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
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.
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
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
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
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
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.
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
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
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
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
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
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.
- 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
- The Accord has been worse than unhelpful.
I invite those who think otherwise to tell me where
Why HR Nicholls?