Increasing annual leave to five weeks would cost employers less than you might think

By Jeff Borland for 'The Conversation'

Melbourne: Five weeks annual leave is an idea whose time may have come.

A decade ago, a Productivity Commission inquiry into Australia’s industrial relations system, recommended governments periodically “examine whether there are any grounds for extending the existing 20 days of paid annual leave”.

Now, with the Shop Distributive and Allied Employees Association pushing for an extra week of annual leave for 1.3 million retail and fast food workers, the issue may be about to get a serious hearing.

Employees doing continuous shift work – including nurses and firefighters – are already able to take five weeks of annual leave.

Recent deals between Ikea, Apple, Bunnings and Big W and staff have added to the number of workers with another week of annual leave.

But for most of us in jobs with annual leave, four weeks is what we get.

Annual leave has remained unchanged since 1974

Historically, extra annual leave has been an important way for workers to secure their share of the gains from productivity growth – in addition to increases in wages and other benefits.

Most workers won the right to a week’s annual leave in 1941 following a case brought to the Commonwealth Arbitration Commission by the Amalgamated Engineers Union.

The entitlement was progressively increased, reaching four weeks in 1974.

Since then, however, annual leave has remained unchanged. Possible explanations include a decline in union power to campaign on behalf of workers, and slower productivity growth.

Although total leave time did grow with the granting of extra public holidays, 50 years on, it is timely to look at increasing annual leave.

How does Australia compare?

Australia is currently in the middle of the pack for annual leave, compared to other OECD countries. Having 20 days puts us in a group with a majority of the 35 countries, including the United Kingdom and New Zealand.

About a quarter of countries have fewer statutory days of annual leave, with the United States having the lowest number, zero. A quarter also have more days. Employees in several European countries, including Austria, get 25 days.

When it comes to total days of annual leave and state public holidays are included, Australia is also middle-ranked for its days of total annual and public holiday leave.

But won’t it increase labour costs?

Increasing annual leave to five weeks would cost employers less than you might expect.

Take the example of a worker employed on an annual salary.

At the moment, an employer pays for 52 weeks to get 48 weeks of work. Suppose annual leave increases to 5 weeks. The employer would then need to pay for 53 weeks to get the same 48 weeks of work. That extra week, from 52 to 53 weeks, is about a 2 per cent increase in labour costs.

This might seem sizeable. But it’s less than the usual annual growth in average weekly ordinary time earnings for full-time employees, which is about 3 per cent per year over the past decade.

Of course, other costs for employers might rise, such as from needing to spend extra time in arranging work schedules.

Offsetting that, however, workers may become more productive. Extra annual leave is also likely to some extent to be traded off for wage increases – as happened when the superannuation guarantee was introduced in 1992.

Another proposal is that increased annual leave could partly substitute for state-level public holidays, such as the AFL Grand Final holiday in Victoria.

Do employees want extra annual leave?

New deals by IKEA and other businesses suggest the answer is “yes” – and workers may be happy to trade off an extra week of annual leave for higher wages.

But the broader picture is likely to be mixed. A survey by the Australian Institute back in the early 2000s found respondents were evenly split between preferring a 4 per cent pay rise or two extra weeks of annual leave.

Australia’s large numbers of workers with untaken annual leave is sometimes also suggested as a reason why extra annual leave is not needed.

A recent Roy Morgan survey found more than one in five workers had more than five weeks leave accrued. However, accumulated leave can be explained by workers saving for an extended vacation, or wanting to take leave but feeling under pressure not to take time off.

Don’t forget casual workers

In all this, it has to be remembered there’s a large group of employees for whom an increase in annual leave brings no direct benefit.

Casual workers, accounting for 22 per cent of employees in 2023, are not entitled to annual leave.

To ensure these workers didn’t miss out, any increase in annual leave for permanent employees would need to be matched by a rise in the leave loading for casual employees.

Yet whether this would bring equity can be questioned, given research showing not all casual employees receive the loadings they should.

If it’s timely to consider an increase in annual leave, perhaps it’s also timely to think again about leave for casual employees.

(The author is a Professor of Economics at The University of Melbourne.)