From Industrial Relations to Personal Relations:
The Coercion of Society
Keynesian Macroeconomics Discover Key to Business Success
Dr Gerald Garvey
I. Introduction and Background
Support for collectivist intrusion into the employer-employee
relationship is increasing on the Australian policy
front. The main form, as usual, is a set of rulings
and policy documents that guarantee trade unions the
right to interfere into agreements even though neither
employer nor employee wish them to be present. The
abrogation of anything remotely resembling normal business
relations or even the rule of law is particularly striking
in the recent Industrial Relations Commission decision
to force Asahi Australia to negotiate with the Automotive,
Food, Metals, and Engineering Union even though none
of Asahi's employees had expressed the slightest desire
to have them involved. As a victorious Mr. Tim Pallas,
assistant secretary of the ACTU, put it:
- "The union had proven in the commission that it genuinely
sought an agreement but the company refused to negotiate
with the union, solely on the basis that it had no
members" (Russell, 1994)
It is hardly surprising that trade unionists should
support decisions and policies which entrench their
monopoly privileges. What is perhaps more surprising
is that high-brow academic economists have recently
been lending support to their cause. This essay will
focus on two major written pieces of support due to
the Nobel Prize winner, Robert Solow (1990) and to
the prominent labour economists David Blanchflower
and Andrew Oswald (1995). To support such measures
as complex award rates and compulsory unionism, these
authors offer the following set of arguments:
- (i) First, assert that the case for freer trade between
employers and employees rests on the textbook micro
economics model with a wage rate that equates spot
demand and supply for labour.
- (ii) Second, make a host of arguments, some basically
correct and others utterly misguided, to establish
that the textbook model is incomplete. The idea is
simply that the basic demand-supply model is an adequate
description of the market for "commodities" such as
fish and cabbage, but is seriously wrong for the special
case of labour.
- (iii) Finally, draw (i) and (ii) together to conclude
that we should advocate free trade in fish and cabbage
but that the special case of labour requires a host
of paternalistic and restrictive measures.
In previous work, I have detailed the features of
a richer economic model of the labour/employment market
and shown how it provides the opposite conclusion;
free trade is more and not less important in labour
than in "simple" markets (Garvey, 1993; 1994a, b).l
While it is true that a pure "textbook" model of the
labour market is hostile to almost any labour-market
policy or formal institution, newer "contractual" approaches
to labour markets surveyed in Part Two provide substantially
more insight into, and respect for, such policies and
institutions. The key element of the standard model
that remains, however, is the insistence that features
be mutually voluntary. Employers and employees can
agree, for example, to restrict entry into internal
labour markets in order to support ongoing employee
commitment and training. Unions and other expressions
of collective worker voice may also arise naturally.
What is much harder to rationalise even under the
richer contractual approach are government policies
that mandate particular structures or outcomes.
This approach can be justified theoretically only on
the grounds of market failure, that is, by establishing
conditions that generally lead transacting parties
to adopt features that are not in their own best interests
or in the interests of society as a whole. In practice,
apparent market failures are in fact due to government
policies. For example, the main impediment to training
is not the inherent inability of workers and firms
to structure contracts that share the costs and benefits
of such investments appropriately. Similarly, the
"free-rider" problem that is used to justify compulsory
unionism only makes sense if it is impossible to exclude
non- members from the benefits provided to paid-up
union members. This is not in fact a difficult technical
matter; the problem is rather that non-members would
have to be allowed to "opt-out" of union status and
conditions and thereby engage in ordinary competition
with union members. The only disadvantage of a direct
solution to the "free-rider" problem is that it would
undermine the monopoly power of unions, a move that
would be desirable in its own right.
The economic model is focused on the creation of wealth
through exchange between free parties. Unless monopoly
power is actually exerted at the contract-formation
stage, it matters little that one party may be 'larger'
than another. Unless we are willing to adopt the paternalistic
position that a worker does not understand his or her
own interest, there is no justification for viewing
exchange as 'unequal'. Unless one side is actually
defrauded or coerced into an 'agreement', outcomes
appear unequal only because the parties entered the
agreement with unequal wealth positions; both were
made better off by the agreement. If we wish to address
the issues of unequal wealth positions, then this should
be done in an up-front way through tax or other explicit
policies rather than turning over social-welfare decisions
to the dictates of trade unions.
The alternative to an imperfect market is not an ideal
set of 'centralised' agreements. Rather, it is an
imperfect system administered by people who do not
and cannot fully comprehend the particular circumstances
that individual employers and employees face. Worse
still, they do not, like the individuals involved,
foot the bill for any errors they commit. The 'free
choice' perspective does not need to maintain that
employees are omniscient. All that is required is
that they are better aware of their own interests and
situation than the average member of the Industrial
Relations Commission. Recall, also, that collective
representatives can be appointed if parties feel they
would gain from their expertise. The invisible hand
also extends to the market for knowledge and expert
Employers can hire more employees, hire better employees
at the same cost to themselves, and so forth, by efficiently
structuring their contracts and internal labour markets.
Only two assumptions are required for this outcome.
First, employers and employees actually must be free
to vary terms of the agreement (including union representation,
fringe benefits, and even the degree to which managerial
prerogative is exercised). Second, employees must
not be systematically duped by employers, or, milder
still, they are better placed to judge their own best
interest than are members of the industrial-relations
bureaucracy, whom they did not even appoint.
The above summarises the three essential points in
Garvey (1993;1994). To recapitulate, the first is
that textbook microeconomics does indeed treat labour
markets as essentially identical to those for commodities.
Although the textbook treatment certainly does not
capture all the richness and detail of the employment
relationship, it makes the key point that all markets
involve the mutually voluntary exchange of rights between
human beings. Mutually voluntary exchange necessarily
involves a gain for both parties. The employment relationship
merely refers to the exchange of a particular set of
Second, the past 30 years have witnessed an outpouring
of theoretical and empirical research that explicitly
recognises the fact that the employment relationship
involves a particularly complex bundle of rights, and
that the exchange can take place over many years.
This research has greatly enhanced our understanding
of such issues as career structures, the exercise of
authority of 'managerial prerogative', and the contribution
made by unions. Although such features of the employment
relationship appear inconsistent with an idealised
spot-market for labour services, they actually serve
to support rather than to restrict exchange. Thus
freedom of contract does not imply an institution-free
labour market. Rather, institutional structures develop
to support exchange.
Third, an understanding of the complexities and idiosyncrasies
of the employment relationship in no way justifies
the coercive features of the Australian approach to
the labour market. Nor do proposals advocating enterprise
bargaining necessarily fare much better. The arguments
for allowing individuals free choice over the terms
under which they work, including the right to join
or not to join a trade, industry, or enterprise union,
become more and not less compelling when account is
taken of the unique problems and opportunities presented
by the market for employment.
II. Intervention in the Labour Market is Justified Only if Employers are Stupid
1. General Arguments
The upshot is that serious labour market researchers
should be opposed to and even outraged by the arguments
made in favour of compulsory unionism and detailed,
centralised awards. Here I want to argue that persons
who matter far more than academics, namely individual
Australian employers and employees, should be similarly
outraged. The line of argument sketched above absurdly
understates not only your intelligence and integrity,
but your basic ability to look after yourselves. Simply
put, you are all well aware of the ways in which your
employment relationships differ from the purchase of
cabbage or fish. As employers, you hardly need to be
told that workforce morale and perceptions of fairness
are important for your bottom line, not to mention
your health and sanity at work. There is a great deal
of competition between employers to provide a congenial
workplace, particularly in an age where human capital
and skills are so important. It pays you to have a
happy workforce, often to such a degree that you profit
by paying employees more than they could earn outside.
Oddly enough, Solow et al. use these rather trite
observations to justify compulsory membership in industry
unions, and strict regulation of individual agreements.
From the argument that smart employers do not treat
their employees like cabbages, the conclusion is somehow
reached that governments should mandate exactly how
individual employees should in fact be treated. How
exactly this conclusion is reached is rarely stated
honestly. And for good reason. The key missing link
in the argument is stupidity of the average employer.
Make no mistake, you are not simply being called "greedy".
Since happy, stable employees produce benefits for
themselves and bigger profits for their employers,
greed will suffice to have employers look after fairness
and employee morale. Only stupid or perverse employers
would overlook this fact. And that is exactly what
you are said to be doing. To illustrate, we now turn
to two more specific arguments.
2. Some Specific Examples and What they Imply
1. Efficiency wages, profit-sharing, and rational
employers. One of the most robust empirical findings
in labour economics is that profitable employers pay
their employees more. This relationship is generally
only implicit, meaning that employees wages are raised
on an ad hoc basis as the company succeeds, but is
sometimes enshrined in explicit arrangements such as
profit- or gain-sharing. The latter arrangements have
many passionate advocates, whose rationales range from
tax-avoidance to "worker-ownership of the means of
production". Such schemes are of course opposed by
some of the more traditional elements in the trade
unions since they may serve to tie the employees more
to their employer than to the unions.
Solow and company seem to argue the opposite, namely
that unions and governments are required to force recalcitrant
employers to adopt profit-sharing plans. They are
certainly tax-advantaged in many countries. But the
arguments in favour of profit-sharing are all based
on the notion that worker productivity, especially
elements of productivity that rely on "teamwork", will
be increased. If so, employers gain from introducing
such schemes. On the outside chance that you had never
thought of such a plan before, here is a bit of free
consulting. More likely, the advice is worth what
you paid for it. Profit-sharing is not always profitable,
if the implied risk of tying employee fortunes to your
fickle markets makes them unwilling to take commensurate
cuts in their other compensation, or if the motivational
effects are small.
The above argument is again uncontroversial. Profit-
and gain-sharing, and other "innovative" forms of employee
relations, are surely a good idea for some companies
and not such a good idea for others. The key question
is who gets to choose which elements get introduced
into which firms. Solow and company do not trust your
judgement, even though you bear the gains and losses
associated with your employee relations programs.
Implicitly, they are saying that Laurie Brereton and
Bill Kelty are in a position to decide how individual
employees should be managed. Of course, this sort
of decision-making process gave us demarcation in the
first place. Equally amazing is the fact that some
researchers in the organisational behaviour area (eg.,
Hellriegel, Slocum, and Woodman, 1989) use the fact
that some employers do not immediately jump at the
suggestion to introduce such systems, as evidence against
employers' ability to make rational choices. I will
leave the alternative explanation to you.
2. Exhortation by political leaders for employers
to limit pay gains to those justified by productivity.
At the end of the week of November 12 of this year,
Prime Minister Keating made a series of statements
to the effect that employers should assiduously seek
out productivity gains and also resist excess wage
pressures. The Accord has delivered employers a low-inflation,
environment with "stable" industrial relations, and
it is now up to employers to link wages to productivity,
for the good of the nation. This was greeted with
the usual head-nodding and sage commentary about the
"shared" responsibility of unions, governments, and
individual employers to achieve low-inflation and other
desirable macro-outcomes. On closer inspection, such
statements must be either inane or very disturbing.
Inane, because they imply that employers have insufficient
incentive to raise productivity and not to overpay
employees. Equally important, it implies that the
Prime Minister actually knows the productivity of individual
work-teams or even individuals.2 If that were true,
collectivist Chinese agriculture would have amply fed
citizens from 1959-61 when in fact more than 50 million
people starved to death (Lin, 1990). On a more theoretical
and less emotive level, how would the government and
the ACTU be able to tell which employers were paying
wages justified by productivity and which were not?
As you well know, one can never perfectly isolate
an employees' contribution even at the workplace level.
How could individuals at the national level ever know
such facts? Even more to the point, what incentive
have they to even try? Re-election and campaign support
do not come from an ability to link employees' rewards
to their contribution, over the long or the short-run.
But these are key elements of successful (ie, profitable)
private sector human resource management policies.
If the Prime Minister's statement is not inane, it
is at least disturbing. The preceding argument assumed
that you would be allowed to freely negotiate both
compensation and work practices with your employees.
More likely, you are going to be asked to somehow uncover
pots of gold to pay for higher wage demands. This
signals a revival of the most primitive version of
the Higgins doctrine, that centralised wage-fixing
will destroy all the "bad" employers and force the
average ones to lift their games. Or perhaps it reflects
a return to the days where you could petition for protection
from overseas competition to help you afford the pay
rise. It certainly does not represent a step forward.
I. As a student of so-called "textbook" markets like
the stock exchange let me also register my outrage
that such markets should be presented as trivial auction
markets. Aitken, Garvey, and Swan (l995) show how
long-term relationships, supported by deregulation
of the brokerage cartel on the Australian Stock Exchange,
have greatly improved the services it provides to its
2. During the 1992 US presidential campaign, candidate
Clinton suggested a wage ceiling for corporate executives,
which was to be suspended only if "justified ..by..the..uh..productivity..of..the..uh....
enterprise". The foregoing is my recollection of the
quote, which lacked the candidate's customary polish.
Thanks to Mark Harrison for some useful suggestions.
Blanchflower, D. and A. Oswald, (1995) The Wage
Curve forthcoming, MIT Press.
Garvey, Gerald T. (1993) "The Market for Employment:
Insights from Traditional and Modern Economics", in
F. Hilmer (ed.), Working Relations, Business
Council of Australia, 239-354.
Garvey, Gerald T. (1994a) The Market for Employment,
Centre for Independent Studies, Policy Monograph
Garvey, Gerald T. (1994b) "Why Labour is not Different",
Agenda, 1, 5-13.
Hellriegel, D. J. Slocum, and R. Woodman (1989) Organizational
Behaviour West Publishing Company, San Francisco
Lin, J.Y. (1990) "Collectivization and China's Agricultural
Crisis in 1959-1961" Journal of Political Economy
Russell, M. ( 1994) "Bosses Forced to Deal with Unions"
Sydney Morning Herald, December 20,1.
Solow, R. M ( 1990) The Labor Market as a Social
Institution Basil Blackwell, London.
Why HR Nicholls?