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. 

Eric Abetz and labour relations

The dog that didn’t bark in the night over the past two years has been industrial relations. Labour relations has been an ongoing sore, relentlessly undermining our prospects and ruining opportunities to raise living standards at every turn. Yet these past two years, conservative government though it may have been, other than a brief wrangle at Qantas, which could have been a massive disaster but in fact wasn’t, I don’t think I can recall a single IR dispute of any consequence.

I have to tell you that I think much of the credit goes to our Minister for Employment, Senator Eric Abetz. In what is the most fractious part of our economic structure, he understood the necessity of working with the grain and not against it. His quiet approach allowed a downwards real wage adjustment to go on behind the scenes, with the most amazing, but largely unnoticed improvement in our labour market having gone on, even with the flat rate of growth in GDP.

Today we find this in The AFR: Abetz accused of restacking Fair Work.

Employment Minister Eric Abetz has made a series of conservative appointments to the Fair Work Commission, using his expected last days in federal cabinet to counter-balance union appointments to the tribunal made by the former Gillard government.

Industrial relations lawyer Tanya Cirkovic, a former legal partner of Liberal Party identity Michael Kroger, and Christopher Platt, who worked at the Australian Mines and Metals Association were appointed commissioners.

Both Mr Platt, currently employee relations manager at BHP Billiton’s Olympic Dam project, and Ms Cirkovic have addressed the conservative HR Nicholls Society.

The last bit does make me laugh since I have also addressed the HR Nicholls Society whose main aim in life has been to rid us of the IR Commission which, in spite of the all too regular criticisms from the HRN and others, has been the main obstacle to union power in this country. If Senator Abetz is removed from the Ministry, just keep the following in mind:

The appointments came as Labor and the Greens denied Senator Abetz a rare legislative victory on industrial relations by stalling the passage of proposed changes to the federal workplace laws changes.

Senator Abetz has reached agreement with six senate crossbenchers to support changes to the Fair Work Act, including new limits on union bargaining power on new projects.

But Labor and the Greens organised a long list of speakers on the bill, ensuring the vote on the changes was delayed until at least the next sitting of federal parliament in three weeks.

[Opposition workplace relations spokesman Brendan] O’Connor said he would spend the parliamentary break seeking to convince the crossbench to reverse their in-principle position and not support the changes proposed by the government.

If it is jobs you are interested in and a reduction in union power, that is the way to have done it. It will be a sorry day for us all if Eric is removed from cabinet and IR is parcelled out to someone less skilled than he is.

Hey hey FWA – how many jobs did you kill today?

The economic arguments in favour of the minimum wage are for all practical purposes non-existent. But our National Wage Case is an established ritual that will not be disappearing any time soon since it continues as the linchpin in our system of industrial relations. But for the system to work as it needs to, those who make the decisions have to understand in their bones that there are no good economic reasons for raising the minimum wage. It keeps many people unemployed who otherwise would have jobs. If anyone on the Fair Work Commission panel adjudicating this case believes they have a convincing and contrary argument to make, they ought to write it up and send it off to a journal. They would thereafter maintain an enduring fame as the person who showed that a higher cost of labour did not lead to a reduced demand for employees. Many have taken up that challenge, but no one has yet succeeded. It is something like the economics equivalent of squaring the circle.

Given that raising the minimum wage will cost jobs, the absolute necessity for those who make these wage decisions is that they balance the economic harm against whatever industrial relations peace it might bring. You cannot count on unions understanding any of this, but you would hope that the Commission does. With the first round of this year’s submissions having been submitted on Thursday, we will see all of this reach a peak sometime in June when the decision is brought down.

I mention all this for a second reason. I am, with Sinclair, on the editorial board of the Journal of Peace, Prosperity and Freedom whose third ever edition has just come out. As its editor, Sukrit Sabhlok, says, it is edited “by a graduate student (me) without administrative/marketing support”. He therefore adds that “letting your local libraries/databases know about print subscriptions would be appreciated”. He further adds that “the journal is the only Austrian economics, free market economics, libertarian academic journal in Australia.” So if you would like to subscribe, you can subscribe here.

And as one of many reasons to subscribe, let me draw your attention to the latest issue in which there is an article with the title, The Irony of the Minimum Wage Law: Limiting Choices Versus Expanding Choices written by the extraordinarily eminent Walter E. Block (PhD, Columbia University), the Harold Wirth Eminent Scholar and Professor of Economics at Loyola University New Orleans, whose co-authors are Robert Batemarco and Charles Seltzer.

Here is the abstract, whose contents will be of no surprise to anyone who understands economics, or indeed to anyone who possesses an ounce of common sense.

Persistently high unemployment among specific sub-groups, namely teenagers, African-Americans and workers with low skills has been a serious problem in the United States. In this paper, we trace a large portion of that problem to the existence of minimum wage laws that have been in force nation-wide since 1938. These laws remain popular despite their adverse effects because of a lack of economic understanding among the general public. In this paper, we aim to make clear even to those without advanced economic training why the minimum wage law is not a viable solution to the problems of those its proponents purport to help, but rather a cause of worse problems for them. Our method is to use elementary economic logic to show that the minimum wage must harm many of those it is claimed to help by costing them their jobs and to review the data to show that it always has harmed them. Our conclusion is that minimum wages have not achieved their putative goal, but have served the ulterior motives of limiting the competition faced by labor unions. Our recommendation is to repeal minimum wage laws, and failing that, to at least lower their rates, and in their place to help low-skill workers by reducing the barriers to their receiving enough education to raise their marginal revenue product so as to permit them to earn higher wages in a way that does not remove their employment opportunities.

As for the title, I know I am using the Commission’s now discarded name, Fair Work Australia, but then if I used its real name, it wouldn’t rhyme. I, of course, trust that you will know what I mean. But will they?

The PM discusses IR reform

There is a difference between fixing our industrial relations problems and merely throwing out the system we have had since just after Federation. The first most assuredly must be done, but is not the same as the second. Let me quote the Prime Minister, who was trying to get people to understand the difference. The story from The Australian is headed, Abbott defends Fair Work Commission’s ability to set penalty rates. He does not deny that they are too high, only that there is a mechanism for adjusting penalty rates to a rate that will allow employment to grow. From The Oz:

TONY Abbott says he will defend the Fair Work Commission’s ability to set penalty rates, as Joe Hockey called on Labor to “stop scaring people” over industrial relations. . . .

Mr Abbott, speaking in Colac, southwest Victoria, set out a “statement of principle” that industrial relations reforms should aim to achieve “more jobs and better paid workers”.

“If the Australian workforce earns more and is as productive as possible that’s going to be good for everyone. Good for jobs, good for families, good for business, good for prosperity, and that’s what I want to see,” he said.

“In terms of penalty rates, we have a very well-established system in this country — it … began back in about 1903, as I recollect — and under our system it’s the Fair Work Commission which sets these rates, that’s how it is, that’s how it was, that’s how it will be.”

I think giving HRH an Australian knighthood was a distraction and made the government an easy target for its enemies. But this is not why I would or wouldn’t vote for some government. But knowing that the only way to fix our industrial relations problems is to go through our established system of labour relations is what needs a more clear-headed understanding by everyone on this side of the fence. On this, he had the vocal support of the Treasurer so we can see that the PM was speaking for the entire government.

On a related note: what does John Howard have in common with Sir Stanley Bruce? The answer to that might help you clear your head.

Plain speaking on IR reform

It’s opaque, not all that clearly stated, somewhat roundabout in getting to its point, written mostly in tongues in the form of an analogy, 100% ironic in its tone, but if you ask me, Grace Collier’s opinion piece in The Australian today – Fair work lessons in the real world – was written in defence our current industrial relations system. It describes a projected guided tour to the land of free enterprise with specific focus on its industrial relations system. And while it is hard to find a straight out quotable quote, let me mention just this one [bad language alert!]:

I am delighted to announce my “Harden the ­F–k Up Industrial Relations Discovery Luxury Extravaganza” to the industrial relations leader (and top shopping destination) of the world, the United States of America. This tour, in March, is aimed at the high-end traveller who thinks the main reason for Australia’s productivity and union problems is the Fair Work Act. It should be noted — and this limits the target market somewhat — the tour is strictly “no grumps allowed”.

There are then a series of vignettes about various aspects of the American IR system, with this the last one which is her grand finale:

Since 1973, union officials have enjoyed exemption from the Hobbs Act, a law that makes obstruction of commerce by robbery or extortion a crime. Union officials can use union violence free from criminal prosecution provided they are seeking to advance “legitimate union objectives.” Union violence is reportedly, since this time, responsible for at least 203 deaths, 5689 incidents of personal injury, more than 6435 incidents of vandalism and tens of millions of dollars in property damage.

The point she is making, but written in code so as not to upset her readers at The Oz who, she suspects, are unanimous in their desire to rip the present system down, is that we have a pretty good industrial relations system already, and we would be mad to try to put in place something like the system they have in the United States. That is exactly so. With every other national government literally the political wing of the union movement, we would be mad to pull down the one piece of social machinery we have designed to contain union power. It’s not perfect, and it can be made better, but there are a lot that are far far worse.

MORE ON THE AMERICAN INDUSTRIAL RELATIONS SYSTEM: It’s titled, “Superman Joins a Union” which gives you some idea about labour relations in Metropolis. At least if he were here he might be able to take his case to an industrial tribunal. The union official you see here is a universal type, known to one and all. It’s funny, but it’s no joke.