The case for industrial relations reform

Recently, here in Australia, there has been an enormous amount of controversy surrounding the government's proposed reforms of the industrial relations system. While details of the proposed changes are still scarce (or at least I'm not particularly up-to-date with them), I will present a broad case for the need for industrial relations reform and labour market deregulation, and attempt to dispel some of the myths perpetuated by its opponents. I will speak generally, without specific reference to the changes being proposed. However, much of what I say is directly applicable to the proposed reforms.

The motivation for labour market deregulation

  • Improved competitiveness
    In today's world it is not possible to consider Australia, or any other country for that matter, in isolation from all others. When determining any sort of economic policies one needs to consider them in the context of the world economy, not just in terms of any single country. This said, there is no denying that many other countries, particularly developing ones, are becoming increasingly competitive. For this reason, if Australia is to remain competitive internationally, the artifical inflation of labour costs (i.e. labour market regulation) needs to be systematically eliminated.
  • Create jobs
    Whether we like it or not, it's a simple fact of life that employers, whether they be governmental or in the private sector, have finite financial resources at their disposal with which to employ people. It is clear that if labour costs are higher then employers will be able to employ fewer people. In my opinion, so long as there are people in society who are unable to find work, the priority of labour market policy ought to be to create full employment, not to artificially boost the incomes and entitlements of those who have jobs at the expense of those who do not. Moving towards a deregulated labour market model is more conducive to this goal than the regulated and protectionist model advocated by social democrats and the union movement, which prices people out of jobs.
  • Improved productivity
    Government imposed regulations and, in particular, collective bargaining decouple employee income and benefits from productivity, thereby undermining incentive. Both have the effect of placing all working class citizens in the one basket, labelled 'workers'. In practice, some workers work harder than others, some are more productive than others, some are willing to work longer than others and so on. For this reason, adopting a system which encourages individually negotiated workplace contracts over regulated collectively bargained contracts is desireable.
  • Respect for personal liberty
    In addition to the economic motives, labour market deregulation is desireable simply from the point of view that it advances personal freedom. In a free society every individual should be entrusted to make all personal decisions for themselves. Nobody other than the individual is better qualified to decide what terms of employment are favourable. Labour market regulations, on the other hand, shift this decision making responsibility from the individual to the government, undermining individual discretion.

Myths about industrial relations and labour market policy:

  • Mandatory entitlements create prosperity
    There seems to be a widespread misconception in society that by legislating employee entitlements and benefits the living standards and working conditions of the working class will be improved. This couldn't be further from the truth. In practise, mandatory entitlements serve only one goal, to artificially inflate the cost of labour. By inflating the cost of labour people are priced out of jobs, resulting in increased unemployment. Prosperity cannot be legislated or regulated into existence. Rather, it is economic growth which creates prosperity for the working class. There is only one way to advance living standards, and that is to embrace pro-economic growth policies.
  • Legislated job security creates job security
    Job security is a benefit like any other, and, like any benefit, it carries a cost to the employer. For this reason job security is best left open for negotiation. There are plenty of people in society who would be more than happy to accept a job without guaranteed security, if the alternative is no job whatsoever. What about people who presently have jobs with guaranteed security? Would these people stand to loose such security under a deregulated system? The answer is no. If peoples' jobs are economically viable with guaranteed security now, so they will be tomorrow, and there is no reason why an employer would be unwilling to negotiate the same terms into an employment contract tomorrow. So what's the difference then? The difference is that some jobs which presently don't exist because they are economically unviable to employers, would become viable. Legislated job security, like other mandatory entitlements, prices people out of jobs, inhibits peoples' ability to freely negotiate, and creates unemployement.
  • Unfair dismissal laws prevent unfair dismissmal
    As I see it, there are two types of dismissal: dismissals which are made in the interest of the employer (e.g. for financial reasons); and, dismissals which are not in the interests of the employer, but which are made anyway for personal reasons (e.g. racial, sexual or religious discrimination, or personal disagreements). Allow me to address both of these types of dismissal individually.

    The former type of dismissal is not, in my opinion, unfair dismissal. Instead, while certainly unfortunate, it is a perfectly legitimate act. It is of fundamental importance that employers be able to act in their own financial interests. If their ability to do this is limited, so too is growth, which, in the long term, costs more jobs. Alternately, the employers might just take their business somewhere else, which, again, costs more jobs.

    In the case of the later type of dismissal, which I refer to as unfair dismissal, it is highly dubious that any sort of government regulation or legislation can be effective. If an employer is genuinely discriminatory, rather than hire and fire someone, they simply wouldn't hire them in the first place. In the case of an employer firing an employee on personal grounds, even if such acts are prohibited there is simply no way of stopping a determined employer from finding some other pretext by which to fire the employee, or make their life so miserable that they'll leave on their own accord. Truly unfair dismissal is something which is near impossible to legislate against, serves to discourage legitimate dismissal and exposes employers to spurious unfair dismissal claims.

  • Minimum award wages protect the battlers in society
    Minimum award wages are simply another form of legislated benefit and achieve the same result, to price people out of jobs. While it is clear that there is a subsistence level below which people cannot survive financially, it needs to be kept in mind that whenever the minimum award wage is increased, there will necessarily be people who loose their jobs as a result. For this reason, award wages ought to be kept as close to the subsistence level as possible.

Having stated my views on these issues, I will suggest policy goals which, in my opinion, will reduce unemployment and boost productivity.

Peter's policy recommendations:

  • Eliminate all minimum award wages and unemployment support, replacing it with negative income tax for people with incomes below the subsistence level
    By completely eliminating all minimum award wages, nobody who is willing and able to work will be unable to find work. Why, if I could employ someone for one cent per hour, I would single handedly take a big bite out of the country's unemployment level (my house could use a paint). To counteract the problem of there being many workers left below the subsistence level, and as an alternative to unemployment support, negative income tax could be employed to boost the effective income of such people back up to the equivalent of the minimum award wage. This would cost the state no more than having these people sitting on the dole and claiming the same benefits. However, productivity would be massively boosted.
  • Eliminate all forms of mandatory workers' entitlements, including job security
    All terms of employment contracts ought to be left open for negotiation. This will encourage a more competitive and productive labour market and not price people out of jobs.
  • Enshrine in law the right of employees to negotiate individual employment contracts
    Freedom of association is a fundamental human right. For this reason closed-shops should be outlated. Under such a system individual workplace contracts would become more common, resulting in an increase in performance based pay, which is more conducive to high productivity.

5 thoughts on “The case for industrial relations reform”

  1. Peter,

    The [eliminate minimum wage + negative income tax] idea is intruiging, but appears fatally flawed to me:

    Let’s say the subsistence level is $5 an hour, so anyone in the labor force earning less than (or equal to) $5/hour would end up taking home $5 an hour at the end of the day. Because of this, they would be completely indifferent to any salary between $0.01/hour all the way up to $5/hour. So businesses would have incentive to put all low salaries at $0.01/hour, and have the state pay the rest. This would include jobs which currently pay at the minimum wage level ($5 or whatever), so the state would start paying nearly 100% of the wages of many workers who did not used to require much if any additional payments.

  2. I agree completely with your criticism, which is why the specifics of the implementation would have to be thought out extremely carfeully for such a system. One possible way to remedy this problem is rather than employ a system which simply subsidises income below $5/hr up to $5/hr, instead employ a graduated system. For example, if you earn 0.01$/hr the state subsisises you up to $5/hr. If you earn 0.50$/hr you’re subsidised up to say $5.20/hr, and so on up to some threshold. In doing so, one could maintain an incentive (albeit a diminished one) for employees earning less than $5/hr to actually care what wage they accept, while still ensuring that nobody lies below the $5/hr mark.

  3. Peter,

    Your seem like such a nice guy but this is, in my humble opinion complete nonsense. Collective bargining is clearly in the best interests of the working class.

    I should point out that I from a working class area of London and as I don’t know much about the history of the trade union movement outside of the UK I’ll restrict my comments to my home country. Look at industrial conditions when something like what you advocate last applied – e.g. children working in mills or down pits and working very long hours. Having no minimum wage encourages sweet shop conditions (look at the UK before ’97) for a large number of expecially imigrant workers.

    Also if you want to make a reasonable comparison look at the different condictions the poor find themselves in the USA (which isn’t so far from what you advocate) and the EU (which has significantly better protection of workers rights). Despite WWII, the cold war. German reunification etc (all of which had a strong -ve effect on EU ecomimies) the economic situation today is pretty comparible between the US and the EU (expluding the newest wave of former eastern block countries to join). However, I don’t need to much thought about where I’d rather be poor, sick or unemployeed.

    The point is that while free market policies may be good for the market there is more to life than the market. A saftey net is needed – not everyone can be succesful as the world only has a finite set of resources.

    Finally, I think there is a reasonable amount of evidence that workers rights are GOOD for the ECONOMY. Look at US economy since Bush started slashing the tax income and workers rights after all the prosperity of the Clinton years (including a large shift to the left by american standards) or whatever happened to the claims that the British economy would collapse if Blair introduced a minimum wage (which was one of his first acts as PM in ’97). Instead we’ve had the longest sustained period of growth in British history, with a sensible mix of free market and protection of the workers and a reasonable tax burden that has allowed a reduction of national debt.

  4. Your seem like such a nice guy
    Thanks. Likewise.

    Having no minimum wage encourages sweet shop conditions (look at the UK before ‘97) for a large number of expecially imigrant workers.
    Having no minimum award wage only encourages sweat shop conditions for those who would otherwise find themselves unemployed. In such cases, I think having low income is better than having no income. We can all stand back in disgust at the existence of sweat shops in South East Asia, for example. However, cheap labour in these countries is precisely what is driving their economic boom, and in time will shift these people from poverty and into the middle class.

    Also if you want to make a reasonable comparison look at the different condictions the poor find themselves in the USA (which isn’t so far from what you advocate) and the EU (which has significantly better protection of workers rights).
    A good comparison.
    Unemployement: USA, UK and Australia 4-5%; Germany & France 10-12%.
    Economic growth: USA, UK and Australia 3-5%, Germany & France 0.1-0.2%.

    However, I don’t need to much thought about where I’d rather be poor, sick or unemployeed.
    I don’t need too much thought where I’d rather be an enterprising, hard working young individual.

    A saftey net is needed – not everyone can be succesful as the world only has a finite set of resources.
    I agree completely. We do need a safety net. But it should be precisely that – a safety net. Not a motivation for people to not work and punish people for trying to prosper.

    Look at US economy since Bush started slashing the tax income and workers rights
    There are countless other contributing factors which have influenced the US economic downturn. I don’t believe that there is any reason to suspect that workplace policy is one of the major ones. Far more likely is that the US is running up massive budget defecits, as a result of increased (primarily military) spending, large trade deficits, and stagnant economic growth in the EU which undermines US export markets.

    In summary Ben, I agree that we need safety nets and certain minimum workplace standards, the question only is where we draw the line. My belief is that things such as unemployment and low economic growth are as much, or more, of a social injustice than not having all sorts of government enforced laws regulating the terms of our employment contracts.

  5. Peter Rohde. I pose this question to you.
    Do different types of bargaining deliver different results?

    Australian evidence shows that collective agreements do deliver better wages and working conditions than individual agreements. For example, average weekly earnings for union members are 17 per cent higher than for non-union members. Part-timers, women and casuals do best from the “union effect” and have therefore most to lose from individualisation.

    As for the proposed national minimum wage, there is no guarantee that it will be adjusted to keep pace with inflation – especially since the government’s changes remove the independent arbitrator.

    It’s also bad news for quality jobs. Australia has very high levels of casual work compared to other OECD countries: 25 per cent of main jobs are casual. Casual work has negative effects on gender equality, skills development and conditions. The proposed changes are likely to expand the gaps that have allowed the rapid expansion of casual work.

    Similarly, independent contractors have found that incomes are more uncertain and their hours of work less predictable. Workers have found, and will continue to find, that there is little choice other than accepting these forms of employment.

    The proposals would mean fewer incentives for women to work. The changes will also exacerbate problems of lower pay, fewer entitlements and job insecurity which already hit women. Overall, the evidence shows that individualised employment arrangements result in miserly work and family benefits. Current data shows that women on Australian Workplace Agreements earn $5.10 an hour less than men on them.

    Some of the proponents of change say it will drive job-creation. One of the most contentious areas in this debate is the link between unfair dismissal and employment. Most researchers are getting tired of having to say the awkward truth over and over again: there is no convincing evidence that the proposals will generate jobs.

    The unfair dismissal exemption could cause the quality of jobs in small-to-medium-sized enterprises to decline. And it may make it more difficult for such employers to recruit high quality workers. Why choose to work for the company best placed to sack you?

    There are also claims about a productivity boom. Productivity, we are told, will rise as a consequence of labour market deregulation. This is complicated stuff, but the claim that individual contracts deliver higher productivity is highly questionable.

    Take two examples. First, if we compare Australia and New Zealand pre-1996, we see that Australia, with its collectivist industrial relations, had substantially higher productivity growth than New Zealand with its non-award, individualised system. Productivity in the two countries had been similar before this. Second, current rates of productivity growth in Australia are, if anything, inferior to those under the traditional award system in the 1960s and 1970s.

    To secure prosperity and to meet the challenges of labour market and skill shortages, slowing productivity and work-life tension, Australia needs innovative reform. Yet the government has come up with an old-fashioned, low-wage solution.

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