MUA---Here to Stay ...Today!
Why The Labour Market Should Be Deregulated
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
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
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
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
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
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
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.
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
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
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
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
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
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
Increases in Employment/Reductions
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.
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
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.
(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.
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
(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.
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.
(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.
to The President of the United States, July 20 1997.
"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.
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
(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).