Assessing the Federal IR reforms

1. A number of conditions are to be removed from the scope of awards;
2. Minimum conditions will be set by legislation rather than through the awards process;
3. Minimum wages will be set by the Fair Pay Commission, rather than the AIRC;
4. State tribunals will be abolished and replaced by a single national system; and
5. EBAs (Enterprise Bargaining Agreements), as well as AWAs, will be assessed by the OEA and both will require substantially less scrutiny.

Most significantly, the reframing of the no disadvantage test will allow AWAs to undercut award minima, effectively making the award protections optional for employers. This key change has attracted little comment to date.

It is difficult to make definitive predictions about the results of particular changes in industrial relations systems. There are a number of reasons for this, including the inherent complexity of employment relationships, the fact systems differ between jurisdictions and over time in ways that cannot easily be measured, and the confounding effect of changes in the labour market, including those associated with macroeconomic cycles.

This point can be illustrated in relation to unfair dismissal laws. A priori arguments are inconclusive. Supporters of such laws make the point that, other things being equal, the easier it is to dismiss employees, the higher will be the rate of dismissal, and therefore the higher the level of unemployment. Opponents counter that employers will be unwilling to take on staff if they are unable to dismiss those who turn out to be unsatisfactory.

In economic terms, the problem starts with the fact that an employment contract has a lot of implicit terms. In the management literature, it’s often referred to as a psychological contract. Once both parties have committed to the relationship, each has the opportunity to cheat on these commitments. How this works out depends on institutional rules, the state of the labour market and so on. Whatever happens there are going to plenty of people who perceive the outcome as unfair, and plenty of cases where this perception is accurate.

What about the empirical evidence? As often happens, the literature on unfair dismissals starts out with a big publication finding clear-cut results, only to descend into a morass of contradictory findings. A paper by Lazear in 1990 found strong negative correlations between the strength of employment protection laws, proxied by severance pay, and desirable labour market outcomes, such as employment and participation rates, hours worked and so on. But Lazear’s results have not stood the test of time. More recent research suggests employment protection laws lower the variance of employment and unemployment but have no clear effect on average levels.

In a comparison between neo-liberal labour market institutions and alternatives involving either collective bargaining or centralised wage-fixation, one feature is clearly evident. Neo-liberal institutions produce substantially more unequal outcomes. This is evident both from comparisons over time and from comparisons between countries.

The US, where the labour market has always had most of the main neo-liberal characteristics, displays easily the highest inequality. The reforms undertaken in New Zealand and the UK show up clearly in rising levels of inequality, overtaking European countries that were initially less egalitarian. In the US, declining rates of unionisation and an even more extreme form of neo-liberalism have produced a dramatic shift in the distribution of income. Low-income families have experienced almost no income growth since 1970. Wages for workers with high school education or less have actually fallen, but this has been offset by longer hours of work and increased female participation.

Defenders of neo-liberal institutions argue that growth in inequality has been offset by stronger employment growth resulting from more flexible labour markets. The evidence is decidedly mixed. Until the present business cycle, from the early 1990s, there was little evidence to support it. For most of the past decade, the English-speaking economies have outperformed those of the EU and Japan. It is too early to judge whether this is merely the outcome of cyclical timing, or whether there is a sustainable gain in employment. Our view, based on the huge current account deficits being run by all the English-speaking countries, is that a severe cyclical correction lies ahead. Only when the macroeconomic imbalances have been resolved will it be possible to make a clear judgement.

Employment relationships are complex, but the outcome of bargaining depends on two factors. The first is the state of the labour market. The second is the balance of bargaining power. Usually, the state of the labour market is more important, but it’s largely determined by exogenous macroeconomic shocks originating not in the labour market but in the financial sector or the world economy. The reforms proposed by the Howard Government will tilt the balance strongly in favour of employers. The likely outcome is a substantial increase in inequality of incomes, and in day-to-day relationships within the workplace.