The Industrial Relations Club

CHAPTER 4

Shortly after his defeat at the March 1983 Federal election, Malcolm Fraser reflected on his period as Prime Minister and on the successes and failures of his Government.  In an interview with The Sydney Morning Herald Mr Fraser said that his greatest regret was that early in the government's term of office he had not initiated a referendum designed to obtain greater powers to act in the industrial relations area.

It was the 1981 wages explosion that wrought havoc on the Fraser government's economic policies and, perhaps more than any other factor, was instrumental in the March 1983 debacle.  The Whitlam government likewise was devastated by the consequences of the 1974 wages explosion.  And the substantial wage increases of 1959 and late 1970 did considerable harm to the electoral fortunes of the Menzies and McMahon governments in 1961 and 1972 respectively.

The message is clear.  Substantial wage increases (unmatched by rises in productivity) lead not only to higher inflation and increased unemployment -- they also undermine the electoral prospects of governments.

COMMONWEALTH POWERS

Successive Australian governments have had to accept responsibility for the economic consequences of wage explosions.  But the Commonwealth, unlike the States, has no power over wages (or prices) and can only directly determine the wages and conditions of its own employees.

Section 51(xxxv) of the Constitution gives the Commonwealth power to make laws with respect to "conciliation and arbitration for the prevention and settlement of industrial disputes extending beyond the limits of any one State".  In 1904 the Commonwealth formed the Conciliation and Arbitration Court (later renamed the Conciliation and Arbitration Commission) to prevent and settle industrial disputes.

The Commission is empowered to bring down awards and certify agreements where there has been an industrial dispute extending beyond the limits of any one State.  However, it is not too concerned with legal technicalities and sometimes hears cases in spite of the fact that its jurisdictional power is uncertain.  About forty per cent of Australian employees come under federal awards determined by the Commission;  about fifty per cent are covered by awards brought down by various State tribunals;  and the remainder are award free.  Over the years the Commission has become the accepted leader in determining overall wage levels by dint of its Basic and National Wage Case decisions.  It also determines many of the key awards and these have flow-on effects throughout the community.  But the various State tribunals are not compelled to follow its lead and, on occasions, have refused to do so -- usually deciding to be even more generous than the Commission.

THE CLUB

Industrial relations in Australia takes place in a club-like atmosphere.  The Club's high priests preside on the Conciliation and Arbitration Commission.  The majority of members of the IR Club are Melbourne-based;  those who are not have reciprocal rights.  The key IR institutions are located in Melbourne -- the Commission, Industrial Registry, Australian Council of Trade Unions (ACTU), Confederation of Australian Industry (CAI) and (until the early 1980s) the Department of Industrial Relations.  The National Labour Consultative Council (NLCC) consists of representatives from union and employer peak councils as well as public servants.  It provides advice to the government of the day on virtually all matters relating to industrial relations.  The Industrial Relations Society (which exists in all States as well as in the ACT and the Northern Territory) acts as a focal point for Club activities.  At its many and varied functions can be found members of employer and employee organisations, public servants, academics, journalists and industrial lawyers -- all of whom have a vested interest in the perpetuation of the system.

There is much emphasis on wine and song (industrial relations is still very much a male preserve).  Participants at the 1982 convention of the Industrial Relations Society of Victoria were formally advised of the advance planning which had been undertaken by the organisers:

For the discerning palate we have again chosen what the Convention Sub-Committee and proxies consider to be an excellent variety of wines.  These will be served with meals during the Convention (excluding breakfast of course).  The following list gives a sample of things to come ... ⁽¹⁾

Many an Australian liver has been damaged in the cause of industrial relations.

The Club's verbalisers and writers traditionally behave in a discreet manner.  There are few journalistic scoops in the industrial relations field.  Industrial journalists rarely describe the murky side of Club life.  There is very little reporting on how deals are negotiated.  Scandals and corruption within unions (e.g. the Builders Labourers Federation) are rarely first revealed in the media.  This is partly explainable by the fact that journalists mix more readily with unionists than with employers.  As a former ABC reporter put it:

The geographical location of the industrial round is a traditional thing and for 50 years most of the major media organisations in Victoria have operated a Trades Hall rounds bureau and have got their news there or across the road at the Trades Hall pub ... ⁽²⁾

Lesson for employers -- if you want better industrial coverage change your drinking habits.

Most academic members of the Club also refrain from any deep critical analysis of the IR system.  Those academics who comment in the media on industrial relations invariably preach the Club philosophy.  For example, during strikes they urge moderation and further talks leading to additional concessions.  They are all for the carrot but see no role for the stick.

One of the many perks available to Club members is the opportunity to participate in the annual pilgrimage to Geneva, the home-base of the International Labour Organisation.  The ILO is the IR equivalent of the United Nations.  It has many members from countries where free trade unions and strikes are illegal.  This does not prevent its plentiful bureaucracy from moralising incessantly about the problems faced by oppressed workers in Western societies.  The current issue of the ILO's house journal contains an article by a Soviet government official entitled "Workers' Participation in Occupational Safety and Health Matters in the USSR".  (Don't hold your breath waiting for an ILO analysis of forced labour in the Soviet Union.)

Clyde Cameron (a former Minister for Labour in the Whitlam government) has written of the "joint junketing" engaged in by members of the IR Club.  He suggests that a key concern of members of the National Labour Advisory Council (the predecessor of the NLCC) was to arrange copious overseas trips -- frequently at taxpayers' expense -- to investigate this or that industrial problem. ⁽³⁾

ECONOMICS AND INDUSTRIAL RELATIONS

The IR Club exudes an ethos of complacency and self-congratulation.  Here can be found men and women who are truly reasonable and moderate.  They alone understand industrial realities;  they alone know how the system works;  and it is they who can do deals and fix agreements.  Within the Club there is no time for confrontation.  Rather, sweet reasonableness prevails.  The task is to secure industrial harmony.  Economic realities take what is very much second place, if that.

From an economic point of view the C&A Court (the Commission took over some of the functions of the Court when established in 1956) got off to a bad start.  Its first President, Mr Justice Higgins, in the 1907 Harvester Judgment stated emphatically that wages should not be determined by the "higgling of the market" but rather by what was "fair and reasonable".  To Higgins, profit levels were not relevant to determining what was fair and reasonable for an employer to pay.  In 1909 Higgins declared that it would be better for an employer to go out of business rather than pay his employees less than the fixed rate.  The responses of the employees who lost their jobs as a result of this decision have not been recorded in industrial relations lore.

The Higgins philosophy prevailed until the 1920s -- when increasing consideration was given to the capacity of industry to pay.  Over the last sixty years the Court has oscillated as to the weight that should be given to economic considerations.  For example, in 1931 the basic wage was reduced by ten per cent but at other times significant wage increases have been granted irrespective of any increase in productivity.

The IR Club has been very harsh on those members of the Court or Commission who in their judgements have placed emphasis on curbing inflation and the necessity for wage restraint.  In 1953 Chief Judge Kelly brought down a majority judgement which abolished quarterly cost of living adjustments and ruled against any increase in the basic wage.  In 1965 (also a majority judgement) the Commission ruled that there should be no increase in the basic wage and, in doing so, stressed the importance of the capacity of the economy to pay.

The 1953 and 1965 decisions made sound economic sense but were treated with disdain by most members of the IR Club.  Mr R.J. Hawke (then in his pre-reconciliation days) described Sir Raymond Kelly as an "Irish pig farmer". ⁽⁴⁾  Justices Sweeney and Nimmo, who were the key figures in the 1965 majority decision, were literally sent to Coventry -- neither sat on a Commission Full Bench again and in 1969 both left the Commission to take up positions in the judiciary.  It is fair to say that the opposition to Justices Sweeney and Nimmo came not only from the union side but also from employer members of the Club and some fellow members of the Commission.

In 1982 one Commission judge suggested that the 1931 decision to reduce wages by ten per cent constituted a "leap into the dark". ⁽⁵⁾  This claim flies in the face of the evidence that those with jobs during the Depression did quite well.  The Depression was devastating for those without jobs but not for those who had to accept a ten per cent wages cut at a time of deflation.

Sir Richard Kirby (who was made President of the C&A Commission in 1956) was in the minority in 1953 and 1965.  He was instrumental in securing the overturning of both decisions -- in 1959 and 1966 respectively.  Up to his retirement in 1973, Kirby was the key figure in Australian industrial relations.  He was succeeded as President of the Commission by Mr Justice Moore (who was knighted in 1976).  According to his biographer Blanche d'Alpuget, Sir Richard Kirby "found in Moore a common desire to help the underdog".  This kind of statement harks back to the days of Mr Justice Higgins.  Indeed Kirby has described Higgins as a "courageous industrial reformer" and d'Alpuget has written that Higgins "was the chief judge most admired by Kirby". ⁽⁶⁾

Both Sir Richard Kirby and Sir John Moore have frequently argued that, so far as the Commission is concerned, economics should take second place to industrial relations.  In his dissenting judgement in the 1965 National Wage Case, Mr Justice Moore stated:

It is a question of competing priorities;  whether the Commission should act as if its primary function were to attempt to create or sustain a favourable economic climate and its secondary function were to attempt to resolve problems of industrial relations or whether the last is the Commissions's primary function and the first its secondary.  In my view the Commission should always give priority to problems of industrial relations.

Recently Sir Richard Kirby was still defending this approach.  He wrote:

... [M]any consider that the Commission should go as far as it can to achieve some sort of economic policy, whether in line with that of the government of the day or otherwise.  I am of the strong opinion that it should not ... ⁽⁷⁾

THE I.R. ETHOS

The tendency to regard industrial relations as some kind of "art" or "science" with a life independent of economic realities or government policies has been a prevailing Club orthodoxy, especially in times of prosperity.  Certainly within the Club there are internal divisions, conflicts and competing interests.  But what divides Club members is of less significance than the IR ethos that unites them.  Central to this ethos is a conciliatory attitude that sanctifies consensus and opposes sanctions.

Consensus is reached by negotiation or -- to put it bluntly -- by doing deals.  In the early stages of any dispute the concept of ambit is very much to the fore.  Both sides make ambit claims more substantial than they hope to achieve.  Protracted discussions then take place -- very often as adversary proceedings before the Commission.  Eventually a negotiated settlement is reached which invariably fails to satisfy the aspirations of either party.  Thus are sown the seeds for further disputation which will, in turn, lead to further claims, more negotiations and yet another settlement.  Once again emphasis will be placed, from the Commission down, on the necessity for conciliation and compromise leading to concessions.  This commitment to consensus goes hand in hand with opposition to the exercise of sanctions.  To members of the IR Club the very concept of punishing unions for award breaches is almost anathema.

Since 1956 the Commission has not had the power to enforce its own awards, orders and agreements.  This situation was welcomed by Sir Richard Kirby who wrote in 1967 that:

[I]t is ... beyond controversy that the system works better when the arbitrating body has not the responsibility and distraction of enforcing awards.  It is all to the good that the Commission's statutory aim of promoting goodwill in industry by conciliation and arbitration should not be made more difficult by the conflicting power of punishment ... ⁽⁸⁾

The Industrial Court (the functions of which were taken over by the Federal Court in 1977) was willing -- perhaps at times too willing -- to impose fines for breaches of bans clauses which had been inserted in particular awards by the Commission.  But in the late 1960s the Commonwealth government backed down on collecting fines imposed by the court -- with the result that penal sanctions have been, in fact if not in law, virtually a dead letter since then.

If an employer breaches an award, he can be prosecuted under the Conciliation and Arbitration Act.  But unions are not bound by awards to the same extent as employers;  moreover, if a union commits an award breach it is virtually never prosecuted.  To the members of the IR Club this is described as "industrial realism".

LEFT AND RIGHT TOGETHER

The existing IR system is particularly kind to unions -- whether they be of the left, right or centre.  While these groups differ markedly on broad political issues they share many common IR positions and most of their leaders fit readily within the Club.

The left is entrenched in the heavily protected secondary industries.  Consequently its leaders consistently call for wage increases and greater protection.  Mr John Halfpenny (of the AMFSU) has threatened the Commonwealth government that his union might drop its support for the wages-prices accord unless additional protection is given to the manufacturing industry. ⁽⁹⁾

The right and centre would agree that the tariff walls should be built even higher -- irrespective of the deleterious impact on consumers and importers.

The right is strong in the white collar and services industries.  Its leaders are highly suspicious of new technology and extended shopping hours.  Mr John Maynes of the Federated Clerks Union has argued that "for Indian domestic purposes, the open-hearth method of steel manufacture, as opposed to the oxygen-injected method, is preferable". ⁽¹⁰⁾  Better Ghandi than Lee Kuan Yew.  Mr Jim Maher of the Shop Distributive and Allied Employees' Association (SDA) believes that the housewife has only a certain amount of money to spend on groceries each week.  Consequently it "doesn't matter what time she shops, she has, or he has, this fairly fixed amount of money to play around with". ⁽¹¹⁾  One wonders what explanation Mr Maher would give for the consistent high level of savings in banks and building societies.  But it is doubtful if such a critical question would come from the left or the centre.

The attitude of the SDA to hours of work is not inconsistent with the views expressed by Mr Justice Macken of the NSW Industrial Commission.  Justice Macken has called for the abolition of scaled union pay rates in industries that employ children as casual and part time workers.  In his view the fast-food industry is particularly "notorious" in this regard. ⁽¹²⁾  It would seem that if the judge had his way all employees in fast food outlets would be on adult pay (including penalty rates).  McDonald's would still have it all for you -- but you would no doubt have to pay more.

The centre is no more rational when it comes to economics than the left or right.  A year ago ACTU President Cliff Dolan came up with the novel suggestion that a job-generating inland diversion of NSW coastal rivers could be financed from a special note issue:

You print the money to do the job and then call it back and burn it. ⁽¹³⁾

An incinerator-led recovery, no less -- but one in which the right and left would be happy to participate.

POWERS OF THE CLUB

A key sector of the Australian economy is virtually controlled by Club members.  The Commission determines overall wage levels which have a direct impact on Australia's ability to compete on world markets.  The Department of Industrial Relations advises the Government on industrial relations issues -- including wage policy and proposed amendments to the C&A Act.  Union and employer members of the Club have considerable influence with the ALP and the coalition respectively.

Club members have been so successful in promulgating their IR ethos that it has become one of the sacred cows of Australian politics.  This was reflected in the Searby/Taylor Report on the Conciliation and Arbitration Act.  In April 1981 the Fraser government appointed consultants to examine the Act and make recommendations on how it could best be simplified and clarified.  The consultants were provided with support staff from the Department of Industrial Relations.  Mr Searby QC is a prominent Victorian Barrister and Mr Taylor is a former Deputy President of the C&A Commission.

In their report Messrs Searby and Taylor commented on the manner in which the "industrial relations community" frequently disregarded the "more general provisions of the Act" in its concern "to arrive at a resolution of an industrial situation".  The consultants continued:

Accepted practices have, accordingly, been long engrained.  Some of them depend upon cases but others are unwritten:  all have become part of the fixed impedimenta.  There is a developed lore by now built in to the operation of the system.  If a provision of the Act were to be altered significantly, in such a way as to preclude the parties from acting in the way they have become accustomed to under the umbrella of the Act, the operation of the system would be damaged. ⁽¹⁴⁾

The Searby/Taylor Report suggested that the existing "norms of established utility" should not be upset.  The implication was that an elected government should tread warily before changing the existing IR system or the "lore" that sanctifies it.

This graph illustrates that (after a certain time lag) substantial hikes in average weekly earnings are invariably followed by peaks in unemployment.

Sourced from Aust. Bureau of Statistics' figures contained in the following:  Australian Economic Statistics:  1949-50 to 1978-79, Reserve Bank of Australia, Occasional Paper No. 8A, July 1980;  Average Weekly Earnings, Australia, March Quarter 1983 (Preliminary);  and The Labour Force, Australia, May 1983 (Preliminary).

EVALUATING THE CLUB

Mr Alan Wood of Syntec Economic Services recently referred to the "Melbourne industrial relations establishment" as a "group which, if judged on results rather than intentions, has done more to create rising unemployment than any other like-sized group in this nation". ⁽¹⁵⁾  Mr Stan Carter of Western Mining Corporation echoed these sentiments when he claimed that it "would be a revelation and a wonder for all to behold if the public was given the Club's achievements during the last 20 years in the field of industrial relations". ⁽¹⁶⁾  After about eighty years of almost untrammelled influence in the industrial relations field, the Club has little to show for its efforts.  In spite of all the rhetoric, industrial disputes in Australia remain at unacceptably high levels.  Take the shipping industry for example.  In the five years to January 1980, Australia accounted for forty-three per cent of international insurance claims arising from industrial disputes;  yet during this period Australian cargoes amounted to only ten per cent of total international shipping.  Australian strikes have a particularly harmful effect on our international trade because they are so unpredictable.

Despite prevailing myths, there is no evidence that the IR Club has been successful in bringing about a very much more egalitarian wages structure in Australia than that which exists in those countries where collective bargaining, rather than centralised wage fixing, prevails. ⁽¹⁷⁾  If the total workforce including the unemployed is considered, there is no evidence that the outcome is egalitarian.

Another Club-promoted illusion is that a commitment to consensus and compromise leads to more harmonious industrial relations.  But the fact is that in recent years employees in countries such as Japan, the United States and West Germany have been more willing to moderate wage demands to preserve the jobs of fellow workers than have their colleagues in Australia.

Measured by the incidence of industrial disputation and the high levels of inflation and unemployment, the Club can hardly be classified as one of Australia's more successful institutions.  And yet it has one of the most enticing career structures in Australia -- all the way up to the most glittering prize of all, a position on the Commission itself.

CLUB LIFE IN THE FRASER YEARS

Prior to his election as Liberal Party leader, Malcolm Fraser was Opposition spokesman on industrial relations.  While in opposition the Liberals issued two policy documents on industrial relations -- in April 1974 and July 1975.  The former was quite moderate;  the latter somewhat tougher.  Mr Fraser's 1975 election speech contained little specific on industrial relations.  On its election to office the Fraser Government came face to face with the harsh realities of Australian industrial relations.  It inherited not only a system that operated without sanctions but also a wages policy that was built on inflation.

In 1967 the Commission introduced the total wage -- previously there had been a basic wage plus margins for skill.  The total wage concept had the strong support of employers but it contained unforeseen consequences.  In 1975 the Commission brought in wage indexation which differed significantly from the cost-of-living adjustments which had existed from 1922 to 1953 since it provided for indexation of the total wage.  Under automatic cost-of-living adjustments it was the basic wage only -- and not margins -- that was indexed.  Wage indexation had the effect of enshrining existing high levels of inflation into the wages structure.

Any realistic assessment of the Fraser government should acknowledge that it did not approach industrial relations with a big stick.  Of the four Liberal Ministers for Industrial Relations, three (Tony Street, Andrew Peacock and Ian Macphee) stressed the necessity for compromise and consensus.  The only exception was Ian Viner -- who lasted for only thirteen months.  Mr Viner was the only one of the four not readily accepted within the IR Club.  Dr Anne Summers has written that Ian Viner did not spend much time in the Melbourne central office of the Department of Industrial Relations.  Moreover he was "not around for the informal gatherings where relations are forged and, sometimes, problems sorted out" and (horror of horrors) he did not attend Melbourne (VFL) football matches on Saturday afternoons. ⁽¹⁸⁾

Certainly the Fraser government threatened much Draconian industrial legislation.  But little of it was actually introduced and virtually none of it was implemented.  The system remained without real sanctions and the comfortable IR Club was disturbed but a little.  The popular perception of the Fraser government was that it was opposed to a consensus approach to industrial relations.  But the facts suggest otherwise.

SUCCESSES OF THE FRASER YEARS

The Fraser government achieved some important successes in the industrial relations field.

First, it created an awareness of the economic problems inherent in increasing wages without an increase in productivity -- for inflation and unemployment.  In 1976 the C&A Act was amended to require the Commission to consider the likely effects of its decisions on the levels of employment and inflation.

Second, the December 1982 wages pause was a truly significant success -- given the traditional opposition of the IR Club to this concept.  The Commonwealth argued for a twelve months freeze.  The Commission decided on a six months pause which was to be reviewed at the end of the 1983 financial year.  It is interesting to note that it was not only union members of the Club who opposed the Commonwealth's case.  The Director of the Victorian Chamber of Manufacturers, Mr Brian Powell, was quoted as supporting a six months pause but not one that would last for twelve months since such a proposal was unrealistic.  Mr Powell also suggested that there should be guaranteed pay rises at the end of a six months pause because this would be in the best interests of industrial relations:  "I don't see our position as being weak", he declared, but "if we aren't bloody-minded with the unions now they probably won't be bloody-minded with us in six months." ⁽¹⁹⁾

Mr Ian Spicer of the Victorian Employers Federation went even further, claiming that "a wages freeze by itself won't work, that there has to be some monitoring of prices, and that the system by which that occurs would probably have to wait another day". ⁽²⁰⁾  And the then Minister for Industrial Relations, Mr Ian Macphee, was reported as having informed journalists in a background briefing that employers might settle for a three to four months wages pause ⁽²¹⁾ (note that at this time virtually all employer organisation were advocating nothing less than a six months freeze and the CAI was eventually to argue for twelve months).  Some months earlier Mr Macphee had been even less optimistic.  He suggested that although unions in export competitive countries were accepting real wage cuts because of the economic downturn, he did not believe it was realistic to expect union leaders in Australia to advocate reductions in real wages. ⁽²²⁾

One of the lessons of the wages pause should be that industrial relations realists are often wrong -- their predictions are as fallible as anybody else's.

Third, the government's most important legislative initiatives were taken with reference to its own employees and public sector unions.  By means of the Commonwealth Employees (Employment Provisions) Act;  the government on occasions took action against Commonwealth public servants who were participating in what was deemed to be unreasonable industrial activity.  In addition, in 1981 military aircraft were used to mount a relief operation for stranded Australian and New Zealand tourists who were victims of a Qantas industrial dispute.  After a few days the strike was ended.

Finally, the Trade Practices Act was amended with the intention of prohibiting secondary boycotts which were designed to damage a particular business or substantially lessen competition in a market.  Section 45D of the Act was used or threatened with considerable effect in certain specific cases.

FAILURES OF THE FRASER YEARS

The most notable failure of the Fraser government was the 1981 wages explosion which did grievous harm to its economic policies.  Certainly the government did not initiate the wages blow-out -- responsibility for this must go to the unions concerned and the ACTU which urged its constituents to obtain higher wages and shorter hours by direct negotiations with employers (who, at times, were State governments) outside the existing wage guidelines.  But it could have resisted the 1981 development with greater fervour.  Certain employer groups, as well, should have fought much harder to moderate wage increases.

The 1981 wages blow-out provided a salutary-lesson on how a government can be undermined by industrial relations developments over which it has no direct power.  From the time of its election in December 1975 the Fraser government stressed the necessity for wage restraint.  It consistently argued before the Commission that indexation should be discounted to take account of certain government decisions and international developments and it continually stressed the damage that existing high levels of inflation would do to the economy and, in particular, to employment.  The unions, on the other hand, argued for full indexation which was to serve as a base for additional wage increases which were to be achieved by means of "work value" cases and, where possible, individual agreements with employers.

Evidence presented at the Economic Summit indicates that from 1974-75 until 1979-80 there was a downward trend in wages share as compared to profits.  But the wages share increased again in 1981-82 and this continued into the first half of 1982-83.  The consequences can be seen in the significant increase in unemployment that occurred in 1982 and early 1983.

In 1981 there were an increasing number of agreements on wages and hours reached between unions and employers -- in spite of the fact that they were outside the existing wage guidelines.  In addition some State tribunals commenced giving wage increases in excess of those laid down by the Commission in national wage cases.

On 24 July 1981 the government met senior ACTU officials -- in the presence of Sir John Moore.  Apparently employer interests were not invited.  At this time Australia was in the grip of several severe industrial disputes -- especially in the transport, Telecom and shipping areas.  Both the government and the ACTU agreed that the wage fixation principles "should not operate to prevent a resolution or prevention of industrial disputation by inhibiting the examination of claims on their merits".  The end result was that industrial peace was won -- but at a heavy cost indeed.

On 31 July 1981 the Commission, in a two-page judgement, abandoned wage indexation but replaced it with no alternative system.  The government had not advocated this -- but the Commission's decision was welcomed by Mr Viner.  What had been envisaged as the solution to the 1974 wages explosion had proved to be manifestly incapable of dealing with its 1981 successor.

When the Commission abandoned wage indexation in July 1981 it did not abolish centralised wage fixation.  Rather the Metal Trades Award became the unofficial pace-setter in determining wages and conditions.  In December 1981 metal trades employers (after experiencing sustained industrial pressure for a lengthy period) reached an agreement with the unions over pay and conditions.  This settlement amounted to an average increase in hourly wages of about twenty-five per cent.  This increase was later reflected in other awards as what the IR Club euphemistically calls the "community round" of subsequent award adjustments took effect.  As Mr Justice Ludeke pointed out in June 1982, the metal industry agreement virtually took over the place previously occupied by wage indexation. ⁽²³⁾

The unintended consequence of the resultant wages explosion was a worsening of the economic climate and substantially increased unemployment -- especially in the metal trades industries.  Unfortunately the government's temporary weakening of resolve in mid 1981 strengthened both the private and public sector unions' hand at a crucial period.  It was to suffer for this in the March 1983 election.

The second failure of the Fraser years was that little was done to disturb the complacency of the IR Club.  By and large the government's industrial advice came from within the Club (i.e. the Department of Industrial Relations and the National Labour Consultative Council).

Finally, in spite of the considerable amount of legislation that was passed, little effective action was taken to protect the rights of individuals who incurred the displeasure of unions -- particularly independent contractors and the self-employed.

MR HAWKE'S OPPORTUNITY

Prime Minister Hawke (as a former leading participant) has an unparalleled knowledge of how the IR Club works.  Consequently he had a unique opportunity to break the vicious cycle of increasing wages (unrelated to productivity growth), high inflation and sky-rocketing unemployment.  The question is whether he will use this knowledge to attempt to circumvent the influence of the Club, or whether he will seek to govern by means of "deals" and "fixes" with influential Club members.

At the April National Economic Summit the government indicated that its preferred wages policy (Scenario A) was one that would allow for a small increase in 1983 and full wage indexation in 1984.  In advocating this option the Government effectively negated a proposal (Scenario C) that there should be no additional wage increases until April 1984 and then only partial indexation.  This scenario was rejected in spite of the fact that it would have led to lower unemployment and lower inflation then any other proposal discussed at the Summit.

Mr George Polites (the Director-General of the Industrial Council of the CAI) informed the Summit that in his view Scenario C was "perhaps beyond the limit of available consensus". ⁽²⁴⁾  And yet the official CAI policy is for no wage increase at least until the end of 1983 -- i.e. it is broadly consistent with Scenario C.  The Summit's technical committee (which consisted of, among others, employer and union representatives) was somewhat blunter.  It described Scenario C as not "fully consistent with the [ALP-ACTU] prices and incomes accord as it now stands and might well be judged unrealistic on industrial relations grounds". ⁽²⁵⁾

According to IR Club members, the Hawke government's proposal to end the wages freeze is (you've guessed it) "realistic".  This is in spite of the fact that a recent Morgan Gallup Poll demonstrated that seventy per cent of Australians wanted the pause extended until the end of December 1983. ⁽²⁶⁾  It indicates just how far the Club is removed from the day-to-day concerns of ordinary Australians -- many of whom belong to organisations headed by Club members.

SOME POSSIBLE REFORMS

No effective attempt can be made to achieve long-term reforms in industrial relations unless due consideration is given to the role and attitudes of the IR Club.  Wherever possible, responsibilities should be taken away from Club members;  where this is not feasible Club members should be made responsible for the consequences of their own decisions.

As an initial step, the Commission should be given power to enforce its own awards.  (This proposal, which formed part of Mr Fraser's March 1983 policy statement, would require a constitutional amendment.)  It is a sound principle that bodies that make decisions should be responsible for the consequences of their own actions.

In the enforcement of awards/agreements no distinction should be made between the legal obligations imposed on the various parties, whether they be individual employers, employer organisations or employee organisations.  Awards should be equally enforceable on all parties -- or none.  It may be necessary to enshrine this principle in the C&A Act.

As previously indicated, the Fraser government altered the C&A Act to ensure that the Commission took note of inflation and employment when arriving at its decisions.  This section of the Act should be further amended to require that the Commission produce impact statements on the likely economic consequences of its own judgements -- with particular emphasis on employment.  It is worth noting that, at present, the Industries Assistance Commission is required to give much more detailed emphasis to the impact on employment of its recommendations than is the Conciliation and Arbitration Commission.

Consideration should be given to abolishing the power to vary an award as set down in the Act. ⁽²⁷⁾  At present an award, once made, can be varied by the Commission if one of the parties creates a new industrial dispute.  In March 1975 Mr Clyde Cameron remarked that an agreement that had been negotiated in April 1974 was subject to an arbitrated award variation some five months later.  The abolition of the power to vary would necessitate that all the parties give greater thought to the actual construction of awards and would ensure that awards were regarded as having a more binding, long-term nature than is presently the case.

For many years, wage levels in Australia have been determined by both national wage decisions and collective bargaining.  The results of collective bargaining are usually enshrined in an award by the Commission (which, at times, plays an active part in the actual negotiations).  Traditionally the Metal Trades Award has been the wage pace-setter in the collective bargaining area.  As a result wage levels have very much been determined by one of the least competitive (and most protected) areas of the Australian economy.  This anomaly cannot be overcome by tinkering with the wage determination system.  Rather the Industries Assistance Commission should be required (either by government instruction or, if necessary, by legislation) to take account of wage agreements when determining appropriate levels of industry protection.  Those industries which have become less competitive as a result of wage increases should not be able to recoup their losses by means of higher tariffs and quotas.

Wherever possible, provisions relating to rights of individual members of organisations (whether employer or employee) should be taken out of the industrial relations area and placed instead in "human rights" type legislation.  Whatever the intention of the legislature, it seems that the IR system is not well attuned to protecting individual rights.  This reflects the fact that the C&A Act places primary emphasis on the rights of registered organisations.

Individual employers should be encouraged to offer their workers a "no-strike" end of year bonus. ⁽²⁸⁾  This would give workers a clear incentive not to strike and would assist certain employees who wish to oppose a union directive at the shop floor level.

CONCLUSION

There is no simple solution to Australia's industrial relations problems.  Nor can there be.  The IR Club is almost eighty years old and its impact cannot be suddenly overturned.  Ironically the Club's longevity is used as a rationalisation for its continued existence.  The Liberal spokesman on employment, Mr Ian Macphee, has disparaged the view that "somehow 80 years of history" can be banished. ⁽²⁹⁾  Normally this would be regarded as a tradition-bound (almost reactionary) position.  But to members of the Club it is simple realism -- nothing more, nothing less.

A reforming government which seeks to achieve changes in industrial relations will have to take on not only the union leadership and the IR bureaucracy -- it will also have to confront the industrial "heavies" in some employer peak councils.  This is no mean task, as Malcolm Fraser found in early 1980.  Then the CAI's George Polites (who was described in the National Times as a "man so powerful ... that he has been known not to bother to return a telephone call from a Cabinet minister") publicly commented:

Our policy is to work within the framework of conciliation and arbitration.  If Fraser pushes for a tough attitude on penalties by the employers we would still be aiming for conciliation and arbitration. ⁽³⁰⁾

Simple solutions do not violate the laws of economics.  But they do violate the laws of politics.  As Max Weber pointed out, politics is about slow boring through hard boards.  At times there will be opportunities for change -- if only because there will continue to be competition within employer and employee organisations as well as between them.  These divisions will provide possibilities for reform -- provided governments and individuals grasp the nettle.

At the moment there is some evidence of an increasing awareness among certain members of the Club (employer representatives, unionists and Commission members alike) of the importance of economic factors.  In recent years there have been several important decisions of the Conciliation and Arbitration Commission that have explicitly recognised the capacity of individual employers and/or industries to pay wage increases.  This is an important breakthrough which indicates that some members of the Commission are becoming increasingly conscious of the economic consequences of their decisions.  Let a hundred realists bloom!

On the wages front there can be no panacea.  Over the years virtually all systems of national wage determination have been tried and found wanting.  The current debate over the virtues or otherwise of centralised wage fixing misses the point.  What matters is not so much who makes wage decisions, but whether they are made according to tough-minded economic criteria.

If the majority of members of the IR Club continue to disregard the harsh realities of the economy, the Hawke government (or any Liberal successor) will have no option but to use fiscal and monetary policies to ensure that the lid is kept on wages and conditions except where there has been a manifest and demonstrable increase in productivity.  To fail to do so will be to ensure eventual political demise amidst ever rising inflation and unemployment.

---

ENDNOTES

1.  The Sydney Morning Herald, 11 April 1983;  see also Australian Financial Review, 11 April 1983.

2.  I. Baker, "The responsibility of the media in industrial relations". Paper delivered to a seminar on "Industrial Relations and the Media" at the Footscray Institute of Technology, 18 April 1980.

3.  C. Cameron, Unions in crisis, Melbourne, Hill of Content, 1982, pp 121-139.

4.  Quoted in Australian Financial Review, 21 August 1980;  see also B. d'Alpuget, Robert J. Hawke:  a biography, Schwartz, 1982, p 99.

5.  Mr Justice Ludeke, quoted in The Australian, 17 December 1982.

6.  B. d'Alpuget, Mediator:  a biography of Sir Richard Kirby, Melbourne, Melbourne University Press, 1977, p 163, p 114.  See also the reference in note 7 at p 160.

7.  Sir Richard Kirby, "Conciliation and arbitration:  can governments control it?" in K. Colke (ed.), Power, conflict and control in Australian trade unions, Ringwood, Pelican, 1982, p 166.

8.  Sir Richard Kirby, "Conciliation and arbitration in Australia -- advantages, defects and trends", supplement to The Chartered Secretary, July 1967, p 6.

9.  The Age, 18 June 1983.

10.  J.P. Maynes, "New technology and unemployment", The Australian Computer Journal, May 1979, p 72.

11.  Melbourne Sun, 17 September 1981.

12.  Melbourne Sun, 7 November 1980.

13.  Melbourne Herald, 20 August 1982.

14.  Report by consultants to Department of Industrial Relations, October 1981, p 6.

15.  Business Review Weekly, 18-24 September 1982.

16.  Business Review Weekly, 9-15 October 1982.

17.  L.G. Rowe, "Reason, force or compromise:  egalitarian wage structures under bargaining and arbitration", Journal of Industrial Relations, June 1982, p 245.

18.  A. Summers, "A sandgroper's view of industrial relations:  Ian Viner as Minister", Journal of Industrial Relations, September 1982, p 457.

19.  The Age, 29 November 1982.

20.  The Age, 27 November 1982.

21.  Workforce, No 420, 10 November 1982, p 1.

22.  The Age, 15 May 1982.

23.  Melbourne Sun, 23 June 1982.

24.  National Economic Summit Conference Documents and Proceedings, Vol 2, Canberra, AGPS, 1983, p 125.

25.  Business Review Weekly, 23-29 April 1983.

26.  The Bulletin, 17 May 1983.

27.  This suggestion was made in July 1981 in a paper written by Mr J.D. Keary.

28.  See the letter by H.W. Arndt in Australian Financial Review, 20 August 1982.

29.  The Sydney Morning Herald, 26 May 1983.

30.  The National Times, 30 March 1980.

Justice Higgins: architect and builder of an Australian folly

CHAPTER 3

On 27 August 1984 Mr John Stone, then soon to resign as Secretary of the Treasury, gave the Edward Shann Memorial Lecture at the University of Western Australia.  In his lecture Stone described Henry Bournes Higgins as the "post-Federation regulator par excellence".  Stone continued, "He was the man who, as Mr Justice Higgins, won renown, as Shann said, 'by renovating as a novel extension of democratic jurisprudence the mediaeval idea of the just price'."  Other references to Mr Justice Higgins are found in Stone's text.  For example:

In Shann's day, things had not approached that pitch of idiocy in these matters which has laid so sharp an axe at the roots of our national productive capacity today.  Nevertheless, even by 1930 they had gone a fair way.  Under the benevolent hand of Mr Justice Higgins and his disciples, for example:

The fear of discontent was held to justify awards of the same basic wage in different industries, on the ground that unequal wages were "anomalies over which men brood" [Shann].

The doctrine of capacity to pay, which to any person of ordinary common-sense (that is, the great bulk of the Australian people, both in 1930 and now) would appear to have a certain compelling quality about it, had been heavily frowned upon in the earlier history of the Arbitration Court.  Let Shann take up the story:

Even this rule of thumb recognition [of the doctrine of capacity to pay], however, was a breach in the rampart of sacrosanctity.  In 1909, Mr Justice Higgins ruled that the Federal Court could not prescribe a lower rate [of pay] in order to keep an unprofitable mine going.  "If shareholders are willing to stake their own money on a speculation, they should not stake part of the employees' proper wage also" [Higgins].

However, in those days some working men at least not only possessed more commonsense than Mr Justice Higgins (and nothing has changed in that regard) but also were determined that their own commonsense should prevail over such nonsenses as he and his fellow regulators would have forced upon them.  As Shann records:

The propriety of a wage, the legal award of which would also abolish their jobs, was not plain to the copper-miners at Wallaroo and Moonta in South Australia in 1921.  They entered into an industrial agreement to work, while the market for copper was low, for less than the basic wage and the usual margins.  This agreement the Federal Court somewhat reluctantly recognised.

Stone's lecture is significant in many ways but his sustained, acerbic comments on Higgins constitute the most significant attack on the founder of our arbitration system since Prime Minister Billy Hughes sought to undermine Higgins in 1917.

That his attack had found its target was soon evident.  In the transcript of the Hancock Enquiry (Committee of Review into Australian Industrial Relations Law and Systems), a fortnight after the Shann oration, we read the following exchange between Mr Charlie Fitzgibbon, former Federal Secretary of the Waterside Workers' Federation and Vice President of the ACTU, and Mr Simon Crean, currently Federal Secretary of the Storeman and Packers Union:

Mr Fitzgibbon:  There has been a well publicised paper delivered recently in which the suggestion that the major cause for youth unemployment is the rate of wages paid to youth.  Do you have any views on that?

Mr Crean:  We have some very strong views on it.  In the first place, it is certainly not our view that the rate of wages paid to youth is the cause of youth unemployment.  The problem with youth unemployment is the problem with unemployment generally, and that is that there just are not sufficient jobs because of the state of the economy.  We have never accepted the argument the level of wage rates is the cause of unemployment whether one takes it on a sectoral approach or overall.  The real problem in this country, in terms of employment opportunities, is that we have gone through a very severe recession which we are just starting to come out of, and, in our view, will take us some time to get out of.

These arguments come from the heartland of Australian trade unionism.  Mr Simon Crean, although a young man, is a widely respected and distinguished trade union official who, it is often suggested, will succeed Mr Cliff Dolan as President of the ACTU.  Another response to John Stone's attack on Higgins came from Higgins' biographer, the Monash historian John Rickard.  Rickard's biography of Higgins was published in September 1984 and was subsequently awarded the 1984 David Syme Prize for Biography.  In a radio interview following this award Rickard said that Stone's remarks were "a kind of back-handed tribute to what Higgins really achieved in setting a certain standard of living".  Rickard has performed a public service with his biography of Higgins.  He is a great admirer of Higgins, and his excellent biography is written with a sympathy which, whilst not entirely uncritical, is pervasive and warm.

It is the outstanding merit of this sympathetic book, and of its author, that those readers who are armed with a few basic facts of Australian economic history will quickly reach the conclusion that Higgins was a nut;  a nut who, to the great detriment of his country, found himself able to give legal form and substance to his fantasies.

What were the essential features of the Australian society of 1870 to which Higgins and his family migrated from Ireland?  How did Higgins make his way from obscurity to national fame?  What are the consequences of his career?  Answers to these questions tell us much about our current difficulties.

The most important fact about Australia in the latter part of the nineteenth century is that its people were, in per capita terms, the richest in the world.  This wealth was based on the production of commodities for world markets, particularly British markets.  The commodities were wool, wheat, gold, silver, and base metals, and the economic opportunities generated by these industries transformed Australia from a collection of colonies numbering some 400,000 people in 1850 to a nation of 4.5 million in 1900.

We, who were once so rich, have now become relatively poor.  This impoverishment has so far been relative, as the countries of the west Pacific -- Japan, Singapore, Taiwan, South Korea -- one by one catch up to us in per capita income and then, seemingly inevitably, overtake us.  But our relative decline will just as surely turn into an absolute decline.  This economic decline (which we can summarise as our pursuit of the Argentinian dream) will force our children and grandchildren to choose between staying at home as international paupers or emigrating to other countries where opportunities are greater.

There are, I suppose, a number of institutions that have contributed significantly to our economic decline, but in any catalogue of them the Commonwealth Conciliation and Arbitration Court, and its child the C & A Commission, would have to occupy first place.  A study of this quixotic institution must begin with its founding father, Henry Bournes Higgins, and the society in which he became first very rich and then influential and powerful but, in spite of this, always remained a crank.  Eccentrics and nuts are always more interesting than ordinary, sane folk, and Rickard's absorbing account of Higgins, who, at least in terms of far reaching influence, must be accounted as one of Australia's most damaging and delusioned nut cases, reveals just how malleable Australian society was at the time of Federation.

In the fifty years after 1851, when gold was discovered, nearly three and a half million immigrants arrived in Australia.  Most of them came in sailing ships, on a three month voyage which took them in sight of icebergs at 60°S, on a great circle route.  Most would never be able to revisit their birthplace.  They came to better themselves;  to earn more than they could ever hope to earn back home;  to try their luck in the hope of getting a fortune.

One such migrant was Anne Higgins.  She arrived, with four children and a servant, at Port Melbourne in the heat of February 1870.  Her eldest son, 18 years old, was Henry Bournes Higgins.  He suffered from chronic respiratory ailments and his health had been one reason for the decision to emigrate.  On arrival the young Henry noted in his diary:

At Melbourne we were struck with the extraordinary bustle and activity.  Everything seemed on the move, very different from the staid gentility and begging poverty of Dublin.  No beggars were discernible.  The horses were driven with furious rapidity and urged mercilessly through thick and thin.

Henry's health improved greatly in Melbourne.  His scholastic record from Ireland enabled him to get a job teaching with little difficulty.  There were then no teachers' registration boards and no diploma of education requirements to obstruct or restrict those who wished to try out their skill at teaching.  Aided by his employer, a Scot from Ayrshire who ran a small private school in Fitzroy (this was, of course, prior to the 1872 "free, secular, and compulsory" education act), Henry pursued his studies, matriculated and won exhibitions which enabled him to study at the University of Melbourne as a scholarship holder.

The subjects that enthralled him, and at which he excelled at the young university, are significant:  Latin, Greek, mathematics, and Roman history.  Henry Higgins enjoyed a classical education, and it is a fair inference that he absorbed in his studies of the great Latin authors the distaste for the market place that was characteristic of Roman society.  Roman citizens could not be shopkeepers.  They could be farmers, they had to be soldiers (at least in the early days of the Republic), but trade and commerce were looked on with disdain.  The Roman economy was kept going by slaves or Greeks or other non-citizens, who acted as middlemen, merchants, shopkeepers, speculators, and traders, often as agents for Roman principals.  This classical distaste for market processes was to find judicial expression in the BHP case of 1909 where Higgins condemned bargaining and the higgledy-piggledy of the market place.

As well as the great Latin poets, Higgins devoured John Stuart Mill, Herbert Spencer, and, significantly, the intellectual founder of socialism, the archetypal social engineer, Auguste Comte.  He was also thoroughly acquainted with Adam Smith and, through the influence of Professor W.E. Hearn, thought of himself as a Liberal free-trader.

Henry Higgins's father, John, had been a Methodist clergyman in southern Ireland.  When he arrived in Melbourne in October 1870, he found himself in the humiliating position of being rejected by the Victorian Methodist Church and obliged, eventually, to take up home missionary work with another connection.  John was something of a dreamer, and Ann Higgins's drive and ambition were now directed to forwarding her children's careers, Henry's in particular.  Despite his brilliance in the classics, and offers of academic posts, she encouraged him to persevere with preparing for the Bar.  She listened to him for many hours as he read aloud, practising like Demosthenes, to overcome the stutter which would have been a major impediment to a young barrister.

The nineteenth century saw a determined assault on the intellectual pre-eminence of the established churches.  Darwinism, the battle over evolution, the development of an anthropological view of religion, which reached its high point in 1890 when Sir James Frazer's The Golden Bough was published, are evidences of the battlefield.  Frazer was two years younger than Higgins, but the same currents that swept Frazer to fame carried Higgins into anxious doubt.  He found those he revered at the University, the writers he admired, to be sceptics to a man.  He committed his doubts and anxieties to paper, but in cipher lest his family should learn of his questioning and doubt.  Loss of religious faith in an heir to strong religious commitment and tradition is a very frequent forerunner of political commitment and political activism, and so it was with Henry Higgins.

In 1876 Higgins was called to the Bar, his nominees being one of his law lecturers and, through his mother's initiative, Victoria's radical liberal leader George Higinbotham.  Higgins concentrated in equity, began making money in 1879, married Mary Alice Morrison (eldest daughter of Dr George Morrison, the founder of Geelong College) in December 1885, and felt secure enough financially to take 1886 off to travel the world with his bride.  When he resumed his practice in January 1887, he was 35 years old and leader of the equity Bar in the fastest growing city in the world.  His mother must have felt greatly satisfied at the transformation that had occurred as a result of that decision to emigrate eighteen years before.

Australia's wealth in the nineteenth century was based on the sale of commodities on the world market.  In the 1890s commodity prices collapsed, and the wool growers, in particular, found themselves in financial crisis.  They sought to share their financial problems with their shearers and station hands, who responded by joining the AWU and engaging in prolonged and bitter industrial campaigns.

The collapse of commodity prices came soon after the collapse of the Melbourne land boom.  The transition from golden boom to leaden bust had been quick.  In 1893 most of the Melbourne banks closed their doors for a week.  There was widespread unemployment, social unrest, and great bitterness.  Many leading Victorian politicians of the eighties and nineties had been deeply implicated in the financial scandals of the land boom.  Even Alfred Deakin, then a luminary of the Victorian Parliament and close protegé of David Syme, was not free of taint.

It would have been much better for the health of Victorian politics if those who had been implicated in the scandals had been driven from public life.  But there seemed to be bipartisan support for a minimum of fuss.  Higgins had not been involved in land speculation, which he regarded with distaste.  His earnings at the Bar had made him wealthy, and his support for Irish Home Rule, as a nominal Protestant but good friend of the Irish Catholics, gave him political advantages in certain electorates.

In 1892 Alfred Deakin urged him to stand for the Victorian Parliament.  Higgins contested Geelong, where his wife's family was very prominent, and lost by a small margin.  The next election was called in 1894, at the depth of financial depression.  As is always the case at such times, the political debate was dominated by economic soothsayers and nostrum-sellers.  Higgins was much influenced by Henry George and he campaigned on a platform of taxation on unimproved value of land, and abolition of plural voting.  (Plural voting allowed for a property-based franchise as well as adult male franchise.)  Nettie Palmer, Higgins's niece, tells the following story in her biography of her uncle:

To this plural voting H.B. Higgins was definitely opposed, and in his opening speech he told the electors so as plainly as possible.  According to this new proposal, he said in a parenthesis, Judas Iscariot would have two votes because he bought a field with the price of his iniquity, whereas Christ would have only one vote, as He had no place to lay His head.  A day or two afterwards his secretary came to him in the committee-room, gloomy and troubled, telling him that one X, who had given him his vote and powerful influence at the last election, had announced that since this Judas Iscariot speech he would vote against him.  Higgins asked why:  had he been thought irreverent or profane?

"No," replied his secretary, "but you were wrong.  You said that Judas Iscariot bought the field, and it appears that it was the priests who bought it."

So the candidate looked again into the Scriptures and found that he was wrong according to St. Matthew, but right according to the Acts of the Apostles!

Higgins on this occasion topped the poll and became the Member for Geelong in the Victorian Parliament.

The 1894 Parliament, reacting to the grim economic conditions of the time (albeit Australia was still better off than the UK or the USA or anywhere else in the world) embarked on a massive programme of nanny legislation.  It is difficult to avoid the suspicion that for many of those public men who had done very well out of the land boom, and who had extricated themselves out of the bust with minimum honesty, this nanny legislation provided a convenient method of assuaging their guilt.  In 1895, the Chief Secretary, Mr Peacock, brought in a Shops and Factories Bill and stated that, whereas two years ago he would not have dreamed of a minimum wage for women and children, the conditions of sweating revealed by the investigations of Mr Harrison Ord had appalled him, and he had had the task of educating his colleagues.

Higgins played a prominent role in these developments.  In the debates on sweating he argued that inspectors should have authority to enter private homes where women worked for piece rates.

The greatest evils of sweating existed not in the factories, though these were bad enough, but where only one or two persons work.  Cases are known such as that of a woman sewing fifteen or sixteen hours daily in her "home" to make nine shillings for her invalid husband.  To those who object that the State should not interfere with what goes on in private homes, I reply that to "interfere" with workers in such conditions is no more than interfering to protect a prisoner in his cell.  Every worker should be under an inspector:  it has been too much the custom to play off the out-workers against the in-workers of a factory, keeping down the conditions of both.

And to those parliamentarians, who attempted to stem the flow of regulatory sentiment and legislation with Ricardian and Smithian arguments of supply and demand, he counter-attacked in bitter terms:

He had been amused by what had been said by the hon. member for Eastern Suburbs about the liberty of the subject. ... The hon. member assumed a degree of free will on the part of those helpless people that they really did not possess.

In the course of 20 years Higgins had moved from the position of a poor student imbued with Gladstonian liberal ideals of individual liberty and free trade to that of a wealthy and influential barrister who supported protection and was prepared to extend the role of the State to that of intruder/inspector into the homes of citizens.  Working wives were placed in the same category as convicted prisoners.

Higgins played a pivotal role in the adoption by the Constitutional conventions of 1897-98 of what is now paragraph (xxxv) of section 51 of the Constitution, the conciliation and arbitration power.  He was narrowly elected as tenth and last Victorian delegate after having been endorsed by the Melbourne Age.  As the conciliation and arbitration proposal was defeated twice before Higgins and C.C. Kingston succeeded in persuading the Convention, by a very narrow majority, to adopt S.51(xxxv), it is entertaining to speculate just how much harm was caused by the editorialist -- perhaps it was Syme himself -- who slipped Higgins's name onto the list of candidates recommended by the Age as worthy to be elected by Victorians to the Constitutional Conventions.  Without that endorsement, Higgins could not have scraped home in the poll, and without the single-minded tenacious advocacy and wirepulling of Higgins there would have been no Conciliation and Arbitration power, no Commonwealth C&A Court and all that followed from it.

After six years as the Federal member for North Melbourne (totally dependent on the Irish-Catholic Labor vote for his success in that electorate) and a brief spell as Attorney-General in the Watson Labor government of 1904, Higgins was appointed by Alfred Deakin to the High Court in October 1906, just in time to avoid defeat in North Melbourne by an endorsed Labor candidate.

Twelve months later he succeeded Justice O'Connor as President of the Commonwealth Court of Conciliation and Arbitration, an institution which the Federal Parliament had established in 1904, using the power of S.51(xxxv) which Higgins had so strenuously pushed through the Constitutional Conventions.

It is noteworthy that three ministries (including the Watson Ministry) died during the drafting and passage of the legislation establishing the Court, and during Higgins's long presidency it remained a subject of political debate.

In his fourteen years as President of the Conciliation and Arbitration Court, Higgins worked long hours, heard many cases, and got himself involved in some notable arguments.  In 1914 a Deputy President was appointed to share the growing workload but, because of the intrinsically arbitrary nature of decision making and the fundamental incompatibility of Higgins's mediaeval vision of economic "justice" with a market economy, particularly an economy based on producing commodities for world markets, disagreements between President Higgins and Deputy President Powers soon became acute.

Higgins's prestige and authority with the trade unions was based primarily on political factors.  As an advocate, although a Protestant, of Irish Home Rule, he had solid support from the Irish-Australian community.  The trade union movement was not an Irish preserve, but the Irish found trade unionism very congenial and took to the tribal rhetoric and politics of unionism with enthusiasm.  After World War I and the conscription referenda Irish influence in the trade union movement and the ALP increased greatly.

Higgins's decisions and the language he used were Aristotelian and mediaevalist in doctrine and sentiment.  This made his work appealing to the Roman Catholic hierarchy, and he was often in correspondence with the archbishops of Melbourne and Sydney.

Two of Higgins's cases merit detailed discussion:  the Harvester case of 1907 and the BHP case of 1909.  The Harvester case has become standard copy in school textbooks.  It had its origins in a deal done to get tariffs through the new Commonwealth Parliament.  Tariff protection was to be granted only to those industries which paid "fair and reasonable" wages.

So H.V. McKay, inventor of the Sunshine Harvester and in 1907 Australia's largest manufacturer of agricultural implements, duly asked the new President of the Arbitration Court to grant him the required certificate.  One can only sympathise with McKay as he slowly realised the trouble he was in.  Higgins seized the opportunity to decide what was fair and reasonable.  As he later wrote in the Harvard Law Review:

Many household budgets were stated in evidence, principally by house-keeping women of the labouring class;  and, after selecting such of the budgets as were suitable for working out an average, I found that in Melbourne, the average necessary expenditure in 1907 on rent, food and fuel, in a labourer's household of about five persons, was one pound twelve shillings and five pence, but that as these figures did not cover light, clothes, boots, furniture, utensils, rates, life insurance, savings, accident or benefit societies, loss of employment, union pay, books and newspapers, tram or train fares, sewing machine, mangle, school requisites, amusements and holidays, liquor, tobacco, sickness or death, religion or charity, I could not certify that any wages less than 42 shillings per week for an unskilled labourer would be fair and reasonable.

This paragraph summarises the fantastic nature of Higgins's mind.  To him the ups and downs of economic fortune and of market prices, the vagaries of the seasons, the decline of orebodies or the discovery of new orebodies, the demanding process of wealth creation was unknown and unappreciated.  Here was a lawyer gone quite crazy.

But the political structure supporting the tariff arrangements was so delicate that no substantial political interest was prepared to make the effort to turn this new development into a laughing stock.  McKay subsequently went to the High Court and got Higgins's judgement disallowed.  But the damage was done.  The idea that wages could be determined by judicial decree was firmly embedded in the Australian consciousness and has remained there ever since.

The BHP case is of greater consequence.  Here Higgins went much further down the road of Platonic guardianship than he had dared to do in 1907.  He was venturing into an industry fully exposed to the ups and downs of the international market place, an industry for which tariff protection was merely an additional cost burden.  The story of the strike at Broken Hill in 1908-1909 is succinctly and vividly told by Geoffrey Blainey in his The Rise of Broken Hill, but in the context of the development of Higgins's theories of wages and markets the important thing is that Higgins laid down a doctrine of bankruptcy rather than adjustment as a response to falling market prices.

If a man cannot maintain his enterprise without cutting down the wages which are proper to be paid to his employees ... it would be better that he should abandon the enterprise.

and

If shareholders are willing to stake their own money on a speculation, they should not stake part of the employees' proper wage also.  (emphasis added)

These two cases summarise Higgins's theories.  Wages, judicially determined after consideration of current consumption patterns, were to be inviolable.  Unemployment was preferable to any adjustment to changing market conditions.  No doctrines could be more damaging to Australia's position as a commodity producer for world markets.

The most illuminating postscript to the Higgins story is the tale of the Foster pound, told by Blanche D'Alpuget in her fascinating biography of Sir Richard Kirby.

In February 1949 the metal trades unions applied to the Court for variation of the basic wage in their awards.  The hearing was a mammoth one, interrupted by strikes for which two unions were deregistered, the striking out of claims by six other unions because of misbehaviour, the coal strike, difficulties of interpretation of new legislation and political pork-barrelling in the general elections of December 1949 in which Chifley lost office.

On 12 October 1950 the bench gave its decision after 122 sitting days, 6950 pages of transcript, 440 exhibits, and 125 witnesses.  The Chief Judge, Sir Raymond Kelly, was determined to use his authority to fight inflation.  He was not prepared to give the unions any increase at all.  Judge Foster had decided to recommend an increase of one pound -- the largest increase proposed since Higgins's Harvester judgement.  But Foster, believing that Judge Dunphy would inevitably come to terms with his fellow Catholic, Chief Judge Kelly, arrived at this figure confident that it would be nothing more than a glorious gesture:  Dunphy was proposing ten shillings, Kelly was adamant that he would support no increase;  by the ordinary rules of politics Dunphy and Kelly would eventually agree to a compromise of five shillings.

About a week before judgement was to be given Dunphy went to Kelly and proposed to him again that they compromise at five shillings.  Kelly would not agree.  Forty-eight hours before judgement day Dunphy returned to Kelly and told him that he believed to award nothing would be wrong, and that therefore he had decided to side with Foster.  Kelly was thunderstruck but he still refused either to compromise or to hold a conference with Foster.  Dunphy re-wrote the last few pages of his judgement;  Kelly tacked onto his a final sullen paragraph stating that he was in a minority;  but it was not until half an hour before going into court that Dunphy informed Foster of his decision.

Foster, said Dunphy, was "not delighted so much as astounded".

In 1921, at the age of 70, Higgins declined to offer himself for re-appointment to the Arbitration Commission, believing perhaps that Prime Minister Hughes would delight in appointing someone else over him.  His last years were spent in literary pursuits, in seeking to build up the prestige and strength of his Arbitration Court, in following the troubled course of Irish affairs and in fulfilling his duties as a High Court Judge.  He presented his Harvard Law Review articles to the University of Melbourne, as publications to be recognised for the granting of a doctorate.  After his death in January 1929 his place on the High Court was taken by Owen Dixon.

One wonders if he was ever troubled by intimations of the damage the Arbitration Commission, the institution to which he had been father, midwife, and builder, had caused and would increasingly cause to the land to which he had come as a bronchial eighteen year old.

Real wages and employment -- an econometric view

CHAPTER 2

THE QUESTIONS

The questions examined in this chapter are:

1. Do real wage rises destroy employment?
2. If so, why?
3. Is there any way out of the current unsatisfactorily high levels of unemployment?
4. Are the answers to the above questions mainly reflections of an economist's ideology, or can policy perspectives be reached which are largely independent of such subjective viewpoints?

THE EFFECT OF REAL WAGES ON EMPLOYMENT

By the real wage is meant the money wage deflated by some index of the general level of prices.  For our purposes, the consumer price index (CPI) will serve as deflator.  We need to distinguish between real wages as a cost to employers of labour, and real wages as take-home pay (i.e. as disposable income).  The former is important for labour demand because to the users of labour it represents a major component of costs.  As a very rough rule, in a typical industry total costs split about 50:50 between the purchase of inputs of materials and services, and the costs of labour and capital.  The latter two are referred to collectively as "primary factor costs", in which the typical split between labour and capital is of the order of 65:35.  Thus directly labour represents about 33 per cent of total costs (i.e. 100 x 0.5 x 0.65).  In an environment of wage indexation, however, the costs of material inputs and services tend to move with labour costs, so that a 10 per cent increase in real wages leads to an increase in costs greatly in excess of 3.3 per cent.

In emphasising the importance of real wages as a cost, we are following the neo-classical tradition.  The Keynesian tradition, on the other hand, stresses the role of real wages as take-home pay.  Before proceeding we should note that real wages as a cost and real wages as disposable income are not necessarily equal.  First, and foremost, real wages as a cost include a host of items not normally thought of as "take-home pay".  These include:  workers' compensation insurance premiums, the cost of paid holidays, payroll tax, employers' contributions to superannuation, and (in some cases) several other fringe benefits.  Many of these items may correctly be regarded as income-in-kind, since they cannot be cashed and used at will for other purposes.  But they are not a discretionary component of individuals' expenditure.

An increase in disposable income leads to an increase in commodity demand.  In a situation of general unemployment, such a fillip to the economy is magnified via a multiplier sequence.  From this point of view, an increase in real wages as disposable income is desirable since it leads via the expansion of commodity demand to an increased demand for labour;  i.e., to more employment.  The proponents of this Keynesian view of the world tend not to be overly concerned with what happens on the cost side.

In a justly famous article, Professor Trevor Swan points out that in an economy which is open to international trade both the level of aggregate commodity demand and the domestic (e.g. Australian) level of costs need to assume appropriate values if we are to have a satisfactory level of employment without experiencing difficulties with our balance of trade. ⁽¹⁾  Figure 1 illustrates his argument.

Figure 1 Swan Diagram The curves A1, A2 and A3 show combinations of real wage levels and aggregate commodity demand which keep employment constant.  The constant level of employment along A3 is higher than that along A2, which in turn exceeds that along A1.  The curves B1, B2 and B3 represent three constant levels of the balance of trade surplus.  The constant value of the surplus along B1 exceeds that along B2 which exceeds that along B3.  A2 represents full employment.  The B curves become steep after their intersection with the A2 curve because increases in real spending with a fixed trade balance, irrespective of Australian competitiveness, become impossible after all resources are fully employed.  (After Swan [1955])

Increasing the aggregate level of real expenditure (also called real absorption or aggregate demand) in the economy tends to lead to a deterioration of the trade balance:  imports increase and exports fall.  This occurs first because buoyant demand conditions spill into imports and lead to additional domestic use of exportables, and second because of the inflationary impact of the additional expenditure.  This second effect acts to restrain exports because their prices are determined in world markets more or less independently of Australian export volumes:  Australian producers are poorly placed, therefore, to pass on cost increases resulting from additional inflation.  Moreover, our more vulnerable import-competing industries are disadvantaged relative to imports, and hence contract.  In the face of the increase in aggregate demand, therefore, the trade balance can be preserved only if there is a compensating improvement in the international competitiveness of our import-competing and exporting industries (which, of course, is the opposite of what tends to occur naturally).  Such an improvement in Australian competitiveness could be achieved by a reduction in Australian real wage costs.

In Figure 1 the curves labelled B1, B2 and B3 indicate combinations of Australian competitiveness and of aggregate demand in Australia which are consistent with given balance of trade positions.  Thus, on each of these B-curves the balance of trade is constant.  The trade balance on B1 is more favourable than that on B2 which in turn is more favourable than that on B3.  The reason that the B1 curve lies above the others is that more favourable domestic cost conditions are required, at any level of aggregate demand, to achieve a large balance of trade surplus than would be required to achieve a small one.

Increases in real wages (that is, decreases in our international competitiveness) lead to falls in employment.  This is because of the deleterious effects (noted above) of the resultant cost increases on the performance of exporting and import-competing industries.  In a situation of slack labour markets such as Australia has experienced since the mid-1970s, it is reasonable to assume that there is a virtually unlimited supply of labour available at the going real wage.

An increase in real aggregate demand for commodities, therefore, leads to an increase in employment.  Thus as real expenditure increases, employment demand will be kept to a given level only if there is a compensating deterioration in our international competitiveness.  This explains why the curves A1, A2 and A3 in Figure 1 slope downwards from left to right.  On each of these curves the level of employment is fixed.  A3 shows a higher (fixed) level of employment than do the other curves.  This is because at any given level of aggregate demand a lower real wage (i.e. a more favourable competitive position) will lead to a greater volume of employment.

The Swan diagram illustrates the following two-instrument two-target problem:  having selected a desired level of employment and a desired balance of trade position, find the levels of aggregate demand and of real wages necessary to achieve these goals.  If these desired levels are A2 for employment and B2 for the trade balance, then in terms of Figure 1 the solutions are W* for real wages (equivalently, C* for competitiveness) and D* for aggregate demand.

O.R.A.N.I. ESTIMATES OF THE SWAN DIAGRAM

The policy debate in Australia largely hinges on different conceptions of the slopes and positions of the A and B trade-off curves shown in Figure 1.  This is essentially an empirical matter.  The characteristics of these curves depend on many hundreds of thousands of parameters relevant to the behaviour of economic agents in the Australian community.  To aggregate these micro-behavioural parameters sensibly requires a formal modelling framework.  Such a framework is provided by the ORANI model of the Australian economy. ⁽²⁾  With such a model it is possible to obtain quantitative estimates of the degree of restraint in real wages and of the expansion in aggregate demand which would be required to achieve given employment and balance of trade targets.

The ORANI model is solved in terms of percentage changes in its variables.  It is designed to answer hypothetical questions such as:  If the real wage were to be increased, relative to some control scenario, by x per cent, by what percentage would employment demand differ from the value it would have taken in the absence of this increase in real wages?  We can think of the control scenario as the point E in Figure 1.  In terms of percentage changes, this is represented by 0 (no change).  Thus the point E in Figure 1 becomes the origin in the percentage change version of the Swan diagram shown as Figure 2.  We have chosen as our external balance target no change on the balance of trade:  hence the trade-off line for this goal passes through the origin.  Implicit in this treatment is the assumption that the initial trade balance position E in Figure 1 is satisfactory.  For our employment target, however, we have looked to an improvement of 5 per cent over the initial situation.  (If we had selected a more ambitious employment target, the A trade-off line would have been located upwards, and to the right, of that shown in Figure 2.)  According to a recent version of the ORANI model, to achieve our targets would require real wage costs to be restrained by about 5 per cent, and aggregate demand to be stimulated by about 4 per cent. ⁽³⁾  (In an earlier version, the corresponding percentages were estimated as 6 and 3 respectively. ⁽⁴⁾

ANSWERS TO QUESTIONS 1 AND 2

We can now answer the first two questions posed in this chapter.  Yes, increases in real wages which are reflected in real labour costs do cause employment demand to be less than would otherwise be the case.  In a situation in which employment is less than full, therefore, rises in real wage costs actually destroy employment.  This conclusion is inescapable for an internationally trading economy because of the need for its exporters and import competing industries to keep their costs in line with their overseas competitors.  To fail to do so leads to a balance of trade deficit which cannot be eliminated without a fall in aggregate demand and in employment.

This conclusion holds equally under pegged and flexible exchange rate regimes;  that is to say, changes in the nominal exchange rate ($A per $US, say) are only relevant to the extent that they change real cost levels in Australia.  A nominal devaluation, therefore, cannot have more than transitory impact on our international competitiveness unless it succeeds in holding down real wage costs or the real return on capital.  Because of the international mobility of the latter, a squeeze on profits cannot be maintained for long without a collapse of investment. ⁽⁵⁾

Figure 2 Percentage Change Version of Swan Diagram The line B shows combinations of wage restraint and demand stimulation which maintain the initial balance of trade position.  The A line shows combinations of these variables consistent with a 5 per cent improvement in employment.  According to the ORANI model, simultaneous achievement of both targets requires an increase in real expenditure of 3.7 per cent accompanied by a reduction in real wage costs of 4.9 per cent.  (Source:  Parmenter [1983])

POLICY OPTIONS (AN ATTEMPT TO ANSWER QUESTION 3)

If alleviation of unemployment can be achieved by moderation in real wage costs and expansion of aggregate demand, one may well ask why governments have not implemented such a policy.  One answer, of course, is that they have tried to do so.  The problem is that neither real wage costs nor real aggregate demand are under the direct control of the government.

In the case of wages, the Arbitration Commission makes decisions whose independence is guaranteed by statute.  The federal and State governments of course can, and do, seek to influence such decisions by their submissions to the Commission (especially in national wage cases).  Not all wage decisions, however, follow this institutionalised path:  private treaties account for some of the wage bargains struck.

Governments, by borrowing and/or by manipulating tax rates, are able, within very wide limits, to finance any targeted amount of nominal (i.e. money) expenditure.  True, to the extent that the rate of inflation is affected by the amount of government expenditure, government has less direct control over real expenditure than over its nominal value.  Moreover, the possibility of "crowding out" private sector investment and/or consumption means that a given injection of government spending may lead to an increase in total spending which is less than the amount injected.  Nevertheless, it is reasonable to suppose that the federal government has much tighter control over aggregate real expenditure in the economy than it has over wage costs.

The Hawke government has attempted to have wage restraint recognised by the organised labour movement as an essential element of a policy for economic recovery.  Relative to what might otherwise have occurred, this attempt has been judged by many commentators to have been successful.  Nevertheless, unemployment and hidden unemployment remain high.  The reluctance of organised labour to accept a squeeze on real wage rates at first seems reasonable:  on closer examination it is less so for the following reasons.

First, while demand for labour may not be very responsive to real wage costs in the very short run (3-6 months, say), it is almost certainly very responsive in the longer run (1-2 years).  (An identical conclusion is reached in the case of Belgium, another small trading economy.) ⁽⁶⁾  Employment is lower than would be the case under a regime of lower real wage costs.

Second, a lower level of real wages stimulates profits and thereby increases investment (and consumption) expenditure by profit earners.  This is good for the labour market.

Third, the increased aggregate employment and lower rate of inflation engendered by real wage restraint have favourable effects on the average propensity to consume:

Over the seventies, households spent a significantly reduced share of their disposable income -- whereas the average savings ratio for the four years ending June 1972 was 9.1 per cent, in the four years ending June 1976 the corresponding figure was 15.3 per cent.  Why, in view of the rapid depreciation in the real value of money, did households choose to save more? ...  Two factors likely to be important in the explanation can be identified.  First, the accelerated inflation of the 1970s led to large reductions in the real value of the stock of households' savings.  In an attempt to mitigate this decline households apparently chose to save a larger proportion of current income ...  Second, the high inflation was accompanied by a much higher risk of unemployment [and the average length of a spell of unemployment increased dramatically].  Households' savings are used partly to tide workers and their dependants over periods of lay-off.  Given that this risk became higher in the mid-seventies, households had an additional reason for saving.  If these arguments are accepted, then it follows that a reduction in unemployment and inflation, via a reduction in real wages, could stimulate aggregate household expenditure by reducing the average propensity to save.  It also follows that the standard of living need not fall, even of those who are employed before the reduction in real wages.  (It is clear that the standard of living of formerly unemployed people who find a job at the lower real wage will be raised.) ⁽⁷⁾

Thus even if real household income were reduced (not a likely outcome), the improved macroeconomic climate could nevertheless allow households to maintain real expenditure because of diminished needs to repair the inroads of inflation into their assets and to carry liquidity as unemployment insurance.

Many observers consider it politically naive to expect Australian union leaders to be persuaded by the force of such arguments.  Whilst this is not a good reason for failing to engage unionists in discussion of the issues, it does make it more attractive for government to attempt to lower real wages as a cost without any cut in real take-home pay.  Since the biggest component of the gap between the hourly rate of expense incurred by employers in obtaining labour services and the hourly take-home rate of pay are PAYE (income) taxes, a "wage-tax bargain" offers scope for restraining real costs without cutting take-home remuneration.

The prospects for successfully implementing a wage-tax bargain depend on two key factors.  The first is the compliance of organised labour.  Once the bargain is struck it must be "adhered to by the unions even when unemployment is substantially reduced as a result of the associated demand expansion". ⁽⁸⁾  The second is technical and empirical:  the additional product demand engendered by the conditions pertaining in the environment of the wage-tax bargain must be capable of being satisfied by the additional supply made possible by the cut in costs.  An initial exploration of this issue by Corden and Dixon was not optimistic about the chances of satisfying this technical requirement;  at least one of the authors, however, now believes that there is a chance of the package working, and that this chance is better than the alternative of doing nothing. ⁽⁹⁾  The crucial unknown in assessing the technical viability of any particular wage-tax proposal is the willingness of the public to accept paper assets issued by the government in exchange for claims on current production which their money incomes would otherwise entail.

MODEL RESULTS AND IDEOLOGY

We have seen above that real wage restraint is an essential element of any policy aimed at improving the overall level of employment.  Equally essential is an expansion in real aggregate demand.  Estimates of the Swan diagram, which shows the relevant trade-offs involved, have been reported.  They were based on the ORANI model when used in a standard neo-classical fashion.  It is also possible to use the model in a neo-Keynesian way.  The latter involves the allowance of fewer substitution possibilities between capital and labour, the application of fixed mark-ups on capital services in use in industries other than agriculture, the assumption of an excess capacity of such services at the going mark-ups, and the assumption that Australian exports are completely unresponsive to changes in local cost conditions.  Dixon, Powell and Parmenter have provided estimates of the Swan diagram based on these assumptions. ⁽¹⁰⁾  The results differ only marginally from those obtained under neo-classical assumptions.  This robustness stems from the following consideration.  Under the neo-Keynesian assumptions, demand expansion generates more employment per unit deterioration in the balance of trade than in the neo-classical case.  This is (1) because producers' costs, and hence the domestic price level, rise less rapidly as output expands;  and (2) because a smaller proportion of the economy is vulnerable to the adverse effects of cost increases.  In particular, exporters are no longer allowed to reduce their outputs in the face of declining profitability (nor to increase them when profits rise).  So while factor (1) implies that demand expansion is less inflationary and therefore less damaging to the trade balance, factor (2) (namely, the reduced sensitivity of the economy to cost changes) implies that in order to correct any given deterioration in the balance of trade, a larger cut in real wages is required in the neo-Keynesian than in the neo-classical case.  The net outcome is to make the required amounts of wage restraint and demand expansion roughly equal under the two sets of assumptions. ⁽¹¹⁾

This robustness is not confined to conclusions based on the work of a single group of authors.  Using a variety of approaches, a large number of researchers have reached qualitatively similar results about the essential nature of real wage restraint in policies for economic recovery.  For instance, on the basis of entirely different methods to those underlying ORANI, Valentine concluded:

These results indicate that a successful policy to deal with unemployment would combine wage restraint with a moderate expansion of government spending.  A similar conclusion was reached ⁽¹²⁾ in a study of the depression period.  It is unfortunate that those people who support one of these policies are usually opposed, for reasons which are largely ideological rather than analytical, to the other one. ⁽¹³⁾

Valentine's perspective is, I believe, representative of current thinking among Australian policy economists. ⁽¹⁴⁾

Question 4 can now be answered with reasonable confidence.  A satisfactory strategy for a restoration of macroeconomic health involves an essential element of real wage restraint.  I see this view as largely independent of the ideological stances taken by individual economic analysts.

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ENDNOTES

1.  T.W. Swan, "Long-run problems of the balance of payments", paper presented to ANZAAS, Melbourne, 1955;  published in H.W. Arndt and W.M. Corden (eds), The Australian Economy, Melbourne, Cheshire, 1963, pp 384-395.

2.  P.B. Dixon, B.R. Parmenter, J. Sutton and D.P. Vincent, ORANI, a multi-sectoral model of the Australian economy, Amsterdam, North Holland, 1982.

3.  B.R. Parmenter, "The IMPACT macro package and export demand elasticities", Australian Economic Papers Vol 22 No 41 (December 1983) p 411.

4.  P.B. Dixon, A.A. Powell and B.R. Parmenter, Structural adaptation in an ailing macroeconomy, Melbourne, Melbourne University Press, 1979.

5.  W.M. Corden, Trade policy and economic welfare, Oxford, Clarendon, 1974.

6.  J.H. Dreze and F. Modigliani, "The trade-off between real wages and employment in an open economy (Belgium)", European Economic Review, vol 15 (1981) p 1.

7.  Dixon, Powell and Parmenter, op. cit.

8.  W.M. Corden and P.B. Dixon, "A tax-wage bargain in Australia:  is a free lunch possible?" Economic Record, Vol 56, No 154 (September 1980), p 209 and p 210.

9.  P.B. Dixon, interview with Michael Schildberger on ABC radio 3LO, Melbourne, 9 a.m. approximately, 13 March 1984.

10.  Dixon, Powell and Parmenter, op. cit.

11.  Ibid, pp 36-40.

12.  T.J. Valentine, "The battle of the plans:  an econometric analysis", paper presented to the seventh Conference of Economists, Sydney, 1978.

13.  T.J. Valentine, "The effect of wage levels on prices, profits, employment and capacity utilisation in Australia:  an econometric analysis", Australian Economic Review, first quarter 1980 pp 13-22.

14.  C.I. Higgins, "Coming of age in the 1970s:  reflections of a practical macro-economist", paper prepared for a symposium entitled "Lessons from recent European and Australian macroeconomic experience", Ottawa, 8-9 June 1984, Royal Commission on the Economic Union and Development Prospects for Canada.

FURTHER READING

G.A. Meagher, "An empirical analysis of the effects of a change in the mix of direct and indirect taxation on the Australian economy", IMPACT Project General Paper No G-53, University of Melbourne, 1984.

A.A. Powell, "Employment prospects for Keynes's grandchildren:  some popular fallacies", Australian Bulletin of Labour, Vol 6 No 2 (March 1980) p 84.

The lessons Australia must learn from the recession

FOREWORD

Some kind of division of labour is found in even the most primitive societies.  Those who hunt do not gather, and those who gather do not hunt.  In a society whose economic organisation is as complex as ours, a division of labour is essential.  Together with cooperation between individuals with differing skills and specialities, it is necessary to allow the use of capital in large, efficient chunks;  a steamship instead of a rowing boat, a factory instead of a garden shed with workbench.

Once there is a division of labour and the need for teamwork there must also be some means to distribute the products of the labour and to ensure (within limits) that things that need doing are done.  In Australia, voluntary employment for wages is the main means by which these goals are achieved;  it is accompanied by private entrepreneurship and bureaucratic planning which, on a larger scale, look for things to do and ways of doing them.  Wage employment is not the only possible organisational structure.  Slavery and cooperative sharing by the workers of profits and losses have both been tried.  Both have a poor track record in terms of operational efficiency, equitable distribution, and individual liberty.  Workers in large scale cooperatives or communes in communist nations are often not free to quit and find work elsewhere.  Their condition is thus in practice little different from slavery or serfdom.  In Western nations communes are not popular and have a poor productive record;  they have often been subsidised with taxpayers' money whether directly, through unemployment benefits, or through government-provided infrastructure for which there is less than full cost recovery.

Voluntary employment for wages is as old as recorded history.  The system may not be perfect but it has stood the test of time and few Australians suggest that there is a better basic alternative.  Unfortunately, there is no general agreement on the ideal form of the labour markets which are inseparable from voluntary employment.  This book is about Australian labour markets and industrial relations.  Much of the analysis is critical, for clearly the outcome in terms of unemployment and dissatisfied workers is a long way from ideal.

So long as potential employees are free not to take particular jobs or to leave particular jobs, and so long as potential employers are free not to employ particular workers or to stop employing particular workers, then employment happens only when both employees and employers feel that they are advantaged by it:  that is a market.  The point is obvious and would not need to be made of any market but the labour market.  This most important of all markets is, however, so clouded with traditions, with folklore, with values giving rise to strong emotions, that objectivity is more than usually difficult and it is more than usually easy to lose the wood among the trees.  This problem is compounded by the fact that the journalists and academics who write about it are themselves participants in the labour market;  many of them are also members of the "Industrial Relations Club".

Hundreds of thousands of unemployed people can testify to the inefficiency of the Australian labour market.  Much analytical effort which might more profitably have pursued the causes of unemployment has gone into demonstrating the self-evident truth that unemployment is a serious social ill.  The 1983 National Economic Summit Conference, composed of government, trade unions and employer groups, accepted that the demand for labour is price-elastic, that employers will hire more people if it costs less to do so.  This acceptance was not accompanied by policy changes.

A feature of a perfect labour market is an employment cost at which everyone who wants a job can get one.  In other words, the market clears.  This happy circumstance would not only eliminate involuntary unemployment and its attendant personal costs, but the goods and services produced by people who would like to work would improve living standards.

Not only does a perfect market clear, it also allocates production, and -- as is relevant here -- the factors of production, to optimal uses.  In the neo-classical model this is achieved by a perfect range of relative prices.  A labour market which encourages activity which is not the most productive possible (for instance by legislated monopolies or tariff protection) or which distorts choice between work and leisure, or encourages people to waste effort picketing or going slow, is flawed.  This is not to imply that the author believes that a perfect market can exist in an imperfect world;  but it is certainly possible to improve on the present state of affairs.

It is easy to agree that the goods and services which free markets in general, and free labour markets in particular, would call forth would contribute more than those of unfree markets to the satisfaction of the sum and particularity of human wants.  It is less easy to agree on what should be done about flaws in the markets:  should they be attacked at the roots or should we merely attempt to countervail them?  There is also a great deal of argument about the distribution of wealth occasioned by all free markets, and especially by labour markets.  Most of the unfreedoms are attempts to affect this distribution, so an analysis of labour markets must ask whether the distribution has been fair, as intended, worth the lost production, and as efficient as practicable.

While it may be possible to offset or prevent a market imperfection by regulation, caution is required lest a bad situation be made worse.  When individuals are prevented from undertaking anything, including employment, they suffer loss of liberty.

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CHAPTER 1

In the September quarter of 1981 the unemployment rate was 5.8 per cent and by the June quarter of 1983 it had risen to 10.3 per cent.  This really sums up the effects of the disaster.  Now it is important to see what lessons can be learnt.  How many of the causes were home-grown, for example, the wages explosion, and how many came from the world recession?

The wages explosion began with an extraordinary settlement that 400,000 metal workers, representing 9 per cent of the workforce, received at the end of 1981.  It represented an average increase in hourly wages of at least 24 per cent;  some of it to come immediately and some in 1982.  As is usual, the effects spread quickly to other awards throughout the economy:  in 1982, wages increased in nominal terms by over 16 per cent.

It was inevitable that this would present economic policy-makers with a dilemma, and once the wages push of the time had started this was clearly seen by many observers, including, for example, the Melbourne Institute in its economic forecast for 1982, and the present author in a public lecture in February 1982 (later published in The Economic Record).

The authorities had two alternatives.  They could pump money into the economy, so raising price inflation, avoiding a real wage increase and preventing a short term rise in unemployment, but at the cost of later problems resulting from the acceleration of inflation.  Alternatively, they could fail to ratify the wages explosion by keeping monetary growth and fiscal policies fairly steady and so allow nominal wages to rise ahead of prices.  In fact inflation did increase, but the ratification was partial.  This led to the crucial real wage increase, resulting in an inevitable squeeze on profits which was presumably what the trade unions who lit and spread this fire intended to achieve.  Between 1980-81, that is, before the wages explosion, and the September quarter of 1982, when real wages reached their peak, the rise in real wages (real labour costs per employee hours worked) was 7.2 per cent.

The world recession clearly played a role in causing our own recession, but it was not transmitted to Australia through the familiar channels through which, for example, the world depression came to Australia in 1929 and 1930.  Capital inflow did not dry up and there was thus no monetary contraction through a balance of payments deficit.  The terms of trade did not deteriorate significantly (only 2 per cent in 1982-83 compared with the previous year) and the volume of exports actually rose during 1982, the fall in rural exports caused by the drought only coming in the first half of 1983.  The world recession came to Australia via the investment slump.

The big event was a drastic decline in private investment which began in the first half of 1982 and accelerated after that, reaching a low point in the first half of 1983.  All the main categories of private investment slumped -- fixed capital equipment, construction, private housing, and stock building.  Mining investment, however, kept up through 1982, even though it was much less than had been expected;  thus there was still a modest resource investment boom.

The world recession led to a reassessment of Australia's resource export prospects, and thus moderated considerably the resource investment boom.  This meant, in turn, that the prospects for manufacturing industries that had expected to be suppliers of investment goods looked worse than before and, more generally, that overall Australian prospects deteriorated, so that profit expectations in industries selling to the Australian consumer market were reduced.

Another cause of the decline in investment must have been the rise in world real interest rates, but heavy weight must still be given to the wages explosion as a cause of the investment slump.  The immediate effect was to squeeze profits and so cause a shortage of internal funds and de-stocking.  There was a big fall in the profit share in 1982;  in real terms the gross operating profits of companies fell 17 per cent in 1982-83.  Furthermore, the wages increase reduced the longer term profit expectations and would have lowered investment even if there had been the same availability of internal funds and no change in the real interest rate.  An additional effect of the wages increase was rapid labour-shedding, so that employment actually fell faster than output.

It is usually assumed that a recession in major countries must be transmitted to Australia, but such transmission is not inevitable.  There was little transmission through the usual channels, namely the terms of trade and the monetary effects of reduced capital inflow.  Furthermore, in 1981 we were still doing well while the world was in recession.  Differences in relative inflation rates can be offset by exchange rate adjustment and this is, more or less, what happened.  There was a substantial depreciation during 1982-83 of the Australian (trade-weighted) exchange rate, sufficient to avoid any decline in international competitiveness.  Finally, if international factors, such as the change in expectations about our resources prospects, reduced aggregate demand, it might be argued that demand-expanding fiscal and monetary policies might compensate for this.

This question of whether a fall in aggregate demand, such as the one experienced, could have been avoided by expansionary short term fiscal and monetary policies is quite central to policy discussion.  Some people on the left think that much more could and should have been done.  Others think that governments' powers to affect macroeconomic events are now severely reduced.  Two points have to be stressed.  First, the unions really have a veto over what governments can do.  It is obvious that if every rise in nominal aggregate demand brought about by fiscal or monetary policy led to a compensating rise in nominal wages no increase in employment need result.  For example, if the government pumps funds into the building industry, the building trade unions -- if not restrained -- can certainly ensure that the benefits go primarily in higher wages to their existing members and not to new employees.

The second point is that in 1982 and 1983 government policies have certainly been expansionary, so that Keynesian compensatory policies have to some extent been followed.  Exchange rate policy -- which is really an aspect of monetary policy -- has apparently ensured sufficient depreciation to preserve international competitiveness.  One might say that in this respect the wages push has been more or less ratified, though this has not happened for the overall economy, since there was no big acceleration of monetary growth.  If there had been, it might have moderated the rise in real interest rates and brought about a depreciation of the Australian dollar not just in nominal but in real terms -- provided wages had not then risen to compensate!  Fiscal policy was certainly expansionary.  Public spending, both for consumption and for investment, increased while private spending declined.  By 1982-83 expenditure of Commonwealth, State and local governments combined had risen from an earlier norm of about 38 per cent of gross domestic product to 42.6 per cent.

But there are severe limits to such Keynesian counter-cyclical policies, and they need to be more widely appreciated.  First, there are lags in recognising the need for policy changes, then in implementing them, and, above all, in their subsequent effects on the macro-economy.  By the time results come through the need may have passed.  While the decline in the economy resulting from the wages push was seen at the beginning of 1982, the extent of the decline, especially in the changes of profit expectations connected with the world recession, was not.  By the time compensating public expenditures get under way, private investment may revive again, so that public policy reactions may intensify rather than modify a cycle.  This is the familiar problem of fine-tuning.

Second, there is the political difficulty of reversing expansionary policies when the need for them has passed.  Can an increase in public expenditure that benefits particular sectors -- and all public expenditures generate powerful interest groups committed to continued spending -- ever be reversed?  The same difficulty applies to tax cuts and possibly to easy money policies.

Third, there is a genuine problem on which the Treasury has continually focused.  Expansionary monetary and fiscal policies are likely to stimulate inflationary expectations.  This would be so even when the aim is simply to prevent a current deflation that would otherwise take place, so that there should be no immediate excess demand or current inflation generated by the policies.  But people may see an expansionary policy that is designed to be temporary as just a sign that the longer-term trend to reduce the inflation rate is being reversed.  Whether these expectations are irrational depends on whether governments can be expected to be successful at fine-tuning.

Fourth, the central objection to more expansionary policies in 1982 was simply that the inflation rate was already high and rising.  At the beginning of 1982, the wages push was widely expected to be ratified by monetary policy.  Hence common forecasts were for a 16 per cent inflation rate.  With the inflation rate having been brought down to 10 per cent in 1980 -- not a marvellous achievement in itself -- a rise to 16 per cent or more two years later would have meant throwing away a great deal.  If the recession had been caused purely by a fall in private investment brought about by changing overseas conditions, more counter-cyclical expansion might have been justified.  But the wages explosion, and the implication that the unions were determined to attain or maintain certain real wage levels (at least after lags), would have made this an unwise policy.  Consistent expansionary policies designed to keep the unemployment rate at, say, 6 per cent would have involved a continuous wage-price spiral and, eventually, an inflation rate well above 16 per cent.

All this does not mean that the precise extent of expansionary policies was just right.  The massive expansionary measures that would have been needed -- and needed quickly -- to avoid or significantly to moderate this recession would have been unwise, other than from a very short-term point of view.  It is much more important to get medium-term fundamentals right by lowering the medium-term real wage sufficiently, at least in the absence of substantial productivity improvements.  For example, a temporary rise in the unemployment rate to 6 per cent as a result of an unexpected shock originating from events abroad, when the normal rate is 2 per cent, would be acceptable.  Things are very different when the rise in the unemployment rate is from 6 per cent to over 10 per cent and it is not even certain that the rise is temporary.

Because of the likelihood that a really powerful economic expansion would require a fall in real wages and because it is likely that such an expansion would lead to nominal wage increases ahead of inflation -- that is, to real wage increases -- expansion may have to be modest.  High levels of unemployment may therefore continue for several years, if not forever.  This could lead to a search for false or "snake oil" solutions to the unemployment problem.

The two "solutions" that are most popular are measures to reduce the supply of labour, and that hoary old nostrum, an increase in protection.  It is true that, if real wages were rigid, unemployment could fall if the labour-force were reduced.  A sufficiently high real wage could force most people out of the workforce, so if the unemployed then give up looking for jobs the statistical unemployment rate would certainly fall.  But here it has to be remembered that if shorter hours are introduced while the weekly wage is not reduced (so that the wage per hour rises), industries' costs increase and unemployment could actually rise.  In any case, real wages are not necessarily rigid, especially upwards, and unions can always set wages so as to ensure an unemployment rate that they consider tolerable.

There is certainly no evidence that countries with large labour-forces in relation to their population necessarily have higher unemployment rates than countries with small labour-forces.  When one reflects upon it, to suggest that people should be forced out of the workforce, or encouraged to work shorter hours, when they want to work is really a confession of failure of our economic system.  It is surely a prescription for national impoverishment to encourage or compel people to work less when they want to improve their living standards through work.  It needs also to be borne in mind that people who do not work will not be paying taxes, so that the smaller the income-earning workforce in relation to population the higher average tax rates on income earners have to be.  These higher tax rates, whether direct or indirect, may then lead to higher wage demands so as to keep constant the take-home pay of workers.  The higher wages would, in turn, reduce employment.

The other favourite snake oil solution is protection.  Protection involves reshuffling profits and employment between industries, not necessarily increasing them in total.  On balance there could be some modest net effect on profits or employment, but it could go either way.  Because protection leads to inefficient resource allocation, the aggregate national effect in the longer run, when all adjustments have taken place, would be adverse.

Members of the business community who devote so much of their energies to protectionist activities and advocacy are engaging in a competition among themselves that lowers the national product.  It is very different from the fruitful competition involved in seeking to meet the needs of buyers at home and abroad more efficiently.  But it would be as naive to expect lobbies for special interests to give up their competitive protection-seeking activities as it would be to expect unions to give up their competitive wage-seeking activities.  But national organisations in the business world would serve the interests of their members -- as well as of the unemployed, and in the long run, of most workers -- better if they devoted more of their energies to teaching Australians the simple fundamentals about wages and unemployment, rather than pushing long-discredited protectionist arguments.

It is surprising that the weaknesses in popular protectionist arguments designed to show that protection increases or maintains employment are not recognised more widely in the business community.  If protection is increased, for example, for the automobile and components industries, employment in those industries is certainly likely to rise relative to what would have happened in the absence of this increase in protection.  But this neglects the general equilibrium repercussions.  Dearer domestically-produced cars and components would replace cheaper imported goods.  The cost of living would rise as a result and, with indexation, nominal wages would have to increase to maintain real wage levels.  The higher nominal wages would then raise costs for other industries and reduce employment there.

If one imagines a world without wage indexation, where, instead, nominal wages were held constant, one must take into account the inevitable exchange rate adjustment associated with higher protection.  Imports of the protected products would fall, the balance of payments would tend to improve, and so, in due course, the exchange rate would appreciate relative to where it would have been in the absence of the increase of protection.  This appreciation would then reduce employment in export industries and those import-competing industries where protection was not increased.

To sum up, there are no easy solutions to Australia's macro-economic problems.  The recession's causes were as much domestic as foreign.  Contrary to popular belief, traditional Keynesian counter-cyclical policies were to some extent followed.  Only massive expansionary measures would significantly have moderated the recession, however, and these would also have led to a wage-price inflationary spiral, causing more trouble in the medium term than had been avoided in the short term.  Together, the wage explosion and the recession demonstrated both the importance of wage restraint if Australia is to sustain growth and reduce unemployment, and the difficulty of achieving it with current institutions and power structures.