INDUSTRIAL RELATIONS DOWN UNDER – WHERE TO NEXT?

In 2015, Australia is experiencing lower growth and higher unemployment – especially for younger Australians. The slow growth across the Western world suggests this is a global problem but many see Australia as increasingly uncompetitive as a trading nation. Australian columnist Judith Sloan believes Australia’s industrial relations system leads to lower economic growth and higher unemployment. The Secretary of Unions NSW, Mark Lennon, disagrees and maintains that the system is not in need of reform. On Monday 15 June 2015, Mark Lennon and Judith Sloan addressed The Sydney Institute to put their diverse views.

  INDUSTRIAL RELATIONS DOWN UNDER – WHERE TO NEXT?

JUDITH SLOAN

This is a topic I have been interested for decades – in fact since I moved to Flinders University and worked for the National Institute of Labour Studies under Dick Blandy. We punched above our weight there. We were a small research group at a small university in South Australia.

But we were one of the first groups of academics that was proposing Australia shift away from the highly centralised system of compulsory arbitration towards enterprise bargaining. That does not sound such a radical proposition, but in those days it was a very unpopular thing to say. And it required a high degree of courage, both on the part of Dick and the people he led in that group. I look back at that time, with a high degree of professional pleasure. But there were some rather hair-raising times in terms of being targeted.

I don’t know what people in the audience think, but industrial relations Down Under is very unique. It’s still very different from how work arrangements are established, in an institutional sense, compared with other countries. Some people don’t think it’s important anymore. So I would like to make the case to say that it is still very important.

Now I guess Mark Lennon will say it’s important too, because otherwise he wouldn’t be in his job. But maybe he’ll have a slightly different take on why it’s important.

One of the reasons economists might feel industrial relations is not particularly important at the moment is that we have extremely low wage growth. In the 1970s, 1980s and even into the 1990s, we had debates about how we might control wage breakouts and the like.

But, today, if we look at the wage growth figures, they’re pretty much as low as they’ve ever been in recorded history. And that is something interesting to think about. We also have very low rates of industrial disputation. We used to have lots of strikes – short strikes, longer strikes, big strikes – going back and right through into the 1980s. Now, it’s started to fall off and we have a very low rate of industrial disputation. And this is, basically, a worldwide phenomenon. There really are no developed economies anywhere where there are high rates of industrial disputation.

To my mind 6 per cent unemployment is too high. Youth unemployment, at a much higher rate, is far too high. But I’ll come back to that. A lot of people wouldn’t see the unemployment rate being linked to anything that goes on in industrial relations. I would contend that there is a big link there.

Another reason people think industrial relations is irrelevant is unionisation. The proportion of workers who belong to unions is down to 17 per cent overall. Once upon a time it was over 50 per cent. The rate of decline has been very rapid, and if we look at private sector unionisation, it is down to 13 per cent. Public sector unionisation is around 40 per cent, but it’s very much, nurses, teachers, ambos, and firies.

On the macro front, the productivity figures continue to lag badly. There was a bit of a kick up in 2010–2011, but it’s now fallen in a heap. With the end of the mining boom, net national income, particularly per capita, is beginning to fall. And the only way forward now to increase living standards is through productivity.

I’m sure education is part of the story. But we’ve been investing seriously in education over long periods of time and productivity has fallen in a hole. Productivity was increasing at 2.5 per cent in the 1990s and now we are lucky if it’s 1.5 per cent. I feel a little conflicted having spent a lot of my time in higher education. The idea that simply spending more taxpayers’ money on higher education and training will lift our economic performance is probably not true.

It is important to frame the debate about why industrial relations is important. We have come to an agreement that in many ways the macro story is a lot less interesting than the micro story. When we think about industrial relations, what’s important for large business is not the same as what’s important for small businesses. And what’s important in some sectors, in tourism or higher education or manufacturing, is not the same as in other sectors.

Indeed, what’s important in the public sector is not necessarily the same as what’s important in the private sector. So when we think about the debate around whether industrial relations is important – yes it is. But the issues, the more specific issues are actually quite variable. If you think about the small business world, unions are by and large irrelevant. There are some small exceptions – such as subcontractors in the building industry and the like where the unions are important – but in many areas the unions are irrelevant as far as small businesses are concerned.

But, for many small businesses, the issue of penalty rates is very important. It was very pleasing to see Martin Ferguson talk about the importance of penalty rates in tourism. Tourism is a 24/7 activity and, if we’re going to flourish in what is a highly competitive international environment, it’s very important that we think about penalty rates.

The years of Dad going off to work 9-5, Monday to Friday, with Mum at home or young people leaving school and going into full time work are all gone. We have a very fluid labour market, where there are lots of people for whom the non-standard is actually what suits them. This debate has not gone well but it’s very important.

The world of work has changed, the nature of the workforce has changed and overseas they survive extremely well without penalty rates. We know that there are times of the week when employers will have to provide what we call a supply price, in order to induce and encourage workers to work at certain times, particularly certain kinds of workers to work at certain times.

But a top-down, fixed arrangement clashes with the supply and demand situation. What you get is a serious degree of economic sub-optimality, and businesses are not being created because the business model will never work with this top-down penalty rate  provision. If you go overseas and you look at what happens, sure there are penalty rates. But in Europe, the UK, they do not have our penalty rate structure. Even in France, they can’t believe it.

The irony is that Australia’s basic wage is very high compared to benefits paid to the unemployed. This is not widely acknowledged. Government interventions typically take the form of providing wage subsidies for people who have been unemployed for a long time and find it difficult to get a job. This happens because the regulated wage is too high to encourage employers to take them on

In a sense, you actually have a government acknowledgement, including Labor governments, that the wages are too high. We know that people would accept lower rates of pay, but they are legally excluded from that arrangement happening. If you drill down, you’re now getting quite high rates of youth unemployment.

If you drill down a bit further, and look at who those young unemployed people are, you find that they’re people who may have patchy education records and the like. They may not have got off to a good start in the labour force, but the regulations exclude them from getting a foothold in the door. The research is very clear – you can start in a casual job, a low paid casual job, but if you get on that escalator you have a really good chance of making it. If you don’t get on that escalator in the first place, people often stay in real trouble.

We talk about the changing nature of the workforce, but the unions are very supportive of collective bargaining. And we need to go in the direction of individual contracting. We no longer have big manufacturing operations with big tranches of undifferentiated jobs. We now have agile, technology disrupted service industries where we want individuals to be individuals. There’s a big philosophical clash in this. In 20 years’ time, I don’t see much of a role for collective bargaining. We’re not interested in undifferentiated, leave-your-brains-at-the-gate kind of jobs.

The Fair Work Commission makes Australia very unique. If we look overseas, there are often government-run, end-point dispute resolution institutions. But the Fair Work Commission is completely different from them. The Fair Work Commission is about establishing, for example, modern awards. There are 122 modern awards, and the key about them is that they set the floor above which bargaining occurs. Generally speaking, in order for an enterprise bargain to be certified by the Fair Work Commission. it would have to be at least as good as the award.

This was the big mistake about WorkChoices. One of the things that WorkChoices did was to create a national system. I am a great federalist and believe that we’ve lost tremendous scope for flexibility by getting rid of the state systems. There used to be 3000-4000 awards. Now they have been head butted together to create 122 modern awards. It’s been a case of the highest common denominator.

Take tourist operators in Queensland, for example. Most of those Queensland awards had either no or very low penalty rates. Over time, they’ve now been forced into coverage by the modern award, which sets much higher penalty rates. So, for businesses set up on the basis of a certain business model, the industrial relations environment has changed and created real tensions.

Unions in Australia have a model where their influence is not dependent on the proportion of workers who belong to them; they are run through the regulatory system, through the Fair Work Commission and through public policy more generally, particularly at the state government level. Through this, regulation becomes anti-privatisation, imposes staff ratios on hospitals, and certain rules in respect of education. That disjunction between how many people are bothering to join up to unions and the influence that they can actually impose through these other means is our problem. And the Fair Work Commission is one of those means.

One of the reasons the federal government wanted to get rid of the state systems was that the NSW system was so appalling that the Howard Government was willing to do anything to get rid of it. The others weren’t so bad.

You should not expect wages to be the same in smaller states as they are in NSW; you don’t expect the wages to be the same in Port Augusta as they are in Bondi. Our system has some flexibility above the minimums, but it doesn’t have the flexibility that it used to have in terms of regulated wages that were different across the states. Interestingly enough, as I recall, there were some states which actually had regional wages as well as CBD wages -Queensland, for example. We definitely lost a lot of flexibility with that change.

The Fair Work Commission is a kind of retirement village for ex-union officials, by and large. They occasionally get a token lawyer or a token rep from an employer association, but there is a disproportionate number of ex-union officials as members of the Fair Work Commission. And they come up with some really strange decisions from time to time. You see a decision that you think is reasonably sensible and then you come up with a decision, you think that’s really weird.

The bottom line is, in a sense, we shouldn’t be going to a third party to make these decisions at all. These decisions should be left to the actual parties, to the employment relationship between the workers and the bosses. And if the workers voluntarily want to be represented by the union or other bargaining agents that should be fine.

It’s been exciting with the Royal Commission into Union Governance and Corruption. It’s the problem you see in companies where you need legislation to ensure that the managers and the directors act in the best interests of the owners of the firms. That doesn’t mean that every firm is run by crooks. But we accept the fact that we have a regulatory framework to try and deal with that agency problem.

In the case of the unions, we don’t really have good legislation to deal with the agency problem. When those guys and gals took away the union dues down at the HSU, there was no regulatory constraint on that happening. There is nothing that guarantees transparency and accountability.

It would serve the unions well if they were to voluntarily agree to this a new regulatory environment. Most union officials are perfectly honest and will be perfectly happy being more accountable and transparent. That legislation could end up doing the union movement a great service. It might actually shine some disinfecting sunshine on such organisations and that could be a help.

I am in favour of greater union competition. If you’re a shareholder of a company and you don’t like how it’s going, you sell your shares and buy shares in another company. But, say you were a hospital orderly and a member of the HSU and you heard of the misbehaviour of HSU officials, your choice essentially wasto stay with that one monopoly union or to resign. There is no other choice.

Bad behaviour of unions is partly because of that lack of competition. If there had been greater transparency, accountability and competition, my guess is that the HSU officials would never have behaved the way they did. Once it got out, people would head off in the direction of alternative representation.

If you look at how the system of compulsory arbitration was traditionally conceived, the trade unions were the enforcers. They only ever enforced well in respect of larger firms. So there was a massive degree of non-compliance in the system, which is why it didn’t completely grind to a halt. But now you’ve got a very well-resourced Fair Work Ombudsman with eager and zealous young graduates working there and they’ve become the enforcement mechanism. Up to a point, I think this has undercut the role of the unions.

Let me just finish off by talking about the Productivity Commission inquiry. Again, you’ve probably all forgotten about it. This was a pledge by the Abbott team in opposition that they would bring on a Productivity Commission inquiry into the economic impact of industrial relations regulations. That is currently grinding through the process. They’ve had calls for submissions and submissions have been put in. We’ll probably get a draft report inJuly, with the final report towards the end of the year.

I was a productivity commissioner for 12 years, so I guess I’ve got some insight into what’s likely to happen. I imagine it will be a document that economists can be happy with. But I don’t think they’ll overstate the case. The trouble is that when we’re thinking about economic outcomes like productivity, and even firm performance, the answer is always multi-factorial. It is difficult to pin down and they won’t have had time or the data necessary to come up with very strong empirical results when it comes to industrial relations. What the final report is likely to do is establish a set of principles that should govern our industrial relations regulatory framework in a way that it can improve economic opportunities.

Will it be controversial? It could well be. It will be quite a political challenge for the government. For example, they must inevitably deal with the issue of penalty rates. They will deal with the issue of unfair dismissals and other regulations.  And such things, unless handled well politically, can create potential political damage because you can create a fear campaign.