A Controlling Agenda: The Attempt to Protect Unions by Re-regulating the Labour Market

An Address to the Annual General Meeting of the H.R. Nicholls Society,
27 November 2000

Mr President, ladies and gentleman.

Unions are losing the battle for the hearts and minds of Australian workers.  The unions' collective loss of market share has accelerated to the point where, not only is the share of the workforce who are union members continuing to fall, but the actual number of union members is falling.

Less than one fifth of private sector workers are union members.  To put it another way, eighty per cent of private-sector employees do not think that union membership is worth the cost and bother.  In August 1990, union membership peaked at nearly 2.7 million members.  By August 1999, union membership had fallen to just under 1.9 million, a fall of almost 800,000 or 29 per cent in a mere nine years.

In Victoria, the fall has been particularly notable, union membership falling from 719,000 in August 1990 to 456,000 in August 1999, a fall of over 260,000 or 36 per cent -- the largest percentage decline of any State over that period.

If one presumes that workers are being rational, it would follow that circumstances are changing in ways which makes union membership not worth it for more and more workers.  If that is so, then any revival of union fortunes will either require them to improve the services they offer or to change the institutional circumstances or both.

There is a line of argument which holds that the liberalisation and other changes in the labour market which have occurred over the 1990s have fundamentally undermined the situation of ordinary workers.  The first problem with this argument is that, given it is illegal to discriminate against union membership, it ultimately presumes workers are being stupid.  If institutional circumstances are moving against them, then surely union membership should become more attractive.  Indeed, the argument that labour market liberalisation worsens the situation of workers is, in fact, an even stronger condemnation of the failure of unions to hold their membership.  Either that, or Australian workers are being very dumb.

There is no serious evidence, however, that workers are being undermined by liberalisation.  Real wages have increased, labour has maintained its share of national income (while ownership of capital has become much more widely spread) and, despite many claims to the contrary, polling data and the stability of the pattern of job duration over the last three decades do not suggest a more insecure labour market.  The rate of increase in the income of low-skilled workers has been much the same as middle- and high-skilled workers -- the measured increase in inequality in earned income has come about largely via an increase in the number of high-skilled workers (hardly a bad thing and a natural result of the shift to a human-capital-based service economy).

There are a range of institutional changes which make the situation of unions more difficult, or at least less central.  The number of people in the labour market who might be called either "residual claimants" of income or those in the contract-for-services market -- employers, own-account workers and family helpers -- now outnumber private-sector union members.  These and other modes of employment not conducive to union membership -- casual, subcontracting, labour hire -- have been increasing though, in the case of casual employment, more in the 1980s than since labour market liberalisation began.  (Which, of course, suggests casualisation may be a form of refuge from excessive regulation of the labour market:  international comparisons provide further support for this).

More broadly, there has been a range of changes which have tended to increase the bargaining power of workers.  Changes such as:

• the expansion of the welfare state (pensions and benefits effectively set the minimum wage);
• the expansion of personal grievance avenues (private advocacy services now provide real competition to unions);
• the increase in educational qualifications;  and even
• the operation of investigative media

With the increasing importance, and recognition of the importance, of "human capital" in the success of firms, there has also been a widespread trend of businesses putting more resources into managing employees.  All these factors make it harder for unions to provide services of sufficient value that workers are willing to pay for them.

But far from impossible.  The Shop Distributive and Allied Employees Association operates in an industry with a lot of female, young and casual workers.  Despite operating in an environment which, on economy-wide trends, militate against union membership, it is one of only two ALP-affiliated unions which has increased its membership over the last 10 years.  The way it has done this is by concentrating on providing services for its members that they actually want.  What, in other industries, is known as "maintaining customer-focus".  For example, their attitude to casual employment is that, if the member wants to work casual, that's fine.  If they want something more permanent, the union will see what it can do to arrange that.  The retail industry superannuation fund is barred from direct investment in the retail industry, to ensure that there is no conflict of interest.

This contrasts with the attitude in some other unions, where they will represent workers -- but on the unions' terms.  The Amalgamated Manufacturing Workers' Union, for example, takes the attitude that casual workers are not the sort of workers they wish to represent.  When a senior mining executive recently asked a senior ACTU executive why the unions don't just also represent workers on individual contracts the official, apparently, went ballistic at the suggestion.  There have also been games played with union-controlled superannuation funds with industrial disputes.

Which brings us to the issue of institutional changes within unions.  The most obvious is the long-term trend of capture by unions by officials.  The above examples provide instances of this capture in operation.  Some other indicators of such official capture include:

• From 1968 to 1996, the ratio of union officials to members trebled;
• From 1971 to 1989, union membership fees' increased at a faster rate than wages;
• The "super union" amalgamations took place on the basis that no official would lose their position;  and
• With the downturn in membership since 1990, there have been cuts in clerical and administrative staff:  but the number of officials has increased marginally.

The unions' action plan unions@work ranks campaign activity, talking to journalists, wages policy and dealing with a changing labour market above responding to members (which is followed by "international unity").  This is not an ordering which grasps unions' essential problem -- ordinary workers don't think the cost of union membership is worth the benefits received.  It is an ordering which makes sense in terms of "official capture" of unions, however.

It is also worth keeping in mind that the operation of the "conveniently belong" rule keeps unions from competing with each other for members, leaving exit as the only effective strategy for individual workers to deal with inadequate service.

The first wave of union response to their declining market share was the Kelty strategy of the Accord, the social wage and super-unions.  This was very much a politically-focused strategy.  It can now be seen to have been a complete disaster for the union movement.

• It provided benefits via political mechanisms which workers did not have to belong to unions to participate in.  (Indeed, the tax-and-transfer system in Australia has completely negated the increase in inequality in earned incomes and incomes in the bottom tenth of the population had the highest rates of growth from 1982 to 1996-97).
• It co-opted unions into supporting a specific political agenda, reducing their capacity to operate as an independent voice.
• It expanded the routes for personal grievances not requiring union activity -- the WA IRC, for example, has seen a greatly expanded proportion of applications by individuals who can just as easily be represented by solicitors or other private advocacy services as unions.
• It created centralised "super unions" much more removed from ordinary workers.  This has proved to be particular problem for the outlying States, whose workers have defected with notable speed from the "super unions".

Faced with an imploding membership, the Combet-Burrows leadership is undertaking a new strategy to revitalised the union movement.  And they are proceeding to make the Kelty mistake in new forms.  Once again it is politics -- not customer-focus, not value-for-money -- to the rescue.

The politics in question is the labour market re-regulation agenda.  There are two key texts for this agenda:

• Australia at Work, published by Prentice Hall in 1999 by the Australian Centre for Industrial Relations Research and Training (ACIRRT) -- an organisation of about 20 staff originally funded by taxpayers but now supported by consultancy work, often from major corporations;  and
• Sydney University Law Professor Ron McCallum's 1997 Whitlam Lecture Crafting a New Collective Labour Law for Australia, available on the ACTU website.

This agenda has inspired the Queensland Industrial Relations Act 1999, attempts this year to amend the New South Wales Industrial Relations Act, an attempt currently going through the Tasmanian Parliament to amend their Act and, in Victoria, the Fair Employment Bill now before the Victorian Parliament.

The agenda starts with a misdiagnosis of current trends.  They take the view that markets have an inherent tendency towards wickedness, that businesses inherently exploit workers, that unequal bargaining power is endemic, that labour market liberalisation must have had bad effects and that union membership is inherently a rational choice for workers unless pernicious institutional factors are operating.  Thus, in his Whitlam Lecture, Prof. McCallum blames labour market liberalisation for the decline of unions, even though it was clearly underway well before the limited liberalisations that took place from 1993 onwards.  If you take such views as axiomatic, a whole range of alternative explanations are going to be ruled out.  As Professor Mark Wooden from Melbourne University said in his review of Australia at Work

... it is their passion for the subject matter that is the key weakness of this work.  It would appear that ACIRRT believe so deeply in their cause that nothing, and certainly not facts (or the absence of them), was going to stop them from reaching the conclusions they did.

"Journal of Industrial Relations", September 1999.

But if you diagnose the problem is in those terms, then the obvious response is political action to change the institutional structure.  Which is what we see in the labour market re-regulation agenda.

The high point of the re-regulation agenda is the Victorian Fair Employment Bill as originally tabled in the Victorian Parliament on 25 October 2000.  It is such a high point, that I will concentrate on it because all the other versions are just lesser examples.

Some features of the original Bill are:

• Section 4 defines an employee for Chapter 3 of the Bill (Sections 101 to 114 dealing with workplace grievances and related matters) as including a person engaged to perform work under a contract for services and as an employer those for whom the services are contracted;
• Section 5, defined as an employee any person who is in a partnership larger than three (while such a deeming provision is in other legislation, it is the interaction with other provisions of the Bill one has to keep in mind);  it also defines an outworker to be an employee;
• Section 6 gives the Tribunal the power to declare persons to be employees;
• Section 7 declares those in receipt of labour hire services to be an employer in respect of the individual providing the services;
• Section 8 defines an outworker as including a clerical worker working from home;
• Section 45 establishes a legislative right to long service leave;
• Section 49 provides a very generous definition of "one employer" for consideration of length of services;
• Section 51 provides a very generous definition of "continuous service";
• Section 53 provides additional considerations for length of service for casuals;
• Section 57 narrows the capacity to exclude persons from the above provisions;
• Section 77 voids any contract whose provisions are less than those of an industry sector order issued by the Tribunal;
• Section 93 made the principal contractor liable for the remuneration payable to employees of a subcontractor;
• Section 101 provides a broad definition of a workplace grievance;
• Section 107 gives Tribunal broad powers to revolve such grievances;
• Section 108 grants Tribunal power to declare and to rewrite contracts deemed unfair;
• Section 109 gives Tribunal partial power to override Fair Trading Act with respect to unfair contracts;
• Section 110 provides a six year limit for former employees to bring a workplace grievance action;
• Section 114 gives the Tribunal wide ambit for its conciliation and mediation services;
• Section 155 gives the Tribunal wide investigative powers;
• Sections 225-9 grant extensive powers of entry to registered organisations (such as unions)

The Bill also sets up a wide range of prosecutable offences

What the Bill is about is trying to draw the IR net so widely that no-one can escape.  In the past, as legislation has loaded more and more costs and liabilities on the mode of employment known as permanent employment, people have moved to other modes of employment.  (This is standard Coasian economics:  increase the transaction costs of a particular mode of operation -- such as permanent employment -- and other modes -- such as casual employment -- will become increasingly used, including moving transactions outside the firm entirely -- such as through contracting out and labour hire).  So the Bill has been set up in such a way as to cover all modes of employment.  This is also Federal Labor policy:  item 76 of the decisions of the recent Hobart Conference says

The protection of the industrial relations system should be extended beyond a narrow definition of employees to include those in employment type relationships.

The effect in the Fair Employment Bill as originally tabled is to cover all commercial contracts relating in any way to the provision of services except those elements protected by Federal law.  Attempting to effectively re-write the law of contracts in such a fashion and in such a way was bound to create all sorts of stupidities and anomalies:  such as long service leave for babysitters and housecleaners, fights between partners in a family farm going to the Tribunal with someone suddenly claiming all their back and holiday pay, etc.  What the Bill does is set up a whole series of loaded guns in the hands of entrepreneurial lawyers.

There seems to be two prongs to the motivation.  The first is that the unions' problem is seen in terms of shifts to other modes of employment which are less friendly to them.  As a diagnosis of their basic problem, this strikes me as simply false.

The second prong is that, by creating a Tribunal which they can expect to functionally dominate -- or which, at least, gives them much wider range of operation -- they can effectively herd workers back into the union movement.

Again, I think this is just false.  I see no particular reason why unions will be advantaged against lawyers and other private advocacy services.  Any benefit to unions on either account is likely to be far smaller than they expect.

The social costs imposed, however, are likely to be very large.  Everyone in the debate admits the Bill will cost jobs:  the only question is how many.  The problem here is that estimating lost jobs is difficult since the prime variable used to do so is increase in wages or in total labour costs, and I don't believe that will be the main effect of the Bill.  The main effect of the bill will be to massively increase commercial uncertainty and transaction costs.  People will not know whether the arrangements they enter into in good faith will stand up under Victorian law or not, whether they will be suddenly re-written and so forth.  (For example, to return to the family farm case, under the original Bill, arrangements made on the basis that partners were "residual claimants" to income could suddenly become employment arrangements).  While the effect will be particularly strong if and when the Bill first becomes law, I see no reason why it will not be a continuing one.

That being the case, the effect on Victorian employment could be very deleterious indeed, though it may take quite a while to show up.  It will only take a few horror cases for firms thinking of establishing or expanding operations in Victoria to move elsewhere and the slow accumulation of non-arrivals will eventually show up in higher unemployment.

So Victorian workers will pay in reduced employment prospects, with these costs likely to be extensive.  But they will also pay in other ways.  First, the union movement will continue to be focused on politics and regulatory-games, rather than customer service.  Even if workers are, as I doubt, herded back into unions, it will not be because unions are providing better services or are less official-captured or more customer-focused, it will be because of legislative privilege.

Second, the costs of this vast new regulatory structure (which will extend way beyond the administrative costs of running the new Tribunal and its officers) will have to be paid for, and they will be paid for by reducing the potential returns to capital and to labour.  A key reason why mining companies have been able to offer individual contracts to workers which increase their wages is that, by sidestepping complex arrangements, resources are released which can be shared between labour and capital.  The orders of tribunals do not, except in the short-term, increase the returns to labour, they merely re-arrange them, since employers make hiring decisions on the basis of the total cost of labour.  And regulatory impositions and expenses are included in that total cost.  (It is in the interests of union officials to separate out the returns to labour into a variety of "bits" -- a variety of leaves, special allowances, etc -- so they can laud what a good job they are doing getting the latest extra bit:  when managers and workers deal more directly, it is in their interests to bundle them up into as simple an arrangement as possible, to minimise the administrative expense).

A group of workers who will be particularly disadvantaged will be workers in regional Victoria, since the imposition of rules to suit Melbourne on the whole of Victoria cannot but disadvantage regional workers.  Consider what would happen if petrol could only be sold in the country at the same price as it was in Melbourne:  petrol availability would drop dramatically.  Given the lower shelter costs of regional Victoria, regional workers do not have to be paid as much to have an equivalent income.  Forcing the same rates across the State will mean that a range of cost differences will not be taken into account, disadvantaging regional Victoria.

The public claim in support of this Bill is that a lot of low-wage people, particularly in regional Victoria, are slipping through the cracks in the current system.  When examined, this proves to be spurious.  First, there are plenty of avenues in the current system to deal with such issues -- better enforcement and approaches to the AIRC, for example.  Second, the average wage on the Schedule 1A system which this Bill seeks to replace is actually higher than those on federal awards and, given the different levels of coverage, there are actually slightly more people on low wages under federal awards than Schedule 1A.  Third, the Bill is just a more complete version of the re-regulation agenda which has been working it ways around the States and which has nothing to do with the specifics of the situation in any particular State and everything to do with using political privilege to revive the union movement.  That the agenda is an Australian-wide one -- as Robert Gottliebson set out in The Australian a fortnight ago -- is not something, however, that The Age has seen fit to inform its readers:  but that would involve treating its readers with respect rather than as an audience for its staffs' moral preening.

Looking further at the data, we can see a pattern of higher wages in Melbourne and lower wages in regional Victoria under Schedule 1A -- which indicates that the system is responsive to different costs structures in different parts of Victoria.  Finally, the attempt to race the Bill through the Victorian Parliament as quickly as possible shows that the advocates are fearful of closer examination of the actual provisions of the Bill.

The attempt to co-opt the language of public debate by use of the term "Fair Employment" is certainly one of the problems those who wish to preserve the integrity of the commercial contract system in Victoria have to deal with.  There has also been a program of moral and other intimidation -- the alliance forged over the WEF demonstrations between union movement and the SII activists network being seen with the FairWare campaign and scenes of attempted intimidation in the Legislative Council chambers.  This program has proceeded in the normal modern moral vanity style (with The Age, of course, leading the way) using what I call the motivational fallacy -- this Bill is about fairness, you are a critic of this Bill, therefore you are against fairness.

But the Bill is not about fairness, it is about power.  As originally drafted, it is about creating the power of third parties to intrude into just about any commercial contract in Victoria pertaining to the provision of services and re-arrange it if it is convenient for them do so.  But that is not only an assault on the integrity of the whole structure of contract law, it is an assault of property rights of a most basic kind, since if one cannot use one's property as one sets fit within a secure and clear ambit of law, those property rights have been gravely reduced or, in the extremity, voided.

As my colleague Jim Hogget points out, it is also an assault on individual rights.  Individuals need to be able to contract freely with each other to suit there own specific and changing needs.  This is a personal freedom that allows them to optimise their own lives and is the basis of an efficient economy and society.  The existence of the new obligations in this legislation may appear to be a one-way bet for individuals, but not if it leads to the disappearance of opportunities to contract on a basis that suits individual needs.  It is facile to contend that the legislation does not limit individual rights if that outcome is because one party to the equation (the deemed employer) withdraws.  Loss of employment is not just a lost economic opportunity but arises more fundamentally from an attack on individual rights.

Many of the new class of deemed employers will themselves be individuals who also lose the right to contract on agreed terms.  They have the choice of accepting the uncertainty associated with a contract revocable at any time, including well after its conclusion, or not contracting at all.  In either case, there will be a loss of creative activity and employment as the deemed employer seeks to write complicated and expensive defensive contracts for those he does contract for services or employment -- or decides that it is not worth the effort and sits still or migrates.

Nor can Victoria wait for standard practices to evolve out of the new arrangements.  With the increasing range of telecommuting, the opportunities for migrating jobs without moving the business means that the most vibrant and modern service industries will be best placed to use avoidance strategies against this ring-fence legislation.  That does not just mean migration to NSW but also to Singapore and China.  Victoria is writing the script to ensure that it fulfils the worst fears of the unions, that it will retain the low-skilled low-paying jobs that cannot migrate -- the so-called Macdonalds economy.

Consider the situation of an IT worker operating from home at 2am for a client in London.  Does it make any sense at all to require that worker to charge, say, double or triple time?  Or do we treat them as mature adults able to make their own decisions?  Having Victorian IR law regulating our international transactions in such a way is just ludicrous.

As originally drafted, this Bill would make Victoria the place not to be, if you wanted any reasonable certainty in your contractual arrangements:  or even if you just wanted to be treated as a competent adult in your ordinary undertakings.  It remains an attempt to create legislative privileges to protect unions whose own members are deserting them.  What does it say about the Bracks Government that it is prepared to rewrite basic commercial law on the advice, and in the interests, of a union movement not competent enough to keep its own members?  That it is prepared to do so when the number of people in the "contract for services market" exceeds those who are private sector union members?  And what does it say about the Victorian business community if it cannot preserve the basic sinews of its existence, the integrity of commercial contracts?

On the last point, the early indications are, at best, mixed.  With the advent of organised opposition from employer groups, what started as an urgently needed structure to address manifest injustice suddenly became a negotiable ambit claim.  Negotiations then proceeded -- typical for a power grab -- on the basis of divide-and-rule.  About two weeks ago, the Victorian Government suddenly started floating amendment suggestions.  It has already moved amendments prior to the Bill passing the Legislative Assembly on 16 November and more are in the offing.  On Monday 20 November, the Bracks Government reached agreement with the HIA, the MBA, the VACC and the Road Transport Association (i.e. the housing, construction and car industries) that they would support the Bill, subject to promised amendments.  AIG, Retail Traders, VECCI and VFF all said it was news to them and currently still oppose the Bill.  (The MBA did say it would prefer that a State system not be re-introduced at all).  The Opposition has held the Bill over in the Legislative Council until March 6 2001, saying the sudden waves of amendments showed the Bill was flawed and required adequate time to consider.

The various amendments limit the capacity of the Tribunal to review "unfair contracts" to four specific groups of workers -- security guards, owner-drivers, cleaners and child-care workers.  The liability of principal contractors for remuneration payable to employees of sub-contractors is to be limited to outworkers.  (Of course, a principle established for specific groups is easily extendable at a later date:  the strategy of thinning the edge of the wedge).  The right of entry for union officials is to be limited to that applying in the Federal Workplace Relations Act.  The definition of employee has been tightened by dropping the provision covering persons in a partnership of more than three persons while the power of the Tribunal to declare persons to be employees has been limited to natural persons who consent in writing to such a declaration.  Such a declaration also will not be able to apply before the date of the decision.

These amendments simply further indicate the fundamental problems involved in trying to re-write basic contract law in such a way.  They can be classified as "but we didn't intend that" or as "oops, that upsets people too much" amendments.  By setting up limitations to general principles, or establishing principles for particular groups, the amendments leave the basic structure intact, and it is the basic structure which is fundamentally flawed and objectionable.

Whatever happens in the Victorian Legislative Council -- and it is to be hoped that the Bill is killed in its entirety -- Victorian events have revealed the full nature of the labour market re-regulation agenda.  It is an assault on the basic sinews of commercial operations and property rights which goes way beyond anything we saw with the traditional arbitration structure.  It reveals a power-obsessed union officialdom, presiding over an imploding union movement being destroyed by being captured by that officialdom, which is completely shameless in its willingness to grab for legislative privilege to protect its position.  It also reveals the ill-effects of having a party of government -- the ALP -- so beholden to a union movement which now represents a mere quarter of the workforce.

Australia and New Zealand share the dubious distinction of having the lowest rates of per capita economic growth in the developed world over the 120 years from 1870 to 1990, with economic growth rates per head less than half the developed world average.  It is open to doubt whether one can continue to have long-run growth rates that comparatively low without eventually sliding out of the ranks of developed countries.  Our comparative economic performances have been particularly bad since 1913 -- that is, after the full introduction of arbitration systems in both countries.  (Australia's performance in the 1960 to 1990 period was a bit less bad, largely due to the advent of a strong export mining sector).

In his brilliant book The Mystery of Capital, Hernando de Soto identifies six characteristics that well-ordered system of property rights have which allow assets to be turned into capital, thus creating the basis of sustained prosperity.  A well-ordered system of property rights:

• fixes the economic potential of assets;
• integrates dispersed information;
• makes people accountable;
• makes assets fungible;
• networks people;  and
• protects transactions.

The traditional arbitration structure violates most of those principles.  The new labour market re-regulation agenda, in its full form, attacks them directly.  The traditional arbitration system was perhaps the most destructive element in the public policy regime which gave Australia and New Zealand the lowest rates of per capita economic growth in the developed world.  Adoption of the full labour market re-regulation agenda by either country would mean that we really were choosing to become Third World countries by adopting a Third World institutional structure:  one where property rights are denied or fundamentally corrupted to suit the interests of narrow elites.

And to do so to suit the interests of a narrow clique of union officials which cannot retain the support of its own membership would not merely be a stupid act, it would be criminal one.