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The benefits of a freer labour market

By Richard Blandy - posted Thursday, 3 November 2005


The Federal Government introduced its industrial relations legislation into Parliament yesterday.

The legislation’s main intent is to grant greater freedom to enterprises and employees to develop their own workplace arrangements, including wages and conditions of work, and to further restrict the right of third parties, like the Arbitration Commission or unions, to intervene in the employment relationship between an enterprise and its employees.

I believe these are good objectives. If they are achieved, they will not only increase the economy’s flexibility and productivity, but will better meet our objectives of liberty, equality and fraternity.

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Up until the last quarter of a century, a liberal democratic model, a social democratic model and a communist (Marxist-Leninist) model of how liberty, equality and fraternity should be achieved have each possessed considerable political momentum.

The communist (Marxist-Leninist) model was abandoned by China, the Soviet Union and Eastern Europe in the 1980s.

The democratic socialist model is now under siege in the European Union from the combined impacts of globalisation, European Union enlargement and the evident economic success of “le modèle Anglo Saxon” in recent times.

The remarkable improvement of economic outcomes in East Asian countries (most notably China) appears to be associated with the adoption of elements of the liberal democratic model, particularly capitalist, competitive free markets. There has also been a big turnaround in New Zealand’s economic outcomes following its liberal economic reforms.

Over the past 25 years, Australia, too, thanks to the liberal democratic reforms introduced by the Hawke-Keating and Howard governments, has enjoyed a spectacular turnaround in its economic and social fortunes.

What we can now see is that the successful liberal democratic reform program put in place by Hawke, Keating and Howard has been part of a global ideological change. Australian labour market reform is part of this liberal democratic reform process.

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Enterprise bargaining was introduced by the Hawke-Keating governments, leading to a reduction in the significance of wide-ranging awards. The Howard Government further reduced the scope of awards and increased the use of enterprise agreements and individual contracts.

About 40 per cent of workers are now covered by collective agreements, about 40 per cent are covered by individual arrangements (including about 2 per cent on Australian Workplace Agreements), and 20 per cent are covered by awards.

The essential case in support of the latest labour market reform proposals is that it is good for particular people and the particular enterprises employing them to work out their own salvation together, rather than to be told what they must accept by some outside party. The insiders know the score: the outsiders don’t.

Bob Hawke, then president of the ACTU, was quoted in The Australian in 1971 as saying:

The least likely way of maintaining harmonious relations in industry is going to be a system where some external parties impose their will on the two parties most affected …

(By “parties”, Mr Hawke meant unions and employers.)

Bill Kelty, secretary of the ACTU, said in evidence to the Australian Industrial Relations Commission in 1990:

… [We must] create a new wages system ... involving ... a diminution in the authority of bodies such as the ACTU; bodies such as the conciliation and arbitration systems of Australia, as more and more is done where more and more has to be done, and that is in the workplaces of this country …

Waterside Workers Union secretary, Charlie Fitzgibbon, said in 1986:

... the one thing that no ideologue or anybody else can ever overcome is a feeling of being part, of being fairly treated, and seeing the advantage of the enterprise also meaning an advantage to the individual ...

Businesses have to pay the market rate to their workers if they are to stay in business. A business is not likely to pay more than it needs to, but it is not likely to pay less either, because to do so means that it would not be able to employ the workers that it needs to operate successfully.

This market wage may be less than a wage posited to be “fair and just” by some outside third party, but the result of enforcing a wage that is higher than the market wage is that that job may no longer be available.

Further, because people compare the “net advantages” of different sorts of jobs, a sensible business will try to tailor its conditions of work, to suit the preferences of the people it wishes to employ. If it is able to do this inexpensively, it will be able to pay lower wages, while still attracting the people it wishes to employ.

By the same token, a sensible business will wish to remove conditions of work that are costly to it, but that the people it wishes to hire place little value on. By doing so, it will be able to pay higher wages, if warranted.

What about very young workers - schoolleavers? Consider young Bill, who is presently unemployed. As a result of the new system, Bill can expect to receive a job offer (which he accepts) at a lower rate of pay and offering fewer benefits, than the sort of job he would currently like to get, but is unable to find.

Bill did not have a job before. He now has one. Is this not an improvement for Bill?

If, as a result of the new industrial relations legislation, the pay and conditions of work that schoolleavers (like Bill) are looking for deteriorate (as predicted), two things will happen: more young people like Bill will be employed, and fewer young people will want to leave school. Are not both of these outcomes desirable from the point of view both of the young people concerned and from the community’s perspective?

Another reform that has attracted controversy is the effective ending of unfair dismissal laws for businesses employing fewer than 100 people. Making it easier to sack employees is certainly harsh on people who are good workers, but who refuse to perform unreasonable acts demanded by their boss.

But why would a sensible person want to remain in the employ of a bastard like that, anyway?

The problem that decent employers face is finding it costly (because of an unfair dismissal action) to let people go who are not productive enough, or not fitting in well enough. The consequence is that businesses will be more reluctant to hire people. If it is easier to let people go, job applicants with less compelling qualifications are more likely to be given a chance.

As time passes, and people and enterprises adjust, more and more of the results of the new reform proposals will turn positive. They will make a good contribution to the long run welfare of the Australian people.

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This article is an edited version of The Anne Hawke Memorial Lecture presented recently by the author. This edited version was first published in The Australian on November 1, 2005.



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About the Author

Richard Blandy is director of the Centre for Innovation and Development and Division of Business at the University of South Australia in Adelaide.

Creative Commons LicenseThis work is licensed under a Creative Commons License.

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