You never want a serious crisis to go to waste. These words of wisdom came from Rahm Emanuel, Barack Obama's chief of staff, last November. Rahm said one of the benefits of a crisis was that you could do things you previously thought you couldn't do. He said the economic crisis gave Obama the chance to make radical health and education reforms.
This week ACTU president Sharan Burrow warned that the crisis could be used by Australian businesses for an altogether different purpose. She's worried that bosses will use the crisis as an excuse to sack workers. Instead, she wants companies to "retain, reskill and redeploy". Private-sector economists and commentators have also felt free to offer their opinions. We've witnessed the situation of those economists and commentators urging bosses not to slash and burn, while the financial institutions that employ those economists and commentators are instigating massive retrenchment programs.
The sentiment that businesses should try to avoid job losses is worthy -- but nothing more than sentiment. Sentiment doesn't pay the bills. There are few things easier than telling other people what to do. After all that's what unions do. But there wouldn't be too many employers in the country who need advice from the ACTU on how to run their business. Instead of telling bosses how to do their job, maybe the ACTU should spend more time representing the interests of the 15 per cent of private sector workers who are members of a union.
It looks like the severity of the crisis is dawning upon the Rudd government. Yesterday, Julia Gillard was (fortunately) far more sensible than the ACTU. In response to Construction Forestry Mining and Energy Union demands for pay increases of 33 per cent for workers in the aluminum industry, Gillard in effect told the union not to be ridiculous. Whether her comments make any difference remains to be seen. Presumably the CFMEU wants to make its pay demands before the emissions trading scheme sends Australia's aluminum industry offshore.
Successful businesses rely on their ability to attract and retain good staff. Employers don't need to be told this by the ACTU. What the ACTU forgets is that an employer's primary responsibility is not actually to their employees. An employer's primary responsibility is to the business itself. If the business doesn't exist then the jobs don't exist. To remain in existence, some businesses will inevitably be forced to make redundancies.
It's fine to talk about reskilling and redeploying employees and these are options that some businesses may take up. But if the government and the unions were serious about maintaining employment, or at least restricting the extent of job losses, they'd contemplate an obvious but unpalatable reality. Wages may need to fall. Ultimately it is the price of labour that determines the level of employment.
Over the past 15 years Australians assumed wages were like house values and stock prices -- they could only go up. In the past 12 months we've discovered the truth about house values and stock prices. In the next 12 months we might discover the truth about wages as well.
The evidence is clear. In economic conditions such as we are about to face, when governments and unions prevent real wages from falling, unemployment increases. An important paper published last year by the Melbourne Institute of Applied Economic and Social Research (Phillips Curve and the Equilibrium Rate of Unemployment) recounts the Australian experience of unemployment since the 1960s. It demonstrates "that declines in real wage rigidities lowered the equilibrium rate [of unemployment] in the periods 1971-1983 and 1992-2002, while increases in real wage rigidities increased the equilibrium rate in the period 1983-1992". Broadly translated, this means that the more flexible the method of determining wages, the lower the expected rate of unemployment.
The paper identifies something else of significance. In Australia when unemployment increases, the increase is dramatic and rapid. Rises in unemployment are seldom gentle and gradual. Going back to 1960 there have been four episodes of significant growth in unemployment -- roughly 1960 to 1962, 1974 to 1976, 1981 to 1984, and 1989 to 1992. In each case the unemployment rate approximately doubled in the space of 12 to 36 months. And unemployment stayed high for years. Reregulating the labour market is a bad idea at the best of times. But a crisis and the beginning of a possible recession is the very worst time for the Rudd government to embark on its industrial relations "reforms".
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