Economists are the last people you should ever ask to design an industrial relations system

Went out to dinner a few nights ago and out of nowhere found myself in an argument about industrial relations. Having been involved in one National Wage Case after another, even having presented the employer economic submission on a number of occasions, after having written many others before that, this was an issue close to my heart. And here is my central conclusion having represented employers in so many forums over so many years:

The free market system depends for its survival on providing buffers between buyers and sellers and between workers and employers.

Leaving such matters “to the market” as it is often put is certain to end in some kind of socialist/anarchist revolution which would not be long in coming. The notion that someone who successfully manages a business enterprise is in any way evidence that such a person is actually in any way morally superior is absurd. They may put their own capital at risk, or perhaps it is the capital they have borrowed that has been put at risk, but beyond that, there is no evidence of superior virtue and moral authority of the entrepreneur. There must therefore be laws and regulations in place to create industrial peace as best as a community is able.

That there must be some kind of wage setting process in place has been discovered by every market economy that has ever existed. No one agreed with me, but what’s new about that?

These were then my morning-after thoughts following this conversation. The central issue was whether Australia’s system of conciliation and arbitration, which embeds a minimum wage adjustment process, is consistent with good economic theory and practice. That virtually no economist thinks this is true only shows what a useless preoccupation economic theory has become.

———————
Tampering with the employer-employee relationship that leaves employees without any recourse to the actions of employers will not work anywhere. And I am conservative enough to recognise that a system that has evolved over more than a century embeds within it all kinds of features that no one can identify but which make it work out there in the real world.


The market system depends for its existence on institutions that buffer the relationships between businesses and their customers and between employers and their employees. This is the Australian system.

So let me begin. Even more than ever I was reminded that economists know almost nothing worth knowing about the practicalities of running an economy, and this is shown in spades in their thoughts, such as they are, about industrial relations. The last thing that will work is “to leave it to the market” where union power exists, and where socialist trouble makers are to be found at every turn. So I did the tiniest bit of research when I came home, and was amazed I still remembered where to look, given that I have not been personally involved in any of this for eighteen years.

The Fair Pay Commission

First there was The Fair Pay Commission. How did I even remember its name? And what a name! It might as well have been “The Just Price Commission”. Australia’s IR system was in its origins designed “to prevent and settle industrial disputes” that ranged beyond the compass of a single state. Being fair to both employers and employees was obviously a necessary ingredient if it were to function, but that was not its purpose. The aim was to provide a structure to encourage industrial peace.


“Fair pay” is not a market principle. Do economists nowadays discuss “fair” prices? The discussion of The Fair Pay Commission at the link is a generally sympathetic account, andgets the story mostly the way I remember it. There we find under the heading “2006 decision”:

On 26 October 2006, the Commission handed down its first decision. The Commission’s media release stated: The Australian Fair Pay Commission today announced an increase of $27.36 per week in the standard Federal Minimum Wage and in all Pay Scales up to $700 per week. This covers just over one million Australian workers who rely on the Commission’s decisions for adjustments in their wages.

The Commission also awarded an increase of $22.04 per week to all Pay Scales paying $700 per week and above, or more than $36,000 per year, representing another 220,000 workers, about 2% of the workforce.

In hourly terms, the Australian federal minimum wage increased to $13.47 per hour (for workers on pay scales of less than $700 per week), with effect from 1 December 2006….


Many commentators were surprised the Commission’s first decision was so generous. For example, the Australian Council of Trade Unions had asked for a minimum wage increase of $30 per week.

An absurd decision which virtually granted the entire ACTU claim in full. “Surprised” is not the word for such an extravagant decision based on nothing whatsoever, and certainly neither on economic sense nor industrial need. And just for the record, let me mention who were the members of the FPC who had made this decision.


The inaugural chairman of the Commission was Professor Ian Harper and there were four commissioners: Hugh Armstrong, Patrick McClure AO, Mike O’Hagan, and Honorary Professor Judith Sloan.

Work Choices

Work Choices was the name given to changes made to the federal industrial relations laws in Australia by the Howard Government in 2005, being amendments to the Workplace Relations Act 1996 by the Workplace Relations Amendment (Work Choices) Act 2005, sometimes referred to as the Workplace Relations Amendment Act 2005, that came into effect on 27 March 2006.

This is how it is described.


In May 2005, Prime MinisterJohn Howard informed the Australian House of Representatives that the federal government intended to reform Australian industrial relations laws by introducing a unified national system. WorkChoices was ostensibly designed to improve employment levels and national economic performance by dispensing with unfair dismissal laws for companies under a certain size, removing the “no disadvantage test” which had sought to ensure workers were not left disadvantaged by changes in legislation, thereby promoting individual efficiency and requiring workers to submit their certified agreements directly to Workplace Authority rather than going through the Australian Industrial Relations Commission. It also made adjustments to a workforce’s ability to legally go on strike, enabling workers to bargain for conditions without collectivised representation, and significantly restricting trade union activity.

I was also long gone from involvement with the system by then so just watched from the sidelines. This is where it ended up.


WorkChoices was a major issue in the 2007 federal election, with the Australian Labor Party (ALP) led by Kevin Rudd vowing to abolish it. Labor won government at the 2007 election and repealed the whole of the WorkChoices legislation and replaced it with the Fair Work Act 2009.
The FWA was a disaster and I did a lot of work on trying to overturn it working with various IR organisations. Not mentioned, for some reason, is that not only did Labor win, but John Howard lost his own seat, the only time other than in 1929 this had happened, which also happened to be the only previous occasion when a government had tried to get rid of the Federal industrial relations system. Lots of detail at the link, but this is where it comes down to.


The Australian Government stopped using the name “WorkChoices” to describe its industrial relations changes on 17 May 2007. Workplace Relations Minister Joe Hockey said the brand had to be dropped due to the union and community campaign against the WorkChoices laws. “It has resonated because it has been the most sophisticated and articulate political campaign in the history of this country.” The ACTU countered that the name may have changed but the laws were the same. The Government did not rename the brand, but did launch a new advertising campaign that did not refer specifically to WorkChoices.

And the political washup.

Howard’s successor as leader of the Liberal Party, Brendan Nelson declared that his party has “listened and learned” from the Australian public. He also declared that WorkChoices was “dead” and would never be resurrected as part of Coalition policy, and called on Rudd to move quickly to introduce draft industrial relations legislation. Former IR minister Joe Hockey said the laws “went too deep” but were introduced with “the best intentions”. “As I said yesterday and I’ve said since election day, WorkChoices is dead, and there is an overwhelming mandate for the Labor Party’s policy of tearing up WorkChoices,” he said.And from the sidelines:

Former Prime Minister John Howard broke his post-election silence in March 2008 by attacking Rudd’s industrial relations policy while defending WorkChoices.

Tampering with the employer-employee relationship that leaves employees without recourse to the actions of employers will not work anywhere. And I am conservative enough to recognise that a system that has evolved over more than a century embeds within it all kinds of features that no one can identify but which make it work out there in the real world. 

The market system depends for its existence on institutions that buffer the relationships between businesses and their customers and between employers and their employees. This is the Australian labour-relations system. No one will think of dismantling it any time soon. There may well come a time, but it won’t be in any time soon. 

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