The "vegemite" syndrome

In a market economy scarce resources, including labour, are used, made idle and redeployed with frequent regularity as producers strive for new and better ways to serve customers.  During the good times, the retrenchment of a worker doesn't receive as much press coverage because, more often than not, the worker can find alternative employment options fairly quickly.

However, when credit availability tightens up and consumer demand slows down during a recession, the retrenchment of workers becomes more commonplace and news of massive job cuts dominates the headlines.

For industries that are prone to structural adjustment pressures, such as Australian manufacturing, a recession can bring on a wave of retrenchments.  The Australian Bureau of Statistics quarterly data on industry employment clearly shows that manufacturing had felt the pressure of the looming recession early.

Manufacturing sector employment in February last year was at a five year high of 1.12 million people.  However, by November employment declined rapidly by over 50,000 people.  The canary in the economic mine is in desperate need of some veterinary attention.

Given the fast pace by which the economic slowdown has occurred, hundreds of manufacturers have been forced to shed labour in order to keep their doors open.  In the most high profile case of recent weeks, Pacific Brands announced the axing of over 1,800 jobs mainly in Victoria, Queensland and New South Wales and the relocation of most of its operations offshore.

It is reasonable to ask why PacBrands has been the focus of negative publicity about manufacturing job losses in general.  There is little question that the company is being affected by the "vegemite" syndrome, otherwise known as the howls of protest that accompany the loss of domestic production for a household brand name.

As the maker of well known household clothing lines, such as Bonds, Berlei, Holeproof and King Gee, the adverse public reaction is perhaps not unexpected.  By the same token, the overly harsh criticism of PacBrands seems to be unfair given the labour shedding being conducted by other manufacturers and firms across the economy.

The more emotive the public outcry is, the greater potential for important facts to become distorted or ignored.  As difficult as the loss of 1,800 jobs is, the critics have ignored the fact that the company will retain about 5,000 workers in Australia.

A more insidious claim being made is that the company handed out pay rises for its executives, as it planned to retrench staff.  However, the increase in executive salaries reflected promotions into positions left behind by personnel who retired, as well as the appointment of staff midway through the previous financial year.  Importantly, the promotions also took place about 14 months before any redundancies were announced.

The federal government has also weighed in on the debate, with Prime Minister Kevin Rudd describing the PacBrands jobs decision as one that "absolutely stinks".  To some extent, the government's criticism is based on its eagerness to deflect public attention away from its failed economic policies.

After all, it was Treasurer Wayne Swan who boasted prior to Christmas that the initial $10.4 billion fiscal stimulus would be a catalyst for a "socks and jocks" recovery.  With evidence pouring in that Australians largely diverted their handout into savings, it is unsurprising that the cash splash was not enough for the company to retain 1,800 workers.

Even more disturbing is the government's use of the PacBrands decision to justify moves to further regulate executive remuneration.  As Swan recently stated, "to see that a privileged few are doing so well at a time when thousands of workers are being retrenched is frankly sickening".

It is typically difficult for politicians to appreciate that executive salaries reflect a combination of the limited talent pool that can capably run large businesses, the need for managers to exercise their unique skills in overseeing finances, personnel and operations, and the much higher risks of dismissal.  Just like footballers, actors or musicians, top flight executives are hard to come by and are thus remunerated appropriately.

Using PacBrands as a scapegoat to ram through executive pay controls would further distort the Australian labour market by deterring top ranking personnel from seeking positions in affected companies.  Whereas executive remuneration is determined by what the owners think they are worth to the company, a cap on executive pay would be determined by what politicians think the electorate would support.

The use of PacBrands as a political football increases the difficulty for Australian manufacturers during a precarious economic period.  The current debate also does not make life any easier for those people who had to swallow the news of their retrenchments.

The best thing that government can do is to improve the overall efficiency of the economy, so that PacBrands and others can get on with business and position themselves for investment and jobs growth during the next boom.

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