Don't be a labour law fashion victim

As the Commissioners of the Fair Work Act Review work their way through the mountain of submissions, one of the most critical aspects they will be called on to consider is the relationship between labour law and productivity.

My research over a number of years has consistently demonstrated that the assumption of a direct, widely agreed relationship between the concepts of decentralisation and deregulation and superior productivity performance is wrong.

Even before the global financial crisis, normally 'pro-market' international agencies such as the OECD, IMF and World Bank released a series of very thorough research papers that established this point. The only unambiguous relationship between bargaining structures and outcomes is that decentralised, deregulated systems are consistently associated with greater inequality.

Any empirically sensitive, robust analysis of the relation between labour issues and productivity must engage with four fundamental paradoxes.

The first is that strong productivity performance in recent times is an extremely poor predictor of economic performance today. The key regularity to note here is that between 2000 and 2007, the top performers in labour productivity were Greece, Ireland, the US and the UK. These are now today's economic basket cases. We must be very careful what we wish for.

The second is that a preoccupation with the optimal deployment of labour in the short run retards economic development and social inclusion in the medium and longer term.

Extensive research by the Workplace Research Centre over the last two decades in the metal and engineering sectors has established this point. But this problem is not confined to this sector – our analyses have involved research in sectors as diverse as agriculture, mining, health and community service and many parts of the private services sector.

Australia is not alone in its productivity slowdown, which has been occurring at a time of unprecedented abundance in all advanced industrialised countries.

Thirdly, outputs and labour inputs are often not independent variables – and treating them like they are can result in major inefficiencies. The clearest example of this paradox is provided by the comparative performance of the US health system.

Within the OECD countries, it is the one most consciously constructed around the market-based model of 'efficiency'.

The outcomes are well known and undisputed: within the OECD, the US spends just under twice per capita on health as countries like Australia, the UK and Japan, yet also has the shortest life expectancy and highest infant mortality. Preoccupation with market 'efficiency' at the micro level can have truly tragic results in aggregate.

Lastly, the prima facie 'productivity slowdown' is occurring at a time of unprecedented abundance in all advanced industrialised countries, including Australia. In Australia's market sector, output per worker has all but doubled since 1978. Real wages have only risen, on average, by 20 per cent.

The question we need to ask is not "where will the productivity growth of the future come from?” Before any robust answer to this question can be provided, we first need to understand this question: "Where did the productivity growth of the last 30 years go?”

Any starting point for a serious analysis of how to improve output and employment must grapple with the non-delivery of promises made over 30 years about how a society can prosper by embracing market-inspired structural reforms.

Work I am currently undertaking with scholars in the US and UK reveals that many of the 'gains' of the last 30 years were achieved by factors other than market flexibility. Indeed, net employment growth outside publicly funded community services and health has been anaemic – even in the heartland of the "new economy”, California.

And the growth that has occurred has generated more jobs of poor quality, in terms of labour standards, than in the past. This experience highlights that the GFC was not an accident. Rather, it was the culmination of an unsustainable policy regime.

Policymakers need to give greater attention to job quality and fairer distributions of income – both functional and personal – if we are to move onto a sustainable trajectory of economic development.

Further, the implications for these analyses for the Commission are simple: build on and do not further undermine Australia's unique contribution to labour law.

The commissioners should resist most of the widespread narratives about the assumed 'productivity-retarding' legacies of the Fair Work Act – such assertions are generally based on anecdote or economic analysis that fails to engage with empirical realities.

Australian labour law has, over a century pioneered, in a very practical, modest and effective ways innovations to handle the complex challenges of reconciling the need for economic prosperity and fairness.

The Commission should ensure its review recommendations build on these very practical achievements and avoid kowtowing to currently fashionable economic doctrines that have, in recent times, taken the world to the brink of ruin.

This article is an edited version of John's submission to the Fair Work Act review. The views expressed are his own.

Professor John Buchanan is Director of the Workplace Research Centre, University of Sydney Business School. This story first appeared on The Conversation. Reproduced with permission.