Arbitration In Contempt

Farmers, Australia's Cost Structures, and Union Power

Ian McLachlan


The post-war period---especially since the late 1960s---has seen an increase, overall, in the power of trade unions, and a corresponding increase in the subservience both of governments and of supposedly independent arbitral authorities. This trend culminated in the Accord between the ACTU and the ALP, which was finalised in February 1983. The Accord was the basis for the present Federal Government's Prices and Incomes Policy. In turn, the Accord and the Prices and Incomes Policy were ratified in September 1983 by the Arbitration Commission as its wage fixing Principles (now under review). The recently concluded agreement between the ACTU and the Federal Government---Accord Mk II---will extend the duration of this formal relationship as it, too, progressively is ratified by the Arbitration Commission, notwithstanding overwhelming economic and social reasons for its rejection.

The farm sector is acutely aware of these changes in relationships. Their results include major impacts on Australian cost structures. These, combined with difficult trading conditions, threaten the viability of the rural producer. They threaten Australia's living standards as well.

Today, there would be little challenge to Mr Justice Higgins' implicit assessment of where the arbitral authorities stand in the pecking order, as revealed in his 1911 exchange with Mr H.E. Starke, Q.C. We all know who's running the country.

As a group exposed to the hard economic realities of international competition, farmers are unprepared to accept that these relationships should endure (and, if the Hancock Committee has its way, be further strengthened). Economically, farmers' backs are against the wall. With their survival on the line, they are determined to fight. That fight is intended to ensure that other groups in the community face up to economic realities as well.

My objectives in this brief address are as follows. First, I will review some of the main channels through which unions influence Australian cost structures and economic performance, as seen by farmers. I will illustrate how acceptance of union power has produced a number of myths about economic performance, policy and prospects in Australia. Second, I will argue that unions ultimately are constrained by economic realities, but that those realities may only intrude after irreparable economic and social damage has been done. The economic pain involved in the operation of those constraints is directly related to the pursuit of centralised industrial appeasement and to the lack of effective Common Law restraints upon union excesses. Finally, I will suggest some policy orientations that must be pursued if that economic pain is to be reduced on a lasting basis.

Union Influences on Farmers' Cost Structures

a) Overview

It is well understood that the farm sector is closely linked with other areas of economic activity. On the production side, these links reflect the interdependence between production, processing, transport and marketing of farm production, both in Australia and overseas. On the income/expenditure side, the farm sector is a significant generator of income, especially foreign exchange, and of demand for goods and services from other sectors.

Nevertheless, there are special features applying to the farm sector. These relate primarily to the problems it faces on world markets for its products. The subsidisation of European (and, in retaliation, United States) production and export for such markets is a most worrying example. Limited access to some overseas markets is another. The uncertainties of supply associated with weather conditions are with us all the time and farmers understand that. Interestingly, analyses of Australian economic activity typically exclude the volatile farm sector and focus on non-farm production in an attempt to obtain a clearer view of 'underlying' economic performance, unaffected by weather conditions.

These special features imply two aspects worth noting. First, they apply mainly to farm output. Second, for all practical purposes, they are probably not amenable to control by farmers or Australian policy makers to any great degree.

On the input side, however, the same sorts of cost problems and concerns as do other parts of the economy. The intensity with which those pressures are felt by farmers is much greater, however, because they are determined in ways that generally have little regard for the problems faced by them in selling their output.

Even so, a most important aspect of Australia's cost structures is this: potentially, at least, they are amenable to substantial control by Australians---if we really want to control them.

The farm sector takes a macro view of costs: much that happens beyond the farm gate determines whether or not a farmer's output can compete on product markets. Farmers are particularly concerned about the need to minimise total production costs. If costs cannot be restrained, farmers will lose markets. In addition, their net returns from those markets to which they have access will continue to decline. By and large, farmers are price takers. The latest BAE estimates for prices received and prices paid by farmers show how the rural sector has undergone a steady cost/price squeeze over the years. For example, since the September quarter 1983---just after the last drought broke--- the ratio of prices received to prices paid has fallen on average by about 10 per cent.

I do not need to emphasise the importance of the farm sector to Australia. Farm output amounts to about 5.7 per cent of GDP. Its contribution to exports of goods is much higher, at around 40 per cent. Without that contribution to exports and activity, Australia would be much the poorer. For that contribution to continue, Australia's cost structure must more closely reflect its international trading environment.

b) How Unions Affect Cost Structure The Statement of Accord between the ACTU and the ALP shows how broad the influence of the unions upon all facets of Government policy can be. The coverage of the so-called 'social wage', for example, extends to almost every conceivable area of activity. The ramifications of the Accord result in major union influence upon all elements of cost structures faced by farmers and other producers.

Farmers are very conscious of the influence of union power on (i) labour costs, (ii) other current input costs and (iii) capital costs of production. These influences can be quite obvious or more indirect.

Labour Costs

Both rates of remuneration and performance are directly affected. Unions have used their industrial muscle to push up wage and non-wage remuneration rates. Unions have also undermined productivity growth---which otherwise would reduce the adverse effects of cost increases---by forcing the adoption or retention of a whole range of productivity-destroying practices (e.g. the present method of applying the tally system in the meat industry, and overmanning on railways). The arbitral authorities, by and large, have ratified these claims and given them legal force.

Other Current Input Costs

The effects of union power are seen in input prices through a variety of channels. Apart from the direct effect of changes in unit labour costs on such prices, there are indirect influences as well. Protection policy---strongly supported by key unions---increases input costs and holds the exchange rate higher than otherwise would be the case, putting exporters' competitiveness from both output and input perspectives. Increases in government taxes and charges add further to input costs. Union influences on public service salaries and on the level of unemployment add to these charges by increasing public spending and the demand for tax revenue. Indeed, the problem of excessive public sector spending is substantially attributable to problems arising from the exercise of union power, as perusal of the elements regarded by the unions as sacrosanct parts of the 'social wage' suggest.

Capital Costs

The interest rate and debt stock implications of large public sector borrowing requirements are now obvious. High levels of public sector spending---in part the result of union excesses---are the prime cause. Those borrowings are at present combined with an automatic, formula approach awarding regular wage rises (largely 'justified' by, of all things, our excessive inflation rate). That system is regarded not only as being unable to cope with, but also as ignoring, the requirements of a flexible exchange rate and difficult international trading conditions. Interest rates have been at record levels. They are perceived by the Government to be needed to support the dollar against 'irrational' selling pressure. But why support the dollar? Why not let it float more freely? The Government is worried that a further fall in the dollar would precipitate a devaluation/inflation spiral. That spiral would be the probable result of the wage system that the unions have insisted that the Government retain. The Government is not prepared to confront that reality.

By driving up production costs in almost every conceivable way, union influence in Australia is the most important single controllable impediment to better economic performance:

  • union influence retards progress towards reducing inflation and unemployment;

  • union influence deters increased investment (both by driving up required rates of return and, through direct action to disrupt projects, by generally putting investors off). Without that investment, sustainable growth and rising living standard cannot be achieved;

  • union influence hampers resource allocation to the most efficient areas of activity, imparting a defensive, inertial attitude to industry.

Union power in Australia operates over time to undermine living standards for non-unionists. By slowing attainable real growth, it also reduces prospects for better real living standards for union members themselves.

c) Australia's Economic Performance, Policy and Prospects: Some Myths

The influence of unions is regarded by many in Australia as an immutable constraint, akin to overseas economic conditions or the weather.

Acceptance of such views has contributed to the development of a number of myths about Australian economic performance, policy and prospects. These are properly regarded as self-imposed limits upon realisation of Australia's economic and social potential. They illustrate nicely the channels through which unions affect cost structures. I would like to focus upon three of them, identified by the following assertions:

    (i) the accord has worked;

    (ii) Australia has a floating exchange rate;

    (iii) it is not possible to alter wage relativities in the Australian context.

I believe that acceptance of each of these myths, and failure to address the controllable factors underlying them, is a recipe for further economic mediocrity, both absolutely and relative to other countries.

(i) The Accord Has Worked

Let me stress that, while they disagree with its detail and with the way it was finalised, farmers have no difficulty at all with the central objectives of the Accord which are simultaneously to attack inflation, and unemployment. Farmers also have no problems agreeing with the mechanism linking labour costs and those objectives. As with all so-called incomes policies, the core proposition of the Accord is that cost restraint will allow a retreat from 'stagflation' toward better economic performance. Lower labour costs mean more jobs and less inflation.

But what runs are on the board? To be sure, rates of unemployment and inflation have been reduced recently and, however achieved, that is a source of some satisfaction. But there is a long way to go. Inflation is at present running at about 7 per cent. It is around twice that of our main trading partners. Inflation is still too high, both absolutely and relative to our trading partners, and seems likely to remain so even on the basis of official forecasts. Unemployment is still high---just under 8 per cent of the work force. The youth unemployment rate is nearly three times as high. The Government tends to be very cautious when asked to forecast unemployment prospects. Unemployment remains as a major problem too.

In terms of its own central objectives then, the Accord has not worked---at least not yet. Given that its real claim to fame is its asserted ability to allow full employment with low inflation, it remains fully to be tested.

Moreover, what prospects are there for success? The Accord's framers and its defenders at least implicitly accept that wage and labour cost restraint is crucial for success. The ACTU, for example, warns of a wage explosion, with all its dire consequences, if the Accord is abandoned. However, the key wage fixing Principles enshrined in the Accord---especially national wage indexation to the CPI and national productivity guidelines---operate directly to retard reductions in inflation and unemployment.

  • By definition, the objective of wage indexation (Principle 1) is to ensure that real wages do not fall. Wage indexation, per se, does not help to reduce real labour costs or contribute to an easing of inflation.
  • The only other avenue for reducing production costs---and thereby inflation and unemployment---is productivity growth, but unions want that to be appropriated for existing wage earners in national productivity increases (Principle 2), regardless of industry or enterprise performance.

In short, through the Accord and Accord Mk II, unions have been allowed to impose major limits upon the extent to which production costs can be reduced, and thereby upon prospects for the full achievement of the objectives of the Accord itself.

In fact, success to date---such as it has been--- has been due substantially to cost restraint. However, if cost restraint since 1982 is attributable to anything beyond underlying market forces, it is surely not to Principles 1 and 2. Rather, as. far as institutionalised wage fixing processes go, it is the direct result of:

  • the Fraser Government's wage pause, which continued well into the Hawke Government's first term;
  • the CPI consequences of the introduction of Medicare (the 'Medifiddle'): the CPI did not increase in the first half of 1984, and therefore there was no indexation adjustment of wages, even though other price indices increased over that period;
  • the postponement of any consideration of wage increases on account of any so-called national productivity claims.

That is, to the extent that it has been secured, cost restraint has derived from exceptions to the main wage fixing Principles in the Accord. The mechanism intended to promote the Accord's objectives---reduced costs of production---works.

(ii) Australia Has A Floating Exchange Rate

Technically, of course, it is true that the value of the Australian dollar is determined by the market; that is, by demand for and supply of foreign exchange. That was stated as the immediate objective of the Government's decision announced by the Treasurer on 9 December 1983.

However, 1985 has seen substantial declines in the value of the Australian dollar. In the second half of 1985, the market---or at least the private sector players therein---were accused by the Government of being 'irrational'. That is, the Government believed that these market participants' views about domestic policy and prospects, including wages and labour cost prospects, were wrong. ('Rationality' and 'consensus' seem to have one thing in common: they both involve acceptance of Government/union views.)

Accordingly, monetary policy was tightened, resulting in a marked increase in Australian short-term interest rates over the course of the year from around 13.5 per cent early in 1985 to about 20 per cent or more by year's end. This action was dictated largely if not wholly by a desire to maintain the value of the Australian dollar.

Left to itself, and in the absence of other policy action, the dollar would undoubtedly have fallen to much lower levels. Substantial intervention was considered essential in Australia's 'best' interests.

Is the exchange rate management situation post-9 December 1983 really different in a fundamental sense from that applying before that date?

To be sure, there is now no scope for net foreign exchange inflows or outflows, and that volatile influence on domestic monetary aggregates has been replaced by more volatility in the exchange rate itself.

However, concerns about domestic policy and institutional inadequacies remain, and official acceptance of the need to offset these by intervening to influence the value of the dollar also remains.

Concern about the inflationary impacts of devaluation, arising out of Australia's wage fixing arrangements, militates in favour of Government intervention to support the dollar (mainly by maintaining tighter monetary policy settings and therefore higher interest rates than otherwise would apply). The adverse effects on business and consumer confidence of a devaluation/valuation spiral reinforce these views. Concerns about the effects of devaluation upon the servicing and repayment of Australia's overseas debt work in the same direction.

However, all along there has existed an alternative policy approach open to the Government to maintain a strong dollar namely, Government action to change the system of indexed wage determination: through renegotiation of the Accord.

London and New York based money market operators advise that the downward pressure on the $A stems from a view that Australia has an inflation problem. They see the inflation problem linked primarily to a rigid, indexed wage system. They do not believe that the Australian Government has the resolve to tackle this underlying cause of the inflation problem. Without such resolve, propping up interest rates becomes the overriding policy response.

In fact, the failure to deregulate labour market arrangements at the same time as the foreign exchange and financial markets were liberalised has now produced one depressingly familiar result. Specifically, Australian economic policy must still rely heavily upon the 'blunt instrument' of monetary policy to regulate the economy. Ironically, the Accord was supposed to obviate the need for such blunt instruments. In the event, the main elements of the Accord, notably wage indexation and provision for national productivity-based wage increases, have not avoided that result. If anything, with a floating exchange rate, they have made it more certain.

The Government is aware of the problem. Partial (but delayed) discounting, and some further postponement of the productivity claim, as included in Accord Mk II, are a very limited reflection of that. In the end, however, the unions have been able to limit the Government's preparedness to act.

Australia's exchange rate and official intervention policy have been determined by the unions. Through high interest rates, that influence is operating to subdue investment prospects and thereby undermine capacity for sustainable growth. The adjustment burden is being diverted: the share of that burden that properly falls to wage and salary earners is being shifted by unions onto the jobless, employers, farmers, and other groups.

This is not to say that a lower value for the Australian dollar is desirable in all circumstances. Devaluation involves a loss of national income. If greater wage restraint was achieved or even expected, there is little question that selling pressure on the dollar would be reduced if not eliminated, without the need for deflationary domestic policy. The international capital market does see a strong future for the Australian economy if a credible anti-inflationary policy is put in place. The strategy, incidentally, would be wholly consistent with the objectives of the Accord.

The central point is that unions are preventing the exchange rate working efficiently to preserve external balance and sustain strong domestic growth.

The dollar is not floating: it is under the old management in a new guise.

(iii) Wage Relativities Cannot Be Altered

The preceding myths relate mainly to perceptions about the degree of average labour cost restraint that is believed to be feasible.

But wage relativities are also believed to be inflexible because of union insistence, in various forms, on 'Comparative Wage Justice' (CWJ). CWJ is a key element of 'industrial relations realities'. In fact, the Minister for Employment and Industrial Relations recently stated that the Government did not believe that relativities could be adjusted under the present centralised system without threatening what little wage restraint Australia has already secured. That is a most telling comment on that system. It also speaks volumes about official perceptions of union power. Is the Minister saying that the Government is not in control? Is he suggesting that the Arbitration Commission is not in control? If he is, then the system is in need of change.

Inflexible wage/labour cost relativities contribute to pockets of greater inflation and unemployment than would otherwise develop. Such inflexibility does not help to reduce inflation and unemployment, despite the stated objectives of the Accord.

In fact, wage relativities have been adjusted in Australia in the past. Some examples serve to illustrate these obvious points.

First, in the case of pre-tax/subsidy rates of remuneration:

  • rates of pay for women, youth and unskilled labour have been increased relative to other rates, on 'social justice' grounds;
  • 'plateau' indexation in the 1970s, per se, operated generally to raise lower income levels (for those with jobs) relative to higher income levels, again on 'social justice' grounds;
  • in terms of award wage relativities across industries, even the Arbitration Commission has allowed change---at least temporarily (e.g. the Pastoral Award was not adjusted fully to the so- called metal industry 'standard' in 1982: that decision was delayed until 1985).

Second, in terms of post-tax/subsidy rates of pay:

  • the intended squeezing of relativities in favour of lower income groups by the income tax system is also apparent although the actual degree of income redistribution probably falls well short of that intended because of major design deficiencies in the tax system.

Third, in terms of post-subsidy rates of pay as perceived by the employer:

  • The so-called 'Priority One' project, and other wage/training subsidy schemes, are intended, inter alia, to change relative costs of employing specified members of the workforce or to increase their skills at no, or reduced, cost to the employer.

The first and third of these sets of changes are related.

The first involves raising relative rates of pay for lower income/less skilled groups, despite relative increases in the number of such people seeking work in pre-tax terms. This movement has been built into the award structure.

The third involves increases in subsidies and other expenditures by governments to lower the cost of employing younger, less skilled job seekers. In effect it attempts to reverse the abovementioned narrowing of award relativities, as faced by the employer, but at the expense of the taxpayer, rather than employees.

The net effect of these two movements has been to divert needed wage flexibility into increased public spending, taxes and borrowing.

In short, there has been some flexibility, but in net terms, as revealed, for example, by relative unemployment rates for youth and the unskilled, it has either been in the wrong direction or at least inadequate. In either case, unions have been a major cause of the problem.

Ultimate Constraints on Union Power: Economic Realities

Implicit in the foregoing comments is the fact that union power is ultimately constrained by the economic realities of Australia's situation. Unions cannot extract more from the private sector in remuneration and benefits than it can afford to pay. Farmers know only too well how the adjustment mechanism works. Excessive union demands boost the cost structure to a point where labour is laid off and/or some farm operations close down. The problem is that the present adjustment mechanism imposes too much damage---often irreparable damage---upon particular groups, such as the unemployed, farmers, and other small businesses, and, finally, upon the economy more generally.

The choice lies between allowing larger and larger doses of economic pain to constrain union irresponsibility on the one hand, and effecting enforceable legal restraints on union power, on the other. The more the latter restraints are binding, the less Australia needs to suffer poor economic performance, and conversely.

This fundamental tradeoff must more widely be understood. Here, too, the Accord and Accord Mk Il fail---indeed they are counterproductive. For example, Accord Mk II suggests to wage and salary earners that they do not need to shoulder their share of the adjustment burden required by the devaluation of the dollar. Specifically, pre-tax discounting of wage indexation (intended to respond to the price effects of devaluation) is to be countered by income tax cuts, preserving post-tax incomes. In fact, of course adjustment is taking place to a degree. To the extent that the tax cuts are financed by 'bracket creep', they are illusory. To the extent that they are not, then they must be financed by expenditure cuts, by more borrowing (higher interest rates and public debt), or by more inflation, all of which involve burdens for some groups, including, but not only, wage and salary earners. The central point, however, is that these adjustment paths are less direct and less understood: there is probably greater scope to 'con' the unions. If policy operates on this 'pea and thimble' level, is it any wonder that a 'cargo cult' mentality about remuneration prevails in Australia?

How, under this regime, can we expect Australians to shoulder their economic responsibilities, rather than behaving like undisciplined children?

Australians need to be told it like it is. To my knowledge, there is no historical precedent supporting the proposition that appeasement constrains the activities of any entity having unusually wide powers and privileges. There are plenty of contrary examples.

Those powers and privileges must be addressed directly, regardless of the groups possessing them. It is the responsibility of governments, for the common wealth, to address them. So far from accepting this responsibility, successive governments have run away from it. The Accord and Accord Mk II are examples of appeasement. The Government's continuing disgraceful conduct in relation to the Mudginberri dispute is a classic example. This Government seems destined to relearn the lessons of history through deteriorating economic performance in Australia over the latter part of 1986 and beyond.

Some Policy Orientations

Farmers cannot agree that avoidable constraints upon economic performance should be accepted when unavoidable constraints are making life difficult enough for them as it is. Australia can do better---if it wants to.

I believe that the following three elements must be included in a policy program directed at sustainable improvements in Australia's economic performance.

1. Under present centralised wage fixing processes, there should be no improvements in award conditions for as long as Australia continues to have either unemployment or inflation problems. Principles 1 and 2 should be suspended indefinitely, at least pending restoration of full employment and durable growth. That is our position in the current National Wage Case.

This proposal should receive full Government support. It is directed at the objectives simultaneously of reducing inflation and unemployment. It exploits the mechanism (production cost reductions) already used with some success by governments both here and overseas in the recent past. For example, in response to similar economic conditions in Denmark in 1982, wage indexation was suspended, and a temporary wage freeze was put in place. In response, interest rates fell from 21.5 per cent in 1982 to 13.5 per cent in 1983. Inflation trends were reversed, and began to decelerate more strongly than abroad, and exports grew in 1983/84 by 7 per cent.

2. Provisions of the Trade Practices Act applicable to unions should be retained. They have proved effective, when used, in restraining abuses of union power.

3. All sanctions against both employers and unions at present contained in industrial legislation should be abolished. The Hancock Committee has proposed this in respect of unions. The NFF simply seeks the same treatment in respect of employers.

The first of these elements is restrictive. That reflects Australia's present economic situation. Further inroads into unemployment and inflation require lower production costs.

The second element continues direct legislative restraint on the abuse of union power in the interests of fair trade.

The third element recognises the ineffectiveness of sanctions on unions under the Industrial legislation, and seeks to balance that with corresponding adjustments with respect to employers, in the interests of better economic performance.

I believe that this third element will have a number of desirable effects:

  • it will bring about no dramatic change, but a freeing up at the periphery of the economy;
  • it will lead to a reduction in the importance of centralised authority in the industrial arena, that is, 'The Club';
  • it will, I believe, re-establish the personal responsibility of employers and employees for their own industrial welfare;
  • this proposal allows for what will be, over time, the most important change in industrial relations since 1904, without causing panic or dislocation to the great majority of employers and unionists;
  • it is able to be achieved by the repeal of a number of provisions in the Act in one set of amendments. It does not require a series of amendments over time;
  • it is entirety compatible with the increasing demand for further flexibility in our economy and it does not force alteration, lt allows change,
  • this proposal would provide business in trouble with the option of going to its employees and allowing them to decide to join the firm in fighting for its future rather than compelling the firm to sack all or some of them;
  • the eventual effect would be to bring the wages system to a combination of adjudication and contract;
  • nothing in these proposals should lead to the removal of regulations affecting registered organisations. They can remain regulated without in anyway restricting the deregulation of individual employers and employees;
  • implicit in this proposal is the eventual re-establishment of the employment contract between employer and employee enforceable at law, and able to be prosecuted by the existing inspectorate machinery.

The employment contract constitutes the core of an alternative system that more fully acknowledges the economic realities faced by Australia. In particular:

  • it allows scope for different arrangements reflecting differing industry/enterprise conditions and prospects;
  • it ensures that those directly affected by their results have the responsibility for framing conditions of employment, engendering greater commitment thereto;
  • it enhances perceptions of the common interests of employer and employee in the economic performance of the enterprise/industry concerned, operating to minimise industrial disputation;
  • above all, it restores perceptions of the fundamental link between reward and performance, and breaks down the 'cargo cult' perceptions of wage/benefit increases that have built up under the centralised wage fixing system. In that sense, it is not restrictive at all, but rather an incentive to better economic performance---and rewards therefrom---as the Mudginberri example so clearly illustrates.

I suspect that many members of the Government and the Labor movement would strongly identify with the advantages of removing the penalties for all.

Let me quote two authorities. First, John Ducker, at the time Senior Vice President, ACTU, and Secretary of the NSW Trades and Labour Council, March 1972:

    'So constant repetition of the phrase that arbitration cannot work without sanctions is pointless. It emphasizes only that he who uses the phrase has not thought about penal provisions, their inherent injustices, or even examined history.'

The second was in December 1971 by Clyde Cameron, Labor Member for Hindmarsh and Minister for Labour under Edward Gough Whitlam.

    'In Labor's view, such an award or agreement fixing national minima only will not entail penalties against either unions or employer organizations if their members breach it. Penalties in this area are entirely wrong and unfair'.

We must insist that the Government shoulder prime responsibility for facilitating the implementation of these proposals. Groups such as this Society must assist the process of public education that will be needed to ensure that the Government faces up to its responsibilities.

If our elected leaders do not face up to these policy realities, then, sooner rather than later, the electorate must force these policies on them.

Why HR Nicholls?