WHY REGULATION OF THE
LABOUR MARKET IS
INEQUITABLE, OUTDATED
AND INEFFICIENT

BY DES MOORE

Tonight I want particularly to focus on the equity arguments because I feel that the main support for preserving Australia’s regulatory arrangements derives from a belief that they are producing equitable results that would be undermined by deregulation. Indeed, some bodies with considerable resources want to put increased emphasis on equity. For example, ACIRRT , which was established as an Australian Research Council Key Centre at the University of Sydney, and which has a staff of 19, has recently published a very dirigiste book stating that "the key issue ….is to build labour market and industrial relations policy around the equity aspects of work" (page 176) and that "the notion of fairness however much it may appear to be value laden or imprecise, lies at the heart of industrial relations." (page xix). At the Economists Conference in September the Deputy Director of ACIRRT asserted that the economists’ solution to unemployment is to let wages fall to starvation levels. Such statements may be thought extreme: but none of the academic economists present challenged that assertion.

If deregulation is to be achieved, it is particularly important that some counter is provided to the propaganda that the less regulated US market produces inequitable outcomes, notably the creation of a group of "working poor".

Those who espouse labour market regulation talk a great deal about "fairness" and "equity" and the Workplace Relations Act 1996 itself contains many references to "fair" ,such as requiring the Commission to "ensure a safety net of fair minimum wages and conditions" (Section 88B(2). Strikingly, nowhere in the Act is there to be found a definition of "fair" and advocates of regulation rarely define it when they use it.

However, statements by those advocates imply that it is inequitable if the distribution of incomes becomes more unequal and that any country that has a wider dispersion of labour market earnings than egalitarian Australia is, by definition, treating its poor inequitably. By contrast, our wages "system", it is said, ensures both a minimum living standard and comparative wage justice. This nonsense is, in turn, reflected in the medieval idea that different kinds of work or (as in the current debate about junior wages) different degrees of "competency" can have values put on them regardless of the forces of demand and supply.

However, from the perspective of moral philosophy, an inequity cannot be assumed to exist merely because there is an inequality in incomes or an increase in inequality. There are many ways in which income inequalities may arise. The crucial test of whether inequity exists must surely be whether the inequality arises from "unfair dealings" or "unfair practices." But how to determine such dealings or practices?

While judgements will inevitably vary, unfair dealings should, at least prima facie, include actions that prevent others increasing their incomes or seeking alternative courses that might allow that to occur. Protectionism in all its forms provides clear examples. In the context of the regulation of industrial relations, actions that restrict the freedom of employers to offer such conditions as they determine or that impinge on the freedom of employees to accept alternative conditions would therefore seem to be unfair or inequitable unless, perhaps, it can be established that the inequity is balanced by a greater equity. It will be noted that I include here inequities against employers, although one never hears of such a phenomenon outside the HRN.

Using the criterion of unfair dealings, this Society is well aware of many such actions of Australian governments and tribunals in administering the labour market regulatory systems. However, it is worth noting here for the record some of the more important case studies presented at our meetings that have established beyond any reasonable doubt the inequitable treatment not only of employers but of many of the actual or potential employees involved:

• Robe River and the tribunals’ effective support for blatant union restrictive practices. It was mainly the persistence of Charles Copeman that succeeded in persuading the workforce at Robe River to adopt practices that undoubtedly saved the venture and its jobs. (C. Copeman).
• Dollar Sweets, which (as our present Federal Treasurer proclaimed to the Society) threw up an unlikely hero in the person of Fred Stauder. This showed the potential for using common rather than industrial law to overcome the intransigence of the industrial tribunals (P Costello).
• Saxonvale coal mine and the refusal of the NSW Minister for Mineral Resources to allow Peko to purchase from BHP, reflecting union fears that it would "do a Robe River" (H.Larratt and A.Kuru).
• Containerisation and the abject failure of the Commission under the late Sir John Moore to deal with the blatant union obstruction and to administer justice to employer interests (G. Gilbert).
• Private hospitals and the failure of the Victorian Industrial Commission to deal with industrial activity by nurses unions (N. Hughes).
• Wide Combs and the stubborn determination of a few individuals which succeeded in forcing the reluctant Commission to change the shearers award. (P.Houlihan).
• Live sheep exports, which succeeded despite the industrial tribunals because those concerned were prepared to take the matter into their own hands ( Ian McLachlan & David Trebeck)
• Columbus shipping lines, which stayed in Australia despite the picketing for eight years of its premises over the manning levels of ships. This again demonstrated the value of using the common law to secure employer rights (H. Rilk).
• Brewery and electricity restrictive practices, which the tribunals failed to recognise and deal with and which were again only overcome after a titanic struggle (W. Gilbert).
• The "Thorley 25" and their disgraceful treatment(P.Murray and others).

Most of the stories that have been recounted at meetings of this Society resulted in the breaking down of regulations which were inhibiting change; but some failed. In either event those involved were subject to unfair dealings and put to unnecessary expense. Indeed, it is not going too far to suggest that many of those involved in these and other disputes showed courage worthy of wider recognition by the community. As far as I am aware, however, none have been honoured. This is a matter that the Society may wish to consider putting to the Prime Minister, with a recommendation that there be a special form of words used in explaining the honour - such as ‘for contributions to improving workplace relations." My current nomination would be Chris Corrigan.

It is significant that experience under the Workplace Relations Act passed only in 1996 indicates that serious injustices continue, centred around the preparedness of unions to exploit the difficulties of defining legislatively the circumstances when industrial action is or is not legally permissible, the continued permissiveness of tribunals (and even the Federal Court) in allowing such action by giving unions preferential treatment, and some failures of police forces to enforce the law when breaches occur. Prominent legal expert Graeme Watson recently reviewed the first 18 months of operation of the compliance provisions of the Act and concluded that:

The continued failure of tribunals to provide fair treatment in regard to industrial action derives importantly from the misconceived notion that there is an inequality in bargaining power between employers and employees and that unions therefore deserve special and privileged treatment. This is despite the fact that only 23 per cent of private sector employees are now union members, a figure that would be much less if unions were not accorded privileged treatment.

But, even leaving aside the immorality in treating employers and some actual and potential employees inequitably, there is no practical basis for an approach that effectively says that one inequality deserves another. In my August paper I argued that there is no evidence of any generalised inequality of bargaining power and I want here to emphasise only two points.

First, there are nearly 700,000 businesses in Australia and the notion that some general monopsony might exist or occur can be no more than a text book curiosity. True, employers are in aggregate wealthier and more powerful than employees: but it is the competitive not the aggregate situation that is relevant. Second, if there was some such inequality it would surely by now have been reflected in a downward trend in the share of national income going to labour in the US. However, the opposite has tended to occur there.

The well-intentioned solution proposed by Graeme Watson is to amend the legislation to "remedy the current deficiencies." But can the deficiencies of philosophy (sic) in the tribunals be remedied? I fear not. They will continue to administer any amended legislation on the false assumption that there is an inequality of bargaining power. The only solution is to eliminate the capacity of the relevant institutions to exercise legal power.

In its 1997 living wage case the AIRC expressed concern "about the size and continued growth of the gap between wages emerging under workplace bargaining and award wages." Its decision in the 1998 case to award a safety net increase that was "tiered", with proportionately less for those on higher wages, was thus " deliberately designed to give a greater increase to award employees at the lower levels, whilst" .. wait for it…. "not neglecting the interests of those at the higher levels who also receive no payments other than those prescribed in the award." As to the effects on employment, in typical Commission-speak it stated that "We are satisfied that, at most, very limited effects on employment would result from such an adjustment" (p29).

However, the Commission’s comparative wage justice approach can be said to be defective from almost any perspective.

First, even if one were to accept that it is inequitable to allow a widening in dispersion of earnings, the Commission has not performed. OECD data indicates that earnings dispersion has widened in Australia since the late 1970s whereas it did not in the majority of OECD countries for which data is available. In fact, the real minimum wage has been falling since the early 1970s. In April 1998 the Commission acknowledged that its decision "took into account" an ACTU chart showing a widening in earnings dispersion since the mid 1970s but failed to explain why it had allowed this inequity (sic) to come about. Using the Commission’s own criterion, the Commissioners should surely resign for failure over a long period.

Second, contrary to popular perception, Australia is not the egalitarian benchmark that is so popularly touted. In fact, it has a wider dispersion of earnings than eleven out of 24 OECD countries for which data is available. The Italians, Germans, Swedes, Swiss and the Belgians are all more egalitarian. Again, the Commission could be said to have failed.

Third, and more important, the attempt to administer even flawed equity by increasing wages of the low paid is itself clearly and obviously fundamentally flawed from an equity viewpoint. As Chart 1 shows, more than half of those who earn "low" wages (which are classified for this purpose as less than $10 per hour for adults and less than $6 per hour for juniors) live in households with incomes in the upper half of the income scale. This may seem surprising but it becomes less so once it is realised that many of the low paid are second earners in a household who are prepared to accept low paid jobs to help pay off the mortgage or some such. But what conceivable equity ground could the Commission have for adjusting wages of such people?

Fourth, any equity ground for increasing wages of the low paid is further greatly lessened by the fact that the unemployed are predominantly in the bottom half of the income scale (see Chart 1). Even if one were to accept that increasing wages of the low paid has only "very limited effects" on employment, such action is clearly inequitable in relation to the unemployed because it reduces their chances of obtaining a job and must mean that at least some miss out. Moreover, it is important to recognise that it is not only the unemployed who may be being kept out of employment: there is over I million who are not in the work force and who are not therefore counted as unemployed but who say that they would like to work if it were available. Further, the prevention of employers from employing clearly involves unfair dealing with respect to them.

Incidentally, it is interesting to note that the highly respected US authority on the effect of minimum wages on employment, Professor Daniel Hamermesh, recently made presentations to the Department of Workplace Relations and the Productivity Commission in which he characterised the academic debate on this matter as "boring" because it had produced no new developments in theory. He mentioned various possible reasons why minimum wages may in practice appear to have only small employment effects, pointing in particular to situations where minimum wages are very low compared to average wages. At a subsequent press conference he stated:

"In my mind the international evidence is quite, quite clear despite some views to the contrary and I think it applies rather well to Australia and indeed it applies I think with more force to Australia than to most other places."

The reason it applies with more force to Australia is, of course, that our minimum wage of $9.83 an hour is almost 50 per cent of average weekly earnings, significantly higher than the 35-40 per cent of average wages in the US and Canada.

Fifth, while some might argue that any inequity to the unemployed and/or employers is balanced

by the equity of ensuring that those low paid in genuine need are provided with a "living wage", there is really no basis for the AIRC to act as a social welfare judge. Australia now has a very comprehensive social security system and, even if one accepted that the wage system had a social justice role in 1907 when Justice Higgins made his infamous basic wage decision, that role has now clearly been assumed by government, as should be the case.

Government social security and welfare spending now accounts for 10 per cent of GDP and, if expenditure on education, health and housing are added , that increases to over 20 per cent of GDP. Benefits are provided under a wide range of schemes and are targeted to meet the needs of different groups in the community. In 1993-94, such benefits provided the principal source of income for nearly 2 million households containing over 4 million people, that is, over one quarter of the population.

In fact, for the bottom quintile of the household income scale, social security benefits provided the majority of income, as Table 1 shows. If non-cash benefits were to be added the proportions would be even higher.

Source: A.Harding, "The Suffering Middle: Trends in Income Inequality in Australia, 1982 to 1993-94", Australian Economic Review, Vol.30, No.4, 1997, Table 5.

In short, even accepting that the original role of the AIRC was legitimately to try to provide social justice through the wage system, that is now clearly outdated and pursuit of it creates inequities which cannot be justified given the modern role of government. If wages were allowed to find their own level and the resultant labour market earnings proved to be socially unacceptable, they could then be supplemented through, say, tax credits to the extent that the existing means tested benefits did not provide appropriate top-ups.

Even if the advocates of regulation could be persuaded that our system is outdated and inequitable, a great effort would still be needed to persuade them to accept a reduction in regulation to the same extent as in the US. The efforts of most Australian academics and media commentators, not to mention trade unions, have created a climate of fear that this would simply lead, as John Carroll put it recently, to the "inequality…misery and squalor (that is) rampant in its large cities." The bogey man is that deregulation will create an under-class of "working poor."

Although my report deals with this issue at some length, it warrants much greater attention. Tonight I can only touch on it briefly, although I propose to add one or two points to those in the report.

Let me start by first noting that the welfare lobbies have so inflated the definition of "poverty" as to make it almost meaningless and indeed to undermine their own raison d’etre (or what that should be). "Poverty" is no longer defined in terms of having insufficient income to pay for basic necessities but in terms of whether incomes are "low" relative to average or median income levels. For present purposes, however, I am accepting this "relative poverty" approach.

In the US the "standard" poverty line for a couple with two children was about $US 16,000 in 1996 and that showed 14 per cent of the US population below the line. At an exchange rate of 60 cents, $US16,000 is equivalent to about $A26,000. It so happens that $A26,000 was the cut off point in 1995-96 for an Australian couple with two children according to our standard Henderson poverty line. As that produced a total of 19 per cent (3.4 million) in poverty, Australia appears to start with a significantly higher proportion of its population in that state than the US.

Second, it is relevant that over 17 million of the 36 million classified as in poverty in the US in 1997 were from minority Black, Hispanic and Asian/Pacific islander groups. As we have no substantive parallel groups, it is not surprising that the 1994 and 1995 international adult literacy survey of thirteen countries suggests that Australia has a smaller proportion of its working age population with very poor or low literacy skills than the US. Such data , together with casual observation, therefore suggests that Australia should have a relatively smaller proportion in poverty.

Third, as Chart 2 shows, even using the fairly generous definition of poverty, the US has only about 9 per cent of its employed in poverty and only about 6 per cent of its population in poverty and working. Moreover, contrary to popular perception, there has been no increase in these proportions since the early 1980s. By contrast, while no definitive estimate has been made for Australia of the proportion of employed who are "working poor", one recent study suggests that using the Henderson line it may be over 7 per cent, up from 3 per cent in 1981-82.

Source: US Bureau of Census; US Bureau of Labor Statistics

In short, even with the advantage of a higher quality work force at the bottom end, Australia’s regulated labour market appears not only to have produced almost as high a proportion of working poor as the US but to have allowed the proportion in that category to grow. Moreover, this has occurred even though, with a much higher proportion of its working age population employed than Australia, the US would naturally be expected to have a higher proportion of working poor.

Fourth, the focus on the working poor in the US has led to assertions that, as employment has shifted away from manufacturing and towards services, that has led to a deterioration in overall job quality. Accordingly, so we are told, what is happening in the US is that a low paid service economy is being created in which people largely sell hamburgers or act as janitors. The implication is that Australians wouldn’t want those sort of jobs or that sort of economy. Instead, the ACIRRT’s and Carrolls want government to develop "strategic" industries, to subsidise training programs and generally to provide high quality jobs - meantime continuing to complain about the low rate of employment and the high rate of unemployment !

The problem with this low-paid, low-quality service sector jobs picture is that it is very wide of the mark. For a start, Australia already has an economy that relies on the services sector for jobs almost as much as the US does: in 1997 some 78 per cent of non-agricultural employment was provided outside manufacturing, mining and construction compared with 80 per cent in the US.

Second, while the services industry in the US is very diverse, with some jobs of higher quality and some of lower quality than in manufacturing, as Chart 3 shows the distribution of earnings in services is similar to that in manufacturing. It is true that average wages in US manufacturing are slightly higher than in services but the differential is only about 8 per cent and that gap has narrowed markedly over the past thirty years.

NOTE: Data for the services industry excludes workers in private households.

The distribution of earnings is similar for services and mnufacturing, suggesting that the notion is overly simplistic that services is "low wage" and manufacturing is "high wage"

None of this is to deny that the overall dispersion of earnings is wider in the US than in Australia. However, it seems to be completely overlooked that the higher the proportion of the working age population that is employed, the wider is likely to be the dispersion in earnings due not to any "inequities" but to the natural differences in human capacities ie with its much higher employment rate, the US is bound to have more lower quality labour in jobs than Australia and hence bound to have a wider dispersion of earnings. Moreover, if as seems to be the case, the quality of labour at the bottom end is also lower in the US, that will add further to the dispersion.