The Legacy of the Hungry Mile

The Industrial Relations Commission in Terminal Decay?

Geoff Carmody

Is the Industrial Relations Commission in terminal decay? While most members of the H R Nicholls Society would rejoice at that prospect, the question is open to debate. It is important to distinguish normative from positive assessments. I think the IRC should be in terminal decay, but reports of the imminent death of the IRC in fact are greatly exaggerated.

The question which should be asked is this:

    Is the rate of decay of the IRC such that it will be outlived by the organism that spawned it---the Australian economy---or will both decline together?

Most probably, both will sink together. Both will adapt in response to political and economic pressures, but, like many cancers the IRC will prove robust and difficult to excise from the body politic.

Who said this?:

    'Given the excessive level of imports a fall-off in the level of export growth the deterioration in the current account, a serious and continual deterioration in the balance of payments, the level of international debt, high interest rates and renewed concerns about inflation, there are substantial economic grounds for rejecting any notion of wage increases at the present time.'

That wasn't the NFF (although we did say something very close to that). It wasn't the CAI, who claimed that 3% wage increases could be afforded because productively growth might be 2.5% this year (which implies either a labour market shakeout or continued overheating). It is the Full Bench of the IRC in its Reasons for Decision, handed down on 7 August 1989.

This is not some freak occurrence. The IRC and its predecessor, the Conciliation and Arbitration Commission, have said similar things before.

Who said this?:

    "This case was conducted against an economic background that should concern all Australians. As the Commonwealth put it:

      'On the economic front Australia's external imbalances remain serious and wages policy must continue to play a key part in addressing them. The current account deficit and associated external debt remain pre-eminent economic problems. Growth in demand has been much stronger than expected resulting in inflationary pressures, a delay in expected improvements to the current account deficit and increases in Australia's external debt. Controlling demand pressures and getting the medium term adjustment process back onto track are central objectives of government policy.

      'They will require among other things reducing inflationary pressures, improving our international competitiveness and raising productivity while avoiding a wages explosion and recession. This in turn calls for continuing nominal wage restraint as part of an integrated package of accord policies including concerted action to improve labour market flexibility and productivity on a sustained basis'.

    This view of the state of the economy has much in common with the conditions discussed by the Commonwealth during the National Wage Case which led to the decision of 10 March 1987. The Commission then noted:

      'In these proceedings the Commonwealth expressed succinctly the economic predicament Australia faces. It said:

      'Correction of the imbalances that have developed in Australia's external accounts is necessary. If this is not done the economy runs the risk of becoming enmeshed in a vicious circle of exchange rate depreciation, mounting inflation and deepening external imbalances.

      'This would result in an erosion in overseas and domestic confidence in the economy's future, seriously undermining private investment, economic activity and employment. The current account deficit would eventually be reduced but at a cost of a deep recession in the economy'.

    At the time all parties to the proceedings accepted that Australia's economic performance had to be improved quickly. In spite of the improvements in the domestic economy the comments quoted above from the March 1987 National Wage Case decision are even more appropriate today than they were then. That this is so is of great concern."

Again, that was the IRC, in its latest National Wage Case Decision, noting with approval a quite sensible summary of the state of the economy, and the broad responses needed to address them, presented by the Commonwealth itself. The interesting thing is the IRC's explicit expression of concern that, in August 1989, it still seems to be hearing the same assessments that it heard in February/March 1987---despite strong world growth and a massive recovery in the terms of trade. And yet, incredibly, the IRC basically agreed with the ACTU/Commonwealth argument that a 6% 'restructuring'-based award wage increase should flow across the economy between now and late 1990, with supplementary payments for lower paid employees.

The reasons given for this decision reveal the IRC's depth of appreciation of economics. Here is the relevant full paragraph from the latest Decision:

    'There are however many interrelated elements involved in the work environment and economic considerations cannot be taken in isolation. Indeed to do so could bring about a perverse situation which may compound rather than reduce the economic difficulties.

    Ultimately the test is not the pursuit of what is perfect in the abstract, but what is the best outcome which is workable and sustainable immediately and over the medium and longer term. Further there are both economic and non-economic considerations which point to an alternative conclusion. These include:

    • the movement in prices and in particular the erosion of the real value of wages;
    • the effect on employees of high interest rates;
    • the level of capacity utilisation and company profits;
    • the tight labour market as reflected in employment and unemployment statistics, labour shortages and overtime and vacancy data;
    • the attitudes of governments and private employers in increasing management and executive salaries and over-award payments in current economic circumstances;
    • the agreement between the ACTU and the Commonwealth;
    • the attitude of some large employer organisations and their membership covering a substantial number of individual employers in a number of industries;
    • the expectations created by the agreement of the ACTU and the Commonwealth and the support of state governments, the ACT and some major employers for that agreement;
    • the current level of industrial disputes; the fact that commercial considerations, attitudes to comparative wage justice, the structure of trade union and employer organisations and the structure of awards remain fundamentally unchanged from the periods of earlier wage breakouts; and
    • the importance of attaining the objectives of the structural efficiency principle'.

I won't discuss all of these reasons, but one or two deserve special mention. I'll pass over the obvious yearning for wage indexation implicit in the use of price inflation as an argument for money wage increases. But I can't pass over the argument that high interest rates are a reason for wage increases.

The IRC heard plenty of argument---including from the Business Council and the National Farmers' Federation---about why interest rates are high. In short, interest rates are high because the Commonwealth is unprepared to adjust other levers of economic policy, leaving monetary policy as the only lever for 'controlling demand pressures and getting the medium term adjustment process back onto track' (the Commonwealth's words).

To argue that money wage increases were justified by the effect on employees of high interest rates is to argue for continued high interest rates and an increased prospect of recession as the only solution to our current economic difficulties. That seems a most irresponsible, anti-investment, anti-employment rationale for conceding the ACTU's claim.

Another reason for the Decision was the judgement that expectations had been built up by the wage/tax deal between the ACTU and the Commonwealth, and the support for that agreement expressed by a 'substantial number' of employers, as well as State governments. That suggests that the IRC has no independence, that you can ensure you win before the Bench by publicly advertising your claims and locking them down by some well-publicised 'negotiation' process. Who needs the IRC if that is to be the procedure?

Interestingly, the IRC was a little coy about what might happen if it rejected the ACTU claim. During the proceedings, the IRC repeatedly warned employers that it wanted no part of a wage explosion, and feared that result if it did not agree to the claim. The Commonwealth and the MTIA helped by warning of the dire consequences of a wage explosion. (Of course, we in fact have a 'wage equivalent' explosion as noted explicitly by the Treasurer, but that's another story.) But the IRC itself was a little more obscure about a wage explosion, noting only that, to reject the claim 'could bring about a perverse situation which may compound rather than reduce the economic difficulties'.



In my view, the IRC's coyness is well-founded. I have drawn its attention to Figure 1, which compares average earnings growth and award wage growth over the last four decades. The clear message is that every time Australia has suffered a wage explosion, the Commission has been right in there, either leading the way (as in 1974-75) or validating the explosion (as in 1981-82). Moreover, fear what would happen if the Commission said 'no' is unjustified. There is no evidence that wage explosions across the whole economy can occur independently of the Commission, and strong evidence that the Commission's decisions work to sustain explosions. In any case, a wage explosion not underpinned by increases in awards can be reversed; awards are notoriously inflexible downwards.

But the most telling point about the IRC's appreciation of matters economic comes in its criticism of employers in not putting a united position to the Full Bench during the case, and its related charge that groups like the NFF were presenting 'pure, impeccable' economic submissions which were unrealistic. Nothing could be further from the truth. Several points support this contention:

    (i) The IRC itself is guilty of seeking to impose pure economic outcomes on the economy. The application of a uniform wage increase across a modern, diversified economy is beneficial only if the labour market is very flexible, with a homogeneous and highly mobile workforce. The IRC would be among the first to claim that Australia does not have such a labour market. It follows then that differentiated wage outcomes will be needed to clear different market segments. Economically, the IRC itself is guilty of that charge. In economic terms, the Commission is being impractical, not employers.

    (ii) The differing views of employer organisations are a natural reflection of varying perceptions of economic conditions and prospects in different sectors of the Australian economy. Why should employer groups ignore such differences in putting positions to the Full Bench? If they did so, they would not be doing their jobs.

    (iii) And finally, the IRC itself set the ground rules for the Wage Case in the 25 May decision on the review of the so-called restructuring process. Among those rules, it specified that wage increases under the restructuring principle were to be uniform across all awards. It resurrected the notion of Comparative Wage Justice, even if it did not use those precise words then (it did use them in its August 1989 Decision).

Having imposed that strait-jacket on employers, it then complained long and loud when employers came up with different views. It had no economic argument with the logical lowest common denominator outcome within the rules it had specified---a zero wage increase--- but used so-called employer disunity as an excuse to ignore economic considerations in its decision.

In effect, the IRC treated the National Wage Case as a sort of consent hearing, where it accepted a deal done between the ACTU and the Commonwealth, supported by some State governments and some employer groups. But instead of confining the agreement to those prepared voluntarily to go along with it, the IRC went the extra step of imposing that agreement on other groups who did not agree with the terms of the deal. And it accused those employer groups, who argued---naturally---that you can't squeeze higher living standards out of a sluggish economy, of being unrealistic.

As currently practised in Australia, especially at the Federal level, the industrial law is an ass. As a result, the economy is forced to plod, donkey-like behind the four tigers of Asia.

My limited experience before the Full Bench of the IRC leads me to the view that the IRC should be in terminal decay. But that view still is not widely shared amongst the Australian community. Why is this the case?

The IRC is just another messenger boy, signalling by its actions what is wrong with the system that creates the roles it ends up playing. But as long as the system remains, the various messenger boys spawned by it will continue doing their jobs in the light of that system.

The IRC is a product of government legislation. Its specific functions are largely defined by that legislation. Its decisions are the product of the arguments put to it, the size of the constituencies represented by the advocates appearing before it, and its perceptions of the effects of its decisions.

Advocates for genuine reform of Australia's labour market should not focus their attention too much on the IRC per se. Rather, they should focus their attention on the system within which the IRC will claim it is only doing its job. It would be more productive, ultimately to push for change to the following key features of the system itself:

    (i) For as long as settlement of industrial disputes' remains the primary function of the IRC under its legislative Charter, the IRC will compromise economic prospects in its decisions. The only way to remove the perceived conflict between industrial peace and economic rationality to the participants in the industrial relations process realise that the two go hand in hand. That can only happen at the enterprise level. At the national level, industrial peace often means industrial silence and economic stagnation.

    (ii) For as long as big government forms an alliance with either big business or big unions, and is allowed to appear before the IRC as a 'statutory intervener' arguing in the 'national interest', then the IRC will take sides with that alliance regardless of the economic merits of its arguments. The Commonwealth should not be permitted to argue a view on claims in National Wage Cases---if these must continue. Rather it should be required to present an overview in National Wage Cases of economic prospects. It should also be subject to cross-examination by other parties on its assessment.

    (iii) For as long as Australia does not have a level playing field, at law, between different economic players, processes of arbitration and conciliation will always be likely to produce results that favour those groups less bound by legal restraint on their outcomes than others. That is, the balance between union power and the power of other individuals and groups remains the major underlying cause of our problems in the labour market area.

It may be enjoyable to engage in debate about what's wrong with the world and what needs to be done to put things right. But if we aspire to more than warm inner glows, then we must do more. For as long as groups like the NFF wish to argue a strong economic line before the IRC, I will be happy to continue tilting away. At the very least, the economic argument does get some coverage. But I see that function as no more than laying some of the attitudinal groundwork for more fundamental change.

There is no doubt that deregulation in other parts of the economy will gradually exert increasing pressure on the rigidities in the labour market. But if action is to be taken to accelerate that process, it requires community acceptance of legislative change. Responsibility for that change, in the first instance, rests squarely on the shoulders of politicians and those about to become politicians. Politicians will be responsible for changing the legal framework both concerning the IRC's Charter and the application of common law provisions to all players in society.

To revert to the medical analogy, if the decline of the IRC is to proceed at a rate much faster than the relative economic decline of the Australian economy, then legislative surgery is required. That requires a lot of courage plus a very effective PR campaign, because mainstream political opinion still holds to the view that Australia's IR Cancer is inoperable.

Why HR Nicholls?

More...