IR reform and inequality

The National Tertiary Education Union, of which I’m a member, has nominated today as a day of protest against the government’s Industrial Relations reforms, but has left it up to members how to make their protest. For me, the obvious thing to do is to get to work on my long-promised analysis. I’ve written most of a draft, and I hope to get the rest done this evening, but in the meantime, I thought I’d give a short statement of how I see the relationship between industrial relations institutions and inequality, which is my central concern.

Employment relationships are complex, but the outcome of bargaining over employment depends on two main factors. The first, is the state of the labour market. The second is the balance of bargaining power. Usually, but not always, the state of the labour market is more important, but it’s largely determined by exogenous macroeconomic shocks originating not in the labour market but in the financial sector or the world economy.

The 19th century starting point for employment relationships was one in which the employers (then called ‘masters’) held the upper hand, both because they were more powerful than individual employees and because the state and the common law was at their command. Not surprisingly, the outcomes included very high levels of inequality. By the middle of the 20th century, the rise of legally protected trade unions, and government intervention through the arbitration system had changed the balance of power dramatically. In combination with the full employment that characterised the long boom after World War II, this produced a great reduction in inequality. Unfortunately, there were plenty of instances where unions abused their power, setting the stage for the subsequent reaction.

In most of the English-speaking countries we’ve seen, since about 1980, a move back towards the 19th century system, with ’employment at will’ based on individual bargains between workers and employers becoming the standard form of employment relationship. The US was furthest in this direction at the beginning of the period, and went even further over the 1980s and 1990s. The UK and New Zealand made the most radical changes (as on many topics, I don’t have good information about Canada). Although Australia experienced substantial changes (decline in union membership, enterprise bargaining replacing awards and so on) the shift here has been less dramatic.

The associated outcomes speak for themselves, I think. This is evident both from comparisons over time and from comparisons between countries. The Figure below from Smeeding (2001) illustrates developments over time.

Inequality Fig 1

The next figure gives more detail on developments in the US since 1970, where declining rates of unionisation and a general shift towards even more extreme forms 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.


The big question is whether this growth in inequality has been offset by stronger employment growth. The evidence here is decidedly mixed. Until the present business cycle, beginning in the early 1990s, there was little evidence to support it. For most of the past decade, however, the English-speaking economies have outperformed those of the Eurozone and Japan. It’s still too early to judge whether this is merely the outcome of cyclical timing, or whether there is a sustainable gain in employment here. My 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 judgements

43 thoughts on “IR reform and inequality

  1. John, you make some good points, but as always with types of comparisons, there are exceptions which complicate the story.

    Your graph of inequality shows that it has risen significantly in Norway. Admittedly, I don’t know much about Norway, but as far as I am aware it hasn’t had the good dose of neo-liberal policies that other countries have had, with power being shifted to the “masters”, so that can’t be the cause of the rise in inequality there. Maybe there is another factor that has caused inequality to rise there and elsewhere.

    And, not all the English speaking countries are running huge current account deficits. Britain has a deficit of 2% of GDP, which is no big deal. Canada has a small current account surplus. It’s a bit simplistic to imply that low unemployment is simply the resut of an unsustainable spending and borrowing boom that must end in tears, sooner or later. You can find countries in the world with every possible comination of high/low unemployment and current ccount deficits/supluses.

  2. Some good points, Milton, and of course any discussion of this kind is an oversimplification. For example, quite a few European countries have lower unemployment and/or higher E/P ratios than the US and UK.

    I’d observe that Canada’s surplus is entirely due to its trade with the US. Aggregating the two there’s a substantial deficit.

  3. The UK is interesting in comparison with euroland in that Milton’s 2 per cent deficit is a turnaround from a 1 per cent surplus in 2000, a consequence of counter-cyclical demand management to avoid the slowdown, whereas the euro has refused expansionary macro policies. Still, high housing prices and personal indebtedness also characterise the UK economy, somewhat like the Oz economy I guess, and in contrast to high savings in euro.

  4. Specifically on the NTEU protest.

    I am suspicious of the Government’s motives behind this legislation. Universities already have the ability to pay above average rates of pay so my guess is that the implications are designed to facilitate salary cuts in ‘teaching-only’ universities. In the regional universities that I am aware of there often is creditable research effort and very heavy work loads. Where there are problems they can be dealt with on an individual basis.

    Hence this afternoon I will attend the union protest in Melbourne. It is the first public protest meeting I have attended in just under 30 years so this gives a measure of my concern. I recently rejoined the NTEU as I think there are advantages in having a union defending university working conditions.

  5. The Australian government might be interested to know that the software sector in America, generally seen as a forward thinking sector, is increasing the uptake of unionisation.

    The $14 billion game maker Electronic Arts was recently forced to start paying overtime to its software engineers, and so too was consulting giant Computer Sciences Corp.

  6. Harry, I wouldn’t rule out the possibility that if the legislation goes through, there will be some phone calls from various Ministerial offices to Vice-Chancellors or PVC(A)s about the terms of AWAs for particular individuals who are seen to be critics of the government or to have inconvenient views on some issues.

  7. Paul, I know that this government’s tolerance of dissent and criticism is nil, but nonetheless I will give you odds of 1000-1 at the Ricardo tote that that will never happen.

    The government is full of crazy ideologues, but they are not certifiably insane.

  8. John:
    I really don’t think your analysis of the US situation is complete or accurate. So let me explain
    Without quoting, you mention that low skilled jobs in the US have remained static in terms of wage rates since the 70’s. This is wrong, as they have actually risen. But I will leave that aside and focus on what is the 2000 lb gorilla affecting the US labour market at the lower levels of wage scales.
    Pure and simply it was the opening up of immigration in the 1968? Federal Immigration Act, which allowed for a huge increase in immigration of low skilled workers into the US. This policy, incidentally, was a Democratic initiative to increase their vote. As is usual with this disgusting party, the hidden agenda is what one ought to look for.
    The second but most important factor in the US labour market is the 11 million illegal immigrants who have crossed the border virtually at will. It is this group that has pushed down the labour rates of the poor and unskilled in the US. Both political parties have been responsible for this abomination.

    Rather than criticising the relatively unregulated labour market in the US for slower wage growth in unskilled wages, the Americans ought to be thankful that the flexibility of the labour market there has allowed the market to clear a large pool of illegal immigrants taking jobs away from poor Americans. But unfortunately clearing has occurred at lower real wage rates.

    If you want to look at comparisons, I would suggest you look at the Hong Kong and compare the numbers with the US. Hong Kong is/was also sitting next door to a poor Country, China. However, unlike the US the authorities there took illegal immigration as a serious issue. In other words it was able to keep out a lot of illegals by simply deporting them back to the mainland or wherever they came from. Wage rates in Hong Kong, which has a more unregulated labour market than the US, grew steadily for all workers in the same period.

    I don’t buy the idea that illegals in the US only do the jobs that American find too dirty etc. This argument falls on its face when consideration is given that wage rates would have zoomed for these lower jobs if illegal weren’t crossing the border. Sure there would have been fewer of them, but those jobs that would have been available would have also been far higher paid and satisfied both sides.

    The cause of this problem is not the wonderful flexibility of the US labour market. The problem can be placed on all the administrations since the 70’s of both political persuasions that have allowed illegal immigration to go on. It is disgusting.

    Both parties have allowed this to go on because of self-interest. The Dems see this pool as potential voters while the some Republicans see them as fodder for the factory. In either case it is the poor American who loses out as a result atrocity.

    Australia can be thankful for it has both parties concerned with stopping illegal immigration dentention centres aside. We are also lucky as we don’t have a 2,000 mile border with Mexico that the US federal Government refuses to protect.
    This is going to be a big issue in the 2008 elections.

  9. S Brid :

    I’m not sure where you are getting your figures for HK from, but even if wages have grown across all groups, the discrepancy between wages of poor and rich workers must be one of the highest in the rich world (due to the fact that there is no minimum wage, apart from for domestic helpers not from HK). Given that HK was not especially prosperous before the 70’s and that huge amounts of wealth have been created since then (going mainly to rich people), I’ll just assume that the figures you are suggesting are wrong.

    Last time I checked, the average _graduate_ starting salary was around $HK9,000 per month = about $1,500, which might well be less than the minimum wage in Australia (and would be if hourly rates were taken into consideration, although there is basically no tax on that, so it is not as low as it seems in take-home terms), and average salaries paid to all of the low-level staff are even less.

    Looking at the gini coefficient from here

    confirms this — HK is less equitable than the US. In fact its one of the least equitable places on Earth.

  10. hooray for the NTEU!

    As an academic I recall them being a particularly useless organization. The pay rises they negotiated were lousy. And like all unions, they were obsessed with the lowest common denominator – unwilling to introduce truly flexible arrangements. I have no doubt that I and and many of my colleagues, and the University system as a whole, would have been much better off under a more meritorious structure.

    And they campaigned against Voluntary Student Unionism. Never was I more pissed off than as a self-funded student of little means being forced to pay extortionist fees to an organization from which I received very little and that was permanently shrouded with the smell of corruption.

    Like I said, “Hooray for the NTEU!”

  11. John,
    Is it not conceivable that widening dispersion in incomes (to use an objective non-pejorative expression in lieu of “inequality�) is to some (large?) extent due to structural changes in the commercial labour market that are independent of IR “reform�? In particular higher growth in higher value-added, higher education-consuming, sectors of the economy should have seen upper income activity expand faster than the sorts of jobs that have low value-added and so warrant lower incomes. This consideration would drag up the top of the income range faster than the bottom – and may actually be a good thing in itself even as it widens income dispersion. (This of course is merely a hypothesis, and I leave any academic scrutiny to those with the time, inclination and commitment to rigour rather than ideology.)

    At the same time most of those sectors of the economy that support faster rising incomes are less unionised and lack the evidence of the sorts of worker exploitation that fostered union strength in the first place. Indeed, the decline of unionisation may partly be a consequence of the success of past unions in securing institutional structures and regulation that now securely preclude the worst excesses of worker exploitation, such that some may think that the job of the unions in much of the community is now done and they can safely pass into history.

  12. While I think the Libs Industrial Relations reforms have some rather odious implications for low income workers, the academic employment market is greatly is need of a dose of liberalisation. There are too many lazy and ideologically loopy academics out there. The most imaginative thing many senior academics do is push work down onto junior staff.

  13. Conrad – you’re still alive!! What happened to the Gweilo Diaries – I thought the Authorities had got you, or something.

    I think this focus on inequality, however you wish to define it, is a load of bollocks. I don’t give a toss about the fact that there are people who are super-wealthy – just give me a chance to work and I’ll prove whetehr Im worth it. And if you don’t pay ne what I think I’m worth, then I’ll go elsewhere (in my case – start my own business).

  14. Conrad:
    With due respect average income in Hong Kong (2003) was US$ 25,860. Ours was err…. US$21,950. The starting salary ,you mention, for a graduate at HK$9,000 is something I cannot argue with and I will take your word for it. Even so, graduates in their first year are a prettty useless bunch. In fact, the salary you mention is more indicative of my argument in that in that it shows how flexible an unregaulated labor market actually is. Considering their unemployment rate is about 2.5%%, combined with high per capita GDP level indicates there is probably tremendous mobility up and down their market. A good thing I would imagine.

    And purchasing power is about the same as ours.

    The problem you and a lot of people in Australia have is that we are so hung up on “equality”. Truth be told this is a spuious argument. I bet Packer feels poor compared to Bill Gates. The world has tried the equality thing before and it didn’t seem to work (Soviet Union). This is the typical hangup of the labor party these days. They are so obsessed with equality and redistribution they lose sight of the goal posts, which for any govenment is enuring the poor are able to find good paying jobs. Only a deregulated labor market can achieve this.

  15. It is somewhat vexatious, to say the least, for right-wingers to pop into a blog explicitly announced as providing commentary from a social democratic perspective to launch assaults on the value of equality.

  16. I suppose it’s a little off-topic, as John was discussing the impact of IR reform on equality, not the pros and cons of equality itself. But wouldn’t you agree that social democrats must consider whether equality, produced in this way or that, has costs associated with it?

  17. I’m happy to defend equality from a number of different perspectives, though I’ll probably do so in a full-length post rather than a comments thread.

  18. Do lower minimum wages reduce unemployment? Probably yes, but the question is by how much.

    If we are interested in the welfare of the most disadvantaged in society (rather than just whether they have a job), then the question of the strength of the demand relationship is critical. At the very least, we should be asking whether the aggregate income of the low-skill population will increase if wages fall. (Some might also want to consider the value of lost leisure).

    Ignoring labour supply (and tax-transfer) effects, this will be the case if the absolute wage demand elasticity is greater than one (ie employment increases by a greater proportion than wages fall). I haven’t actually seen estimates of the demand elasticity for the low-skilled (as opposed to the overall population), but I would be surprised if the employment response was this large.

  19. Michael Burgess

    My own experience suggests most academics do pull their weight. The sort of claims you make are popular but wrong. They are damaging because they create a case for attacking a sector that has been subject to repeated attacks for years. Evidence Michael please — you are making the strong claims.

    And who judges the ‘ideological loppiness’ of academics? You?

  20. Harry, Michael is extrapolating from his own unhappy experiences amongst arts academics. He apparently suffered some terrible trauma at the hands of a philosopher, or historian, or some such. I can sympathise. What could be worse than to be hit with a post modern deconstruction about the Middle East situation over tea and bikkies?

    Anyway, let’s just assume for the sake of argument that arts academics are ideologically loopy.

    Michael, how many ideologically loopy academics do you know, or know about, in faculties of: commerce, engineering, science, medicine, law, dentistry, veterinary science?

    One or two? None? I thought so.

    Why do people who know nothing about universities think that arts faculties are synonymous with universities?

  21. Harry

    Let me fill you in, since you’ve evidently been out of circulation for a while. Michael Burgess was sacked at some stage as a casual teacher because he criticised David Suzuki. He hasn’t gotten over it, and every post is more or less explicitly an attack on incompetent and ‘ideologically loopy’ academics.

  22. Media Matters

    A quick update on a few topics which have been the subject of ongoing analysis and discussion here at LP. It seems that the concerns expressed over the tone and intensity of the Boycott Bali coverage have sunk in to some editorial or proprietorial brai…

  23. CS
    Believe it or not there are right wingers whose only concern is the pplight of the poor and disadvantaged. I would have thought thats also the main concern of a social democrat. In that sense we are on the same side, which is helping the poor. I came from a poor family and know what it feels like when father’s lose their jobs and need to ask family to help as there is not enough money for food.
    My major concern is for the poor. I think the best thing we can do for them is ensure there are numerous jobs. That way they are off the social net and earning better money than the dole.

  24. “I bet Packer feels poor compared to Bill Gates.”

    The purpose of money is to buy things. Packer can buy everything he could conceivably want, 100 times over. While Gates could buy everything he could conceivably want, 5000 times over, that wouldn’t make Packer feel poor.

  25. S Brid, believe it or not there are others who have heard that line a million times. I was born in a brown paper bag, but struggled till at least I now know the difference between expressing sanctimonious sympathy for the poor and the topic of inequality, which was what I was talking about, which is what I should have thought you might be talking about on this thread, and which is where the principal philosophical difference lies between liberals (not that I’m suggesting you are one) and social democrats.

  26. CS

    Instead of calling yourself a social democrat, why don’t just call yourself what you really are: a socialist, which of course means a re-distributionist. Please I am not offering an opinion on this, as it is a free country. Tell me, exactly, how much of the GDP should be confiscated for re-distribution. Round it off to the nearest 5%. We are presently around 33%. The please tell me why you think your number is fair.


  27. David:

    Poverty is a relative thing. A poor Aussie would be a filthy rich

  28. David:
    One other thing:
    The purpose of money is not just to buy things. It is also used as status. That’s the point raised about Packer/Gates. Of course packer could buy everything he ever wanted in life, but beyond a certain threshold it starts to buy status. And for red blooded males- trophy wives. Ever seen the gal Trump prances around with: she’s gorgeous. And Trump: isn’t he one ugly dude.

  29. Poverty is conventionally expressed in both absolute and relative terms. Moreover, the principle of diminishing marginal utility implies that a dollar for a rich person compared to a less rich person will normally enhance the latter’s welfare by more than it adds to the former’s. In the case of Packer and Gates, we are well past the point of indifference. Dave is correct.

  30. The drive to go back to the 1850s where the employers were in charge without any controls is one that will result in people joining unions or their equivalent.

    The one major change that the series of accords in the 80s produced was a reduction in unionism as it was no longer seen as relevant. Employers were seen as benevolent and prepared to look after their workers. The remnants of the award system and the ability of the IR commission to mitigate the excesses of employers has allowed this view to continue and in enlightened workplaces it has.

    Once the IR system is destroyed and everyone is tied up in knots over contracts – with small businesses taking contracts from the “un” Fair Pay Commission, the next target will be to get rid of the Occupational Health and Safety laws with a limitation on what can be claimed for death and injury.

    The language around the massive changes masks what is happening. Historically though we are seeing what can only be described as a radical rewriting of relationships in this country which is very likely going to lead to violent clashes and the growth of alterntive and socially unacceptable ways of making money.

    The other result will be the push to import cheap labour to take over and a reduction in welfare to make it impossible to avoid the new system. This may in turn lead to a new push for race based limitations on immigration.

  31. So Jill:

    Just so I understand your points, you believe that unless the poor/working class in Australia are bought off their violent tendencies will come out and will go and ransack And according to you the only way to stop this is to buy them off. Is that correct?

  32. S Brid :

    I’m only arguing that you are wrong to say that HK versus the US has achieved greater equity — it simply hasn’t, not whether inequity makes a place better or worse. In addition, I haven’t seen the statistics (if they in fact exist), but the amount of upward mobility in the labour market is certainly extremely limited, since to get most of the “good” jobs you need to be trilingual these days, and the vast majority of people that are went to extremely expesive schools which poor people certainly cannot afford (the schools cost upward of A$1000 per month, which is basically the entire income of most people working all the menial jobs).

    Also, I’m really not sure where you are getting your figures from. The unemployment rate in HK is currently around 5.6% if I remember correctly (it has only recently started declining). Admittedly the underemployment rate was only around 2% (versus god knows what the real level is in Australia) — and the figures are undoubtedly far less diddled than most countries, where I think the number is simply uninterpretable now.

    In any case, one might also like to consider longer term trends about how this level of inequity affects the population and social statistics, rather than just absolute comparisons of economic performance at a given time point. Perhaps the most salient one is that people in HK breed at a rate of less than 0.9 per female (the lowest in the world), and this is undoubtedly at least in part due to the completely deregulated labour market (i.e., people tend to work ridiculous hours and have basically no job security). This might be ok for HK, where you can basically outsource breeding to mainland China, but I very much doubt such a strategy for population replacement would go down to well with the Australian populace.

  33. Conrad:
    Hong Kong was a poor backwater in 1960. Open markets from trade to labor got it to having one of the highest per capita GDP in Asia. The contrast between itself and what lays over the border could not starker. And yet the glass it half empty.

  34. Harry, Dave, James, dear oh dear. Academics like to criticise others and like to make strong claims about their intellectual role in society etc. So personally I don’t see anything particularly outrageous in criticising this sector. As for knowing nothing about this sector well I did get a PhD and spent a number of years casual lecturing and tutoring. Moving away from the ideologically aspects of social science departments (which has reached outrageous levels), I know of numerous postgraduate students (of different ideological persuasions) who do not regard their university experience as positive. A common complaint is that it would take months for supervisors to briefly read the draft copies of their theses. A second is that the feedback they received was far too brief and not particularly useful.

    In other words they might as well have gone to North Queensland and spent their time in a beach shack doing their thesis for all the use academics were. Another complaint is simply the lack of intellectual stimulation. One expects rigid factions in a political party but in a university. As far as I am aware my views on the negative view of universities by post-graduate students in borne out by surveys of students.

  35. Michael, Criticism is fine but it should be informed. You seem to have had a bad experience from which you have generalised a lot. I am Head of a medium-sized university Department and I know individual academic workloads since I partly define them. Academics that I know of work hard at teaching, conducting research and doing administration. Moreover we have never to my knowledge discriminated against anyone for their ideological perspective — we have conservatives and one Marxist-neo-Keynesian in our Department.

    A difficulty with thesis supervision is that it is almost force fed to us (funding depends on postgraduate enrolments) and yet teaching workloads have steadily risen as have administrative duties. One can criticise Dawkinsesque managerialism but try escaping from it. It is sometimes ridiculous but it is real.

    Academics are easily dismissed as a lazy bunch of bums but the picture is generally false. Where it is not false my guess is that the overly bureaucratic measures that are now being taken by universities do more harm than the damage they seek to address.

    The universities are expensive institutions but the real social costs will arise if they are destroyed. And to a large extent that is what is now happening on the basis of largely misinformed criticism.

  36. I can’t read the first diagram (from Smeeding 2001). When I try to magnify it, it just blurs into illegibility. Second diagram is fine.

  37. gordon, you need to click the diagram. This will show a new page with a larger version of the diagram. When you’ve finished, use the brower’s back button to return to the page you were reading.

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