Cutting through an IR battlefield
How urgent is it that the industrial relations system be reformed? What benchmarks can be used to judge the efficiency of Australia's workforce?
In simple terms, if the industrial relations system in Australia was broken, misdirected or inefficient, it would likely show up in a mix of high unemployment and/or high wages growth. The other observable problem would be ongoing low levels of labour productivity.
The recent data flow suggests the IR system is far from broken, although obviously there are reforms that can be made not only to lock in this good performance, but to push the boundaries on the current estimates about potential GDP growth, wages and the level of full employment.
The unemployment rate is currently 5.2 per cent, something that the Reserve Bank of Australia, Treasury and most credible economists suggest is near full employment. Unemployment has been around that level for a year now, having fallen from a peak of 5.9 per cent when the GFC blew cold air over the Australian economy. It is almost nine years since the Australian unemployment rate was above 6 per cent. On this score, the IR system must be doing something right.
The Labour Price Index data released yesterday showed a rise of 1.0 per cent in wages in the June quarter for an annual increase of 3.7 per cent. The annual growth rate in the LPI has averaged 3.8 per cent over the past decade. Again, there is nothing in these data to suggest any generalised wages problems. If the IR system was biased unfairly to either the employer or the workers, wages growth would not be this stable and sustainable.
Most sober assessments would conclude that if these sorts of results for unemployment and wages growth were to be the average for the next five years or so, Australia would be doing very well.
Which leads to the current policy debate. Are the current arrangements consistent with ongoing low inflation, ongoing moderate nominal wages growth and, in a structure where inflation will average around 2.5 per cent, real wages growth for workers?
For more than a century, industrial relations and productivity issues have been top-tier policy issues in Australia. The 1907 Harvester judgment set the scene. That was when Judge Henry Higgins ordered that workers be paid a wage that was "fair and reasonable” for "a human being in a civilised community.” The weekly wage, according to Higgins, "must be enough to support the wage earner in reasonable and frugal comfort.”
Employers were dismayed, workers delighted.
The IR system has evolved from the Harvester judgment. In the three decades or so, some key IR benchmarks include automatic wage indexation (a disaster which fuelled a wage/inflation spiral): the Prices and Incomes Accord (brilliant policy which linked pay rises to productivity and it was a factor that helped smash inflation and boost superannuation); WorkChoices (a step too far with a severe tilt in the balance towards employers) and now Fair Work Australia (not a bad compromise, although there are questions over the regulatory framework and whether there is enough attention given to productivity and flexibility).
One problem with IR and productivity enhancing policies from the government is that they often have tremendously long lags. There is no quick fix.
With the hard data on wages and unemployment at favourable levels, actual workplace practices can and should be addressed cautiously, rather than radically overhauled.
Productivity growth, on the other hand, has been poor for a decade or so and things need to be and are being done to correct this.
Spending money on primary school students to boost literacy, numeracy and language skills, for example, is essential, but this will not yield productivity benefits for 20 years. Good governments do this with a short-term cost, but with great long-run benefits. It's similar, but a bit less extreme, when there are policies to retrain and reskill workers who might lose jobs in declining industries and boosting workforce participation.
Other productivity enhancing policies are being implemented now: freeing up working visa requirements, for example, so that firms in the fast lane of growth can quickly and reasonable easily employ skilled immigrants.
Then there are issues on 'red tape', taxation and infrastructure. The federal systems makes progress on these fronts slow, but essential if the economy is to be more efficient. And COAG is having some success on these business regulation issues.
The recent news on productivity has been a little less bad. In the last year, there are tentative signs that productivity is turning higher, albeit from a low base. A couple of years' more data is needed before we can be sure whether these green shoots in productivity enhancement are real or sustained.
In the meantime, it is to be hoped that labour market laws allow for optimal flexibility, with pay rises biased to skills, productivity and fairness. As long as the unemployment rate stays low, wages growth moderate and productivity gets a shot in the arm from long-run government policies, Australia will continue to do well.