Home > Oz Politics > A bit late for May Day

A bit late for May Day

May 3rd, 2007

I meant to do a May Day post on Industrial Relations, and particularly Labor’s proposal requiring employers to grant new parents 12 months unpaid leave, in the absence of “reasonable business grounds” for refusal. It’s hard to analyse a policy like this in terms of labour market microeconomics. A standard equilibrium analysis would suggest that some firms might voluntarily offer family-friendly conditions, but the number of such firms would be smaller than the number of employees who would prefer them (since there is less cost and trouble for employers in being family-unfriendly) and this is what we see.

Assuuming there’s a general social consensus in favour of assisting families with children, an obvious question is whether business should be expected to carry some of the burden. As this graph of the profit share of GDP shows, there shouldn’t be a problem of affordability.

Profitsshare

Of course, there will always be marginal firms, but if you can’t make it with profits at current levels, probably you shouldn’t be in business at all.

From the viewpoint of the average member of society, depending mainly on labour income, the case for accepting a substantial profit share rests on the assumption that incentives to seek profit will ultimately benefit everyone. It’s hard to make this case when conditions like parental leave haven’t improved substantially in decades and other conditions, such as rights to weekends and public holidays, are going backwards. The long term interests of business would be better served by a less aggressive pursuit of short-term goals.

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  1. May 4th, 2007 at 04:21 | #1

    JQ: “but if you can’t make it with profits at current levels, probably you shouldn’t be in business at all.”

    This seems like a remarkable thing for an economist (or anyone really) to say. At any level of growth or GDP there will always be marginal performers. The reason our economy is doing better is that more marginal performers are moving from marginally not viable to marginally viable. That is a good thing.

  2. May 4th, 2007 at 04:25 | #2

    And as for “businesses carrying some of the burden”, it is my understanding that businesses (and the people who run and own them) already pay tax just like the rest of us. What you presumably meant to say was whether small business people or people who own shares should carry an extra burden in paying for the reproductive choices of parents.

  3. rog
    May 4th, 2007 at 07:20 | #3

    Many or most businesses are “marginal performers” working on high turnover with slim margins. The “aggressive pursuit of short-term goals” is exactly how profits are made, most businesses are happy to get through the year whilst meeting their obligations.

  4. conrad
    May 4th, 2007 at 07:37 | #4

    I agree with John Humphries. I’m sure most people who have jobs in marginal businesses are pretty happy they have one. Lots of these marginal business also not only make the place better, but also employ people otherwise difficult to employ. Think of all those cheap eateries in Australian cities, or the myriad of other things people do very cheapley in Australia. Even better, try comparing the convenience of doing anything to a place like France, where these marginal businesses exist in far fewer quantity.

  5. Andrew
    May 4th, 2007 at 08:22 | #5

    Businesses do not exist to create social equity – they exist for for the over-arching reason to make a profit. Businesses are constantly balancing short term profit v’s long term profit. The really successful businesses do both well. Issues such as providing parental leave for employees is one of those balancing items – it hurts short term profit but makes the employer an ‘employer of choice’ (thus attracting better staff) and benefits long term profits.

    If a business get this balance wrong and treats staff badly it will eventually go out of business. If it becomes too generous then it will be at a short term competitive disadvantage and may also go out business.

    Given the above – why do we need to regulate this area and impose one size fits all rules?

  6. Fred Argy
    May 4th, 2007 at 08:50 | #6

    I think the comments on JQ’s piece miss the point. Of course it’s a good thing for a business to move from marginally non-viable to marginally viable – but only if it does that through improved efficiency or better marketing skills or innovation – not if it does it by reducing the effective take home pay of workers per hour worked (via WorkChoices). In the latter case there would no net welfare gain for the community at large (and there could be a net welfare loss). If a company is free to reduce wage costs every time it runs into trouble it gives out all the wrong incentives e.g. discouraging efficiency-enhancing measures. .

    On today’s announcement, Howard may now have strengthened the safety net but it will still have lots of holes I suspect.

  7. May 4th, 2007 at 09:36 | #7

    A “general social consensus” does not justify the imposition of burdens on minorities. Rather than being an obvious question it is actually a highly insulting one.

  8. gordon
    May 4th, 2007 at 09:47 | #8

    I am interested in Prof. Quiggin’s graph showing steadily rising profit share in Oz. The US blog Economist’s View (Mark Thoma) has had a couple of posts recently on the relationship between the profit share and investment, beginning with this one by Paul Krugman, followed by this one by Menzie Chinn. Krugman bewails the way increasing profit share in the US hasn’t led to an investment boom. I wonder whether Prof. Quiggin has any information on the profit share/investment relationship in Oz similar to Krugman’s for the US.

  9. May 4th, 2007 at 09:55 | #9

    Is the profit share of GDP related to the relative shares of wages and profits within businesses?

  10. May 4th, 2007 at 10:15 | #10

    Profit = Superannuation.

    Not entirely true but worth reflecting on.

  11. Andrew
    May 4th, 2007 at 10:49 | #11

    Many very successful businesses set up a structure that allows employees to earn more if profits go up – either through equity in the business or through a bonus scheme. Creating a corporate culture where employees think like owners is very powerful.

    Of course – that’s anathema to unions – equal pay for equal work, and don’t work too hard or you’ll show the rest of us up.

    There’s a couple of interesting debates in the media on this at the moment. The first is real estate agents who are trying to organise an exemption from WorkChoices to opt out of the minimum wage conditions – many of them would prefer to be on a commission only payment structure. The second is on performance pay for teachers. In my view – teachers should get performance pay – I think we should reward excellence in teaching. I want my kids taught by the best possible teachers and I want those teachers to have an incentive for performing well. The debate at the moment is about how to measure performance.

  12. wilful
    May 4th, 2007 at 15:02 | #12

    Many very successful businesses set up a structure that allows employees to earn more if profits go up

    Quite a few seem to pay their executives more even when profits fall! There aren’t that many Australian examples of bonus schemes open to general employees.

    Of course – that’s anathema to unions – equal pay for equal work, and don’t work too hard or you’ll show the rest of us up.

    Oh really? What rubbish.

    And why does all of the evidence say that performance pay for teachers doesn’t work?

  13. jstrocch
    May 4th, 2007 at 18:26 | #13

    Pr Q says:

    From the viewpoint of the average member of society, depending mainly on labour income, the case for accepting a substantial profit share rests on the assumption that incentives to seek profit will ultimately benefit everyone.

    THe social justification of extra-ordinary profits, assuming competitive markets, rests on the propensity of capitalists to re-invest a greater share of the surplus into extending and intensifying capital technology.

    Pr Q’sa splendid little graph shows that the profit share of GSP has risen by 5%over the past decade, from ~22% in 1995 to ~27% in 2005. The ABS figures show that the private business investment share of GDP has grown by a not-that-impressive 1% over course of the late nineties/early naughties boom, from just under 12% in 1995 to just over 13% in 2005.

    As a proportion of GDP, investment by Non-financial corporations generally fell during the 1970s and was reasonably stable up to the 1990s. It has generally been above 10% and in 2005-06 investment by Non-financial corporations was 13.2% of GDP.

    I would not be surprised if the “missing” 4% profit share of GDP helped to fuel the bout of affluenza that some unfortunate Eastern suburbanites are now suffering. The equity/property boom is probably financed by foreign debt or share buy-backs.

    Pr Q says:

    It’s hard to make this case when conditions like parental leave haven’t improved substantially in decades and other conditions, such as rights to weekends and public holidays, are going backwards. The long term interests of business would be better served by a less aggressive pursuit of short-term goals.

    That correspondence of interests between labour and capital in a healthy democracy assumes an integrated national community. This is an increasingly reckless assumption given the the insularity and “un-domicility” of Australian elites.

    This past decade the bosses have been feathering their own nest in the finest tradition of a militant union. Pr Q’s graph underestimates the regressive trend in income distribution because executive salaries, deducted before profits, have also skyrocketed.

    The more Australian businessmen are able to insulate themselves from other social classes, by exclusive suburbs, schools and medical care, the more their interests will diverge from the common citizenry. Likewise the more globalised Ausrtralian commerical and cultural elites are, the less likely they are to care about what happens in Australia, “the arse-end of the world” according to one commercial/cultural elitist.

    A spell of national service under the watchful eyes of an unsympathetic NCO would do the lot of them no harm.

  14. gordon
    May 5th, 2007 at 10:01 | #14

    Thanks, Jack Strocchi. Readers may be interested in another quote from the National Accounts: “General government investment as a proportion of GDP peaked at 4.5% in 1975-76 and has generally fallen since then. It was 2.1% of GDP in 2005-06″. I wonder whether the Future Fund will move this figure higher again over the next few years.

    Footnote Dept.: Prof. Quiggin’s graph is here, together with a matching graph of wages share. J.Strocchi’s quote and figures for investment are from the first linked page.

  15. mugwump
    May 6th, 2007 at 06:37 | #15

    Under WorkChoices, employees already get 12 months unpaid parenting leave. Labour wants to extend that to both parents, which strikes me as a little odd, since I don’t know too many battlers who can afford for both parents to quit work on the arrival of a new baby, so who are they targeting this to? Mum stays home for the first year and Dad for the second? Glad they’re expending all this energy on a policy that might be exploited by 0.0001% of the population.

    And as for the weird remark:

    “Of course, there will always be marginal firms, but if you can’t make it with profits at current levels, probably you shouldn’t be in business at all.”

    it gives an example of just how out of touch Labour and their accolytes are with the business community. I thought the essence of a free market is that profits can only be maintained at abnormally high levels in the presence of significant barriers to market entry. Large businesses are able to erect such barriers, but small businesses almost universally cannot, therefore nearly all small business run on razor-thin margins (many successful small business owners I know are not much more than a payroll away from losing their house).

    It’s a tournament: most small businesses fail, most of the rest generate a lower wage for the owners than they could otherwise make as an employee, some generate a healthy return but stay small, and then a few of the tiny fraction remaining become medium or large businesses.

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