Thursday, 5 February 2015

Industrial reform: ignore fairness at your peril

by Steven Kates

Industrial relations protests in Sydney, November 15, 2005. Image via iStock.

Any industrial system that doesn't recognise the importance of fairness is destined to fail. That's why we need tribunals and can't simply "leave things to the market".

It always worries me when economists get involved with industrial relations reform, since their area of expertise is often too remote from what they need to understand to make useful policy.

Sure, there are prices called wages. There are a number of workers who will be hired at different wage rates, while the level of wages will affect the number of workers looking for jobs. But an economist all too often argues that the labour market should be administered like any other market.

Let the equilibrium wage be determined by supply and demand, they say, and leave arrangements to the law of contract. Bring in real courts to deal with breaches of agreements. Don't interfere in the market for labour (unlike in the market for money and credit) since it will only distort outcomes and leave us economically worse off. Beyond the pale is any suggestion of a minimum wage.

Where I can agree with the economic consensus is that our cost of labour is too high in relation to productivity. Unemployment could be much lower if the cost of labour could more closely conform to capacity to pay.

It is unreasonably difficult to effect workplace change, or start a new business from scratch. Far too much of what is required at the workplace in relation to the employment of labour is pre-determined by legislation and industrial awards, with only a limited ability to make changes that suit the particular circumstances of a workplace.

The Fair Work Act remains a genuine obstacle to economic prosperity.

Yet all too often, the core issue about industrial relations reform is not about outcomes, but about the structure of the system itself. Australia has developed its own unique and largely successful system of tribunals that has been the perennial target for elimination by economists since it was first formed.

And so it worries me that we are there once again. This is the basic outline of what is being investigated according to the Productivity Commission website:

In undertaking this inquiry, the Commission has been asked to review the impact of the workplace relations framework... [my emphasis]

If the continuation of industrial tribunals were off the PC agenda, and instead the issue was how our existing industrial relations system could be made to function for the better, I would be much more confident that the PC inquiry might come up with something of genuine value.

So my prime recommendation to the PC is this. If you start from the premise that industrial tribunals are here to stay, there is a possibility that the inquiry might do some serious good. But if that is not your premise, I would expect little good to come from this inquiry.

So let me mention a couple of things that are different about the labour market, and why industrial tribunals are important for the operation of our economy, while "leaving things to the market" will seldom work out for the best.

Start with this: union power. Union power is different from market power. And what makes it different is that unions are filled with some of the most ideologically driven people you are ever likely to meet. Their aim is not to try to make a market system work as efficiently as it can. Their aim is to represent the interests of employees, who may be expected to resist workplace change that is perceived to make them worse off.

And unions are working in an environment in which individual workers are going to find decisions made that will be detrimental to their own future livelihoods and workplace standing. They will want someone to take up their case, which is why, when union elections come round, the delegates with the hardest edge are often the ones who get elected to represent the rest.

Meanwhile, the reality of the business environment is constantly changing, and the need to adapt to a very rapidly evolving economic landscape is an absolute necessity.

Industrial disputes are therefore common. And unlike union officials, the owners of business are not specialists in labour relations. What is needed is a system that can channel, as rapidly as possible, workplace disputes into outcomes acceptable to both parties. That is what our present industrial "framework" is designed to do.

And what is likely to be ignored in looking at this framework, since it is outside of the normal range of economic consideration, is the importance of fairness in any economic institution, which is of particular importance in labour relations.

Put simply, if the system is not perceived to be fair, it will not work.

To an economist, something called "the just price" is an absurdity. There is an equilibrium price, which clears the market. If the actual wage is higher, some people will be unemployed who would otherwise have found work.

I can certainly agree that administered, arbitrarily determined wages and conditions will cause havoc in any market. So it is the process that needs to be fair in arriving at the equilibrium price.

The importance of fairness is generally ignored in the approach taken by economists, and I say this even though the PC notes that the aim is to find "fair and equitable pay and conditions for employees, including the maintenance of a relevant safety net".

We have an indigenous system of industrial tribunals that has been at the centre of our labour relations system for more than a hundred years. I often think it is under appreciated because of its uniqueness. But sometimes, like this time, we do things better than anyone else.

Steven Kates is Associate Professor of Economics at RMIT. He was chief economist for the Australian Chamber of Commerce for 24 years and a commissioner on the Productivity Commission. This article was originally published on The Drum and is republished here with permission from the author. 

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