Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999

Submission to the Employment, Workplace Relations, Small
Business and Education Committee of the Senate on the
Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999

INTRODUCTION

The Workplace Relations Legislation Amendment (More Jobs, Better Pay) Bill 1999 seeks to improve the legislative framework within which the Australian labour market operates.  Knowledge of how labour markets work and how regulation is likely to interact with those workings is essential to assess the likely effects of the Bill's provisions.

HISTORICAL BACKGROUND

The almost 30 years from the end of the Second World War to the 1973 Oil Shock was the only period this century when Australia has enjoyed full-employment.

Graph 1

Since the 1970s, Australia has been moving further and further away from full employment.  The period since the Whitlam Government has seen Australia's worst sustained period of unemployment this century -- 22 years during which annual average unemployment rate has not fallen below 6 per cent.

Australia has been experiencing what might be described as the "rising mountain" pattern of unemployment, where the peak of unemployment in each recession is higher than in the previous recession, and unemployment generally does not quite recover to its low at the peak of the previous economic boom.

Graph 2

Part of this increase in unemployment has been attributed to the increase in the labour force to a historically high proportion of the population, largely due to the entry of women into the workforce.  Wrongly so, in our opinion.

Graph 3

The declining proportion of the working-age population in full-time employment and the fall in the proportion of the working-age population in employment during the later 1970s and early 1980s tends to undermine any such argument.  More fundamentally, it is reasonable to expect economic institutions to be able to adapt to reflect changing preferences.  There is no known limit to the useful goods and services that might be produced if people are permitted to produce them at prices that people are prepared to pay.  The more that is produced, the greater the resources of the community as a whole.  (Distribution of the rewards of that production is discussed in the following.)

International comparisons weaken even further the argument that unemployment is caused by the increased supply of labour, and provide more evidence of the deterioration in Australia's overall labour market performance.

Throughout the OECD nations, an increased proportion of women have entered the paid workforce yet, prior to 1975, Australia's rate of unemployment was consistently below the OECD average.  From 1975 to 1988 it moved up to around the OECD average.  Since 1988 it has been above the OECD average.

Graph 4

Yet another stark indicator of Australia's deteriorating labour market performance is shown by comparison with the United States.  Prior to 1974, Australia and the US had very similar proportions of their working-age population in employment.  Since 1974, the US has employed a higher proportion of its working-age population than Australia, a gap that has tended to increase over time.

Graph 5

In the United States, where women have entered the workforce in great numbers, a greater proportion of the population is working age is in the labour market than in Australia, yet unemployment is lower there than in Australia.

A final piece of telling evidence that labour markets can cope with people who want to work is the manner in which Australia itself absorbed the return of the troops, and then high levels of post-war immigration, without suffering unemployment.

We do not claim that the economic adjustment is immediate and therefore that a sudden increase in the supply of labour cannot cause temporary unemployment, but that is not what Australia is facing.  What is more, the experience of Hong Kong was that, when refugees caused a sudden and unexpected increase in the number of people seeking work, these were absorbed very quickly by the colony's relatively unfettered labour markets.

If unemployment is not cause by the increased supply of labour, then another cause of Australia moving up to the OECD average rate of unemployment, and the diverging Australian and US employment/population ratio, must be found.  These tendencies began with the wage surge of the Whitlam years.  The Australian labour market was not able to recover full employment afterwards -- in contrast to the greater wage surge in the Korean War "wool boom".  In the wool boom case, however, the wage surge had been a result of a genuine upward shift in national income from a dramatic increase in exports.  Employees were sharing the increase in national wealth.  The Whitlam-period wage surge was a result of political deals at a time when Australia was actually under significant negative economic stresses (see Appendix).  While the lower earnings growth of the later 1980s was associated with higher employment growth, the Australian labour market has not yet regained full employment, nor does it seem likely to.  We submit that this is because of a highly-regulated system generating wage-surges not based on genuinely improved economic conditions, preventing their reversal and imposing additional costs upon employment.  (The last would, if wages were totally responsive to supply and demand, not cause unemployment but lower wages instead.  Wages are, however, not totally responsive.)

Graph 6 ⁽¹⁾

An even more stark indicator of Australia's declining labour market performance has been the increase in the average duration of unemployed, from about 13 weeks in 1975 to about a year now.  This is a record which contrasts markedly with the USA's generally steady average duration of unemployment.

Graph 7

MUTUALLY BENEFICIAL EXCHANGE

For most markets for goods and services, the common intuition is that the seller of the product is, somehow, typically "the winner" in the exchange -- hence commentary on international trade on the basis that imports are bad and exports are good.  In the case of labour markets, the common intuition is that the buyer of labour services (the employer) is deemed to be inherently the winner:  certainly as the one from whom the sellers need "extra" protection.  In fact, if market exchanges did not generally leave both sides better off, they simply would not happen.  Yet political debate is filled with commentary that shows no real understanding of this basic truth about market activity -- the "gains from trade" as it is known in economics.  The two real issues are whether these gains are maximised and whether they are optimally/fairly shared.

Employment exchanges occur when an employer offers a wage rate and conditions that a prospective employee thinks is an improvement on his or her present situation and when an employee offers services such that a prospective employer can expect an improvement in his or her situation. ⁽²⁾  Raise the cost of employing someone, increase the risks of employing someone, reduce the output of the employee, reduce the price of what is produced, then the job is less likely to be offered.  Lower the wage and other benefits of moving into employment, increase the costs of qualifying for, and finding employment and getting to and from work, and increase the alternative sources of income and/or non-monetary satisfaction and then the employee's services are less likely to be offered.

Except where employment is compulsory, unemployment is the inevitable consequence of employers and employees inability (without flouting the law) or unwillingness to offer benefits to each other.  Any steps toward removing impediments to finding the "gains from exchange" are improvements to labour market law.

Although poverty (either relative or absolute) is very strongly associated with unemployment ⁽³⁾ there would, even in that theoretical construct the totally flexible labour market, always be a small proportion of the currently unemployed whose productivity is so low that, although employed, they would remain in absolute poverty defined at any reasonable level.  These people need help.  It is, however, better to subsidise them in work than out of it.  This is, first, because productivity is not innate but tends to increase markedly with experience, and second, because there is satisfaction in producing.  (Everyone can bring to mind at least one example of a slow learner or otherwise severely disabled person who has worked his way into gainful employment and would not have it otherwise.) One of the worst faults of Australia's dis-functional labour market is that it denies the dignity of work to so many.

In most cases, even in the current environment, the "gains from exchange" are quite large, certainly large enough to raise the issue of how they are distributed between the bargaining parties.  Two centuries of evolving economic understanding have reached a generally accepted view of circumstances that will cause any market to maximise aggregate welfare.  Conversely, there is also a very fair understanding of the circumstances that cause markets to depart from optimum prices and of conditions of asymmetric bargaining strength.

Employers typically engage more than one employee and are therefore able to spread the considerable costs of information gathering and formalising the deals over several employees.  Where employers are relatively few in number, it is probably possible for them to collude to keep prices and conditions down -- even if only informally by one watching what the other does.  It is fair and efficient that employees should countervail this power by forming unions.  It is, however, neither fair nor efficient that employees or employers should be able to combine as monopolies to engage in holdout strategies against the other party.

For the government to legislate to provide the countervailing power -- either directly or through subordinate legislation such as decisions of industrial relations commissions -- is a particularly egregious exercise of monopoly power.  It has, among other ills, seen 22 years in which the average annual unemployment rate has never fallen below 6 per cent.

It is a particularly striking feature of the Australian labour market that many commercial acts between consenting adults are rendered illegal.  Indeed, the general trend of policy until the Workplace Relations Act 1996 was for the labour market to become more regulated over time.  And the Workplace Relations Act 1996 was, at best, a very mild relaxation of a very highly regulated market.

In most human affairs, conventions grow up to deal with interactions between people.  The sanctions vary, but reputation effects from behaviour -- which encourage good behaviour on both sides -- can be particularly important.  Governments should always be wary about intervening in such conventions, because they often rest on a delicate balance of interests and trade-offs.  Upsetting such a balance can easily lead to outcomes notably worse than the preceding circumstances.

Legislation against "unfair dismissals" provides a classic example of this.  First, the concern is very one-sided.  There is no suggestion that there should be legislative protection for employers against "unfair resignations" even though an employer may be subject to very real costs if a key employee suddenly walks out.  "Unfair dismissal" legislation creates a quasi-property right for employees in their job ⁽⁴⁾ (just as legislating against "unfair resignation" would create a quasi-property right for employers in employees' labour services).

By creating this quasi-property right, such legislation changes quite significantly the incentives facing the parties involved.  The risks inherent in hiring a new person are considerably increased and, if wages or other conditions of employment are not allowed to fall, then fewer jobs are offered.

This may suit labour market "insiders" -- those already in employment, those with appropriate certification, track record and networks able to vouch for reputation -- are advantaged.  New labour market entrants -- with no track record -- and other "outsiders" are disadvantaged.  Since big companies can spread the inherent costs and risks better than small employers, unfair dismissals legislation advantages them against small business competitors.  It is not surprising, therefore that an ACCI survey of employers found that concern about unfair dismissals is strongly related to the size of the business. ⁽⁵⁾  This is of particular concern given that 90 per cent of all additional jobs in Australia between 1985 and 1995 were in firms with 20 or fewer employees. ⁽⁶⁾

Unfair dismissals was introduced into Commonwealth law by the Industrial Relations Reform Act 1993.  The Act was given Royal Assent in December 1993 and its provisions were fully in operation by June 1994.  Given lags for people to become aware of the changes, information to spread on their operation and changes in incentives to be manifested in employment outcomes, one would expect results to show up from 1995/96 onwards.  It is therefore somewhat suggestive that the current economy recovery and the post 19982/83 recovery have had very similar rates of per capita GDP growth (in fact, per capita GDP growth has been slightly higher in this recovery) and equivalent rates of growth in full-time employment until after the third year of the current recovery (1994/95) when the growth of full-time employment in the recent economic recovery began to be notably lower than in the previous recovery.  Given full-time employment represents the greatest inherent risk in a new employee, is more likely to be permanent rather than casual, and the importance of small business in employment, the results are certainly compatible with unfair dismissal legislation discouraging employment.

Graph 8

There are many other examples of the want of wisdom in attempts to replace complex, time-honoured customs including informal penalties by regulation that is at once too simple and too complex.  The words of noted US economist Paul Krugman talking about French employment regulation also ring true for labour market regulation in Australia:

The French have no monopoly on intellectual pretensions or on muddled thinking.  They may not even be more likely than other people to combine the two.  There is, however, something special about the way the French political class discusses economics.  In no other advanced country is the elite so willing to let fine phrases overrule hard thinking, to reject the lessons of experience in favor of delusions of grandeur

To an Anglo-Saxon economist, France's current problems do not seem particularly mysterious.  Jobs in France are like apartments in New York City:  Those who provide them are subject to detailed regulation by a government that is very solicitous of their occupants.  A French employer must pay his workers well and provide generous benefits, and it is almost as hard to fire those workers as it is to evict a New York tenant.  New York's pro-tenant policies have produced very good deals for some people, but they have also made it very hard for newcomers to find a place to live.  France's policies have produced nice work if you can get it.  But many people, especially the young, can't get it.  And, given the generosity of unemployment benefits, many don't even try.

True, some problems are easy to diagnose but hard to deal with.  If [New York Governor] George Pataki can't end rent control, why should we expect [French President] Jacques Chirac to be able to cure Eurosclerosis?  But what is mysterious about France is that as far as one can tell, absolutely nobody of consequence accepts the obvious diagnosis.  On the contrary, there seems to be an emerging consensus that what France needs is¾guess what?¾more regulation. ⁽⁷⁾

Comparisons of employment growth make it easy enough to see why an informed US commentator would be vastly unimpressed by Europe's performance.

Graph 9

In Australia, it is not delusions of national but of moral grandeur which provide a destructive conjunction with sectional interest.  A whole range of possible solutions to our dis-functional labour market are deemed unacceptable because their advocacy is taken to be a sign of moral turpitude.  Those playing such moral vanity games are patently more concerned with being seen to be a "good person" because they have the "approved" opinions than improving the job prospects of their fellow Australians.  It requires no undue humility to concede that we are still as incapable of redesigning well a social system that has evolved over centuries as we are of redesigning an eco-system.

THE "NATURAL" RATE OF UNEMPLOYMENT

Economics has developed the concept of the non-accelerating inflation rate of unemployment (NAIRU), sometimes misleadingly known as the "natural" rate of unemployment.  The NAIRU is the rate of unemployment which -- given current institutional structures -- macroeconomic policy cannot reduce unemployment below without inflation increasing.

In other words, if unemployment is to be reduced further, there has to be institutional reform.  That is clearly the case in Australia.  Substantial, sustained improvement in unemployment cannot be expected without major structural reform in the labour market.  Any improvement achieved merely through economic growth will be vulnerable to the next economic downturn.  Nor is economic growth itself independent of the efficiency of the labour market.  Major regulatory and institutional reform is required.

INSIDERS AND OUTSIDERS

Unemployment is not an evenly spread experience.  University graduates, for example, experience very low rates of unemployment -- and they are the people making the key decisions and writing commentaries on public policy issues.

Since 1982/83, from one to three per cent of the working-age population have been unemployed for 12 months or more.  This is a proportion which has tended to go up over time.

Graph 10

Unemployment is concentrated in specific groups who have differing experiences.  While about 60 per cent of the unemployed are under 35 this age group accounts for only about 40 per cent of the long-term unemployed.  About 65 per cent of the long-term unemployed are in the 25-54 age groups.  Though members of older age groups are much less likely to be unemployed, if they become unemployed they are more likely to become trapped in long-term unemployment.

Graph 11

The Australian labour market operates as one of advantaged "insiders" and disadvantaged "outsiders".  If one removes unemployed teenagers and the long-term unemployed -- creating what might be called the "politically significant rate of unemployment" -- unemployment rates are markedly lower.  If one excludes all unemployed youth as well as the long-term unemployed, the unemployment rate has spent much of the past two decades in the two-to-four per cent range.  This may explain why unemployment has been the subject of many pious political words but little effective political action.

Graph 12

Excluding the young and the long-term unemployed identifies "frictional" unemployment -- which is fairly stable, though above the one-to-two per cent it was in the 1950s and 1960s.  Youth unemployment has risen as youth wages have increased relative to adult wages, undermining their capacity to compete (given their lower level of skills, experience and established track record) ⁽⁸⁾ with older workers and with women entering the workforce.  Long-term unemployed youth provide the basis for the development of an Australian "underclass" -- a welfare-dependant group with a high rate of drug use and petty crime.  Older unemployed can suffer problems of not having appropriate skills in a changing economy while the expansion in family support in welfare provides less pressure to accept work of lower-status or requiring other major changes, such as shifting house (which may be particularly difficult if that means going to an area with much higher housing costs).  In all cases, not being able to "bid" for employment at a level commensurate with their actual productivity is a barrier to employment.  Claims that such barriers are to stop "exploitation" are merely the self-justification of an anti-competitive cartel -- the unemployment which is generated by such barriers most certainly being the result of exploitation of regulatory privilege for private gain.

The failure to substantially improve the deteriorating performance of the Australian labour market is the most powerful evidence that the Australian political system, in practice, rates more highly goals other than restoring full employment -- such as not antagonising the advantaged labour market "insiders".  Indeed, so far from being, in practice, seriously interested in reducing unemployment, the political process has regularly produced outcomes whose most likely effect would be to make unemployment higher than it would otherwise have been -- such as unfair dismissals legislation, legally-imposed wage minimums unconnected with productivity, legally enforcing benefits to employees, increased employer liability for employee actions and increased legal obligations consequent on employment.

UNIONS AS INSIDERS

The union movement is generally strongly in favour of Australia's highly regulated labour market structures and against substantial de-regulation.  On the contrary, they have generally supported increased regulation, even treated that as a major goal -- as was seen recently with the controversy over youth wages.

The point of unions is to deliver advantages to their members.  Clearly, they will seek to advantage their members and pursue their own institutional interests.  This is in itself not a problem, provided the regulatory power of the state is not enlisted in this cause.

The unions' basic approach is to defend the interests of incumbent, organised "insiders".  Historically, these have been male, full-time workers, particularly in manufacturing, construction and other large work-sites.  The groups who threaten the interests of these "insiders" are not the employers -- they are the source of income.  The groups who threaten the interests of the labour market "insiders" are their competitors -- new labour market entrants, such as young people and women, those wishing to work under arrangements which are not easily organised, such as part-time and contract work.  The power of unions has rested on the ability to provide services to their members.  These services have included the wages and conditions for which only a labour monopoly could successfully bargain.  The power and security of unions officials is similarly enhanced by monopoly power.  Monopoly is the exclusion of competitors -- "scabs" are simply competing suppliers of labour.  The losers are the "outsiders" -- those who have never become employed and the marginally employed.  Typically, these are young, in some industries female, and play no effective part in union affairs.

Rules such as "first in-first out", unfair dismissal laws (which raise the risks in hiring new, unknown workers but give incumbents quasi-property rights in their job) and raising youth wages (so less experienced, skilled and productive young labour market entrants cannot compete against the incumbent unionised workers) ⁽⁹⁾ are all based on this pattern of union defence of labour market "insiders" against their competitors.  This has created a problem for unions as those "outsider" groups have become increasingly important in the workplace.

Similarly, complex rule demarcations and specialist arbitration structures provide a role for union officials to acts as intermediaries between workers and management.  Impediments to efficient labour and capital use retard living standards below those otherwise attainable.

Union officials strenuously deny that their activities were based on self-interest against the interests of other workers (and sometimes even their own members).  But an epigram Ben Chifley was fond of quoting comes to mind -- "in the race of life, back self-interest, it is the only horse that's trying".

AWARDS AS THIRD PARTY IMPOSITIONS

The award structure itself is morally offensive.  It imposes, via the regulatory power of the state, conditions on employers and employees to which they have not consented.  Where the effect is to destroy their prospects of employment, it become utterly morally retrograde.  Awards provide a form of price-maintenance and inhibition of competition which is explicitly banned for other goods and services under the Trade Practices Act.  Given that unions only cover about 20 per cent of the private sector workforce (and union membership in some industries is less than entirely voluntary), the award structure cannot be defended on the ground that it is, at least, democratic.  It is something which has completely outlived whatever usefulness it may once have had.

AWARDS AFFECT COMPETITION BETWEEN EMPLOYERS

Union power and labour market regulation often enforce implicit or explicit barriers to competition.  Complex regulations imposing high administrative costs advantage large companies (who can spread the costs over more units of production) against smaller competitors.  Unions can be relied upon to oppose, by political and industrial action, competition among employers which reduce their own opportunities for rent-seeking.  Union opposition to the break-up of electricity and telecommunications monopolies and to the imports of motor cars and clothing provide examples of how effective they have been, and sometimes still are, at opposing competition.  Unions are confident they can share the economic rents and employers with access to such rents would sooner share than forego them.  Consumers, of course, pay these rents, which are typically highly regressive in their effects.

Unions provide real benefits to their members and to the economy.  It is because of their special legal privileges within a vast regulatory apparatus creating a highly dis-functional labour market that the costs they impose are said to, and may in fact, outweigh their benefits.  The solution is not to ban or to regulate them in any special way, but to make ordinary corporate citizens of them.  Changes to workplace law should be directed to that end.

UNEQUAL BARGAINING POWER

It is perfectly reasonable for unions to play the role of improving the capacity of workers to bargain with their employers.  This is a fundamental service they can offer to current and potential members.  It is an entirely different matter for them to be granted special legal privileges to pursue this aim.  After all, the declining rate of unionisation to its current level of just over 20 per cent of private sector employees itself indicates that workers do not feel this is a necessary service for the conduct of their employment activities.

The best single protection for workers is to have skills in demand, to be in a full employment situation, to have employers competing for their services.  A recent speech by Roger Kerr, Executive Director of the New Zealand Business Roundtable expresses these points well:

Behind these developments is the same ideology that was rightly set aside in reforming most other features of New Zealand's labour law, namely that helpless employees must be protected from omnipotent employers.  We all deal satisfactorily with banks, retailers and other firms with far greater resources than we have, without the aid of laws on minimum deposit rates and maximum retail prices, and without resorting to unions of savers or consumers.  This alone suggests that there must be a strong measure of myth in the doctrine of unequal bargaining power.  If bargaining power was a systematically one-sided problem -- as opposed to something which fluctuates with market conditions and which affects employers and employees alike -- we would expect to see wages driven down towards zero in countries without minimum wages, employees without the power to quit at will, and the prices of goods sold by big firms tending towards infinity.

Of course, none of this happens, because it is not the difference in resources between buyer and seller that matters, but the alternatives available to each.  Employers and workers are not in competition with each other:  employers are in competition with other employers for workers and employees are in competition with other employees for jobs.  In all markets, including the labour market, the best protections for savers, consumers and workers are freedom of entry and exit on both sides of the market, and openness to competition.  Hong Kong has no minimum wage or unfair dismissal laws.  Because these freedoms have helped it to maintain virtually full employment ⁽¹⁰⁾ despite massive structural change, its workers are not easily exploited and they now enjoy average incomes 50 percent higher than those of New Zealand workers.

This is not to say that employers and employees have no inclination to behave opportunistically.  Rather, the circumstances in which opportunistic behaviour is profitable are relatively rare.  One reason is that it is normally profitable to strive to achieve and maintain a reputation as a good employer.  Another is that contractual arrangements have evolved through market processes to safeguard against opportunistic behaviour on the part of both parties to an employment contract.

The legal scholar Richard Epstein has repeatedly emphasised the folly of judicial intrusion into routine affairs such as employment contracts:

It is one thing to set aside the occasional transaction that reflects only the momentary aberrations of particular parties who are overwhelmed by major personal and social dislocations.  It is quite another to announce that a rule to which vast numbers of individuals adhere is so fundamentally corrupt that it does not deserve the minimum respect of the law.  With employment contracts we are not dealing with the widow who sold her inheritance for a song to a man with a thin moustache.  Instead we are dealing with the routine stuff of ordinary life;  people who are competent enough to marry, vote, and pray are not unable to protect themselves in their day-to-day business transactions.

Beyond the issues that arise in standard contract law -- such as fraud, misrepresentation, and duress -- employment contracts do not leave gaps or implied terms that courts need to fill.  Employment contracts are made every day;  the costs of contracting are low;  and people can evaluate realistically the risks and costs of contingencies such as dismissal.  If it is optimal for workers to have a job security or just dismissal provision they will negotiate one voluntarily because the barriers to doing so are trivial.  If not, they will choose to avoid the costs to them of lower wages or other less favourable terms in their contract which are the inevitable trade-off for greater job security.  In short, mandatory unjustifiable dismissal provisions diminish the value of the compensation bundle for most employees.

Thus the problem that activist legislators or courts seek to address is an imaginary one, and their decisions harm the very parties they hope to benefit as a class.  Activist judges often find meddling in other people's affairs a rather pleasant burden, but this tendency lends itself to abuses of power.  The law has no economic rationale for a good faith or fair dealing intervention in labour relations.  Economic competition does not create a perfect world, but on both the demand and supply sides of the market it provides incentives for civil and cooperative behaviour.  Firms do not sack workers willy nilly;  such practices are virtually unheard of as they are bad business and the costs of changing staff can be high.  New Zealand employers have every incentive to keep and reward quality employees - after all, there are over 200,000 firms that can bid them away at any moment.  The at-will contract is often the best mechanism for establishing terms of employment which avoid vulnerabilities, opportunism, one-sidedness and monopoly by either party in an employment relationship.  If, subject to the terms of a contract, an employee can quit at any time, the firm has every reason to be responsive to the employee's concerns.  If, subject to the terms of a contract, an employee can be dismissed at any time and for any reason, that employee has every reason to be productive.  Productivity creates job security. ⁽¹¹⁾

Unequal bargaining power is not a reason to maintain Australia's complex and intrusive structure of labour market regulation, nor to do other than to treat unions as ordinary corporate citizens.

WHY REGULATION OFTEN FAILS

There is nothing particularly mysterious about why government regulation in markets is often counter-productive -- it has been well, if not exhaustively, analysed.  In practice, there is usually very little real quality control on regulatory provisions, either before or after the fact.  Determining effects is often quite difficult ⁽¹²⁾, few resources are put into systematically doing so and there is very limited feedback into the legislative process from such measurement as does occur.  Worse, such feedback and measurement as does occur is often left to the regulators, who have a vested interests in the regulations they administer. ⁽¹³⁾  This situation was much improved by the creation of the Industries Assistance Commission in 1975 but, 29 years later, there is still far to go.  There are also obvious conflicts of interest in government funding evaluation, since governments are not likely to want to be publicly and authoritatively told that their policies are not working.

Furthermore, interest in public policy itself is a "public good", subject to considerable "free-riding", so therefore tends to be under-provided.  By contrast, those with concentrated special interests often have powerful incentives to be involved, leading to intrusive regulation tending to favour those with such interests (e.g. by raising marketentry costs in, say, law and medicine).

Unlike ordinary commercial exchanges -- where people only come together in expectation of benefit, where people have to know only their own situations and preferences -- regulatory action is the application of centralised coercion.  The regulator cannot learn of the diversity of ever-changing personal preferences, aptitudes and resources.  Even if they could, they much adopt a "one size fits all" approach, even though they know perfectly well that it does not.  Were they to adopt the "flexible" approach, so often advocated by business, they would very soon find themselves accused of favouritism, of corruption.  The operation of centralised coercion is such an excellent way of gaining benefits while passing the costs on to others that those who impose regulations -- even of the "one size fits all" type -- do not escape moral hazard.

There is a place for judicious regulation (they can reduce transactions costs, for example) but there are also powerful reasons why there should be no presumption that extensive regulation is socially beneficial.  The experience of Australia's highly-regulated labour market certainly provides evidence of the cost of over-regulation and regulation imposed at the behest of particular interests.

EXAGGERATED CONCERNS

Argument against de-regulation of the labour market are often based on concerns about increasing income inequality and allegedly increasing poverty rates.  Regarding the former, there seems little doubt that market incomes have been becoming more unequal.  This is largely explained by life-time earning paths becoming notably steeper.  Evidence from the US is particularly pertinent, as the US is usually used as the "horror" example of income inequality.  Whereas, in 1951, earnings in the US peaked in the 35-44 age group at about 50 per cent greater than the earnings of 20-24 year olds, they now peak in the 45-54 year age group at about three times the earnings of 20-24 year olds, as human services and knowledge skills become increasingly important in the economy.  This pattern of steeper life-time income paths has certainly significantly increased income inequality.  That is, however, not something that public policy should be concerned with.

Graph 13

Although poverty even in well-to-do Australia should concern us, claims about increasing poverty are wrong, since it is actually decreasing, both here and in the US.  One US study found that, if households were assessed against the official US poverty standard (three times the income needed to purchase a nutritionally adequate diet) according to their actual consumption patterns, poverty in the US has declined from 31 per cent of the population in 1949 to 13 per cent in 1965 and 2 per cent by the late 1980s. ⁽¹⁴⁾  Applying the official, income-based, definition of poverty, in the early 1990s, the median duration of a poverty spell in the US was 4.2 months.  Only a third of those classified as poor by the Census Bureau had been below the poverty line for 24 or more months reducing the long-term poverty rate (measured by income) to about 4 per cent of the US population. ⁽¹⁵⁾  A University of Michigan study of households tracked over a 16 year period (1975 to 1991) found that only 5 per cent of the households who were in the lowest fifth of income in 1975 were still there by 1991.  A far larger proportion (29 per cent) had made it to the top quintile ⁽¹⁶⁾ -- employment growth and steeper lifetime earnings in operation.

Despite claims to the contrary, the United States is not a nation in which poverty is increasing -- quite the reverse!

Concerns over inequality and poverty are not good reasons to fail to embrace major labour market reform.  Particularly reforms that would increase employment and decrease unemployment which would therefore reduce poverty and, by lifting the incomes of the poorest people, reduce the disparity of incomes a little.  There are no good reasons for Australia not to learn the lessons of American success or to follow the path of European failure.  On the contrary, getting people into jobs and up the employment ladder is the best path away from poverty.

WHERE REGULATORY POLICY SHOULD BE DIRECTED

Wage Arbitration remains the last great survival of the Deakinite Settlement (see Appendix).  Indeed, with the exception of some very partial freeing up in the Workplace Relations Act 1996, the labour market has been a conspicuous holdout from the process of de-regulation in factor and product markets with measures such as unfair dismissal laws and affirmative action and equal opportunity legislation, or indirectly, through health and safety regulations, welfare changes and so forth adding to the regulation of the labour market.

Australia has tried increasing government regulation of the labour market, and it has been a notable failure.  It is time to change direction.  In particular, it is time to stop loading onto labour market regulation redistributive goals which should be pursued through the tax-and-transfer system.

Current regulatory structures create or entrench the "insider/outsider" divisions in the Australian labour market.  Regulatory reform should therefore be systematically directed to abolishing or reducing provisions which create barriers to entry to employment.

The Workplace Relations Legislation Amendment (More Jobs, Better Pay) Bill 1999 must be regarded as a mild step in the right direction.  Taking the major features in the order they are set out in the Explanatory Memorandum:

• Restrictions of the ambit of awards, allowing parties to choose appropriate jurisdictions and clarifying the role of the courts and Commission in dealing with unprotected industrial action are but minor improvements on the award system and subsidised compulsory arbitration.  The fundamentally dis-functional system is retained;
• Given the decreasing importance of manufacturing in the economy, adoption of the term "workplace relations" is hardly objectionable, nor is improved services -- though the competitive pressures of an open market in arbitration and mediation would improves services more effectively;
• Establishing the distinction between compulsory and voluntary arbitration is a desirable step toward removing inappropriate taxpayer-subsidy to arbitration services;
• Similarly, providing for the use of voluntary mediation as an alternative to the Commission is a step in the right direction.  The role of accreditation of mediators is more problematic, since it provides the possibility, indeed likelihood, of (re)creating an "insiders' club" of the type which has for so long be-devilled the Australian labour market;
• If awards are not to be abolished, they certainly should be limited in their coverage as much as possible;
• Any easing of the burden of unfair dismissals is desirable.  As much of the harm such provisions do is, however, entirely independent of the merits of any particular case, the benefit of any such restriction -- short of complete abolition -- must be doubtful;
• Simplifying the registering of AWA's is also inherently desirable, though it is hard to see why workers and management cannot be treated as adults and allowed to come to their own arrangements without any need to register anything;
• Industrial action is both clearly a basic defence for workers against unconscionable action by their employer and a means by which power can be exerted against other parties in an unconscionable way.  It is therefore desirable that the law on such matters be clear, that they be undertaken only with the workers' clear consent and that they should not be used as a weapon against third parties;
• Right of entry can be easily abused and safety issues can be, and have been, used as a "cover" for inappropriate industrial action.  It is therefore appropriate that the property rights of employers be protected in these matters, without impeding the legitimate activities of unions.
• Freedom of association is one of the more basic civil liberties that should be adequately protected by common and criminal law but, to the extent that it is not, it become an appropriate realm for legislative action.  It is certainly desirable that the individual's right not to be compelled to associate (or not) be clarified and that attempts to get around protection of such rights be blocked;
• Since Victoria has surrendered legislative responsibility to the Commonwealth, improved integration of the Victorian system is clearly desirable.  It is worth noting, however, that one of the most unfortunate aspects of Australian labour market regulations has been the imposition of standards which may be appropriate for Sydney or Melbourne on places -- such as rural Australia -- where they are very inappropriate;  and
• Repealing of provisions that allow the Federal Court to vary or set aside contracts made with independent contractors is highly desirable, given that having the Courts interfere in contracts in such a way must tend to have a pernicious effect on commercial operations, greatly reducing certainty in commercial transactions.

In summary, the Workplace Relations Amendment (More Jobs, Better Pay) Bill 1999 is not the radical reform that the Australian labour market -- and the unemployed -- both need.  It does, however, move policy in the right direction.

We are happy to support this Submission by appearing at a public hearing.

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ENDNOTES

1. Information on female average earnings is not available prior to September quarter 1981.

2. The operation of features such as implicit contracts, etc add to the subtleties of the labour market exchanges without changing the essential details.

3. See Bob Gregory and Peter Sheehan, "The Collapse of Full Employment", in Fincher, R. and Nieuwenhusen, J. (eds), Australian Poverty then and Now, Melbourne University Press, Melbourne, 1998, pages 103 to 126.

4. Steven Kates, "Unfair Dismissals", Paper to the H.R. Nicholls Society Conference, August 28, 1999.

5. Ibid.

6. Gregory and Sheehan, Op. Cit., page 111.

7. Paul Krugman "Unmitigated Gauls:  Pardon my French about French economics", Slate, posted Thursday, June 5, 1997.

8. The element missing in the old refrain of "can't get a job because I don't have experience and can't get experience because I don't have a job" is being able to put a bid to start off on a wage sufficiently low that it is worth the employer's while to have a punt on an inexperienced person.

9. That raising youth wages can be seen as "benefiting" young workers -- indeed, if they are abolished all together one can parade one's opposition to "discrimination" -- provides an excellent example of conspicuous benevolence and sectional interest marching together.

10. Since December 1998, the Hong Kong unemployment rate has been 6.0 to 6.3 per cent, during a period of deep economic stress.  Australia could only manage a rate that low for some months in 1989 after six years of economic recovery and has not managed it since.

11. "Obstacles to Employment and Productivity Growth in New Zealand's Labour Market", speech to Institute for International Research, 11th Annual Industrial Relations Conference, 3 March 1997 available at http://www.nzbr.org.nz/documents/speeches/.

12. Effects of any particular provision tend to be very hard to pick out from a mass of government action.  The enormous increase in legislative activity (see Appendix) militates further against effective quality control.

13. Not least, in preserving the "human capital" of intimate knowledge of the regulatory structure, with potential future earning potential.

14. Slesnick, Daniel T., "Gaining Ground:  Poverty in the Postwar United States", Journal of Political Economy, February 1993, pages 1-38, cited in Cox, W. Michael and Alm, Richard, Myths of Rich and Poor:  Why we're better off than we think, Basic Books, New York, 1999, page 16.

15. Cox and Alm, Page 74.

16. Cox and Alm, Page 73.