Submission to the Victorian Industrial Relations Taskforce

Submission

EXECUTIVE SUMMARY

This Submission argues strongly that any changes to Victorian labour market regulations should be in the direction of reducing barriers to entry to employment and the costs of regulatory complexity.

In particular the Submission;

• expresses no view about whether particular matters should be regulated at a State or a Commonwealth level or the use of different voluntary mediation services;
• notes that Victorian labour market outcomes are broadly in line with Australian experience and do not support possible claims that Victoria now has general labour market difficulties which are unusual in Australia (section 1.2);
• argues strongly against giving official discretions to declare arrangements freely entered into are of a different type than the contracting parties believe them to be (section 1.18);
• argues strongly against unfair dismissals legislation, particularly for its burdens on smaller employers (Section 1.5);
• argues strongly against additional regulatory intrusion into the labour market as being unwarranted -- in particular, that, with at best minor exceptions, they are unnecessary to protect worker's interests (Sections 1.12, 1.13, 1.16);
• argues strongly that the costs of such regulatory intrusion and regulatory complexity constitute major barriers to entry into employment (Sections 1.3, 1.7, 1.8);
• argues strongly that full employment (within the rule of law) is the first-best protection of the interests of workers (Section 1.12);
• is based firmly on a position that efficient use of capital and labour flowing from allowing people to make the arrangements which best suit them within a system of open contracts, freedom of association and protection of property and person is the best long-term protection of living standards (Sections 1.4, 1.14);
• argues strongly that burdening their choices with complex and costly regulatory structures constitutes a costly burden not justified by its putative benefits (Section 1.6, 1.10, 1.11, 1.14 to 1.16, 1.19);  and
• argues strongly that complex regulatory structures get in the way of people making arrangements that genuinely best suit them and that such structures advantage the well-placed and the organised at the expense of others (Sections 1.9, 1.19).

In the light of the above, as the Submission (Section 1.19) says, it is particularly important that there be very clear voices speaking for those whose interests are not served by regulatory complexity and its costs -- ordinary workers, employers, taxpayers.  It is even more important that those charged with considering the public interest in such matters look past the well-connected, the articulate and the powerful and look to those -- the young job-seeker, the home-maker juggling family and work, the migrant, ordinary workers, small businesses -- who bear the burden of the costs of regulatory complexity, and consider their interests.  We are strongly of the view that that their choices should have a strong presumption of being reasonable, that they are to be respected, and that the proper role of policy is to expand, not restrict, those choices.

1.1. INTRODUCTION

As the largest single source of income, the labour market is the most important market in Australia.  Since 1963-64, the ratio of compensation to employees to GDP has not fallen below 52 per cent and has been as high as just over 60 per cent. ⁽¹⁾  As with any market, the question is not whether there shall be rules, but which rules shall there be.  Despite some winding back of regulation in recent times, particularly with the passage of the Workplace Relations Act, Australia retains a highly regulated labour market.  Indeed, a highly regulated labour market was one of the key planks of the "Deakinite Settlement" which dominated Australian public policy for most of the twentieth century (see Appendix).  There is strong reason to doubt that Australia has been well-served by its labour market regulations.

1.2. VICTORIA BROADLY SHARES AUSTRALIAN EXPERIENCE

We do not support any contention that Victoria has some special labour market difficulties over and above those which afflict Australia in general.  Victoria has broadly followed Australian patterns for industrial disputes, for example.

Graph 1

Moreover, Victoria has experienced employment growth very close to the Australian average over the recent economic expansion (change in employment/population ratio is used as an indicator, as that compensates for changes in population).

Graph 2

This performance is in noted contrast to Victoria's dismal relative performance over the previous 10 years, from recession to recession.

Graph 3

We also agree with the Taskforce Chair, Professor McCallum statement in his Whitlam Lecture Crafting a New Collective Labour Law for Australia that:

The protection of workers, however, must not be at the expense of the young, the aged, the unemployed and those not engaged in the labour force.  In other words, a modern labour law framework cannot be constructed in isolation, for cognisance must be taken of economic growth, the size of national debt, the social security laws and the levels of direct and indirect taxation.

Which is why this Submission provides an Appendix setting out the broad historical and policy context and why, given that Victoria follows broad Australian trends, this Submission will concentrate on the general circumstances Australia finds itself in.

It seems particularly important to do so as Professor McCallum seems to share the common delusion that the last two decades have seen a shrinking of government activity, saying in his Whitlam Lecture that:

They [the economic reformers] advocated labour market flexibility at a time when federal and State governments were shrinking their public sectors and reigning in their spending.  Governments bought the idea that greater labour market flexibility would limit unemployment.  At this time, the social capacity of governments to cope with welfare programs and payments was diminishing, but if it would limit unemployment then deregulation was worth a try.

In fact, as the Appendix lays out, government welfare activity has grown markedly over all the last three decades.  Indeed, fiscal pressure from this growth has been a prime driver of reform.  Moreover, it is particularly ironic that Professor McCallum should articulate such claims in a lecture named in honour of the Prime Minister whose expansion of the welfare state set in train events which fatally undermined the Deakinite Settlement and who is, in many ways, the father of "economic rationalism". ⁽²⁾

1.3. HISTORICAL BACKGROUND

The Deakinite Settlement can be usefully thought of as a risk-management policy structure (see Appendix).  Much of the policy push behind its establishment flowed from Australia poor performance during the Depression of the 1890s.  Ironically, the system adopted was based on the Victorian model, yet protectionist Victoria had handled the 1890s Depression much worse than free-trading New South Wales:  between 1891 and 1901, male employment in NSW grew by 69,000 or 19 per cent;  in Victoria it fell by 3,000 or 1 per cent. ⁽³⁾

The key elements of the Deakinite Settlement were established by the Deakin Government of 1905 to 1908.  At that time, Australians enjoyed the highest living standards in the world.  In the century leading up to the First World War, Australian GDP per capita was higher than the US's.

Graph 4

During the period of the two World Wars and the Depression it slipped behind until, by 1950, American per capita GDP was a third higher than Australia's, a ratio which has remained in place since.  It was precisely in the crisis period of the century when the ability of institutions and economies to cope with shocks was under the greatest stress–from 1914 to 1945 -- that Australia's relative income slipped most.  Australia also did notably worse than comparable countries under the shock of the Depression of the 1930s.  The pattern continued:  in each of the major postwar global downturns -- of 1961/62, 1973/74, 1982/83 and early 1990s -- Australia performed worse than the previous occasion and comparable countries.  Its capacity to maintain economic balance in the face of external shocks was clearly declining.  Only the recent Asian crisis has seen a (spectacular) reversal of the trend -- the floating exchange rate performed admirably as a shock absorber.  The Deakinite Settlement was very much one of protection and market restriction -- of trade protection and labour market regulation.  Yet long-run economic data tends to support the contention that small trading economies suffer particularly badly from protectionism.  It restricts their capacity to take advantage of economies of scale and scope in external markets and makes them more prey to exploitative cartels and monopolies:  a process that the Australian arbitration system facilitates.

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 sustained full-employment.

Graph 5

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 6

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 7

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 8

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 9

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.  Americans, including black Americans, are more likely to be employed than Australians -- in December 1999 the Australian employment/population ratio was 59.0 per cent, the African-American was 60.7 per cent while the overall American rate was 64.4 per cent. ⁽⁴⁾  If translated to Australia, that would mean an extra 816,000 Australians in employment.  (Even the African-American rate would mean an extra 257,000 Australians in employment.)

A point sometimes used to argue against use of American comparisons on labour market performance is the increasing number of American being imprisoned and thereby removed from the labour market statistics, which only cover civilian population.  While it is true that the American prison population has been increasing, this has been more than compensated for by the decline in the American armed forces.  In fact, the US now has less people removed from the civilian population by institutionalisation than at any time since the end of the Second World War, despite its total population almost doubling in that period.

Graph 10

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 that therefore 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 caused 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).

Graph 11 ⁽⁵⁾

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 which

• generates wage-surges not based on genuinely improved economic conditions;
• prevents their reversal;  and
• imposes additional costs upon employment (which would, if wages were totally responsive to supply and demand, not cause unemployment but lower wages instead.  Wages are, however, not totally responsive).

The costs of regulatory complexity is an important focus of this Submission.  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 12

1.4. 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 they are known in economics.  The two real issues are whether these gains are maximised and whether they are optimally or 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. ⁽⁶⁾  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 ⁽⁷⁾ 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 asymetric 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 six 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. ⁽⁸⁾  And the Workplace Relations Act 1996 was, at best, a very mild relaxation of a very highly regulated market.

1.5. "UNFAIR DISMISSALS" -- A COSTLY REGULATORY INTRUSION

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 ⁽⁹⁾ (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. ⁽¹⁰⁾  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. ⁽¹¹⁾

Unfair dismissals was introduced into Commonweath 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 13

1.6. A GENERAL PROBLEM

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 is -- guess what? -- more regulation. ⁽¹²⁾

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

Graph 14

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.

1.7. 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.

1.8. 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 15

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 16

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 17

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) ⁽¹³⁾ 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 pattern of such people not moving quickly into employment during upturns is not a inherent "law" of labour economics, but a function of particular institutional arrangements.  The behaviour Professor McCallum alludes to in his Whitlam lecture when he says:

When a firm wishes to hire labour, it has two choices:  It can either hire from the ranks of the unemployed, or can offer employment to workers who are currently employed in other undertakings and who possess motivation.  While in the short-run it might be cheaper to hire from the unemployed, in the long-run, it will make commercial sense to pay for more expensive labour from other undertakings.  In other words, although there is a large supply of unemployed labour, the demand to fill jobs from this labour pool is less than most people imagine.

can be overcome by institutional reform, though we agree with Professor McCallum that, given the build-up of people alienated from employment by long-term unemployment, bridging measures do have an important role.

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.

1.9. UNIONS AS INSIDERS

The union movement is generally strongly in favour of Australia's highly regulated labour market structures and against substantial de-regulation.  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) ⁽¹⁴⁾ are all based on this pattern of union defence of labour market "insiders" against their competitors.  Unfortunately for the union movement, "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.  Expanding the legislative privileges of unions would entrench and extend such behaviour.

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".

1.10. 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 cover less than 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.

1.11. 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 while 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.  It should certainly not move in the opposite direction.

1.12. 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 less than 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 ⁽¹⁵⁾ 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. ⁽¹⁶⁾

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.

1.13. 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, ⁽¹⁷⁾ 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. ⁽¹⁸⁾  This situation was much improved by the creation of the Industries Assistance Commission in 1975 but, 25 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 market-entry 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.

1.14. THE ROLE OF REGULATION

Some forms of economic regulation do add enormously to human welfare.  The basic laws protecting persons and property provide a necessary set of rules which allow economic activity to flourish.  Over time, those societies which allow people to go about their business secure in their person and property are enormously more productive than those that fail to do so.

Graph 18

But that flourishing is based on people being able to make their own judgements about the exchanges and trade-offs they wish to engage in.  Unless regulation does genuinely encourage greater productivity -- which, beyond those basic laws, very little of it does -- it merely re-arranges existing benefits.  Indeed, given the costs in enforcing and complying with the laws, and the regulators' isolation from the consequences of their actions (often very difficult to determine anyway), there is every likelihood that the regulation will impose a net social cost.

Labour regulation provides a good illustration of this.  Such regulation is typically justified on the grounds that it provides extra benefits to workers.  If such benefits were of low cost, employers would almost certainly already offer them -- if workers want such things, and they are of little or no cost, it would be foolish employer who did not offer them.

If the benefits are not offered as a normal part of employment contracts, this must be because there are significant costs involved in doing so.  That being so, if they are imposed, those costs have to be recouped.  If they make workers more productive, the costs can be recouped from improved returns from employing people.  But if they added to productivity, it would again be a foolish employer who did not already offer them.

So such costs will have to be recouped either by reducing the return to capital or by rearranging the returns of labour.  The former will discourage the use of labour.  The latter will just mean the new benefits are paid for by reducing alternative benefits to labour.  So the regulation will provide some benefits at the cost of other benefits and/or the level of employment that would otherwise occur.  It is very unlikely there will be any net social benefit from this.

Of course, the direct benefits of the regulation will be obvious, while its knock-on effects will not be.  The situation will be made worse if the advocacy of such regulation is widely taken to be a sign of status as a "good person", and scepticism or opposition to such legislation, as a sign of being a "bad" one.  This is, of course, commonly the case, as it is easy to portray the sceptic as being hostile to "the workers".  Moreover, the shouting the virtue of the intention of the regulation is very easy advocacy, arguing about the knock-on effects much more difficult.  Thus, one would expect, over time, for the level of regulation to tend to increase:  which, over the longer term, is clearly the case in the Australian labour market, despite the limited liberalising effects of the Workplace Relations Act and the growth of workplace agreements (themselves a highly regulated instrument.)  The higher the initial level of regulation, the more likely such increases are to impose inordinate costs.

As Labor employment spokesman Martin Ferguson says, the best social security cheque is a wages cheque.  Over 800,000 less wage cheques each week (including about 240,000 less Victorian wage cheques each week) seems a rather large social cost for having one of the most regulated labour markets in the developed World.

Regulation is not free:  the argument for deregulation simply says transactions should be cheaper, easier, and more in line with what people actually want

1.15. 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 -- a not very surprising consequence of increasing importance of human capital in the economy and increased participation in higher education -- has certainly significantly increased income inequality.  That is, however, not something that public policy should be concerned with.

Graph 19

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. ⁽¹⁹⁾  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. ⁽²⁰⁾  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 ⁽²¹⁾ -- 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!  Indeed, poor American households had rates of ownership of consumer durables in 1994 that were equivalent to, or greater than, the American average less than 25 years earlier. ⁽²²⁾  Moreover, while comparisons are difficult, it appears that Australia has a similar rate of working poverty to the US. ⁽²³⁾

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 nor 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.

While it is inherently difficult to maintain real growth in average wages while employment growth is booming at the rate it has been in the US, claims about stagnation in US real wages have also been greatly exaggerated.  First, they can fail to take account of income mobility.  Secondly, employers have used increased non-wage, and generally non-taxable, benefits (such as health care) to compensate workers, so using only direct wage payments is a misleading measure. ⁽²⁴⁾

We therefore do not agree, either with Professor McCallum's statement of the evidence or, where we do agree, with the construction he puts on its in his Whitlam Lecture when he says:

Arguments can be mounted which show - to my satisfaction at least - that through a comparison of similar countries, free market economics and labour relations deregulation will reduce real wages and increase poverty.

On the contrary, a freer and more flexible labour market can be a great boon to the elimination of poverty and its benefits there, and in spreading access to employment, are much more important than any effects on income equality -- which are far better tackled through targeted welfare measures.  Indeed, recent evidence from the work of Professor Ann Harding (Canberra University) that the rate of income growth of the bottom income decile has been 30 per cent -- more than twice that of any other income group -- is testimony what a targeted welfare system can achieve.

1.16. REGULATIONS ARE NOT FREE

Advocates of labour market regulation have a tendency to talk as if the costs of regulation are either insignificant or automatically less than benefits.  The above information constitutes considerable evidence that this is not so.  There is also more direct evidence:  that companies such as Rio Tinto and BHP have been able to offer workers individual contracts which increase their incomes indicates the gains to be achieved by sidestepping the costs of regulatory complexity.

There is also suggestive evidence in the changes of the modes of employment.  Over the last three decades, there has been very little change in job duration.

Graph 20

There has, however, been considerable changes in modes of employment.  The proportion of the workforce employed casually has increased markedly until the mid-1990s, and has plateaued since.  Casual employment allows both workers and employers to avoid many of the regulatory costs imposed on permanent employment:  both sides get greater flexibility, the workers get higher hourly rates and the employers avoid some on-costs -- another example of the mutual gains to be had from avoiding regulatory complexity.  While international comparisons are, at best, very rough, it is conspicuous that within Europe the use of temporary workers (who are roughly parallel to Australian casuals, in that they also represent a mode of employment which avoids many of the costs of regulatory complexity) seems to be directly connected to the level of regulation -- those countries with more highly regulated labour markets tend to have more temporary workers. ⁽²⁵⁾

Graph 21

The proportion of the Australian workforce who are self-employed tended to increase until the mid-1980s and has roughly plateaued since.  Self-employed Australians are the more stable in job duration than either permanent or casual employees ⁽²⁶⁾ is hardly a sign of exploitation, even though they are more likely to want to work less hours. ⁽²⁷⁾

Graph 22

There has also been increased use of labour hire agencies, though reliable statistics on this are hard to come by.

The growth in casualisation has been seen in some quarters as proof of increased job insecurity, although the job duration figures do not support this.  Taskforce Chair, Professor McCallum, in his Whitlam Lecture, said in that lecture of casual employees that

"This growing army of persons are crying out for both recognition and protection."

It seems to be a cry they are not demonstrating in their behaviour, as their rate of unionisation has been falling steadily.

Graph 23

Moreover, in Victoria, most employed people (65 per cent) are in the form of employment of their choice, ⁽²⁸⁾ a remarkably high figure since employment is an exchange between the provider and the user of labour.  Clearly, any attempt to further restrict their options is hardly likely to increase satisfaction.

1.17. TRENDS IN UNIONISATION

Casual workers are not alone as a segment of their market that unions are failing to entice as members.  The general rate of unionisation, both overall and in the public and private sectors has been falling steadily.

Graph 24

This decline is a long-term one.  The rate of decline increased during the post-1983 reform period, but seems to be fairly consistent over that period.

Graph 25

While there was a notable drop in the rate of public sector unionisation from 1994 to 1995, the private sector unionisation rates shows a fairly steady decline over the entire period.  Professor McCallum's claim, in the Third Whitlam Lecture, that:

it is clear in my judgment that the fall in trade union membership is also due to the down-grading of Australian conciliation and arbitration and to the enactment of voluntary trade union laws which now cover the entire nation.

does not appear to be supported by the evidence, since such laws did not "cover the entire nation" until 1993 at the earliest with the passing of the Industrial Relations Reform Act, the so-called "Brereton" Act, and the rate of decline in private sector unionisation in the three periods 1982-1990, 1990-1996 and post 1996 are not notably different.

It is notable that rates of union membership among women are lower than those among men for all categories of employment, ⁽²⁹⁾ yet female employment has been growing much faster than male employment.  This points to a failure by unions to adapt to their changing marketplace.

There are also some interesting shifts in relative numbers:

• In Victoria, more people are union members than are self-employed, but the numbers are comparable.  In August 1998, 417,200 were self-employed, ⁽³⁰⁾ while, in August 1999, 455,800 were union members. ⁽³¹⁾
• The number of self-employed climbed by 10,100 (2.5 per cent) from October 1997 to August 1998 ⁽³²⁾ while the number of union members has fallen by 59,900 (12 per cent) from August 1997 to August 1998, ⁽³³⁾ continuing a long-term trend.  On current trends, the number of self-employed will exceed union members in a few years.
• In the private sector, significantly more people are self-employed than are union members.  Victorian specific private-sector unionisation figures are not available from the published ABS data, but the overall Victorian unionisation rate is only just below the national rate, and the national private sector unionisation rate is now 19.6 per cent. ⁽³⁴⁾  Given that there were 1,432,500 private sector employees in Victoria in August 1999, ⁽³⁵⁾ at a unionisation rate of 19.6 per cent, that would mean there would be about 280,800 private sector union members, compared to 417,100 self-employed. ⁽³⁶⁾

In response to the pressures unions are under, they have two broad possible responses.  One is to seek to adapt to their changing market place by offering services that workers want at prices they are willing to pay -- to live and die by their ability to provide real benefits to others.  The second path is to seek to change their market place by political action in the hope that people will make different choices in different circumstances.  Since union officials tend to be politically-minded and focused, rather than commercially-minded and focused, the latter option is perhaps more natural to them.  The recent ACTU Congress -- with it calls for major public policy changes -- certainly suggests it is the preferred option among union officials.  Unfortunately for their hopes, however, their institutional problems are very unlikely to outweigh, even in the minds of a federal Labor government, the underlying fiscal and other pressures which have driven economic reform (see Appendix), particularly as the failure of Australia's labour market institutions to deliver full employment have been a significant driver of those pressures.  Moreover, it is one thing to call for changes which broaden people's choices, quite another to call for those which narrow them.

1.18. THE "DEPENDANT CONTRACTOR" MYTH

As part of a strategy of changing the institutional environment to foster unionisation, there has, in recent times, been an attempt to create a concept of "dependant contractor".  In Queensland, Section 275 of the Industrial Relations Act gives the Industrial Relations Commission the power to declare any contract for services to be a contract of service (i.e. employment).  A similar legislative provision was recently put before the New South Wales Parliament.  There is no empirical justification for such measures.

Looking at self-employed Victorians, in October 1997, 118,600 (29 per cent) were contractors, 38,000 (9 per cent) were consultants, 8,000 (2 per cent) were franchisees while 242,400 (60 per cent) were other businesspersons. ⁽³⁷⁾

• Of self-employed Australians in August 1998, only 15 per cent of owner-managers (253,600) were dependant on a client, and they were more likely to undertake contract work (i.e. formalise their working arrangement:  they presumably include franchisees) than other self-employed, 74 per cent to 30 per cent: ⁽³⁸⁾
• those contracts sometimes ensured that contractor was the provider -- 70,900 (23 per cent) prevent subcontracting -- some 49,500 (16 per cent) prevented other clients while 192,200 (62 per cent) gave the client control over working procedures, the rates not being much different for owner-managers of incorporated and unincorporated enterprises ⁽³⁹⁾
• translating that rate of 15 per cent to self-employed Victorians produces an estimate of 63,400 Victorians coming under the ABS classification of "dependant".  That is a mere 2.9 per cent of employed Victorians.

Any suggestion that officials should be given such enormous official discretions as those set out in Section 275 of the Queensland Industrial Relations Act is an outrageous restriction on the liberties of Victorians to engage in undertakings in good faith.  It is particularly ludicrous on the basis of an extremely dubious characterisation of a mere three per cent of the workforce.  Apart from being morally offensive, it imposes real uncertainty costs that cannot do other than discourage commercial activity.

Moreover, there is very little evidence of undue constraints on people's choices.  On the contrary, there is much evidence of a lively process of mutually beneficial exchange.  Of employed Victorians who changed their employment conditions in the previous 5 years to October 1997:

• Those running their own business were the least likely to have changed their form of employment (only 12 per cent had done so) followed by permanent employees (23 per cent), those on fixed-term contracts (33 per cent) and casual employees (51 per cent). ⁽⁴⁰⁾

Of those Victorian employees whose conditions changed in the 5 years to October 1997:

• most changes in employment conditions were the worker's choice.  53 per cent of such changes were the worker's choice, compared to 19 per cent from changed conditions at the workplace, 14 per cent from redundancy or closure, 7 per cent due to a promotion and 7 per cent for other reasons;
• most changes in payment type were the worker's choice.  59 per cent of such changes were the worker's choice, compared to 12 per cent from changed conditions at the workplace, 14 per cent from redundancy or closure, 7 per cent due to a promotion and 8 per cent for other reasons.
• the most common change in payment type was from hourly/casual rates.  45 per cent moved from hourly/casual rates, 27 per cent from wages and salaries, 7 per cent from contract, 6 per cent from commission or similar, 36 per cent from other arrangements. ⁽⁴¹⁾

1.19. WHO WHOM?

As in so much of life, the key question is who? whom? -- who will make decisions for whom and under what conditions and constraints?  Those who wish to claim the right to decide on behalf of others must either be able to show some voluntary act of delegation or claim an authority which overrides that of others.  De-legitimising ordinary choices is a key part of the latter.  The entire ideological assault on markets is an attempt to deny legitimacy to the choices people make within them, thereby justifying the movement of decisions to other people and other fora.

Many groups can have a vested interest in legislative complexity.  The regulatory authorities themselves, advocates before those authorities (such as lawyers, union officials and employer organisations and their employees:  an interest often accentuated if appointment to the regulatory body is a potential career path), those who gain benefits from possessing inside knowledge of the complexities of the system (such as corporate HR departments), those who are disadvantaged significantly less than their competitors by the costs of the system (such as larger corporations), those who feel they can publicly display their superior virtue by advocating ever more complex structures of "rights".  They can be expected to speak up loud and clear for their interests.

It is therefore particularly important that there be very clear voices speaking for those whose interests are not served by regulatory complexity and its costs -- ordinary workers, employers, taxpayers.  It is even more important that those charged with considering the public interest in such matters look past the well-connected, the articulate and the powerful and look to those -- the young job-seeker, the home-maker juggling family and work, the migrant, ordinary workers, small businesses -- who bear the burden of the costs of regulatory complexity, and consider their interests.  We are strongly of the view that that their choices should have a strong presumption of being reasonable, that they are to be respected, and that the proper role of policy is to expand, not restrict, those choices.

1.20. 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.  It should not be directed to increasing regulatory complexity.

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

---

ENDNOTES

1.  Data from ABS Cat. No. 5206.0.  The profit share ranges between 12 and 17 per cent of GDP.

2.  See Richard J. Wood, "The Father of Economic Rationalism", Canberra Times, 4 Sept. 1999, also published in The West Australian (17 Sept. 1999), and The Age (4 Oct. 1999).

3.  Vamplew, W. (ed), Australians:  Historical Statistics, Fairfax, Syme & Weldon Associates, 1987, page 147.

4.  Figures taken from Economic Report of the President and ABS Cat. No. 6203.0.  Employment population ratio is ratio of employed persons to civilian population 15 and over (Australia), and 16 and over (US).

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

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

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

8.  Consider, for example, the widening ambit of anti-discrimination legislation, with the liabilities of employers from employee actions tending to increase, thereby increasing the risks to employers of taking on new, untested, employees.

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

10.  Ibid.

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

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

13.  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.

14.  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.

15.  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.

16.  "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.

17.  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.

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

19.  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.

20.  Cox and Alm, Page 74.

21.  Cox and Alm, Page 73.

22.  Cox and Alm, Page 15.

23.  Des Moore, The Case for Further Deregulation of the Labour Market, November 1998, Page 138.

24.  Bruce Bartlett, The Truth About Wages, NCPA Brief Analysis No. 177

25.  "Western Europe's job-seekers limber up, The Economist, June 10, 2000, Pages 49-50.

26.  ABS Cat. No. 6359.0.

27.  ABS Cat. No. 6310.0.

28.  ABS Cat. No. 6358.2.

29.  ABS Cat. No. 6310.0.

30.  ABS Cat. No. 6359.0.

31.  ABS Cat. No. 6310.0.

32.  ABS Cat. Nos. 6358.2, 6359.0.

33.  ABS Cat. No. 6310.0.

34.  ABS Cat. No. 6310.0

35.  ABS Cat. No. 6248.0

36.  ABS Cat. No. 6359.0.

37.  ABS Cat. No. 6358.2

38.  ABS Cat. No. 6359.0.

39.  ABS Cat. No. 6359.0.

40.  ABS Cat. No. 6358.2.

41.  ABS Cat. No. 6358.2.