SOLVING UNEMPLOYMENT -
DEREGULATION OR WHAT?
by Des Moore
Economic Society of Australia (SA Branch)
30 May 2000
NOTE: This paper reflects research undertaken over the past two years. The principal results are contained in a report commissioned by the Council of Federal and State Labour Ministers (and presented to it on 27 November 1998) entitled The Case for Further Deregulation of the Labour Market. Copies of that paper are available from the IPE at $6.00 (Phone/Fax 03 9867 1235). Along with other subsequent papers, it is also accessible via the IPE web site www.ipe.net.au
My argument for labour market deregulation as a means of reducing unemployment runs along the following lines. First, whether a country's institutional arrangements are conducive to entrepreneurial activity is important in determining economic performance. Second, Australia's institutional arrangements for regulating employer-employee relationships contain significant features that deter employment and enhance unemployment, and are generally antipathetic to risk-taking. Third, the principal arguments usually advanced in favour of Australia's system of regulating the labour market do not stand up to close analysis or the test of time. Fourth, there are alternative options available for regulating employer-employee relationships, but I will not have time to elaborate on those this morning.
The relevance of institutional arrangements to economic performance derives from the fact that there is no identifiable statistical explanation for about two-thirds of economic growth. The unexplained two-thirds is usually attributed mainly to technological change. But the key question is - what determines the rate of application of technology? One of the world's leading analysts of historical growth differences between countries, Angus Maddison, 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 or policy influences which may retard or encourage economic development."
Maddison is not alone in emphasising the importance of institutional arrangements and there is a growing literature on institutional economics.
I argue that Australia's institutional arrangements for regulating employer-employee relations have been and remain highly interventionist and considerably restrict employers' discretion both in regard to investment and employment. Indeed, they are probably unique in the world in the extent to which third party intervention can occur in management decision-making on employment. This is not simply a matter of Australia's award system, as reflected in the absurdly interventionist 20 allowable matters (see Attachment), but extends also to the highly interventionist and one-sided interpretations of the law by tribunals.
The most recent example is the extraordinary interventionist decisions of the Federal Court over the last couple of years, particularly over recent months in the building industry dispute in Victoria. Those decisions have effectively neutered two important statutory provisions clearly designed to protect employers against union intimidation - Section 127 of the Workplace Relations Act, which was supposed to be a "quick and effective" remedy against illegitimate industrial action, and Section 45D of the Trade Practices Act to prevent secondary boycotts. As a result, the Government has been forced to try to amend the legislation.
Argument that the Court is simply applying the law as it sees it wears thin when, for example, a judge refuses orders against a ten day strike during the currency of an enterprise agreement that actually had a no-strike clause; or when he decides that an employee is not a "casual" even though he was paid as a casual, called a casual and regarded himself as a casual; or when the Victorian Supreme Court is prevented from hearing employer claims at common law against union intimidation because it was deemed that such claims could constitute "coercion" against unions.
This is only the most recent example of excessive third party interventionism. Those interested in the history, albeit incomplete, can view some egregious examples on the HR Nicholls Society web site (www.hrnicholls.com.au). The long-standing pro-union bias, which has been highlighted recently by union boasts that they hardly ever comply with tribunal orders, adds to the employment deterrent effect.
How has this high interventionism affected our labour market performance compared to other countries? All international comparisons need to be treated with reserve but the most apt are probably with the UK, the US and NZ which have broadly similar political and legal institutions and, except for the US, similar social security systems. As those countries also have much larger ethnic minorities that are less employable because of their lower average literacy and numeracy rates (see Chart 1 attached), Australia should have a better labour market performance.
In fact, our performance has been much worse. If in 1998 we had had the same proportion of our working age population employed as in those less regulated labour markets, we would have had the following additional numbers in employment: USA 755,000; UK 430,000 and New Zealand 218,000. That would almost certainly have meant much lower Australian unemployment too.
Arguments that the US has a higher proportion of its population in jail are irrelevant to employment comparisons based on working age population. Equally, as pointed out in my March 1999 article in the Australian Bulletin of Labour, Gregory's argument that the US labour market has not produced higher GDP growth is largely irrelevant. The US has much higher levels of employment and GDP per head and Australia has not been closing the gap in living standards, let alone in employment.
The Arguments Advanced Against Further Deregulation
I want to turn now to why the principal reasons advanced against deregulation are not soundly based.
First, there is the argument that a high degree of centralised intervention in wage bargaining is needed to prevent wage surges and consequent adverse employment outcomes. However, our centralised system was no help in stopping the large wage breakouts of 1974 and the early 1980s. If we take the profit share as including income of both incorporated and unincorporated businesses, we find that it took more than ten years for the resultant depression of that profit share and the employment rate to recover. Even today the employment rate has not yet regained its peak level of the early 1970s and the profit share remains below pre-1970s levels. (Note, however, that this needs to be qualified to some extent as the profits share so defined includes a labour component in unincorporated businesses just as the wages share data often used by analysts is not representative of labour's share because it does not include that labour component).
However, the main reason for rejecting this argument is that there has been a major change in the respective roles of the Reserve Bank and the AIRC. The Bank now has responsibility for keeping inflation to an average of 2-3 per cent and this means that it no longer has to accept the level of wages determined by the Commission, as it did under the inflationary Accords of the 1980s in particular. This important but little-recognised change means that there is no macro-policy argument against a decentralised system of wage determination, which some economic analyses of different systems have suggested have been more successful than Australia's.
A second argument is that government intervention is needed because the labour market is dealing with people not commodities and people need to be treated fairly. But all markets involve dealings between people and labour markets are not trading people but their services. Further, the each party's decision to engage in a trade of those services involves a complex balancing of the respective costs and benefits, many of which cannot be incorporated in a formal agreement. This makes it difficult, if not impossible, for third parties to pre-determine what the terms of an agreement should be let alone judge whether it is being observed. Indeed, there is a substantial degree of self-enforcement in such agreements based on assessments of the costs each party will bear if the agreement is terminated, as is illustrated by the fact that less than 25 per cent of those who leave their job are retrenched.
Accordingly, it is a myth that there is a large imbalance of bargaining power between employers and employees. Indeed, with over 1,000,000 businesses, employers compete actively for the wide range of available labour services and there is no evidence of any significant monopsony power. In the least regulated US market, labour has held its share of GDP.
Freer labour markets would result in some reduction in wage rates at the bottom end, and some accompanying increase in employment, but the great majority of economists agree that the elasticities are high enough not to involve large wage reductions. Moreover, there would be no across-the-board reduction and even those currently on low rates would not all experience reductions. Nor do freer markets mean that real wages at the bottom end would remain at lower levels. What we would be looking at primarily would be a structural change in wage relativities, followed over time by real increases that would reflect increases in productivity.
The third main pro-regulation argument is that the original justification for the establishment of existing arrangements remains valid, that is, the prevention and settlement of industrial disputes. However, for most of the period from the establishment of the Commission to the late 1970s the record shows a very large number of working days lost from industrial disputation. But such data probably does not fully capture what is happening. For example, in arguing in 1998 that the Workplace Relations Act 1996 had had little or no effect, one legal expert pointed out that industrial action was still "occurring on a widespread basis with little interference from Courts and tribunals charged to ensure that it stop or not occur".
International comparative data shows that Australia's rate of disputation has been consistently above the OECD average, with less regulated labour markets having fewer disputes. It is the same story with the unregulated labour market in Australia's housing industry. That industry operates almost entirely on the basis of individual contracts between trade contractors and builders, with the result that it not only has the most dispute-free workplace arrangements but is the most efficient and cost-effective housing industry in the world. No evidence of exploitation of workers, or unfair pay, has ever been adduced as far as I am aware.
The reality is that the present system has been a failure in terms of the main justification for its establishment.
The fourth and probably the most important argument advanced in support of the existing arrangements is the perception that they are an essential component of Australian egalitarianism. However, since the 1970s our supposedly egalitarian Industrial Relations Commission has presided over a widening in earnings dispersion and a fall in real minimum wages. Furthermore, there are at least eleven OECD countries with a more egalitarian earnings dispersion than Australia - but no Commission. Moreover, is it better to have a narrower earnings dispersion that is caused by having more people on zero earnings because they have no job?
Of course, deregulation opponents are fond of pointing out that earnings dispersion is wider in the less regulated US and UK labour markets. However, as those countries have larger proportion of adults with the lowest literacy and numeracy skills this probably explains the major part of their wider earnings dispersion. It is highly unlikely that an Australian deregulated labour market would produce the same proportions on low pay.
It is also a myth that, without the Commission's wage awards, those at the bottom end would not get a "fair go". It is the social security system, not the workplace relations system, which ensures a reasonable living standard for low wage earners. It does this by, for example, providing households in the bottom quintile with more than half of their incomes.
Indeed, as the majority of low paid are living in households in the upper half of the income scale it is surely farcical to have an institution charged with keeping wages up at the bottom end and pretending to ensure "social justice." This is made even more farcical once it is realised that the Commission's adjustments to the so-called "living wage" actually extend to those earning about $900 per week and cover about 25 per cent of employees.
More generally, concern about the effects of reductions in wages at the bottom end fail to take account of the "dynamics" of poverty. A recent OECD study of four countries shows that the majority of people who are "touched" by poverty are affected for only a short period. In the US, for example, only 4.6 per cent of the population were in poverty over the whole of the period 1988-93. The study also makes the very important point that "obtaining or losing employment is particularly important for transitions into and out of poverty". In similar vein, a recent study published by the ABS found that 45 per cent of Australian low paid workers move on to higher paid jobs within one year and that low paid workers are at much greater risk of becoming unemployed. This again supports the view that it is much better to have working poor than unemployed poor.
Of course, even though the reduction in wage rates at the bottom end under deregulation would result in a net reduction in unemployment, thereby reducing benefit payments and increasing tax revenue, there would likely be net adverse budgetary implications. This would arise because means tested social security payments would tend to increase for those whose wage earnings fell and there could be pressure to provide an additional safety net, such as through a tax credit scheme for low pay workers. Indeed, it would probably be politically necessary to introduce some such scheme in order to achieve deregulation.
But, if the only "penalty" from deregulation was a net increase in budget expenditure, that penalty would surely be worth incurring given the likely increase in employment and reduction in unemployment. In any event, contrary to the scare campaign being conducted by opponents of deregulation suggesting that benefits for those at the bottom end would be cut, there is scope to finance additional benefits for the low paid by reducing some of the $20 billion plus in benefits that are presently provided to middle and upper income groups.
Other reasons are advanced for opposing deregulation, such as that it would increase job insecurity and working hours and/or stress. Indeed, the trade union movement conducted a campaign last year apparently based on the notion that the reduction in regulation to date has done just that and argument that more regulation is needed to protect workers against further such developments.
I want particularly to refer to unsubstantiated assertions that increased job insecurity is a prime cause of increased unemployment. In Australia, Morgans have been conducting surveys of employee perceptions of job security since 1975. These surveys show that only in the recession of the early 1990s has the proportion of employees regarding their job as safe dropped below 70 per cent. Moreover, there has been no increase in the average duration of jobs. The job insecurity thesis is a poor attempt to blame high unemployment on such capitalist demons as globalisation Equally, there is no evidence to support regulation of working hours - average working hours continue to decline; those working long hours are mostly in managerial or professional positions and their hours need to be assessed against the background of the significant and growing reduction in the length of working lives; and, finally, there has been a major reduction in physical labour and the stress from that.
The Alternative Option
I turn now to the fourth prong of my deregulation case, namely an alternative to existing arrangements. That in itself consists of three parts.
First, the common law "system" is a coherent and viable alternative legal framework to the present regime within which employment relationships can satisfactorily be established. The key principle under common law is that the worker and employer should basically be free to decide on the content of their relationship because both parties expect to benefit from entering a contract. However, there are exceptions to this freedom which protect the public interest, such as the unenforceability of contracts entered into for illegal purposes or which involve significant abuse of third party rights. Courts have also come to be prepared to imply a duty by an employer to provide a safe work place.
The common law also protects the processes involved so as to ensure that the principle of freedom of contract is not abused and that the rights of the parties to the contract are protected. Thus, contracts procured by the use of force, fraud or undue influence are not upheld by the courts and, nowadays, this may extend to contracts deemed to have been entered into in a manner which is "unconscionable."
The main changes compared with the present regime would be the elimination of any privileged position for trade unions and of the capacity for third parties to undertake extensive intervention in certain important areas. Intervention would cease in the determination of minimum pay and conditions; in the dismissal of an employee when that is in accordance with the contract of employment; and in a dispute between employer and employees or unions over pay and conditions.
The second part of my alternative is to deal with the potential problem that a return to reliance on the common law would simply move the judicial activism of the AIRC into the courts, as is already happening with the Federal Court. The simple repeal of the Workplace Relations Act 1996 or its successor would thus run a very real risk that, before long, the courts would adopt similar interventionist practices to the AIRC. In New Zealand, a strong tendency of this kind has emerged since the passage of the Employment Contracts Act in 1991.
My proposed counter to such judicial activism would be to change the whole basis of the Workplace Relations Act by substituting new Federal legislation that affirmed certain rights of employers and employees to contract without constraints, or subject only to specified constraints consistent with the common law. In short, the common law applicable to the employment relationship would be codified so as to limit the discretion of the courts in handling such cases.
Such Federal legislation would presumably need to be based on the corporations power. Minister Reith has recently initiated projects to examine the possible use of the corporations power as the basis of Commonwealth regulation of employer-employee relations and I am refereeing one of those projects. There would be potential advantages and disadvantages in using that power. The main advantage is that it would allow the Commonwealth to reduce the scope for judicial interventionism which is inherent in the reliance on Section 51 xxxv of the Constitution.
Minister Reith has argued that this "would enable a coherent national framework of minimum standards to be established for the conduct of workplace relations in corporations", although the unincorporated sector would not be covered. However, from my perspective the minimum standards would mainly be concerned with the processes rather than the content of the employment contract.
This brings me to third and final part of the deregulation alternative. That would be designed to deal with the inevitable assertion that workers would be disadvantaged relative to employers in such a situation.
One could respond to such assertions by pointing out that the market should generally be able to supply adequate information at a reasonable cost to enable workers and employers to conclude contracts without workers being placed under duress. The market should also be able to offer dispute settlement advice and services.
However, to meet concerns that would undoubtedly be raised, particularly in regard to affordability for those who are unskilled and less educated, the AIRC could be converted into a voluntary body to provide advisory/ mediation services to those on low incomes either on a subsidised basis or even free of charge. Such services could include a range of standard employment contracts, with dispute resolution procedures included, and the provision of mediation and advisory services.
Such a body, the Advisory Conciliation and Arbitration Service (ACAS), has been operating in the United Kingdom for 25 years and it has succeeded in establishing a basically voluntaristic approach in relation to settling both collective and individual disputes. Thus, it now handles on an entirely voluntary basis, and settles, the great majority of collective disputes and nearly half of individual disputes. As it never seeks to judge the merits of any case or to impose solutions, the onus to settle disputes is placed where it should be, that is, entirely on the parties directly involved. Indeed, the ACAS approach is to encourage all employers to establish mechanisms to deal with disputes. Most importantly, unlike our Commission, it has established universal acceptance of its impartiality. Although ACAS provides extensive advisory services to both employers and employees at no charge, its annual budget is only around 26 million pounds.
Summing up, my argument for deregulation to reduce unemployment is as follows:
1.Institutional arrangements are important determinants of economic performance;
2.Australia's arrangements for regulating employer-employee relationships are highly interventionist and employment-deterring;
3.The main reasons advanced in favour of retaining a high degree of regulation have not stood the test of time and appear fundamentally flawed;
4.There is a satisfactory alternative based on repealing all the existing legislation regulating workplace relations. I would convert the AIRC into a voluntary advisory/ mediation service with subsidised services for low wage earners and substituting legislation that codifies common law that would normally apply to contractual relationships between employers and employees. If judged necessary to supplement the existing means tested social security system, or possibly as an alternative to some existing benefit or benefits, a tax credit system could also be introduced.
Allowable matters to be included in awards under the Workplace Relations Act 1996
1. Classifications of employees and skill based career paths;
2. Ordinary time hours of work and the times within which they are performed, rest breaks, notice periods and variation to working hours;
3. Rates of pay generally (such as hourly rates and annual salaries), rates of pay for juniors, trainees or apprentices, and rates of pay for employees under the supported wage system;
4. Piece rates, tallies and bonuses;
5. Annual leave and leave loadings;
6. Long service leave;
7. Personal/carer’s leave, including sick leave, family leave, bereavement leave, compassionate leave, cultural and other like forms of leave;
8. Parental leave, including maternity and adoption leave;
9. Public holidays;
11. Loadings for overtime or for casual or shift work;
12. Penalty rates;
13. Redundancy pay;
14. Notice of termination;
15. Stand down provisions;
16. Dispute settlement procedures;
17. Jury duty;
18. Type of employment, such as full time employment, casual employment, regular part time employment and shift work;
20. Pay and conditions for outworkers, but only to the extent necessary to ensure that their overall pay and condition of employment are fair and reasonable in comparison with the pay and conditions of employment specified in a relevant award or awards for employees who perform the same kind of work at an employer’s business or commercial premises.