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Why The Labour Market Should Be Deregulated

Des Moore

At last year's Conference I presented a paper arguing that the increased generosity of Australian welfare benefits accounts for a significant proportion of Australia's existing unemployment (1) and that action to reduce generosity should desirably be combined with substantive deregulation of the labour market. Since then my research has involved analysis of arguments used to support regulation and to oppose deregulation and this paper focuses on points that might help in the on-going public debate. Attachment A contains some summary points.

 

The Flawed Rationales of Labour Market Regulation

Four main rationales for extensive regulation of the labour market can be identified: to compensate for the alleged wide difference in bargaining power between employers and employees; to realise comparative wage justice; to cope with the threat of wage surges; and to ensure that a range of basic community standards are observed in the workplace.

 

Inequality of Bargaining Power: It is really significant?

Although regulation is justified because the labour market is perceived as fundamentally different due to an inequality in bargaining power as between employers and employees, it is in fact subject to the same economic forces of demand and supply as other markets. Moreover, in modern economies there is no general, natural tendency for monopoly to arise under deregulated market conditions. There is certainly no indication of any long term decline in the share of labour income in the relatively deregulated US labour market.

Employers compete with a wide range of other employers for the services of employees who offer a wide range of skills but each with a limited supply. Despite their greater wealth, individual employers are not generally able to dictate terms and conditions of employment or to 'compete down' the general wage level. Indeed, employers' own bargaining position is limited because of their vulnerability to workplace disruption or under-performance.

On the employee side, there is available a range of alternative sources of income either from employment or from social security---or from both. Of course, employees may make an "investment" in a particular job which they need to protect through suitable employment agreements, particularly against the minority of "bastard" employers who may try to take advantage of them. However, nowadays the majority of businesses realise that to be successful they need to look after their employees and that they also have an 'investment' in their employees.

There is also increasing acceptance by both employees and employers that they have a considerable mutual interest in establishing a cooperative workplace and in making enterprises profitable. This reflects a variety of major changes in social and economic circumstances: the move to a more service-oriented economy; an increase in education standards; the increase in ownership of companies by employees and the reduction in ownership by individual employers; and the large reduction in union membership. Such changes represent a transformation in the economic and social structure that itself provides an important case for deregulation.

However, the cost of acquiring information and undertaking negotiations may create inequality in bargaining and some State provision of subsidised advisory and conciliation and arbitration services to both employers and employees may be desirable. Such a service has been provided in the UK for some years (2) and this provides a model for the conversion of the AIRC to a voluntary advisory body.

 

Comparative Wage Justice: Is it desirable?

This Society needs no reminding that the Australian regulatory system has had a long history of trying to limit the dispersion of earnings and that "comparative wage justice" has become a shibboleth to more than "the working classes". But this orthodoxy is deeply flawed.

If the regulatory system is compressing wage relativities, that is likely to be having adverse effects on employment. Some people who would be prepared to work for less than the conditions set and/or whose productivity would only justify lower wages, will not be able to obtain employment. This is not simply an economic issue. Those people who are denied the opportunity to work are being treated unjustly, as are the employers who would offer the work in good faith.

Many examples exist. The Society's Secretary, Bob Day, has often pointed out that the setting of relatively high minimum wages in the building industry has resulted in the virtual disappearance of builders apprentices.

It is in any event farcical to imagine that any regulatory body could take account of the enormous diversity of circumstances of potential employees. For example, how could such a body determine a "just wage" for low wage workers when many of them are not living in poor households? (3)

The appropriate distribution of income involves issues of "social justice" that are essentially for governments to determine at a political level and the AIRC is not equipped to be a social welfare judge. If it is judged politically necessary to have a minimum wage, the Federal and State Governments of the day should take responsibility for setting it after taking advice from a body with expertise in both social security benefits and labour market conditions in the various States---perhaps, an Employment and Social Justice Advisory Commission. Further, a separate minimum should be set for each State and estimates should be published of the adverse employment effects in each State.

It is relevant that the present regulatory system could scarcely be said to have delivered comparative wage justice. Chart 1 shows a declining real level of minimum wages since the 1970s; OECD data indicates that the dispersion of earnings has been widening since the 1970s in line with overseas trends and that, contrary to perceived wisdom, Australia is far from having the most egalitarian distribution of earnings; (4) further, using a broadly similar definition of "poverty", it can be shown that the Australian labour market appears to have a similar proportion of "working poor" (7--8 per cent) as the much maligned US market. (5)

The reality is that social justice is being achieved not through the wage system but through the social security and tax systems. By contrast, when the famous 1907 Harvester decision by Justice Higgins set a 'basic' minimum wage for an unskilled worker, his wife and three children there was an almost complete absence of government social welfare assistance. Higgins role has been taken over by the hugely expanded welfare system, which now accounts for 15 per cent of GDP, almost double the proportion spent as recently as the early 1970s. That system, in conjunction with today's living standards, employment and wage levels, constitutes a transformation in economic and social circumstances that supersedes the need to regulate wages to provide social justice.

In any event, the bottom line surely is that it is better to have 'working poor' than 'unemployed poor'. If a deregulated labour market were to lead to a marked widening in the dispersion of household earnings, and in the event that such widening was not largely offset automatically through upwards adjustments in means tested social security, an earned income tax credit could be offered. It is little known that the US earned income tax credit supplements the incomes of about 15 per cent of total employees or that the supplement is not even counted when the US "working poor" are estimated. (6) With its much more generous social security schemes, Australia would not need to have a scheme anywhere near as extensive as the US one. But the reduction in unemployment benefit payments from deregulation might well pay for the extra outlays involved.

 

The Threat of Wages Surges: The New Role of Monetary Policy

Joe Isaac, a prominent supporter of the centralised system, has argued that the only justification for having a centralised system is to prevent wage surges. Moreover, the underlying rationale of the 1980s Accord was to prevent such surges.

But the disastrous experience of the mid 1970s and early 1980s demonstrates that the Australian industrial relations system has not been successful in preventing 'wage surges': when the unions applied real pressure the old rubber stamp came out. Moreover, although during the Accord period there was no wage surge per se, the high level of unemployment and other factors were important restraining influences. (7) In any event, even the Labor Party's amazing backtracking on industrial reform does not propose a return to any Accord type arrangement.

But the most important development is the new role of the Reserve Bank in targeting low inflation. That represents a major institutional and policy change that undermines any argument for retaining the AIRC to prevent wage surges. Responsibility for preventing wage inflation has passed from the ineffective AIRC to the Bank in a move whose significance has been little recognised. The Bank's task would be assisted if the AIRC's reduced capacity to make awards that 'flow on' through the labour market was entirely eliminated.

 

Basic Community Standards: How far should we go?

Since the 1907 Harvester decision the AIRC has developed a vast array of employment and other conditions through the award system that has gone far beyond setting 'basic community standards' and that has undermined a basic function of management. The President of the Business Council of Australia, Stan Wallis, was recently reported as claiming that "Australian workplaces are regulated by well over 100,000 pages of documentation in the form of awards, orders and recommendations". (8) The Workplace Relations Act 1996 requirement that awards be reduced to 20 allowable matters would be a substantial improvement but, as the list of such matters in Attachment B shows, it still provides scope for an extensive role for the AIRC.

Most people would agree that it should be illegal to use child labour and to engage in actual or threatened violence or intimidation at the workplace. But, such matters aside, should there be other legally enforceable requirements because there is a perception that the "community" demands certain standards?

 

A Minimum Wage?

Whether or not there should be a minimum wage is one of the most hotly debated topics in economics and politics. On the economic side the debate centres around the potential effects on employment.

According to a literature review by Dawkins and Freebairn, "international evidence suggests that the elasticity of demand for low skilled labour tends to be higher than for high skilled labour". (9) They have made simulations suggesting that simply holding the minimum wage constant for four years could increase employment by 400,000--500,000, largely of low-skilled workers. (10). Even the regulatory-oriented Employment Directorate at the OECD has now gone some way to accepting the potential for adverse employment effects in its latest Employment Outlook, viz

there is a general agreement that a statutory minimum wage is likely to reduce employment if set above a certain, usually unspecified, level. While sometimes conflicting, the weight of evidence suggests that young workers may be the most vulnerable to job losses at a high level of the minimum wage. There is less evidence available on the employment effects, if any, for other groups such as women and part-time workers, who represent a large and growing proportion of the workforce. (11)

The comment that employment is likely to be reduced if the minimum wage is set "too high" is relevant to the now notorious debate about Card & Krueger's analysis suggesting that employment growth at fast-food restaurants in New Jersey increased faster than in neighbouring Pennsylvania even though there was an increase in the minimum wage in NJ but none in Pennsylvania. In a recent article in the Washington Post, Card & Krueger felt it necessary to state "we do not reject the laws of supply and demand" and concluded that "if the minimum wage is raised too much, we will see job losses; there is a tipping point". (12) Given that Australia's minimum wage is a relatively high proportion of average earnings, (13) it is a fair bet that even Card and Krueger would recommend a lowering or at least no increase here. That is inconsistent with the Government's endorsement of the AIRC living wage decisions and its apparent inclination to continue the AIRC role in that regard.

However, even leaving aside the evident considerable potential for adverse employment effects, the minimum wage is clearly a badly targeted and inefficient means of attempting to achieve social justice. A significant proportion of the low paid are either married women who are second income earners in a household or young people who are not living in poor households. Indeed, analyses in the US show that only a relatively small proportion of minimum wage earners are poor (14) and an Australian study suggests that a significant proportion of low-wage workers do not live in lower income households. (15)

Income support for low paid workers is most effectively and efficiently achieved through the tax/social security system. While 17 out of 29 OECD countries have a statutory or national minimum wage, there are others that rely on the social security system to set a "reservation wage" below which nobody will readily accept a job. Accordingly, the minimum wage should be determined by the market and any perceived "shortfall" in income for some households should be compensated by a US style earned income tax credit.

 

Maximum Weekly Hours of Work?

Despite the common perception that the regulatory system lays down a 'standard' working week of 38 hours that protects employees from potential exploitation by unscrupulous employers, the reality is that relatively few people work that standard. The average working week is now 36 hours but there is an enormous variation ranging from 11 per cent of employees who work 1-15 hours to over 21 per cent who work 49 hours and over . In effect, the standard working week is really only a way of prescribing hourly rates for 'overtime'. That should be left to employees and employers to negotiate, as they are doing increasingly under negotiated agreements.

 

Increasing Job Security

Both in the media and elsewhere the considerable attention given to the issue of job security has reinforced pressures for maintaining and even increasing regulation and the much publicised attempts by Patricks to replace its unionised work force with a contracted-out non-unionised one have almost certainly added to those pressures.

However, the evidence does not support the perception that jobs have become less secure. In Australia, compared with the 1980s there has actually been a slight increase in average job tenures and in the likelihood of staying with the same employer. Further, 65 per cent of those who leave jobs do so voluntarily and around 15 per cent of the unemployed also do so. Moreover, as Ken Phillips will tell you, an increasing proportion of the workforce is prepared to work as self-employed contractors.(16) Within the OECD area generally, the OECD has concluded that 'jobs seem as stable in the 1990s as they were in the 1980s'. (17)

The apparent long term upward trend in the rate of unemployment has obscured the fact that job availability has increased. As Chart 2 shows, the proportion of the working age population that is employed is now higher than it was in the 1950s and for most of the 1960s.

Moreover, while there has been an increase in the proportion of unemployed that are out of a job for more than 12 months, about 40 per cent of those who are thus categorised as "long term" unemployed at the start of a year are not unemployed at the end of that year.

Arguments for regulation to make jobs "secure" need also to reflect on conclusions such as the following by Siebert :

Job protection rules can be considered to be at the core of continental Europe's policy toward the unemployment problem: protecting those who have a job is reducing the incentive to create new jobs....Empirical studies indicate that job security legislation (including requirements for severance pay) are positively correlated with the unemployment rate in OECD countries.(18)

Indeed, attempts to enhance job security by increasing protection of existing employees would not only inhibit employment: they would also be unfair to the unemployed, to those wanting to change jobs, and to employers. Employers do not generally make dismissal decisions lightly and their investment in enterprises surely entitles them to the final say in an employee's suitability, subject to complying with the terms of employment.

The Government's reduced level of regulation of dismissals is an improvement but, along with the continued regulation by the States, the extent of regulation remains a significant disincentive to employment. Moreover, the requirement that employees should have to pass a 'no disadvantage' test when they enter individual or enterprise agreements simply provides unnecessary opportunities for unions to prevent the consummation of employment agreements.

Job security fundamentally depends on the pursuit of stable macro-economic policies and on deregulation, not regulation, of the labour market.

 

Reducing 'Industrial' Disputes

The prime reason for establishing Australia's almost unique compulsory conciliation and arbitration system was to prevent strikes and lockouts because that was argued to be in the public interest. As Justice Higgins so eloquently put it:

.... the process of conciliation with arbitration in the background is substituted for the rude and barbarous processes of strike and lockout. Reason is to displace force; the might of the State is to enforce peace between industrial combatants as well as between other combatants; and all in the interests of the public.(19)

The report card on this supposedly key community standard has surely to be marked "failed badly". As Charts 3a and 3b show, although the rate of disputation has come down in recent years, it has remained consistently above the OECD average.

Arguably, the model of industrial relations was itself fundamentally flawed right from the start because it had legally to be built around the resolution of inter-state disputes. The need for the regulators of the system to have conflicts undoubtedly also contributed to their misconceived attempt to equalise bargaining power by allowing unions to take industrial action with comparative impunity. Legal expert Graham Watson has delivered a very serious indictment of the system in pointing out that

While certain means are available to enforce outcomes and adherence to the norms of the system these are either observed in the breach or resorted to in very exceptional circumstances. Professor Breen Creighton describes the situation as a paradox within the Australian industrial system ((1991) 4 Australian Law Journal of Labour Law 197). In practice it represents a serious imbalance which has undermined the standing of the Australian system and its institutions. In essence the imbalance arises because awards imposing obligations on employers are fully enforceable through the courts and subject to penalties in the case of breach. Commission recommendations, directions and orders, requiring the cessation of industrial action are commonly ignored by unions and their members, who do not accept the authority of the Commission to determine whether or not industrial action should be continued. Many applications for the insertion of bans clauses into awards have been made but to my knowledge no case since the 1960s has resulted in penalties or fines being imposed. Except in one notable case concerning domestic airline pilots, there has been no recourse to applications to cancel awards. This reflects, at least in part, the feeling amongst employers that moving outside the system is not necessarily the best way to counter aberrant behaviour.(20)

The granting to unions of a privileged position in regard to disputes has had serious effects way beyond the dispute process itself. It has undermined fundamental principles of good business management and created a business culture which has too often allowed itself to operate under the self-imposed constraint that 'trade unions are part of the system and we have to work within the system'. The 'body politic' and the 'body business' have also generally adopted an accommodative response to aberrant union behaviour.

While the Government has modified the role of the AIRC in handling industrial disputes, it retains a significant on-going role (21) that leaves a conflict-resolution model of industrial relations based on an assumption that an 'umpire' will more or less automatically intervene in serious disputes. If disputes between individual employees and their employer were left to be handled through provisions in employment agreements, that would not only be more conducive to establishing a cooperative workplace but would likely result in less disputes.(22) The common law and other statutory provisions can be used to deal with industrial action not covered by such procedures and, if more powerful trade unions sought to take advantage of the withdrawal of remedies supposedly available under industrial relations legislation, employers would need to be prepared to resort to such provisions. But, even allowing for reservations about the recent role of the Federal Court, they would be doing so in a completely different environment.

 

Employee Representation

Australian industrial relations legislation has positively encouraged the formation of employee organisations and the membership thereof because of the perception that employees have a relative disadvantage in the bargaining process regarding wages and conditions. The result has been the granting to unions of privileged and monopolistic positions and a widespread acquiescence in restrictive work practices which has made productivity improvement and efficient management difficult, often impossible. It has also encouraged the aberrant union behaviour resented by the wider community.

But, as there is no inherent, natural bargaining imbalance, there is no basis for special government agencies to be regulating employee representation or providing employees and their organisations with favourable treatment. The private sector can provide such services relatively cheaply and some union and ex-union officials understand that unions operating in a competitive environment could become more service oriented and perform a useful, non-political role to workers and even to business.

The basic need is to eliminate any special status for unions, including removing responsibility for regulation of their affairs from the Minister of Workplace Relations.

 

Flawed Criticisms of Deregulation

The major criticisms of deregulation are based on analyses that fail to take adequate account of the potential economic benefits, that assume that the social changes would all be undesirable, and that draw wrong conclusions about the workings of deregulated labour markets overseas. They are also often based on analyses that derive their results from the workings of the regulated system. For example, the quite wide academic acceptance of the idea that Australia's high unemployment primarily reflects the on-going "hysteresis" effects of past recessions effectively assumes that deregulation would have little or no effect on unemployment levels and that the main solution to the unemployment problem is more labour market programs. But such analyses are based on the workings of the existing system and fail to allow for the likely greater responsiveness of both the labour market and the economy more generally to deregulated conditions. The fall in the rate of long-term unemployment to only around 1.1-1.3 per cent before the 'jumps' in the early 1980s and 1990s also suggests that hysteresis is not the primary source of the problem.

It is pertinent therefore to question the main criticisms made of deregulation proposals.

 

Are Increases in Earnings Inequality a "Bad Thing"?

It is generally accepted that deregulation will tend to increase the dispersion of earnings and critics of deregulation argue that any such widening is necessarily a "bad thing" because it creates divisions in society. Indeed, the latest OECD Economic Outlook states that "the central issue dividing the more comprehensive (labour market) reformers and the less comprehensive is differences in judgement about potential conflicts between better labour market performance and concerns for equity and social cohesion".(23)

However, the widespread expressions of concern at the widening dispersion of earnings since the 1970s overlook the potential benefits from this widening. That is partly due to the increased demand for skilled labour of various kinds and, to that extent, it is surely economically and socially desirable because it both rewards and encourages investment in human capital. OECD data suggests that the main widening in Australian earnings inequality since the late 1970s has occurred between the highest-earnings decile and the rest, and that the lowest decile may have broadly maintained its relationship with the rest. That is consistent with the higher payment for skill thesis.

Further, if a deregulated market led to a breaking down of trade union monopolies and some wages were actually to fall, such a widening could scarcely be regarded as a 'bad thing'. Apart from the improvement in labour market efficiency, either consumers would benefit from lower prices or employers would benefit from higher profits. Either way, investment and/or employment would be encouraged.

Similarly, while a widening due to the removal of the minimum wage would reduce incomes of some, it would benefit those prepared to work for less as well as consumers/employers.

Equity cannot simply be assessed by reference to what happens to the overall distribution of earnings. There is a need to look at the possible causes. Moreover, judgements about the equity of widening earnings dispersions need to have regard to the possible effects on incomes and choices available to consumers, employers and the unemployed as well as to incomes of the employed.

 

Reduced Job Security?

The assumption that deregulation would decrease job security because it would give employers more scope to hire and fire partly reflects the perception that down-sizings have increased insecurity in recent years.

However, Australia's more regulated market already provides lower job tenure and retention rates than in less regulated labour markets such as the US and UK. Moreover, even if deregulation did result in an increase in job turnover, the experience of less regulated markets overseas suggests that this would be accompanied by an increase in job availability. Down-sizings in the US have been more than offset by new jobs created.

In reality, any increase in employers' capacity to hire and fire would likely make them more willing to risk additions to workforces. They would be encouraged in this by an increased capacity for governments to pursue more stable economic policies in a labour market relatively free of monopolistic practices.

 

Increased Industrial Disputes?

The idea that deregulation would increase disputation is not supported by the experience of the more deregulated overseas markets. Indeed, New Zealand's move to a less regulated market has reduced its disputation rate both absolutely and relatively to Australia.

A properly deregulated market would put trade unions on a level playing field where they would no longer face the prospect of a tribunal prepared to turn a blind eye to aberrant behaviour.

 

Reduced Unionisation and Lower Wages/Conditions?

While deregulation would almost certainly reduce the role and influence of trade unions, this should not lead to lower wages and reduced conditions, except where the (unwarranted) benefits from union monopolistic practices were removed. Competition limits the rate of profits (and rent) that can be earned. By definition, the remainder of national income must go to employees' wages and/or the self-employed.

A deregulated labour market would increase employee freedom to negotiate employment conditions not dictated by collectively imposed 'acceptable norms'. That would be a major benefit of a deregulated market.

 

Little or No Improvement in Economic Performance?

Opponents of deregulation claim that industrial relations institutional arrangements have little effect on economic performance.(24) It is argued that the demand for labour is a derived demand determined by developments in other markets, and that overall economic performance is determined by technical progress and additions to the supply and quality of capital and labour. A related argument, commonly advanced by some Australian business leaders, is that enterprises determined to improve their performance have generally been able to do so within the existing system. They argue that the real problem is the non-competitive, risk averse management 'culture' and that the main priority is to (re)educate management, not to change labour market arrangements.

One response to such arguments is that, if institutional arrangements are having little economic effect one way or the other, there should be no objection to changing them.

Another response is that research suggests that institutional factors, including policy differences, are a major factor in explaining differences in countries' economic performance. Angus Maddison, probably the world's leading analyst of historical growth differences, has argued that

If we are to explain why the economic growth experience of nations has been so diverse, and why income spreads are now so wide, it is necessary to go beyond proximate and measurable elements of causality and consider institutional, social or policy influences which may retard or encourage economic development.(25)

On the effect of labour market institutions specifically, the academic debate continues about the differing effects of decentralised, centralised and in-between systems. Contrary to earlier wisdom, the latest OECD conclusion is that there appear to be no statistically significant relationships between the various systems of collective bargaining and economic performance. However, the OECD acknowledges that its analysis should not necessarily be treated as comprehensive, particularly as to institutional effects.(26)

One individual OECD researcher has in fact concluded that strict employment protection regulations are 'likely to raise equilibrium unemployment rates significantly' and that, although the relationship is often weak, union density 'seems to be associated with higher unemployment', with 'a particularly strong impact on youth unemployment'.(27)

In a detailed comparison of regulation both within European countries and between them and the US, Siebert argues that 'the labor market performance of different (European) nations is demonstrably sensitive' to the 'markedly different' institutional approaches. His conclusion is that 'the specter of unemployment that is haunting Europe will not be exorcised unless governments are prepared to undertake major reforms of the institutional set up of the labor market'.(28)

Contrary to the common perception that Australia has performed pretty well under the regulatory system, Maddison's historical analysis of growth in various countries' GDP per head levels (29) shows that, from enjoying possibly the highest average living standard in the world when the compulsory conciliation and arbitration system was established in 1904, fifty years later our relative position had slipped to income per head being about 25 per cent below that for the US and about 12 per cent lower than for the UK.(30) Average annual growth in Australian living standards between 1913 and 1950 (about 0.8 per cent) was not only significantly slower than in the US (about 1.6 per cent) but was also slower than in almost all Western European countries. Moreover, although growth from 1950 to 1992 speeded up considerably (to almost 2.0 per cent) it only kept pace with the US and fell behind that for all the main European countries.

 

Does Labour Market Reform Improve Productivity?

While technological progress may be the main source of growth of total factor productivity, policy and institutional factors have a crucial role to play in creating the conditions in which technological progress is applied, or not applied. This suggests that the difficulties experienced in implementing workplace reforms under the Australian regulatory 'system' is probably a major cause of Australia's low productivity levels. Indeed, an essential element in re-educating management to a competitive, risk-taking culture would be to expose it to the pressure of having to make its own decisions about workplace management.

The stories of Robe River and Rio Tinto, and of the aluminium, stevedore, and coal industries, not to mention the many papers presented at this Society's conferences, illustrate the potential for improving performance at the micro level from workplace reform. But they also highlight the costs and risks involved, many of which are still extant.

It is relevant that Australian enterprises generally remain a considerable distance behind world best practice levels of labour and capital productivity. Labour productivity levels in manufacturing in the mid-1990s were only half those of the US and Access Economics pointed out last year that the labour productivity 'gap' relative to overseas countries has actually been widening. It concluded that 'even adjusting for capital inputs Australia has an appalling productivity performance across the whole of manufacturing'.(31)

The recent improved growth in TFP, particularly from 1991-92, suggests that the benefits of micro-economic reforms are starting to come through and that probably partly reflects the improved performance of some sectors following reduced tariff protection. Labour market deregulation could provide a similar impetus for changing management culture and, in turn, for implementing productivity-enhancing reforms.

 

Increases in Employment/Reductions in Unemployment?

Opponents of deregulation often argue that, even granted that labour market reform led to improved productivity, that would be achieved by reductions in employment. However, as Table 1 shows, while some countries with high labour productivity have relatively poor employment performances, others do not. Countries with relatively fast growth in productivity have also experienced improved employment.

The popular belief that productivity growth means less employment reflects a failure to understand the potential secondary effects of such growth. If unit labour costs can be reduced by new technology or other changes, some employees may lose their jobs or have to accept lower wages, but benefits flow to consumers and/or employers through lower prices/costs. The flow-on effects then tend to increase employment. In Australia, however, the protection given to 'insiders' in the labour market may have diverted productivity gains more to employees than to consumers, causing employment to respond less than if unit labour costs were reduced.

Leaving aside the productivity/employment issue per se, it is pertinent that the OECD's latest estimate of a structural unemployment rate of 7.5 per cent implies that there is little scope to reduce unemployment without running into inflation problems. A recent IMF Staff paper (32) suggesting that a piecemeal approach to reform is likely to have limited effects on structural unemployment levels may be relevant to the apparently limited structural change in the Australian labour market following the various labour market "reforms" that have been made since the late 1980s. Our much lower employment rates than in less regulated markets such as the US, the UK and New Zealand also emphasise the need for structural change. If we had the same proportion of our working age population employed as the US, we would have another 900,000 employed, which could scarcely fail to impact on our unemployment. While a proportion of our lower employment and higher unemployment than the US' is undoubtedly due to our relative generosity in social security benefits, the fact that our employment rates are also significantly lower than in the UK and New Zealand---both countries with similar extensive social security systems---points to the potential benefits from structural labour market reforms per se.

 

Conclusion

A major reduction in Australia's high level of structural unemployment requires action to reform both the social security system and labour market regulation. We need a "big bang" approach that reforms both "systems" together. In the case of the labour market there is certainly a need to go beyond the piecemeal approach adopted so far and that requires a fundamental re-assessment of both the arguments in support of regulation and those used against it.

There is enormous potential for increasing employment/reducing unemployment, and for improving productivity and living standards, by deregulating the labour market. The notion that more time is needed to obtain community acceptance of a move to a much less regulated system seems misplaced in view of the wide and intensive debate that has occurred over recent years. Moreover, to suggest that regulatory reform is of second order importance to changing management culture is to overlook the capacity of people to adjust when faced with radically changed circumstances: if New Zealanders can do it successfully (as they clearly have done), there seems no reason why Australians cannot. In any event, a program of trying to achieve a basic change in management culture from within the existing system would be bound to take a long time to have effect and would run a serious risk of being corrupted by the system. We desperately need a complete break from the old system---a new start that would provide the opportunity for establishing a new province of law and order based on voluntarily agreed exchanges of individual rights and obligations by the parties directly.


Endnotes

(1) A slightly amended version of that paper was subsequently published by the National Institute of Labour Studies, Flinders University in the Australian Bulletin of Labour Vol 23 No4 December 1997.

(2) Advisory Conciliation and Arbitration Service (ACAS), which was established under the Employment Protection Act 1975. It is entirely voluntary and never seeks to judge the merits of a case.

(3) See S. Richardson, "Who Gets Minimum Wages?", Conference on Economics and Industrial Relations: Re-appraising the Relationship, Canberra December 1997.

(4) Of 21 OECD countries for which data is available (supplied by OECD Secretariat), nine appear to have similar or narrower earnings dispersion.

(5) According to a report (Working but poor: how 460,000 battle) in the Sydney Morning Herald of July 25 1998, a study (Working But Poor) by DrT.Eardley of the Social Policy Research Centre at the University of New South Wales shows that, using the Henderson Poverty Line, 7.4 per cent of Australian employees were "working poor" in 1995-96. That is only slightly lower than the US proportion of about 8.5 per cent using a similar poverty line. In assessing this account also needs to be taken of the fact that the US has a significantly higher proportion of its working age population that is working.

(6) See OECD Employment Outlook July 1996 for further details.

(7) See D.Moore, Industrial Relations and the Failure of the Accord: What Should be Done, Australian Bulletin of Labour Vol 15 No.3 June 1989. By contrast, the academic supporters of centralised systems are still endorsing the Accord---see, for example, B Chapman's The Accord: Background, Changes And Aggregate Outcomes, presented at a 1997ANU Conference on "Economics and Industrial Relations: Re-appraising the Relationship." Chapman, incidentally, misrepresented the analysis in my article.

(8) "BCA calls for reform of labour laws", The Australian, July 1 1998.

(9) P. Dawkins & J. Freebairn 'Towards Full Employment', Australian Economic Review, Vol. 40, No. 4, 1997, p. 409. The references are to D. Hamermesh, Labor Demand, Princeton University Press, Princeton, 1993, and L. Katz & K Murphy, 'Changes in Relative Wages, 1963-1987: Supply and Demand Factors', Quarterly Journal of Economics, Vol. 107, No. 1, 1992, pp. 35-78.

(10) Ibid.

(11) OECD, Employment Outlook, 1998 , p31.

(12) D. Card & A. Krueger, Unemployment Chimera, Washington Post 6 March 1998.

(13) Our current minimum wage rate of $9.83 an hour (excluding on-costs) is almost 50 per cent of average weekly earnings (national accounts basis) of $19.70 per hour. That proportion is significantly higher than the 35-40 per cent of average wages in Canada and the US , where the national minimum wage is equivalent to about $A7.70.

(14) Memorandum to The President of the United States, July 20 1997.

(15) S.Richardson, "Who Gets Minimum Wages?", Conference on "Economics and Industrial Relations: Re-appraising the Relationship", Canberra, December 1997.

(16) In 1994 about 7.5 per cent of the workforce was working as self-employed contractors, up from 3.3 per cent in 1989. See, M. Wooden & A. Vanden Heuvel, The Use of Contractors in the Australian Workplace: Evidence from a Survey of Employers, National Institute of Labour Studies, Flinders University, Adelaide, 1996 (Monograph Series No. 3); M. Wooden & A. Vanden Heuvel, Self-employed Contractors in Australia: What are the Facts?, National Institute of Labour Studies, Flinders University, Adelaide, 1995 (Working Paper Series No. 136).

(17) OECD, Employment Outlook, Paris, July 1997.

(18) H.Siebert, Labor Market Rigidities: at the Root of Unemployment in Europe, Journal of Economic Perspectives, Vol 11, No.3, 1997.

(19) H. Higgins, A New Province for Law and Order, Sydney Workers' Educational Association of New South Wales, Sydney, 1922, p.2.

(20) G. Watson, 'Compliance with Dispute Settlement Orders in Australia', in R. Mitchell & J. Min Aun Win (eds), Facing The Challenge in the Asia Pacific Region, Centre for Employment and Labour Relations Law, University of Melbourne, 1997 (Occasional Monograph Series No. 5).

(21) Under the 1996 Act, the AIRC must still be notified of all disputes; the prevention and settlement of disputes continues to be a principal objective of the system; and the AIRC continues to have considerable discretionary powers to both intervene and direct the parties involved, including (if so inclined) simply on the basis that it judges that a dispute threatens to occur. The unions also seem able to manipulate the provision that makes industrial action legal during bargaining periods.

(22) New Zealand did not experience any upsurge in industrial disputation after the passing in 1991 of the Employment Contracts Act, which left industrial disputes (other than those involving personal grievance/unfair dismissals) to be settled by the parties involved. In fact, its rate of disputation has declined relative to Australia's and the OECD average.

(23) OECD, Economic Outlook June 1998, Paris p177.

(24) See, for example, B.Hughes, Wage Questions, University of Newcastle, 1994 (Department of Economic Research Report No.206). It is ironic that, although an exponent of the benefits of government intervention through incomes policies, Hughes's argument against deregulation is based in part on the view that market forces actually operate to offset most costs from regulation through the AIRC.

(25) A. Maddison, Monitoring The World Economy 1820-1992, OECD Development Centre Studies, OECD, Paris, 1995, p. 50.

(26) OECD, Employment Outlook, Paris, July 1997 Ch.3.

(27) S. Scarpetta, Assessing The Role of Labour Market and Institutional Settings on Unemployment: A Cross Country Study, Paris, 1996 (OECD Economic Studies No. 26).

(28) H. Siebert, 'Labor Market Rigidities: At the Root of Unemployment in Europe', Journal of Economic Perspectives, Vol. 11, No. 3, 1997.

(29) A. Maddison, Monitoring The World Economy 1820-1992, OECD Development Centre Studies, OECD, Paris, 1995, Tables 1-4 and 3-18.

(30) A. Maddison, Monitoring The World Economy 1820-1992, OECD Development Centre Studies, OECD, Paris, 1995.

(31) Access Economics, Productivity Levels in Australia, Economics Monitor, July 1997

(32) D.Coe & D.J.Snower, "Policy Complementarities: The Case For Fundamental Labour Market reform", IMF Staff Papers Vol. 44, No.1 (March 1997).



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