When it comes to improving living standards in Australia today, labour market reform is not a first-order issue.
Achieving better health and social outcomes for the Indigenous population - yes. Increasing education attainment, particularly through early interventions targeted at children from disadvantaged backgrounds - yes. New infrastructure projects, tax reform, dealing with environmental degradation - yes. But extra labour market reform - no.
The 2007 election showed that a majority of the Australian population would regard re-deregulation of the labour market in the way that is being proposed by Peter Reith as away of lowering living standards – with adverse consequences for workplace equity and fairness that outweigh any benefits there might be to efficiency.
From the early 1990s onwards regulation of the Australian labour market has altered dramatically. Wage-setting, which used to happen via centralised tribunals, is now largely decentralised, occurring primarily between workers and the enterprise that employs them.
The process through which bargaining over wages and conditions for employment are determined is vastly changed.
Involvement of third-party tribunals in bargaining and their scope to arbitrate on disputes has been reduced, and trade unions generally have a lesser role in representing workers (although there are other reasons apart from labour market reform why this has happened).
Ways in which government intervenes to directly regulate outcomes in the labour market – such as in specifying minimum conditions that a worker must receive – have been a further dimension of the reform of labour market regulation.
Improved efficiency?
Theory tells us that all this should have improved efficiency in the Australian economy. Enterprise bargaining allows wage-setting to be tailored to conditions facing individual businesses and industries, and at the macro-level has reduced flow-on effects in wage-setting.
The capacity to negotiate with workers on their overall set of wages and conditions introduces the possibility of removing inefficient work practices.
And changes to the bargaining process or to the role of trade unions may provide businesses with greater security about the outcomes from future bargaining over wages and conditions that gives greater incentives for undertaking new projects.
For all that, when you look at data on Australia’s recent economic performance, it turns out to be difficult to identify the efficiency benefits of labour market reform.
Take the case of productivity. The rapid growth in productivity that occurred in Australia between 1993-94 and 1998-99 is often attributed in part to the initial phase of labour market reform in the early 1990s.
But the problem is that it is difficult to separate the effects of labour market reform from other influences - such as increasing computer and IT usage, growth in competitive pressure from increases in international trade, and reforms to other areas like the finance sector.
As well, the timing of the productivity growth happens too soon after the commencement of labour market reform to think it could be the only explanation for the productivity surge. As the Melbourne Institute’s Professor Mark Wooden has written, “…the evidence could hardly be described as conclusive”.
Benefits and costs
My own view is that a balanced reading suggests that labour market reforms are likely to have had some benefits for efficiency in the Australian economy – neither as large as the strongest advocates would suggest, or as weak as the strongest critics argue; and that the largest benefits came from the initial phases of reform such as the shift towards enterprise bargaining in the mid-1990s.
What of the costs of labour market reform? Labour market deregulation is often characterised as bringing a trade-off between efficiency and equity. Efficiency may be improved, but at the cost of some loss of equity. Think about the decreasing role of trade unions in setting wages and conditions for employees.
By increasing the bargaining power of employers compared to workers, this may for example give employers more confidence about future wage outcomes, and hence provide greater incentives to undertake investment activity. Efficiency is improved, and the total value of economic output is thereby increased.
This doesn’t however mean that workers are better off. With less bargaining power they are likely to receive a reduced share of the total value of output. If their bargaining power falls by enough then they may even be worse off in absolute terms.
WorkChoices and productivity
Importantly, the trade-off between efficiency and equity is likely to vary with the amount of regulation of the labour market.
When Australia began reforming its labour market regulations in the early and mid-1990s, in response to growing exposure to international competition and a changed macro economic policy setting environment, the benefits to efficiency from reforms such as the shift towards enterprise bargaining and award restructuring, are likely to have been relatively high, and the costs to equity relatively small.
A decade later, reforms such as WorkChoices appear to have had less effect on efficiency, and larger adverse consequences for equity.
Changes under WorkChoices such as the introduction of minimum standards to replace the ‘no disadvantage’ test, and provisions for awards and conditions of employees transferring between businesses, gave rise to a voluminous literature on workers who had been made substantially worse off by these reforms.
This week Peter Reith has claimed that because Australia’s productivity performance has been poor in recent years, and because “labour market issues are at the heart of productivity”, therefore we need more reform.
Interestingly, the period of poorest recent productivity growth in Australia, from 2003-04 to 2007-08, coincided with the introduction of WorkChoices.
And the productivity data for 2009-10, in the first year after introduction of the Fair Work Act, show an improvement in productivity growth.
Now I don’t really believe that the slow productivity growth at the time of WorkChoices, or the pick up post-Fair Work, have much to do with labour market regulation.
As the Productivity Commission has shown, most of the slow-down in productivity growth in the mid-2000s can be explained by one-off factors affecting the agriculture, mining and utilities sectors.
It does however make the point that it is difficult to justify extra labour market reform based on analysis of Australia’s recent productivity experience.
The big efficiency gains in this area have already been made. Add this to the equity costs of deregulating again, and you get the answer that there are much more important ways for government to improve living standards in Australia than labour market reform.