The latest ABS figures show that private sector wage growth has slowed to 1.9%, its lowest level in almost 20 years. But scratch beneath the surface of these figures, and Australia remains a high wage economy in global terms.

Average weekly ordinary time earnings for full time employees are A$1556; in the UK, they are GBP 500, about A$860. At the same time, Australian businesses are increasingly subject to international competition, as ever more goods and services can be sourced easily from abroad.

Every day we see the effects of global trade on Australian business: the resources sector adapting to lower commodity prices, manufacturing under siege from competitors in lower-wage economies, and the sometimes unexpected trade consequences of political decisions (such as Russian intervention in Ukraine hitting Australian dairy exporters).

High domestic wages in relative terms and a changing, globalised world are leading Australian employers to examine how they can make their workplaces more competitive, and better prepared for an uncertain future.

Labour costs are an important part of the analysis, but work practices are also critical.

As the Productivity Commission notes in its report on the workplace relations framework, productivity ‘measures how efficiently inputs, such as capital and labour, are used to produce outputs....’ In the workplace context, inputs involve both the cost and the configuration of labour.

So what can employers do to make their workplaces more competitive?

5 Competitive Approaches for Employers in a Changing World

1. Enterprise Bargaining

In enterprise bargaining, employers should seek real productivity or efficiency gains in return for wage increases, rather than just automatically rolling over agreements at above inflation rates, as has been common over the last two decades.

Wage increases can be partially offset in various ways, such as by:

  • broadening classifications of work to facilitate more flexible deployment of staff; or

  • linking a portion of relevant wage increases to the achievement of productivity targets.

The stakes are particularly high for larger employers. A business employing 100 full time employees on average weekly earnings will pay $31,200,000 in ordinary time earnings over the life of a standard 4 year agreement. Even small changes that bring cost savings and efficiencies can have big implications.

Public sector employers that employ tens of thousands of workers have wage bills in the billions of dollars – the multiplier effect of any cost saving or operational efficiency here is potentially enormous. At the same time, the public increasingly expects private sector standards of service delivery from the public sector. Bargaining will be ever more important in a tight fiscal environment, where the public sector may need to do more with less.

2. Pay Structures

Employers should also consider adopting more nuanced approaches to their pay structures.

In enterprise bargaining, negotiations typically proceed on the assumption that there will be universal and equal increases of a particular percentage over the life of the agreement. This assumption should be challenged.

Differing increases can be applied to the various classifications, to reflect market value. Different rates of pay can be introduced for employees who start after the commencement of the agreement (this can be a means of gradually reducing expensive ‘legacy’ conditions). Another possibility is to integrate one-off payments into the remuneration structure to reduce growth in fixed labour costs.

3. Different Modes of Bargaining

Employers should be aware of the various possible modes of bargaining, and make careful decisions about which to employ and when.

For example, in a greenfields situation, employers should consider whether it is preferable to establish a ‘start up’ agreement with an initial cohort of employees or make a greenfields agreement with a union – and if so, which union. Careful attention should be paid to the scope and application clauses of such agreements, with an eye to future work streams and business opportunities. Such considerations are particularly relevant in the project contracting sector, where competition on labour rates and conditions is becoming intense.

4. Alternative Labour Sources

Employers should give careful consideration to the appropriate use of alternative labour sources, especially for work performed in non-core areas. Even in core areas it may be possible to run effective operations with a lower component of permanent staff.

Sources of alternative labour might come from inside or outside the corporate group. Further, liability for redundancy payments can be reduced through long term planning on attrition – employees leaving the business can be replaced through casuals, labour hire or contractors, or perhaps not at all.

5. Revisiting Discretionary Benefits

Finally, employers should reflect on their capacity to bring about change on a unilateral basis, in particular by revisiting discretionary benefits such as providing insurance and enhanced severance payments. Even if the provision of such benefits is not presently seen as onerous, it is prudent to ensure that employees understand the discretionary nature of such benefits, and that they can be changed or removed in the future.

The five approaches outlined above can entail legal and industrial risks.

In this regard, much could be done to improve the legislative framework – for example, by providing employers with a statutory defence to ‘workplace rights’ claims where they take action for genuine business reasons. Nevertheless, employers should make the most of what is possible within the current system. Careful planning can see risks reduced.

Seeking a more competitive workplace is not about a race to the bottom. It is about being smarter, not just cheaper.

And, of course, workplace change cannot see conditions fall below the safety net of federal awards, the national minimum wage, and the 10 national employment standards in the Fair Work Act. The safety net is where we presently draw the line and say that no one should receive less. Nevertheless, competitive labour pressure will increasingly lead employers to scrutinise their labour arrangements. Such pressure will come not just from the developing world, but from advanced OECD economies – and indeed from Australian employers with successful workplace strategies.

The need for competitive workplaces is a part of a broader national challenge, one that has been a key driver of Australian public policy for decades: we have to be competitive in a global market.