FOREWORD
Some kind of division of labour is found in even the most primitive societies. Those who hunt do not gather, and those who gather do not hunt. In a society whose economic organisation is as complex as ours, a division of labour is essential. Together with cooperation between individuals with differing skills and specialities, it is necessary to allow the use of capital in large, efficient chunks; a steamship instead of a rowing boat, a factory instead of a garden shed with workbench.
Once there is a division of labour and the need for teamwork there must also be some means to distribute the products of the labour and to ensure (within limits) that things that need doing are done. In Australia, voluntary employment for wages is the main means by which these goals are achieved; it is accompanied by private entrepreneurship and bureaucratic planning which, on a larger scale, look for things to do and ways of doing them. Wage employment is not the only possible organisational structure. Slavery and cooperative sharing by the workers of profits and losses have both been tried. Both have a poor track record in terms of operational efficiency, equitable distribution, and individual liberty. Workers in large scale cooperatives or communes in communist nations are often not free to quit and find work elsewhere. Their condition is thus in practice little different from slavery or serfdom. In Western nations communes are not popular and have a poor productive record; they have often been subsidised with taxpayers' money whether directly, through unemployment benefits, or through government-provided infrastructure for which there is less than full cost recovery.
Voluntary employment for wages is as old as recorded history. The system may not be perfect but it has stood the test of time and few Australians suggest that there is a better basic alternative. Unfortunately, there is no general agreement on the ideal form of the labour markets which are inseparable from voluntary employment. This book is about Australian labour markets and industrial relations. Much of the analysis is critical, for clearly the outcome in terms of unemployment and dissatisfied workers is a long way from ideal.
So long as potential employees are free not to take particular jobs or to leave particular jobs, and so long as potential employers are free not to employ particular workers or to stop employing particular workers, then employment happens only when both employees and employers feel that they are advantaged by it: that is a market. The point is obvious and would not need to be made of any market but the labour market. This most important of all markets is, however, so clouded with traditions, with folklore, with values giving rise to strong emotions, that objectivity is more than usually difficult and it is more than usually easy to lose the wood among the trees. This problem is compounded by the fact that the journalists and academics who write about it are themselves participants in the labour market; many of them are also members of the "Industrial Relations Club".
Hundreds of thousands of unemployed people can testify to the inefficiency of the Australian labour market. Much analytical effort which might more profitably have pursued the causes of unemployment has gone into demonstrating the self-evident truth that unemployment is a serious social ill. The 1983 National Economic Summit Conference, composed of government, trade unions and employer groups, accepted that the demand for labour is price-elastic, that employers will hire more people if it costs less to do so. This acceptance was not accompanied by policy changes.
A feature of a perfect labour market is an employment cost at which everyone who wants a job can get one. In other words, the market clears. This happy circumstance would not only eliminate involuntary unemployment and its attendant personal costs, but the goods and services produced by people who would like to work would improve living standards.
Not only does a perfect market clear, it also allocates production, and -- as is relevant here -- the factors of production, to optimal uses. In the neo-classical model this is achieved by a perfect range of relative prices. A labour market which encourages activity which is not the most productive possible (for instance by legislated monopolies or tariff protection) or which distorts choice between work and leisure, or encourages people to waste effort picketing or going slow, is flawed. This is not to imply that the author believes that a perfect market can exist in an imperfect world; but it is certainly possible to improve on the present state of affairs.
It is easy to agree that the goods and services which free markets in general, and free labour markets in particular, would call forth would contribute more than those of unfree markets to the satisfaction of the sum and particularity of human wants. It is less easy to agree on what should be done about flaws in the markets: should they be attacked at the roots or should we merely attempt to countervail them? There is also a great deal of argument about the distribution of wealth occasioned by all free markets, and especially by labour markets. Most of the unfreedoms are attempts to affect this distribution, so an analysis of labour markets must ask whether the distribution has been fair, as intended, worth the lost production, and as efficient as practicable.
While it may be possible to offset or prevent a market imperfection by regulation, caution is required lest a bad situation be made worse. When individuals are prevented from undertaking anything, including employment, they suffer loss of liberty.
CHAPTER 1
In the September quarter of 1981 the unemployment rate was 5.8 per cent and by the June quarter of 1983 it had risen to 10.3 per cent. This really sums up the effects of the disaster. Now it is important to see what lessons can be learnt. How many of the causes were home-grown, for example, the wages explosion, and how many came from the world recession?
The wages explosion began with an extraordinary settlement that 400,000 metal workers, representing 9 per cent of the workforce, received at the end of 1981. It represented an average increase in hourly wages of at least 24 per cent; some of it to come immediately and some in 1982. As is usual, the effects spread quickly to other awards throughout the economy: in 1982, wages increased in nominal terms by over 16 per cent.
It was inevitable that this would present economic policy-makers with a dilemma, and once the wages push of the time had started this was clearly seen by many observers, including, for example, the Melbourne Institute in its economic forecast for 1982, and the present author in a public lecture in February 1982 (later published in The Economic Record).
The authorities had two alternatives. They could pump money into the economy, so raising price inflation, avoiding a real wage increase and preventing a short term rise in unemployment, but at the cost of later problems resulting from the acceleration of inflation. Alternatively, they could fail to ratify the wages explosion by keeping monetary growth and fiscal policies fairly steady and so allow nominal wages to rise ahead of prices. In fact inflation did increase, but the ratification was partial. This led to the crucial real wage increase, resulting in an inevitable squeeze on profits which was presumably what the trade unions who lit and spread this fire intended to achieve. Between 1980-81, that is, before the wages explosion, and the September quarter of 1982, when real wages reached their peak, the rise in real wages (real labour costs per employee hours worked) was 7.2 per cent.
The world recession clearly played a role in causing our own recession, but it was not transmitted to Australia through the familiar channels through which, for example, the world depression came to Australia in 1929 and 1930. Capital inflow did not dry up and there was thus no monetary contraction through a balance of payments deficit. The terms of trade did not deteriorate significantly (only 2 per cent in 1982-83 compared with the previous year) and the volume of exports actually rose during 1982, the fall in rural exports caused by the drought only coming in the first half of 1983. The world recession came to Australia via the investment slump.
The big event was a drastic decline in private investment which began in the first half of 1982 and accelerated after that, reaching a low point in the first half of 1983. All the main categories of private investment slumped -- fixed capital equipment, construction, private housing, and stock building. Mining investment, however, kept up through 1982, even though it was much less than had been expected; thus there was still a modest resource investment boom.
The world recession led to a reassessment of Australia's resource export prospects, and thus moderated considerably the resource investment boom. This meant, in turn, that the prospects for manufacturing industries that had expected to be suppliers of investment goods looked worse than before and, more generally, that overall Australian prospects deteriorated, so that profit expectations in industries selling to the Australian consumer market were reduced.
Another cause of the decline in investment must have been the rise in world real interest rates, but heavy weight must still be given to the wages explosion as a cause of the investment slump. The immediate effect was to squeeze profits and so cause a shortage of internal funds and de-stocking. There was a big fall in the profit share in 1982; in real terms the gross operating profits of companies fell 17 per cent in 1982-83. Furthermore, the wages increase reduced the longer term profit expectations and would have lowered investment even if there had been the same availability of internal funds and no change in the real interest rate. An additional effect of the wages increase was rapid labour-shedding, so that employment actually fell faster than output.
It is usually assumed that a recession in major countries must be transmitted to Australia, but such transmission is not inevitable. There was little transmission through the usual channels, namely the terms of trade and the monetary effects of reduced capital inflow. Furthermore, in 1981 we were still doing well while the world was in recession. Differences in relative inflation rates can be offset by exchange rate adjustment and this is, more or less, what happened. There was a substantial depreciation during 1982-83 of the Australian (trade-weighted) exchange rate, sufficient to avoid any decline in international competitiveness. Finally, if international factors, such as the change in expectations about our resources prospects, reduced aggregate demand, it might be argued that demand-expanding fiscal and monetary policies might compensate for this.
This question of whether a fall in aggregate demand, such as the one experienced, could have been avoided by expansionary short term fiscal and monetary policies is quite central to policy discussion. Some people on the left think that much more could and should have been done. Others think that governments' powers to affect macroeconomic events are now severely reduced. Two points have to be stressed. First, the unions really have a veto over what governments can do. It is obvious that if every rise in nominal aggregate demand brought about by fiscal or monetary policy led to a compensating rise in nominal wages no increase in employment need result. For example, if the government pumps funds into the building industry, the building trade unions -- if not restrained -- can certainly ensure that the benefits go primarily in higher wages to their existing members and not to new employees.
The second point is that in 1982 and 1983 government policies have certainly been expansionary, so that Keynesian compensatory policies have to some extent been followed. Exchange rate policy -- which is really an aspect of monetary policy -- has apparently ensured sufficient depreciation to preserve international competitiveness. One might say that in this respect the wages push has been more or less ratified, though this has not happened for the overall economy, since there was no big acceleration of monetary growth. If there had been, it might have moderated the rise in real interest rates and brought about a depreciation of the Australian dollar not just in nominal but in real terms -- provided wages had not then risen to compensate! Fiscal policy was certainly expansionary. Public spending, both for consumption and for investment, increased while private spending declined. By 1982-83 expenditure of Commonwealth, State and local governments combined had risen from an earlier norm of about 38 per cent of gross domestic product to 42.6 per cent.
But there are severe limits to such Keynesian counter-cyclical policies, and they need to be more widely appreciated. First, there are lags in recognising the need for policy changes, then in implementing them, and, above all, in their subsequent effects on the macro-economy. By the time results come through the need may have passed. While the decline in the economy resulting from the wages push was seen at the beginning of 1982, the extent of the decline, especially in the changes of profit expectations connected with the world recession, was not. By the time compensating public expenditures get under way, private investment may revive again, so that public policy reactions may intensify rather than modify a cycle. This is the familiar problem of fine-tuning.
Second, there is the political difficulty of reversing expansionary policies when the need for them has passed. Can an increase in public expenditure that benefits particular sectors -- and all public expenditures generate powerful interest groups committed to continued spending -- ever be reversed? The same difficulty applies to tax cuts and possibly to easy money policies.
Third, there is a genuine problem on which the Treasury has continually focused. Expansionary monetary and fiscal policies are likely to stimulate inflationary expectations. This would be so even when the aim is simply to prevent a current deflation that would otherwise take place, so that there should be no immediate excess demand or current inflation generated by the policies. But people may see an expansionary policy that is designed to be temporary as just a sign that the longer-term trend to reduce the inflation rate is being reversed. Whether these expectations are irrational depends on whether governments can be expected to be successful at fine-tuning.
Fourth, the central objection to more expansionary policies in 1982 was simply that the inflation rate was already high and rising. At the beginning of 1982, the wages push was widely expected to be ratified by monetary policy. Hence common forecasts were for a 16 per cent inflation rate. With the inflation rate having been brought down to 10 per cent in 1980 -- not a marvellous achievement in itself -- a rise to 16 per cent or more two years later would have meant throwing away a great deal. If the recession had been caused purely by a fall in private investment brought about by changing overseas conditions, more counter-cyclical expansion might have been justified. But the wages explosion, and the implication that the unions were determined to attain or maintain certain real wage levels (at least after lags), would have made this an unwise policy. Consistent expansionary policies designed to keep the unemployment rate at, say, 6 per cent would have involved a continuous wage-price spiral and, eventually, an inflation rate well above 16 per cent.
All this does not mean that the precise extent of expansionary policies was just right. The massive expansionary measures that would have been needed -- and needed quickly -- to avoid or significantly to moderate this recession would have been unwise, other than from a very short-term point of view. It is much more important to get medium-term fundamentals right by lowering the medium-term real wage sufficiently, at least in the absence of substantial productivity improvements. For example, a temporary rise in the unemployment rate to 6 per cent as a result of an unexpected shock originating from events abroad, when the normal rate is 2 per cent, would be acceptable. Things are very different when the rise in the unemployment rate is from 6 per cent to over 10 per cent and it is not even certain that the rise is temporary.
Because of the likelihood that a really powerful economic expansion would require a fall in real wages and because it is likely that such an expansion would lead to nominal wage increases ahead of inflation -- that is, to real wage increases -- expansion may have to be modest. High levels of unemployment may therefore continue for several years, if not forever. This could lead to a search for false or "snake oil" solutions to the unemployment problem.
The two "solutions" that are most popular are measures to reduce the supply of labour, and that hoary old nostrum, an increase in protection. It is true that, if real wages were rigid, unemployment could fall if the labour-force were reduced. A sufficiently high real wage could force most people out of the workforce, so if the unemployed then give up looking for jobs the statistical unemployment rate would certainly fall. But here it has to be remembered that if shorter hours are introduced while the weekly wage is not reduced (so that the wage per hour rises), industries' costs increase and unemployment could actually rise. In any case, real wages are not necessarily rigid, especially upwards, and unions can always set wages so as to ensure an unemployment rate that they consider tolerable.
There is certainly no evidence that countries with large labour-forces in relation to their population necessarily have higher unemployment rates than countries with small labour-forces. When one reflects upon it, to suggest that people should be forced out of the workforce, or encouraged to work shorter hours, when they want to work is really a confession of failure of our economic system. It is surely a prescription for national impoverishment to encourage or compel people to work less when they want to improve their living standards through work. It needs also to be borne in mind that people who do not work will not be paying taxes, so that the smaller the income-earning workforce in relation to population the higher average tax rates on income earners have to be. These higher tax rates, whether direct or indirect, may then lead to higher wage demands so as to keep constant the take-home pay of workers. The higher wages would, in turn, reduce employment.
The other favourite snake oil solution is protection. Protection involves reshuffling profits and employment between industries, not necessarily increasing them in total. On balance there could be some modest net effect on profits or employment, but it could go either way. Because protection leads to inefficient resource allocation, the aggregate national effect in the longer run, when all adjustments have taken place, would be adverse.
Members of the business community who devote so much of their energies to protectionist activities and advocacy are engaging in a competition among themselves that lowers the national product. It is very different from the fruitful competition involved in seeking to meet the needs of buyers at home and abroad more efficiently. But it would be as naive to expect lobbies for special interests to give up their competitive protection-seeking activities as it would be to expect unions to give up their competitive wage-seeking activities. But national organisations in the business world would serve the interests of their members -- as well as of the unemployed, and in the long run, of most workers -- better if they devoted more of their energies to teaching Australians the simple fundamentals about wages and unemployment, rather than pushing long-discredited protectionist arguments.
It is surprising that the weaknesses in popular protectionist arguments designed to show that protection increases or maintains employment are not recognised more widely in the business community. If protection is increased, for example, for the automobile and components industries, employment in those industries is certainly likely to rise relative to what would have happened in the absence of this increase in protection. But this neglects the general equilibrium repercussions. Dearer domestically-produced cars and components would replace cheaper imported goods. The cost of living would rise as a result and, with indexation, nominal wages would have to increase to maintain real wage levels. The higher nominal wages would then raise costs for other industries and reduce employment there.
If one imagines a world without wage indexation, where, instead, nominal wages were held constant, one must take into account the inevitable exchange rate adjustment associated with higher protection. Imports of the protected products would fall, the balance of payments would tend to improve, and so, in due course, the exchange rate would appreciate relative to where it would have been in the absence of the increase of protection. This appreciation would then reduce employment in export industries and those import-competing industries where protection was not increased.
To sum up, there are no easy solutions to Australia's macro-economic problems. The recession's causes were as much domestic as foreign. Contrary to popular belief, traditional Keynesian counter-cyclical policies were to some extent followed. Only massive expansionary measures would significantly have moderated the recession, however, and these would also have led to a wage-price inflationary spiral, causing more trouble in the medium term than had been avoided in the short term. Together, the wage explosion and the recession demonstrated both the importance of wage restraint if Australia is to sustain growth and reduce unemployment, and the difficulty of achieving it with current institutions and power structures.
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