What light (if any) does the economic evidence shed on the arguments for or against the Government’s proposed changes to Australia’s industrial relations system, especially to “unfair dismissal laws”, and the minimum wage?
As Mark Latham noted in his Diaries, “wages … are such an emotional issue it is impossible to shift opinions, even based on sound empirical research”.
By way of background, there has been a significant amount of change in the direction of “greater flexibility” in the Australian labour market over the past decade, largely as a result of reforms introduced by the Keating Government in 1993, and by the Howard Government in 1996. In particular:
- the proportion of employees whose pay is set by awards only has dropped to 20 per cent, from an estimated 68 per cent in 1990;
- fewer people are members of a trade union than at any time since 1958. The proportion of employees who are trade union members has dropped from 37.6 per cent in 1993 to 22.7 per cent in 2004. Only 17.4 per cent of private sector employees are members of a trade union, down from 27.5 per cent in 1993;
- more people are now self-employed (as owner-managers of incorporated or unincorporated enterprises) than are members of trade unions; and
- more people now directly own shares than are members of trade unions.
While Australia’s once highly centralised and co-ordinated wage-fixing arrangements are still more centralised than in other English-speaking nations (other than Ireland) or the Asian members of the OECD, Japan and Korea, Australia now sits towards the lower end of the OECD spectrum on both these scores.
Since the 1993 Keating Government reforms, Australia’s labour market has delivered strong jobs growth (albeit at a slightly lower rate than during the previous 12 years); falling unemployment and under-employment; rising productivity (at least until the end of 2003, since when productivity growth has gone into reverse) and real wages; well-behaved real unit labour costs (rising by 1.3 per cent a year, on average, over the past 12 years); and (at least by Australian standards) low levels of industrial disputation.
How much of this is due to changes in industrial relations arrangements, as opposed to 14 years of more or less continuous economic growth - the longest period unpunctuated by at least two consecutive quarters of negative growth in Australia’s history - is difficult to ascertain. Indeed to the extent that changes in industrial relations arrangements have lessened the probability of a “wages break-out” as the economy has approached “full employment” over the past year - as has occurred at the same stage of each of the three previous business cycles - then they may have contributed to prolonging the current expansion.
International data on the impact of industrial relations arrangements on labour market performance is not entirely clear. However it is clear that some countries are able to combine relatively centralised wage setting arrangements with rapid employment growth and low unemployment
Employment protection regulation and labour market outcomes
Australia’s employment protection legislation is “one of the least restrictive” in the OECD. At the time of its most recent survey, only the US, Canada, the UK, Ireland and New Zealand had less strict employment protection legislation than Australia.
The Government nonetheless argues that Australia’s “current unfair dismissal laws not only discourage job creation across businesses, but impose costs on businesses - small, medium and large alike”. The Prime Minister has described “a culture of complaint and litigation that loads extra costs onto those who society relies on to create wealth and jobs by taking risks with their own livelihoods” and said these laws “hurt the good staff, they discourage small firms from taking on more people and they are a prime example of where over-regulation has worked to the detriment of both business and also employees”.
The Howard Government is not the only contemporary government which takes this view. The Socialist Government of Spanish PM Rodríguez Zapatero is also seeking to relax rules for dismissal of workers.
The idea that legislation which increases the costs (both pecuniary and in terms of management time) of dismissing employees has an adverse impact on hiring enjoys fairly widespread support among economists. Earlier this month the Chairman of the US Federal Reserve, Alan Greenspan, said:
This is an edited version of his October 25, 2005 speech to a conference sponsored by the Australian Financial Review in Melbourne. The complete text can be found here (pdf file 132KB).
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