous segment of economic activity from those regional economies. Queensland is not the only state with these issues, but will be likely to suffer badly compared to other parts of the country.

Public sector leaders have to work within the constraints placed on them by politicians. Politics is supposed to be the art of compromise. It will be interesting to see whether politicians compromise their desire to improve public sector efficiency, when faced with the prospect of government job cuts within their own electorates.

Finding the right balance in public sector workplace reform

There is little doubt that the Australian public sector is facing some major headwinds at the moment. State governments in NSW, VIC, and QLD are all embarking on major reform agendas across their education, health, and transport portfolios.

In each case, the federal government has managed to manoeuvre itself into a position to set the agenda for these portfolio areas, despite state governments being responsible for the delivery of services. The wrangling over the Gonski report into education reforms being just one example.

A really simple reality is now focusing attention within the leadership of the various state public services. Many critical state budget line items are heavily dependent on federal funding, and the principle of “user pays” is now deeply unfashionable amongst politicians. Perhaps more importantly, when state and federal politicians fail to find common ground, funding for even basic state services can disappear.

Beyond the likelihood of ongoing bitter political wrangling, there are of course much broader public service issues which will really start to bite over the next ten years, with basic demographics being one of the most challenging. Put bluntly, the workforce in both public healthcare and education is rapidly aging, with very high attrition rates for young employees.

There are no doubt many within the public sector workforce who will benefit from reforms, but the instability now inherent in a career within the sector is likely to raise workforce costs in the long run.

These higher costs will occur due to the expenses created by the loss of internal expertise, and the consequent need to constantly replace skilled employees at market rates. In an economy facing skills shortages and full employment, employee turnover can rapidly inflate overall costs.

The combination of these factors will undoubtedly make it difficult for state governments to reign in overall costs, with outsourcing simply shifting costs and headcount into a different bucket, rather than reducing them.

To achieve significant improvements in workforce productivity over the rest of the decade, state governments are likely to need to embark on innovative new service delivery models. In many areas this will require legislative and regulatory streamlining, to eliminate prescriptive requirements designed around the assumptions of paper based bureaucratic work practices.

Improvements in workplace environments can of course be achieved while budgets are being reduced. Cross training and multi-skilling of the workforce can be achieved inexpensively by rotating employees through different roles and sections of the organisation. Over time, this can help reduce skills shortages, while keeping the workforce engaged.

Large enterprises are already facing many of these pressures in various parts of the country. Australia has a low age for voluntary retirement, and the proportion of the population over 65 is already very high in regional Victoria, South Australia, and Tasmania.

More than half of Tasmania’s population is older than 40. Inner city areas in major Australian cities have relatively young populations, which might create misleading perceptions for city bound leaders, and further complicate the politics of resource allocation and service delivery.

ABS
ABS June 2011 – Population density for Over 65

This Australian Bureau of Statistics map of population distribution illustrates the issue in pretty dramatic terms. Our rapidly aging population is congregating in regional Australia, where public transport and health services are extremely expensive to deliver.

In reality, the much maligned federal government NBN project is probably going to save the budget bacon for the state governments when it comes to health and education. The potential to improve access to specialist healthcare via video collaboration and other technologies is a very real cost saving opportunity for healthcare, and distance learning is already a fact of life for many Australian university students.

The recent federal government emphasis on teleworking deals with similar pressures, encouraging workplaces to allow people isolated by distance and poor public transport to work from home.

Developing programs to encourage service delivery innovation, update workforce skills, and adopt more teleworking should be high on the agenda for public sector leaders. While political wrangling is likely to make the task harder, budget realities will soon force stark choices for public sector leaders and politicians alike.

How to lead through uncertainty

In a market economy there will always be both winners and losers. That is the name of the game. But bad news attracts eyeballs in the media, and it is a pretty safe bet that your daily serve of news will be full of negative distractions.

In recent weeks the economy wrecking carbon tax has finally vanished from news headlines, and the death of the mining boom was recanted in the space of a single day. After a month of feel good Olympic reporting, it was almost inevitable that we would be due for another dose of doom and gloom. Stepping ably into the breach, both NSW and QLD state governments choose to announce major workforce reductions.

Actual business conditions are of course a positive story, and less likely to attract eyeballs. The ABS announced last week that the economy experienced annual growth of 3.7% for the June quarter, led by the mining, banking and healthcare sectors. Reinforcing the broad impact of our economic strength, CommSec analysed ASX200 company results and found 86% were profitable in their most recent period.

Boat on icebergOf course some industries are feeling pain due to the high Australian dollar. But the reality is that we are at full employment levels, and GDP growth and household savings are booming. Real labour costs are trending upwards, rising 1.4% in the quarter, which is hardly surprising given a full employment scenario in an economy growing strongly.

So why are measures of business confidence falling when operating conditions are good?

Perhaps it comes down to a general mood of uncertainty and poor corporate leadership. Job security is well and truly a thing of the past for most of the Australian workforce, and undoubtedly has an impact on workforce morale and productivity.

The latest ABS analysis of workforce mobility paints a truly Darwinian picture, with high rates of employee turnover across the entire economy. For those employees who recently moved into a new job, 57% changed industry and 42% completely changed occupation. These figures point to massive shifts in the workforce, and the difficulty in sourcing skilled employees. The industries which currently have the highest proportion of employees with more than 10 years of tenure included agriculture (54%), education (35%), public administration (34%), and manufacturing (30%).

Across the entire economy, the ABS analysis found that senior executives were by far the most likely group to still be working at a business after 5 years. It seems that many businesses are still deliberately shedding their most experienced frontline and mid-tier employees, while desperately hanging onto their leaders. It will be interesting to see whether the recent state government workforce cuts follow this same trend.

From a leadership perspective, the best way to deal strategically with uncertainty is to spread your risk, and make smaller moves that can be easily completed in short time scales. You should certainly avoid embarking on any grand plans.

I have often heard leaders cite uncertainty as an excuse to maintain the status quo. In reality, maintaining the course is likely to be one of the riskiest possible options in a truly uncertain environment. Strategically, you could liken it to the captain of the Titanic deciding to speed through a stretch of ocean filled icebergs, rather than slow down and adjust course.

In uncertain times, teams look to leaders for their certainty. When you find yourself navigating uncertain waters, you should expect to make frequent adjustments to your plans, and keep a watchful eye on both your clients and the market. Shared adversity can be a strong glue to help build a cohesive team environment.

Productivity Champions

Everyone loves a champion. The Olympic Games are the one time when the entire world truly comes together to choose winners and losers. The rules for each activity have varying levels of complexity, but they are well defined, and involve very precise measurements.

For a few weeks every 4 years, we all suddenly care about world record times and personal best performances. But above all, it comes down to how many gold medals are won. The recent uproar about the performance of Australia’s swim team should dispel any possible doubts. The sacrifice barely registers interest, the golden prize is all.

So why is a gold medal the only acceptable measure of Olympic success?

Every medal win is based on a team effort, with years of preparation. It is hard to imagine Australian athletes competing without the huge government investment in training resources and infrastructure. In 2010 alone, the federal government spent $237m on a handful of “elite” athletes, going against an expert report which suggested diverting money into grass roots sports participation programs for the entire community.

I doubt anyone will ever seriously do a thorough productivity analysis of the “elite” athlete program, but it would be a very interesting exercise. Because it is quite clear that the leaders of the program have used enormous resources and failed to produce the outcome that “investors” seem to be demanding.

If nothing else, the Olympics managed to shift TV news bulletins away from politicians spouting economic buzzwords. Apart from some recent attempts at singing, our politicians often seem to hide a lack of substance behind economic fluff. The buzzword that is usually trotted out is, of course, productivity.

The problem with productivity is simple. It is now a dog-whistle – used by lobbyists and politicians to signal anything relating to wages and working conditions.

For many organisations, wage costs are a significant portion of their overall costs. Workforce structure is of course a choice made by executives. Any company can manipulate their wages expense and FTE through subcontracting and outsourcing.

So it should perhaps be obvious that lower wage costs by themselves do not necessarily lead to higher productivity.

Simply reducing wage rates might make it harder to attract appropriately skilled employees. It might also lead to lower output quality and volume, while increasing training costs and employee turnover.

If outsourcing is chosen as a means of reducing the wages bill, then serious strategic planning and workflow analysis needs to be done to ensure you don’t simply shift costs and add layers of complexity, resulting in an overall lowering of productivity.

Companies often talk specifically about setting up subsidiaries in foreign locations as a means of reducing wage rates. For many industries there may be a much less complex option. They could try hiring more women.

The latest ABS figures show a huge gap in hourly wage rates between men and women. In the mining industry, the average hourly wage rate for women in non-managerial positions is 19% lower than for men. Perhaps it shouldn’t surprise anyone that only 14% of the mining workforce is female.

To measure productivity seriously is a complex art, and there is an element of subjectivity. It is useful as a method of benchmarking when it can be applied consistently. But the factors that are important can be highly dependent on the organisation.

As you might imagine, the federal government produces reports every year benchmarking service delivery across departments with very diverse operations. Many of these departments produce services that have no revenue attached.

So how is productivity measured?

The federal government has put together standardised productivity frameworks to consistently capture inputs and outcomes. Measurements are made at both a process (workflow) and outcome level. These measurement types allow technical efficiency, cost effectiveness, and overall “program” effectiveness to be measured.

Government organisations place particular emphasis on effectiveness measures – which include quality measures, availability and usage rates, and how appropriate the outcome was to the program situation. Wage costs are of course captured in the technical efficiency measures, and become a factor in a much bigger picture.

Wage rates are easy to measure. It will always be tempting for leaders to rely on the dog-whistle, putting blame for poor performance on wages. By focusing on productivity rather than wages, leaders can improve their visibility of the business, and deliver results that really matter.

Managing wage risk

In a now almost ritualised gnashing of teeth, business lobbyists descended again on Canberra last week to hear the results of their latest efforts to influence the Fair Work Australia minimum wage determination.

A quick read of the report makes it clear that Fair Work Australia is really quite unsympathetic to demands for corporate welfare. It is hard to imagine a more scathing dissection of the demands put forward by the retail and hospitality industries.

Responding to the report, the Australian Retailers Association and the Australian Hotels Association, effectively declared war, claiming that the new minimum hourly pay rate of $15.96 will drive their industries out of business. It does however seem quite ironic that industry lobbyists are paid to talk down the people they represent, painting them as an economic basket case.

Unfortunately for retailers, Fair Work crunched the latest ABS figures, finding no link between wage rates and the widely documented structural change being forced upon Australian retailers by the Internet. Solid profits in the hospitality sector certainly didn’t add credibility to their demand for special treatment.

Choosing different battle tactics, the ACCI announced that they were disappointed that the wage increase wasn’t smaller, taking the opportunity to remind us all that the carbon tax will smash Australian businesses in 2012. Perhaps the well funded lobbyists at the ACCI have uncovered some new meaning in some ancient Mayan prophecies.

In Australian cities, market rates apply for wages. In an era of full employment, offering the minimum wage to attract skilled labour is laughable. The minimum wage is a mirage.

There are many specialist job roles which already struggle to fill positions even when wages are offered well above market rates. In these situations lengthy expensive searches for skilled migrant workers are required, using contentious 457 visa arrangements.

Adopting a rock bottom wages strategy not only limits your ability to fill a vacant position quickly, it is a poor strategy to choose when building a productive workforce.

It is also worth considering how productive your employees will be if they are struggling to feed their families and pay basic bills. The Fair Work report details the reality of the minimum wage, indicating that government welfare and tax concessions already provide a significant portion of the income received for people on the minimum rate. Without that subsidy, market pressure on wages would be higher.

On an economy wide basis, one of the most interesting observations in the Fair Work report is the changing balance between corporate profits and wages income within the economy.

Across the entire economy in December 2011, total income from wages was 53.1% of all income, while corporate profit was 28.5%. In 2001, the corresponding figures were 54.6% for wages and 25% for corporate profit.

Perhaps this simply reflects improved productivity, but it could also be due to the popularity of outsourced labour arrangements. Using these strategies to reduce wage costs does create some major new business risks, as has been seen recently by the construction and mining industries, which rely heavily on workforce “subcontract” arrangements.

The sudden collapse of the Hastie Group is an example, as the firm was a key skilled workforce supplier to many large organisations. The unexpected collapse left their clients without specialist workers, leading to a desperate scramble by their clients to directly hire Hastie employees.

Recent events have also shown that the structuring of outsourcing arrangements is also coming under more government scrutiny. The legal costs faced by Coles are likely to end up dwarfing the pittance they saved by outsourcing trolley collection at a few stores in Adelaide.

Leaders should consider carefully how they balance productivity and wage expenses, and the levels of operational risk they are willing to take to reduce wages expense. Outsourcing and subcontracting arrangements can greatly improve your workforce flexibility, but savings can quickly evaporate when skills are in short supply.