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Judicial intervention in industrial relations is deterring employment and wasting resources, argues DES MOORE
The Commonwealths constitutional power to regulate employer-employee relations is limited to the prevention and settlement of interstate industrial disputes. But the union movement has "created" interstate disputes to provide cases galore to a sympathetic industrial relations judiciary that has then attempted settlement by imposing employment conditions on both sides, including wage levels.
Although the Australian Industrial Relations Commission has a poor record in preventing and settling disputes, with its sisters at the Federal Court it continues to apply conditions that deter employment. These industrial tribunals intervene on a fallacious basis because they mistakenly perceive a major imbalance of bargaining power unfavourable to employees. The judiciary has thus come to award itself a function: the administration of "fairness".
Judicial interventionism is not confined to industrial matters. Writing in 1995, Chief Justice Gleeson accepted the "abiding need for predictability and certainty" from judicial decisions, but acknowledged that they are increasingly based on subjective assessments because they want to reflect "the consequences of what society has come to demand". He did not say, though, how a non-elected judge should determine which of societys many demands should be accepted or how account should be taken of any adverse implications.
For example, how can a judge with no expertise in economics determine that employers have superior bargaining power? True, employers appear to have a stronger position deriving from their greater wealth and their power to hire and fire. But economists know that labour demand and supply are determined by over 1,000,000 businesses competing with each other for the labour services of over 9,000,000 workers with a range of skills. This situation does not generally allow employers to dictate conditions.
Economists also know that in the more competitive labour market operating in the 1990s the share of national income going to labour remained stable and average real wages increased strongly. By contrast, the much greater legislative and judicial intervention in the 1970s and 1980s resulted in an initial short, sharp increase in labours share, followed by a long, steady decline. A more competitive labour market may actually help workers.
Recent analysis by some labour economists of employment contracts is also relevant. This suggests that the industrial judiciary cannot make meaningful judgements of the terms of such contracts and cannot therefore effectively enforce them. This situation arises partly because whether or not an employment relationship works in practice depends on many factors that cannot be specified in a contract. For example, the contribution by an employee will depend partly on the workers capacity and the prospect of advancement while an employer will take account of the risk of employee loss and the training and hiring costs of replacements.
These are necessarily matters only for the parties concerned to judge, not the judiciary. For their part, employees are freely able to make such judgements and do so readily. Indeed, voluntary quits exceed employer firings by three to one.
Of course, employers firing decisions take account of employment protection legislation. But such legislation also makes employers much less likely to employ marginal workers because firing could be costly even if the job-match proves unsatisfactory. The judiciary cannot take account of such potential employment losses.
Unfortunately, the inability of courts to effectively enforce employment contracts does not deter its attempts at adjudication and that tends systematically to undermine the self-enforcing properties of employment contracts, thereby eroding incentives to contribute productive effort to jobs. For example, the focus on procedural fairness in unfair dismissal cases reduce the penalties employees would normally expect to experience for "shirking" and this tends to raise the general level of shirking. The intrinsically complex nature of the employment contract, and its wider implications, are powerful arguments against judicial intervention.
Although successive governments have failed to address the excessive third party intervention issue, the fact that the legislation badly requires reform need not have stopped the tribunals from interpreting it in ways that recognizes the interests of the community in general as distinct from unions in particular. It has effectively imposed upon Australia a highly interventionist set of arrangements and it has done so without adequate understanding of the economic and social implications.
The recent slight moderation in judicial intervention does suggest that expressions of concern have exerted a modicum of influence. But, even allowing for the apparent readiness of the law to provide from its perspective "what society has come to demand", there are few signs of any real conversion of thinking.
Tribunals are continuing to allow unions to play a game of testing every possible provision and business is bearing considerable direct costs, as is the community both from the wasteful use of resources and the adverse effects on employment. It is also remarkable that the plethora of industrial decisions reveals no precedent that would enable an employer to confidently pursue this or that course of reformatory action.
This is an extract from a paper on Judicial Intervention "What Society Has Come To Demand" presented to the HR Nicholls Conference on 24 March. Des Moore is Director of the Institute for Private Enterprise.