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Opening Address

John Hyde


Mr Chairman: Why, when advertising this evening, Ray Evans should have described me as distinguished I cannot say. What does it mean, Ray? Do you think that, just because I am irascible, I am getting old? I have an excuse for my irascibility. I was driven to it by the Wool Corporation, the Wheat Board, and the Arbitration Commission---those legalised tyrants who tried to tell me what to work at, when to work or for what price. Well, let me tell them that, although they mostly did have the last laugh, they didn't win every time. I remember, for instance, one Sunday evening during the 1969 drought drinking to the absence of the AWU. I was drinking with shearers who, toward the end of the fifth run-of-the-day, had just pushed the last of my skinny sheep down the chute.

Those shearers earned a lot of money that day and I got my sheep onto feed before morning. We both got what we wanted and to get it we broke the law. Distinguished intellectuals, perhaps even Professor Hancock or Mr Kelty, might tell you that what we did was wrong, but it certainly did not seem so to any of us in that shearing shed---sorry, now that I am a Victorian, woolshed.

One of the troubles with intellectuals is that they tend to see themselves sitting at the tops of dung hills instructing the microbes within. As if by instinct, they design Wool Corporations, Arbitration Commissions and central plans of all sorts. We microbes---before I was distinguished, of course---are expected to enjoy it and, if not, then, because the whole is greater than the parts or for some reason that is equally fatuous, put up with it.

Karl Marx had predicted the emiseration of the working class, and union monopolies and minimum wage laws were instituted to prevent that from happening.

The Great Depression convinced many people that emiseration meant not, as Marx thought, low wages but unemployment. The intellectuals portrayed unemployment as a scourge of market economies. This was easier to do before we had heard the Polish joke, 'We pretend to work while they pretend to pay us'. The central planners of most Western nations designed countless schemes, known by acronyms such as RED and CYSS, to overcome unemployment. In case these should fail, they agreed to pay us for not working. The dole in most Western nations is higher than the wage in most centrally planned economies.

In spite of the prodigious efforts of planners, unemployment continues to blight the so-called market economies. I will, however, argue that it is caused by the efforts of the planners and not by what is left of free markets.

The Perfect Market:

All markets to some extent fail---the perfect market is a house of straw that provided endless amusement to socialists and special pleaders. Nevertheless, the frictionless market serves as an ideal against which to test public policy. We can with profit ask: does the public policy in question make the relevant market more or less nearly ideal?

In a perfect labour market, each worker would price himself/herself at employment levels and move to where the price was highest. In the real world, however, the cost of moving can be temporarily or even permanently prohibitive. Some markets for employees, such as those for executives, are obviously much more efficient than others, such as for wharf labourers, and some nations plainly have much more efficient labour markets than others. We should understand why.

Ronald Coase, a British refugee from Keynes at Chicago University, noted that no matter what rights including rights of property that people started with, in a perfect market---that is one where knowledge and trading were costless---people would keep on exchanging their rights until they reached a point at which no further gains were possible. This would be the same point irrespective of the initial allocation. Then, not only every person is employed as he/she wants to be, but so is each capital item employed where it is most productive.

This is not the real world. It takes time, and hence money, to find the ideal trading partner, more to draw a contract, more to enforce it, there may be taxes to pay and so on. Inevitably, we stop trying to trade at the point where we believe that the gains from further exchange are equalled by the transaction costs.

It is useful to ask whether particular government actions increase or decrease transaction costs. Much that governments do reduces the costs. Governments maintain property rights, enforce contracts, punish untruthfulness, and define some useful standard forms of contract. However, other things they do raise transaction costs. They tax exchange itself, ban advertising, demand costly paperwork, insist upon registration with inefficient bureaucracies and simply ban deals that do not conform to the central planners' ideal of prices and practice. People die because potentially life-saving drugs are unregistered and others are unemployed because the job they want is illegal. The penalties incurred for shearing on a Sunday, for instance, are so high a transaction cost that they are usually prohibitive.

Hong Kong:

Some countries seem to have less friction in their labour markets than others. Hong Kong has absorbed wave after wave of refugees from mainland China and Vietnam, yet, by Australian standards, the colony has had only modest levels of unemployment and the peaks have been mercifully short. Success did not rely on selective migration. Many people with skills and capital migrated from the developed world, attracted by relatively low taxes and high business activity. Most, however, were refugees who brought little physical capital and few formal skills. Even so, average living standards, that is with the penniless new refugees in the count, rose as fast as anywhere in the world---a remarkable achievement.

Sadly, fear of incorporation within a very different society, mainland China, has stopped the Hong Kong miracle. If it hadn't, growth trends of our two countries would have seen Hong Kong's living standards pass Australia's within a generation. Certainly there are great differences in wealth to trouble the envious, but we rejoice that the poorest people can earn respectable livings and tend to grow rich.

The Hong Kong administration ran its economy by the text books---that is trade in both internal and external markets that was more free than anywhere else in the world. Placed, as it is, alongside centrally planned economies, Hong Kong is an important social experiment. Among other things, how this tiny economy found gainful employment for the rejects of nearby socialism, is a question worthy of an answer. Like all good social scientists, we should ask what distinguishes our subject. I can think of four significant differences Hong Kong has with Australia.

    1. Our populations are racially and culturally different. Hong Kong people tend to slanted eyes and have, it is said, been exposed to the Chain ethic. However, as an hypothesis to explain the economic success of all things Chinese, race and Confucianism fail dismally in, at least, North Korea, Vietnam and mainland China. Perhaps there is a more relevant racial/cultural trait but it is not apparent to me.

    2. After World War II Hong Kong started to grow from a very low economic base and it therefore was able to make high percentage gains by importing modest amounts of technology and capital. But poverty did not produce growth in most other countries. Besides, for some time now Hong Kong has not had a particularly low base from which to make high percentage gains. Neither have most of the other high-growth nations from East Asia to Western Europe. In any case, isn't the idea that it is poverty that allows a country to give wealth to refugees rather too counter-intuitive?

    3. Hong Kong is not democratic and I have heard it said that such economic success would be impossible where people have the vote. This hypothesis won't stand analysis either: in general, economic success and political success, which I equate with democracy, correlate highly. Other aspects of the way Hong Kong was governed may have been important, however. These aspects include the rule of law, civil liberty and economic rules that were, until the mainland threat, certain.

    4. As we have already observed, Hong Kong has few legal barriers to the internal or external exchange of goods and services at mutually agreed prices and upon mutually agreed conditions. Trade and employment are not much regulated, nor are they subject to many discriminatory taxes. Land allocation and housing are, perhaps, the most important exceptions---but, those markets are not part of Hong Kong's success story. They are characterised by queuing and accusations of favouritism.

In summary: Hong Kong has enjoyed strong government that preserved the civil liberties and property rights of its citizens but which did not much interfere with commercial freedom. In these circumstances alone I think we have identified conditions that are to be found in all successful economies, except those with great oil wealth, and which are to be found in no unsuccessful economies.

The Australian Labour Market:

Just as the markets for land and housing were something of an exception in Hong Kong, the market is often an exception in many otherwise successful economies. We find in each case that their governments' liberal attitudes to commerce do not extend to the labour market. Unlike Hong Kong their governments, no doubt from the very best of motives, impose high minimum wages, regulate the terms of employment, and subsidise unemployment with unemployment benefits. (Hong Kong does, in fact, pay social security to needy families but this does not seem to have been at levels that have much discouraged employment.)

Let us turn now to Australia where economic growth is poor, real incomes are declining and six to seven percent of the workforce are 'normally' unemployed. Unemployment is higher at present.

To have even six percent of the workforce doing nothing or very little is, of course, a great economic loss that will ensure that our children are very much poorer than they need to be. Of course, in terms of economic production, it may not be as bad as that---some of these six percent may be doing more than they admit. Then again it may be far worse when account is taken of the so-called hidden unemployed. Assuming that the six percent figure is accurate, and assuming that the unemployed people are potentially, on average, only one third as productive as the employed people are now, then GDP would be two percent larger if they were in work. If these unemployed were to live off current earnings, then the equivalent of the unemployment benefits plus their personal dissavings would, without affecting average living standards, be available to invest or to service the foreign debt. The economic cost of unemployment is obvious and I will say no more about it.

Unemployment is not, however, just an economic tragedy. Even if the dole offered a lavish lifestyle, to be forced into childlike dependency upon others would, for most of us, be galling. We have a deep-felt psychological need to be able to say that so much is ours or our family's, because we earned it. Further, we want to acquire skills and reputations that will take us to higher incomes and more interesting work. In short, once we reach adulthood, we want to make our own way and are distressed when we cannot.

If you want, you may call this psychological need a bourgeois value or a form of false consciousness. I merely ask you to admit that it is real. The frustration experienced by the unemployed is, in fact, well documented---not least by those students of the human condition who claim to despise bourgeois values and false consciousness. If unemployment is a burden and some people are denied work by law, can the law be just? It's funny that the Human Rights and Law Reform Commissions show such a singular lack of interest in the right to work--- if it were not for their charters, one would suspect that they had an ideological distaste for civil liberty.

If, alternatively, people are being seduced by unemployment benefits into dependency, then we have a problem of another kind---one with something in common with the drug problem. There would be a measure of injustice in the fact that hard-working people were being forced to subsidise other people who could work but won't. But, for me, the even bigger issue would be the harm done to those whom we subsidise.

In Western Australia there has recently been a considerable hullabaloo about people feeding dolphins to attract them to beaches where tourists may view them. Rules are now in force to restrict the practice, lest the dolphins become dependent on the handouts and fail to learn how to fend for themselves. Should we not have a similar concern for the human species?

Yet, if we were to countenance laws that prevented people from working and we were not to provide the resultant unemployed with an alternative income, then we would commit an injustice equivalent to denying the dolphins access to the fish in the sea without providing the alternative dole of fish.

What, in fact, are we doing?

It strikes me that our parliaments have done two things that are relevant:

  • First, they have passed laws which confer powers upon quasi-judicial bodies to determine and enforce minimum conditions upon which an employee may accept and an employer may offer paid employment. As the recent courtroom successes of Trouble-Shooters and other cases show, the tribunals' rulings do not, by any means, cover every circumstance in even the unionised industries. Further, these, in my opinion iniquitous, laws do not, even in theory, cover quite large industries such as baby-sitting, and are to some extent ignored in some others such as agriculture. Nevertheless, that part of the total labour market which they do cover is said to be eighty percent.
  • Second, our parliaments have legislated to pay people who do not work.

The Marginal Worker:

Now let us conduct a mental exercise, placing ourselves in the shoes of a marginal worker---that is, one who can almost secure a job and/or who almost wants one. It may help to think of somebody we know.

She will sensibly and quite properly construct a mental ledger. On one side will be the dollars she can get for sitting at home and the fares and other costs, including loss of leisure, involved in holding down a job. On the other side she will put the expected pay packet, the value of having a foot on the employment ladder, and probably an enhanced feeling of self-esteem.

Obviously, the higher the monetary reward she can command, the more likely she is to choose work. The person I am thinking of is an artist. She has, in fact, always been able to find enough paid work to keep the wolf from her door. Sometimes, however, the search costs have been high and the pay low. When things were tough, she found her work in the unregulated part of the labour market. She baby-sat, nannied, worked in pubs and tendered low for particular jobs. In her markets, particularly the non-art markets, she faced intense competition from other refugees from the regulated labour market. So intense was the competition that weekly earnings, less search costs including time, usually fell below the unemployment benefit. A high price was placed upon her pride.

The point I want to establish is that one of the effects of an artificially high minimum price for labour in the regulated market is to force more people into the unregulated market driving down the earnings in that market. There is always work to be done, but in the regulated market it may be at a price that does not pay anyone to offer it, and in the unregulated market it may be at a price that does not pay anyone to take it.

The line between the regulated and unregulated markets is, because of widespread illegality, not as clear as I, for the sake of exposition, have portrayed it, but anything, such as the recent Trouble-Shooters' case, that increases the size of the relatively unregulated market, increases both the supply of jobs and the price of the lowest-paid jobs. To ask whether people are driven or seduced into dependency is a bit like asking which blade of the scissors cuts the cloth. It is clear, moreover, that the poorest people---those without jobs in the regulated market---are those who will benefit most from labour market deregulation.

For simplicity sake, I have to this point spoken of the price of employment as though it were merely wages. However, the price of a job to an employer is its total cost-wages, insurance, holiday pay, the cost of termination, hassle and the rest---per unit of output. And the price to an employee of working is, in fact, the other activities foregone by working---looking after the kids, gardening, surfing and the rest. Obviously, in the absence of rules forbidding private deals, there would be room for agreements that lower the relevant costs and/or increase the returns of both parties---of, so-called, win-win transactions.

In Hong Kong only the small public sector is highly regulated---a fact that surely accounts for that territory's exceptional ability to absorb workers in circumstances where each party wins.

The Accord:

In Australia, 'What about the Accord: hasn't it reduced wage demands and increased the supply of jobs?' is a common response to calls for labour market deregulation. My short counter-responses are: 'What about it?' and 'No'. But, given the popularity of the Accord in some circles, more is called for.

A corporatist state is one in which powerful groups, such as the ACTU and the Confederation of Australian Industry, have a formal role within the processes of government. Many people who were appalled by the possible political consequences of Mr Hawke's corporatist state, nevertheless thought that it might deliver economic benefits. I was one. Hadn't Mussolini made the trains run on time? Hadn't Singapore, Sweden, post-war Austria and pre-war Nazi Germany all once enjoyed high-growth economies? Sweden's poor economic performance during the past ten years means we must now exclude it from the excuses of corporatism.

Mark Wooden (Economic Papers, June 1990) looked at corporatism and labour markets. Treating unemployment on full pay as employment, he argued that international evidence suggested that unemployment is kept low in highly centralised systems---examples might be Eastern Europe and the Melbourne tramways---and also in highly decentralised systems, such as Hong Kong. The half-and-half economies, such as our own, had the highest rates of unemployment. He ranked 17 nations placing Australia upon the high-unemployment hump midway between the two extremes.

The Accord---to the extent that it is an instrument of economic rather than political policy---is an attempt to shift Australians off the hump toward the corporatist end of the spectrum. Deregulation would be an attempt to shift us off the hump in the other direction.

He argued that in economic terms the corporatist experiment failed because unions could not deliver sufficiently low real unit labour costs either by restraining incomes or by raising productivity. To deliver as much 'restraint' as was achieved, the unions were given control of the government's fiscal policy---a typical corporatist trade-off. (At the political level, i.e. the allocation of power, the Accord achieved more or less what it was intended to achieve---a fact that reflects credit on its architects.)

The Accord enabled the unions to force the government to rely excessively on interest rates and produced the recession we had to have. And the Accord increased the strength of the union veto over policies, such as privatisation and deregulation, indeed on any area on which there is an ACTU view. These are mostly the issues that affect productivity.

The relevance of the Accord to overall unemployment is not that the union veto kept some people in relatively unproductive jobs that would, but for the Accord, have been abolished---those jobs were more than offset by jobs lost in the industries that used the consequent high-cost poor-quality services. The Accord, by preventing productivity gains which could have lowered unit labour costs, lowered the minimum wage at which any given number of people were forced out of work. So it was that the older, more securely employed, workers who run the unions pushed their younger, less skilled colleagues off the employment perch. Thus, even with our unsatisfactory centralised award system, the Accord was unhelpful.

About a year before Mark Wooden's article appeared, the IPA's Des Moore had taken the Accord apart in the Australian Bulletin of Labour. His data are now dated but his message holds. It is:

    1. The Accord has not produced wage restraint. Certainly the rate at which wages grew about halved during the time of the early Accord and that allowed employment to improve quite dramatically. But Australia, nevertheless, had the highest nominal unit labour cost outcomes of any developed OECD country except---wait for it---Sweden and Finland. The apparently modest wage increase no more than reflected the depressed labour market and union unpopularity. (Private sector union membership dropped from 39% of the workforce to 34% between 1982 and 1986.) All things considered, it is reasonable to marvel that wages rose by as much as they did.

    2. Compared with the years immediately before the Accord, there was relative industrial peace under the Accord, but we don't need an Accord to explain that. The decline in strikes, which was in any case part of a world-wide trend, was largely the effect of starting from a year of exceptional unrest. Further, there had been Mudginberri, Dollar Sweets, Robe River etc which taught the unions the potential reach of common and trade practices law.

    3. The Accord did not produce rising employment. What really happened was that employment growth returned to its long term trend of about 2%.

    4. The Accord did not improve productivity. It matters not whether we consider labour productivity, capital productivity or total factor productivity: productivity growth fell during the first five years of the Accord when compared with the previous five years. Although labour productivity has picked up recently, mainly due to labour shedding, the overall effect of the Accord remains bad.

The Accord has, moreover, contributed to our debt problem. To buy union acquiescence in wage restraint---which was, in any case, delivered in no greater measure than economic circumstances demanded--- the government spent in ways that stimulated the domestic economy. The traded-goods sector shared in little of the expansion which was concentrated within the public sector. Consumption rose relative to GDP, whereas investment in equipment did not. Overseas borrowing first financed this increase in Australian consumption, and is now paying the interest bill while foreign indebtedness continues to grow.

As Des pointed out, it is reasonable to argue that, had the government not been locked into its 'social wage' commitments, it would have forestalled the very serious debt situation by pulling in its own financial head.

Who wants an Accord with that record?

The other blade of the scissors:

Finally, there is the other blade of those scissors to consider---the rewards or absence of cost for the potential worker who stays at home.

Unemployment remains a considerable incentive to inactivity. The real level of the benefit has not been changed by very much since Labor came to power in 1983, but eligibility has been restricted.

Additionally, I believe that attitudes to work have changed first in one direction and now the other. Unemployment rose sharply under the Whitlam Government and has never settled back. Largely for want of another plausible explanation, I think that at that time, only partly because of Labor's rhetoric, unemployment became a more acceptable way of life. I believe that I now detect evidence that that attitude is being reversed. I nevertheless still look forward to a day when the battler is again given the respect that is his/her due. Indeed, I regard the fostering of a proper respect for honest toil as an important part of the H R Nicholls Society's role.

In Summary:

  • Some labour markets work much better than Australia's, for example, Hong Kong, Japan, Italy because of its black economy, and the United States.
  • Ours works badly because of both the high cost of offering a job and the high cost of accepting one.
  • The Accord has been worse than unhelpful.

I invite those who think otherwise to tell me where I err.

Why HR Nicholls?