Bahnisch & Quiggin on IR changes (crossposted at LP)
Here’s a paper Mark Bahnisch and I have written on the government’s proposed IR changes, aimed at Online Opinion. We’ll try for a more complete analysis when we both get a bit more spare time. Comments appreciated. Crossposted here at LP
Justice Henry Higgins, the architect of the 1907 Harvester Decision of the Arbitration Court which enshrined the principle of a living wage, defined the scope of the Australian arbitration system as a â€œnew province for law and orderâ€?. Almost a century on, John Howard claims that industrial relations reform is â€œone of the great pieces of unfinished business in the structural transformation of the Australian economyâ€?. The great strikes of the 1890s demonstrated that a labour relations regime based on the law of master and servant was untenable as a matter of justice. Federation saw the entrenchment of Commonwealth powers to establish institutions to conciliate and arbitrate industrial disputes across state borders. The States followed suit with their own dispute settling and wage-fixation tribunals. Distinctive about the Australian arbitral model was its recognition of unions as bargaining parties with legal rights, and wage-fixation on national and industry levels through awards. Awards also comprehensively stipulated employment conditions. Over-award collective bargaining was commonplace particularly in industries with well-organised unions and tight labour markets. But overall, the system delivered high wages and employment security, and was supported by both the ALP and the Liberal Party and in general by employers.
Economic turbulence in the 1970s, and a shift in the labour share of GDP and increased bargaining power by unionised workers led to a backlash. For much of the 1980s, increases in wages arose primarily from annual national wage cases, in which the crucial determinant of the outcome was bargaining between the ACTU and the Hawke Labor government under successive versions of the Accord. As the Accord process came under strain in the late 1980s, individual unions sought to regain a more prominent role in wage bargaining, while policymakers sought to increase flexibility. The outcome was the system of enterprise bargaining, in which unions reached agreements with individual employers.
Reflecting the political compromise that led to the adoption of enterprise bargaining, unions focused on the bargaining aspect, while employers focused on flexibility and the opportunity to buy out restrictive award conditions. The election of the Howard government saw three key changes to industrial law. The vestiges of compulsory unionism were swept away, and unions kept on a very tight rein by the Office of the Employment Advocate, and an individual stream of bargaining â€“ Australian Workplace Agreements â€“ was introduced. Federal Awards were simplified to 20 allowable matters. One of the most significant changes was the removal of restrictions on casual employment, which led to an increasing casualisation of the service workforce. The actual take-up of AWAs by employers has not been impressive â€“ except in sectors such as the Federal public service and communications where government pressure played a major role, and in mining where the introduction of AWAs has been the culmination of a decade long de-unionisation campaign by major firms. The AIRC proved more interventionist than anticipated, continuing to set new employment standards through test cases (for instance, redundancy payments in small businesses which the government is keen to wind back). Overall, real wage rates and employment have improved under the Howard government, but with very patchy gains in some sectors, and a continuing rise in inequality. The improved bargaining position of employees as labour market participation increases and skill shortages bite is no doubt a motivating factor in businessâ€™ desire for further IR reform, a desire that can now be fulfilled with the Governmentâ€™s Senate majority.
Unlike the period leading up to the introduction of Enterprise Bargaining in 1991, there have been few sustained attempts to make the policy case for reform. The BCA embarked on a major research programme in the late 1980s with numerous studies arguing for deregulation. As David Peetz has argued, studies recently commissioned do not bear out the arguments for productivity which dominate the rhetoric of the Government and business. The consensus of the academic literature is that high performance work places are perfectly compatible with active unionism and sensible collective bargaining. Nevertheless, Howardâ€™s longstanding desire to reform IR now has a chance of fulfilment, despite the fact that a political storm over the mooted changes is fast gathering.
The reform proposals have two main elements. The first is the amendment of unfair dismissal laws, so as not to apply to enterprises with less than 100 employees.
The second element, is a substantial extension of previous trends, aimed at reducing the role of unions, awards and arbitration, while increasing that of direct contracting between employers and individual employees. In particular:
1. A number of conditions are to be removed from the scope of awards;
2. Minimum conditions will be set by legislation rather than through the awards process;
3. Minimum wages will be set by the Fair Pay Commission, rather than the AIRC;
4. State tribunals will be abolished and replaced by a single national system
5. EBAs as well as AWAs will be assessed by the OEA and both will require substantially less scrutiny.
Most significantly, the reframing of the no disadvantage test will allow AWAs to undercut award minima, effectively making the award protections optional for employers. This key change has attracted little comment to date.
It is difficult to make definitive predictions about the results of particular changes in industrial relations systems. There are a number of reasons for this, including the inherent complexity of employment relationships, the fact that systems differ between jurisdictions and over time in ways that cannot easily be measured and the confounding effect of changes in the labour market, including those associated with macroeconomic cycles.
This point can be illustrated in relation to unfair dismissal laws. A priori arguments are inconclusive Supporters of such laws make the point that, other things equal, the easier it is to dismiss employees, the higher will be the rate of dismissal, and therefore the higher the level of unemployment. Opponents counter that employers will be unwilling to take on staff if they are unable to dismiss those who turn out to be unsatisfactory.
In economic terms, the problem starts with the fact that an employment contract has a lot of implicit terms. In the management literature, itâ€™s often referred to as a psychological contract. Once both parties have committed to the relationship, each has the opportunity to cheat on these commitments. How this works out depends on institutional rules, the state of the labour market and so on. Whatever happens there are going to plenty of people who perceive the outcome as unfair, and plenty of cases where this perception is accurate.
What about the empirical evidence? As often happens, the literature on unfair dismissals starts out with a big publication finding clear-cut results, only to descend into a morass of contradictory findings. A paper by Lazear in 1990 found strong negative correlations between the strength of employment protection laws, proxied by severance pay, and desirable labour market outcomes such as employment and participation rates, hours worked and so on.. But Lazearâ€™s results have not stood the test of time. More recent research suggests that employment protection laws lower the variance of employment and unemployment but have no clear effect on average levels.
In a comparison between neoliberal labour market institutions and alternatives involving either collective bargaining or centralised wage-fixation, one feature is clearly evident. Neoliberal institutions produce substantially more unequal outcomes. This is evident both from comparisons over time and from comparisons between countries. The US, where the labour market has always had most of the main neoliberal characteristics, displays easily the highest inequality. The reforms undertaken in New Zealand and the UK show up clearly in rising levels of inequality, overtaking European countries that were initially less egalitarian. In the US, where declining rates of unionisation and an even more extreme form of neoliberalism have produced a dramatic shift in the distribution of income. Low-income families have experienced almost no income growth since 1970. Wages for workers with high-school education or less have actually fallen, but this has been offset by longer hours of work and increased female participation.
Defenders of neoliberal institutions argue that growth in inequality has been offset by stronger employment growth resulting from more flexible labour markets. The evidence is decidedly mixed. Until the present business cycle, from early 1990s, there was little evidence to support it. For most of the past decade, the English-speaking economies have outperformed those of the EU and Japan. It is too early to judge whether this is merely the outcome of cyclical timing, or whether there is a sustainable gain in employment. Our view, based on the huge current account deficits being run by all the English-speaking countries, is that a severe cyclical correction lies ahead. Only when the macroeconomic imbalances have been resolved will it be possible to make a clear judgement.
Employment relationships are complex, but the outcome of bargaining depends on two factors. The first is the state of the labour market. The second is the balance of bargaining power. Usually, the state of the labour market is more important, but itâ€™s largely determined by exogenous macroeconomic shocks originating not in the labour market but in the financial sector or the world economy. The reforms proposed by the Howard government will tilt the balance strongly in favour of employers. The likely outcome is a substantial increase in inequality of incomes, and in day-to-day relationships within the workplace.