Chapter 3 - Enterprise
bargaining, productivity and economic performance: where is the evidence?
3.1
The Government's central justification for its
industrial relations changes is based on the assumption that it is only through
such changes that the economy can grow and employment rates increase. As this
chapter will show, such an assumption is based less on any serious economic
analysis than on unquestioning faith. In the face of evidence and assertion to
the contrary, the Government has convinced itself of the exclusive nexus
between productivity and industrial relations. All other factors, perhaps more
difficult to rationalise or explain in public debate, are conveniently ignored.
It has been said that, for the Prime Minister, whose personal crusade this is,
the world is painted in:
...vivid black and white, with enemies and supporters, bad and
good, wrong and right, all lined up neatly on the two sides of the party
divide. Critics putting arguments and reasoned differences are treated as
opponents and shoved into the Labor camp. There is no room here for hearing a
range of points of view, grappling with complexity, acknowledging uncomfortable
facts. Rational nuanced debate about complex and difficult matters of public
policy becomes well-nigh impossible.[113]
3.2
The Government has a policy to sell and the money to
sell it, and repetition of an idea and constant reinforcement of a message is
recognised as a successful sales pitch. Reiteration can establish credibility
even when reality suggests unpredictable consequences. An instance of the
Government's avoidance of any argument beyond rhetoric is indicated by the
following Four Corners exchange:
Sally Neighbour:
Numerous labour market economists are saying that there is no evidence that
these [proposed industrial relations] changes will boost productivity but that
what they will do is cut the income of the poorest workers and increase
inequality. What do you say to that?
John Howard: Well, I
don't agree with them and I point around the world to those countries that have
a less regulated labour market – workers are better off...All the evidence
suggests that as you free the labour market, you boost productivity, you lift
wages and you reduce unemployment.[114]
3.3
This chapter examines the debate over the effects of
enterprise bargaining and individual contracts on national economic
performance. It challenges the Government's claim that individual contracts
deliver higher productivity and that greater coverage of AWAs is necessary to deliver
a much needed 'productivity spike' to the economy. Like the debate comparing employees'
wages on AWAs and collective agreements discussed in chapter 2, the committee
finds that the overwhelming view of labour market economists is that a
connection between individual contracts and productivity has not been
demonstrated by any economic evidence, either in Australia
or abroad. As one newspaper columnist has put it, there is as much evidence
that the Government's proposed industrial relations changes will promote
productivity growth as there was for the claim that Saddam
Hussein possessed weapons of mass
destruction.[115] Assertions by
Business Council of Australia (BCA), Australian Chamber of Commerce and
Industry (ACCI) and Australian Industry Group (AiG) submissions about the link
between AWAs and productivity are also without foundation or economic evidence.
3.4
The committee notes that the evidence from New
Zealand shows conclusively that its system
of individual contracts introduced during the 1990s was a disaster for
productivity. Professor David Peetz has drawn
attention to the fact that New Zealand's productivity growth under its radical
Employment Contracts Act fell 14 per cent below what it would have been had it
kept pace with Australia, which then favoured collective enterprise bargaining.[116] A similar story holds for Western
Australia today. The Western Australian Government
submission argued that it is doubtful that AWAs make any significant
contribution to enhanced productivity or efficiency. In fact, the opposite
appears to hold true. The submission pointed out that:
Western Australia
has recorded the highest labour productivity of all the States over the last
three years, despite the repeal of its former system of workplace
agreements...This clearly demonstrates the fact that radical labour market deregulation
is unnecessary for achieving productivity improvements.[117]
3.5
Nor is the committee convinced by additional information
from ACCI which is alleged to show a strong connection between AWAs and
productivity. The material ACCI refers to, including from AWA ambassadors and one
working paper by the Melbourne Institute published in 2002, cannot be relied
upon as either authoritative or conclusive. Most of it relies on business and
industry sources and reflects that bias. The committee does not believe this
material contributes anything new to the debate. During the inquiry there was
no attempt by ACCI or any other employer organisation to respond to the
research by Professor David
Peetz, which has succeeded
in debunking economic arguments underpinning the Government's WorkChoices
policy.[118] This is reminiscent of the
Government's approach to evidence received by the committee's unfair dismissal
inquiry. In that inquiry, authoritative academic voices critical of Government
policy to exempt small business from unfair dismissal laws were either ignored or
brushed aside by employer groups and the workplace relations department, DEWR. While
the committee has had the benefit of examining Peetz's research for this
inquiry, Senators on the committee were denied the opportunity to question him and
other witnesses at a public hearing which was scheduled for 17 November, after
the Government refused to grant an extension to the inquiry's reporting date
beyond 31 October.
Productivity and economic performance
3.6
As discussed in chapter 1, the introduction of
enterprise bargaining as the centrepiece of industrial relations policy during
the 1990s placed greater emphasis on employers and employees handling their own
workplace arrangements and making agreements that best suited their own
interests. The presumption was that reduced interference by the state would
improve productivity and through it national welfare. The Howard
government had a belief that agreements on wages and conditions reached at the
level of the workplace would assist a properly functioning market, a strong
economy and employment growth. The Howard Government has an abiding belief that
a reduction in union power would also assist a properly functioning market, a
strong economy and employment growth. According to one assessment, the
industrial relations changes announced in Parliament in May 2005 are the
fullest expression of this philosophy.[119]
3.7
The Prime Minister's statement to Parliament made it
clear that only with a simplified agreement-making process 'will the full potential
for productivity gains in the Australian economy be realised'. It concluded that
the Government's new framework for industrial relations will 'drive future
productivity growth, create jobs and increase further living standards'. The
clearest expression of the Government's claim that agreement-making at the
workplace, especially individual contracts, will lift productivity is the Prime
Minister's response to questions during a Four Corners
program on the Government's proposed changes. During that interview, the Prime
Minister stated that encouraging increased use of individual workplace
agreements will generate the 'biggest single productivity boost' of all the
changes being proposed by the Government:
Sally Neighbour:
How will these [industrial relations changes] boost productivity?
John Howard: Because
they will give a much greater focus on agreement-making at the workplace level.
And experience all around the world tells us that if we allow individual
employers and employees to work out the arrangements that best suit them, the
businesses go better, they make more money and they pay their workers higher wages.
Sally Neighbour:
And how does that actually boost productivity as in output per working hour?
John Howard: Well,
it must automatically. If you run your firm more efficiently, then productivity
is lifted. And higher wages result because if you make higher profits and you
want to maintain that higher efficiency, you'll pay your workers more so
they'll contribute more. It really is getting it at a workplace level, rather
than having arrangements imposed from on-high or in some kind of pattern across
an industry.[120]
3.8
Submissions from employers groups pushed the same line,
arguing that individual contracts, encouraged by the WR Act, have lifted
productivity and that a higher take-up of AWAs is therefore required to boost
productivity further. The BCA submission stated that AWAs have been a positive
development in workplace relations policy in Australia.
While they represent only a small proportion of total agreements, it is alleged
they have played an important role in driving greater flexibility and improved
enterprise productivity and performance in key sectors of the economy.[121] The same argument is found in the
ACCI and AiG submissions. The committee notes that employer group submissions
do not include any evidence to back these assertions.
3.9
The committee notes the effort by ACCI to provide it with
additional information which is alleged to show a strong connection between
AWAs and productivity growth. Some of the information relates to questions
which ACCI agreed to take on notice at the committee's Melbourne
hearing. In correspondence that followed, Mr
Scott Barklamb,
Manager, Workplace Relations, stated: 'Any suggestion that there is no link
between AWAs and productivity is at odds with the experience of employers. An
ample demonstration of this is found in the experiences reported by the OEA
AWA Ambassadors...and from key industries such
as the mining and hospitality industry'.[122]
The OEA website describes the OEA ambassadors as employers who have implemented
AWAs or possibly employees who have been on AWAs and who are willing to speak
publicly about how their AWAs have been of benefit to them.[123] Is it any wonder that ACCI referred
the committee to a small sample of ambassador reports from employers and
employees willing to write glowing reports of their experiences of AWAs.
3.10
The committee does not believe that the sample of
ambassador reports listed on the OEA's website can be taken seriously as
evidence of any link between AWAs and productivity. Apart from the ambassador
reports and one Melbourne Institute Working Paper, Mr
Barklamb referred the committee to so-called
'evidence' which is already contained in OEA publications and other employer
group submissions. The committee does not believe that any of the additional
evidence contained in Mr Barklamb's
correspondence adds anything new to the debate.
Is there a link between individual
contracts and productivity?
3.11
The Government's argument linking individual contracts
to productivity is rejected by one of Australia's
leading academic researchers of industrial relations and labour market issues, Professor
David Peetz.
He has pointed out that the economic evidence to support the Government's
assertion does not exist. The lack of economic evidence that individual
contracts boost productivity has even been acknowledged by head of the
Australian Industry Group, Heather
Ridout.[124]
The research by Professor Peetz
on individual contracts and productivity is very important in this regard. It
hinges on two separate lines on inquiry. The first is a comparison of labour
productivity over the various productivity cycles since 1964-65 and the various
institutional arrangements that applied at the time (see Figure 1). The
analysis shows that under the award system that operated before the prices and
incomes accord of the 1980s, productivity growth was between 2.4 and 2.9 per
cent per annum. It fell to 0.8 per cent following the introduction of a
centralised accord. With the shift to enterprise bargaining in the mid-1990s,
productivity growth peaked at 3.2 per cent. The current productivity cycle,
which commenced in 1999-2000, has seen a fall in annual productivity growth to
just 2.3 per cent per annum. According to Peetz: 'this is even below the rate
of labour productivity growth that applied during the traditional award period.
It is despite the fact that average union density, at 53 per cent, was over
twice the rate of union density that has applied in the current cycle'.[125]
3.12
The figures on multi-factor productivity tell a similar
story (see Figure 2).[126] They show
that during the most recent cycle, which has taken place under the Workplace
Relations Act, the rates of multi-factor productivity growth have been below
the average that applied during the traditional award period.
3.13
Peetz also challenged claims by the Business Council of
Australia (BCA) linking individual contracts and productivity. He pointed out
that as the most important corporate lobby group supporting the Government's
industrial relations reforms, the BCA co-funded three large-scale academic
studies to examine, in part, this relationship. The studies were based at the
National Institute of Labour Studies, Flinders University; Melbourne Institute
for Applied Economics and Social Research, Melbourne University; and the
University of New South Wales. Peetz found that none of the studies'
conclusions were what the BCA would have wanted:
The Flinders project showed that "unions apparently are
good for productivity, but only at workplaces where unions are active".
The Melbourne
project showed that collective bargaining coverage was associated with higher
claimed levels of productivity. The New South Wales
projects identified 15 "key drivers" for excellence but "working
arrangements and representation" (individual versus collective bargaining)
were not among them: indeed they were "points of difference".[127]
Figure 1 -
Labour productivity growth and wage fixing institutions, 1964-65 to 2003-04[128]
3.14 In
his submission, Peetz continued his critique of the BCA by pointing out that
its Workplace Relations Action Plan released in February 2005 does not refer to
any evidence from the three academic studies that it had jointly funded. It
relied instead on a series of observations on the mining industry, notably the
contentious claim that labour productivity growth from 1994 to 2002 was higher
than in other industries.[129] The
Action Plan ignored ABS data for the eight years to 2003-04 which was released
by the ABS in November 2004. It showed that mining had the lowest rate of productivity growth, which was only a quarter of the
national average growth rate for this period. Peetz is also critical of a
February 2005 report by Access Economics, which the BCA commissioned to give an
'authoritative basis' for its latest claims. The report, according to Peetz, is
dominated by sweeping generalisations about productivity.[130]
Figure 2 - Multi-factor productivity growth and wage
fixing institutions, 1964-65 to 2003-04[131]
3.15
Peetz
concluded that there is no compelling evidence presented by or on behalf of the
BCA to support the claim that individual contracts leads to higher
productivity. What evidence is presented '...is shallow and dependent on either
misrepresentation or failure to use current data that has been available for
some time'. Peetz maintained that the lack of a 'smoking gun' is not surprising.
It is consistent with academically rigorous quantitative studies which show
there is no consistent relationship between either individual contracts and
productivity or unionism and productivity.[132]
3.16
The argument linking AWAs to productivity relies
essentially on enhanced employee commitment. However, studies show that company
commitment is higher amongst people also committed to a union and collective
bargaining. There is a strong argument that individual contacts may actually reduce
productivity because of employee mistrust. That collective bargaining delivers
higher productivity growth than do individual contracts is a view widely
shared, including from some unlikely sources. It is supported by the research
of Professor Peetz
as well as that of Professor Mark
Wooden, who told a recent Four
Corners program:
I think that the biggest gains for productivity still revolve
around a system which is collectively based...with or without unions. I don't
think unions are critical to this though there's plenty of evidence around...that
unions can enhance productivity where they're very active representing the
worker's interest and collaborate cooperatively with firms.[133]
3.17
Research by Professor
Bradon Ellem
and his colleagues compared productivity growth in Australia
and New Zealand
to challenge the Government's claim that individual contracts deliver higher
productivity. It showed that productivity growth was substantially higher in Australia
during the period when Australia
had a 'collectivist national Government' and New
Zealand an 'individualistic one':
Australian productivity growth increased in the productivity
cycle that commenced after the introduction of collective enterprise
bargaining, but fell back in the cycle that commenced after the introduction of
the Workplace Relations Act. Current rates of productivity growth in Australia
are, if anything, inferior to the rates that were achieved under the
traditional award system in the 1960s and 1970s.[134]
3.18
The committee finds it difficult to align the goal of
productivity growth to the Government's WorkChoices policy because productivity
is a function of many factors such as enhanced skills and technical progress.
It is not a product of workplace flexibility and labour regulation.[135] According to Peetz, the rate of
technical production won't come to a halt because a system of individual
contracting has not been introduced or unfair dismissal laws for workers in
firms with less than 100 employees have not been abolished. The Australian
Manufacturing Workers Union National Secretary, Mr Doug Cameron, told the
committee that Ireland was able to move from a rural economy to one of the
highest productivity manufacturing economies in the world through 'skills,
intervention and investment', not through labour deregulation.[136]
3.19
Peetz's criticism is consistent with the broader critique
of the neo-liberal orthodoxy which holds that deregulated labour markets
improve economic performance. The committee notes that the doyen of US
labour market economics, Professor Richard
Freeman of Harvard
University, has published a paper
which draws attention to substantive and growing objections to the evidentiary
base on which the new orthodoxy rests. Freeman's paper reportedly describes as 'non-robust
and ill-specified' and as 'more sawdust than hardwood' the belief that
deregulating labour markets and weakening trade unions will cure employment and
spur economic growth.[137]
3.20
The committee notes that a number of analysts believe
that Government policies risk slowing the rate of productivity. The acting
director of the Australian Centre for Industrial Relations Research and
Training (ACIRRT), Dr John Buchanan, has expressed his concern that the
policies contained in the WorkChoices document, especially a further weakening
of unions and publicly defined standards, will dampen the incentive for
employers to find creative ways to boost productivity: 'The dismal – zero –
rate of productivity in the United States' services sector attests to this'. He
also drew attention to the effect of similar policies on part-time supermarket
workers in New Zealand
whose rates of pay fell by 30 to 45 per cent in real terms in the decade after
its reforms were brought in.[138]
Profits before productivity
3.21
Peetz's work has demonstrated that individual contracts
are attractive for employers because they increase managerial prerogative, and can
be used to raise profits and weaken union power. Productivity is not the
driving motive. It is easier for companies to drive down labour costs in the
short term than it is for them to increase productivity over the long term. His
findings are widely supported in the literature.
3.22
The committee finds that the Government's proposals are
designed to increase short-term profitability rather than productivity,
principally by driving down the cost of labour. It is true that profits can be
increased by gains in productivity, as ACCI pointed out, but it is easier for
firms to increase their profits by cutting employees' wages by reducing or abolishing
penalty and overtime rates, which is already a common feature of AWAs. The
committee notes that a reduction in employee entitlements is often dressed up
as productivity. Employers in the hospitality industry, for example, may claim
that abolishing penalty rates for night or weekend work increases labour
productivity. But it does not. All that happens is that the wage cost per meal
is reduced while profits increase. Productivity, however, is unchanged.[139] The same would apply to waiters in cafes
and restaurants. Cutting their penalty rates would not result in more plates
being carried out per hour, but in a reduction in pay. Peetz concluded his
study by stressing that productivity is not what corporations seek: 'it is
profitability they seek'.[140]
3.23
The other avenue open to firms to increase profits is
to increase the hours of work, which is a central feature of many AWAs.
According to Professor Bradon
Ellem, two of the biggest changes that have
taken place in the services sector and in manufacturing are an increase in the
number of employees on 12 hour shifts and an increase in the length of their
working day to 12 hours.[141] Changing
the hours of work is not a measure of productivity but a way for companies to
increase profits by getting more value for labour than was previously the case,
and without any long-term strategic planning to improve the nature of the
organisation.[142] Professor
Richard Mitchells'
research shows that much of the productivity growth of the past decade is
because people are working harder, their working lives are more fraught, there
is greater employer control over people's working lives and people are doing
more tasks.[143]
WorkChoices: economic and social risks
3.24
The committee believes that the Government is moving
into uncharted waters with its new WorkChoices
Bill. It has not satisfactorily explained
how it will address the social consequences of radical change and the slowdown
in productivity. Nor has it explained how it will create more jobs, alleviate the
labour and skills shortage, ease work-family tensions and address the growth of
low-paid and precarious employment. The committee is not even sure that employers
and business are convinced of the Government's rhetoric that the industrial
relations system is so outdated that a complete re-write of the WR Act is
needed. Far from it. Professor Andrew
Stewart told the committee that most of the
large employers which his law firm represents: 'are not desperately unhappy
with the system that we have. There are certain things that irritate them and
that they would like to see fixed up, but they are not clamouring to go out and
do individual agreements. Many of them are already dealing with the unions and
they are content to continue to deal with unions'.[144] The committee is critical of the
Government's approach to national economic debate, where views and perspectives
contrary to its own are dismissed as wrong and irrelevant, or ignored altogether.
3.25
Nowhere is uncertainty over the consequences of the
Government's proposals clearer than on the issue of skills shortages. The
Government is now arguing that individual contracts will help repair the
current shortage of skilled labour. The argument appears to be that individual
contracts offer workers more flexible working hours which will encourage
people, especially women, back in to the workforce. It is a view which the
committee does not support. The committee, if anything, believes that AWAs will
make labour shortages worse, at least in the short term. Lower wages under AWAs
will mean fewer people will want to enter the workforce. Women in particular
will not think it worthwhile to get a job when minimum wages under the proposed
WorkChoices legislation fall steadily behind the current award rate. As the
committee found in chapter 2, AWAs increase flexibility only in how working
hours are paid for. This means that individual contracts increase flexibility
for employers only, who can use them to achieve cost reductions.[145]
3.26
No one, it seems, outside Government and some business
circles is convinced there is an economic imperative mandating the Government's
industrial relations reform agenda. Yet the Government is pushing ahead
regardless of growing concerns that it has turned a blind eye to community
standards in the pursuit of economic objectives. The evidence before the
committee points in the other direction – that the Government should be
crafting innovative workplace changes that will deliver on economic and social outcomes. The committee
agrees with the research by Professor Bradon
Ellem and his colleagues which found that
the 'old-fashioned low-wage solution' proposed by WorkChoices is a missed
opportunity.[146]
3.27
The committee believes that the Government has failed
to come up with solutions to the significant labour market and workplace
challenges which lie ahead. Dr Ron
Callus and Dr
John Buchanan
from ACIRRT have argued that a new approach is needed to remedy major problems
affecting an increasing number of workers: 'More than a third of part-timers
want more hours of work. More than half of those working more than 50 hours a
week want to work less'.[147] In Dr
Buchanan's view, WorkChoices has failed the
challenge. It is a policy that will deepen rather than solve the major problems
facing workers:
Problems in work-life balance, skills shortages and productivity
growth are real. They require the creative blending of standards for
flexibility, not an erosion of standards in the name of flexibility. The
changes proposed by WorkChoices will become part of the problem, not part of
the solution.[148]
3.28
The debate over whether AWAs are necessary for
productivity growth leads the committee to speculate on the relationship
between enterprise bargaining and factors external to the workplace, such as
the effect of a strong economy, low unemployment and demographic change on the
demand for skilled and unskilled labour. The committee is particularly
concerned by forecasts that Government policy is taking Australia
down the American path of low skills and low wages, which will see the terrible
social and economic consequences of New Zealand's
failed deregulation policies revisited across the Tasman.[149] The committee fears that this will
result in higher levels of poverty and economic deprivation with corresponding
threats to social cohesion. Isolated pockets of skilled labour surrounded by
unskilled and low-paid workers comprising women, young and casual workers and
persons from non-English speaking backgrounds will be created. One commentator
has argued that many of the harsher provisions of WorkChoices will come into
play in a recession, especially for new employees. In this scenario, employers
will be laying-off workers or threatening to do so unless employees agree to
cut back on their conditions.[150] There
is also a risk that consumer confidence will slide as a result of penalty rates
being stripped away without the protection of awards.[151]
3.29
The Government's claim for increased flexibility and a
simpler agreement-making process may also produce an insecure, unstable and
de-motivated workforce. Professor Andrew
Stewart has predicted that
as a result of the Government's proposals:
...we could certainly expect to see an even bigger gap developing
between those fortunate enough to be in high skill, high demand occupations or
in powerful unions, and those who...must effectively agree to whatever their employer
demands. Needless to say, women...are likely to be disproportionately represented
in the latter category. If the Government believes that this is the price that
must be paid for improved economic performance, then so be it – but they should
have the courage to come clean and say so, not hide behind spurious rhetoric as
to individual "freedom" and "choice".[152]
3.30
The Government's claim that its workplace reforms will
lift the employment rate has been brought into question by independent
researchers. It has been pointed out that under the WorkChoices policy, the
Government is only guaranteeing that the nominal value of the last safety net
wage increases given by the Commission will be preserved. Yet there is no
proposed indexation of the present minimum wage to ensure that its real value
is maintained. It is the Government's belief that this new 'Fair Pay'
Commission is necessary to create more jobs. Yet, the committee believes that
the scope for increasing employment by reducing the minimum wage will be limited.
This is because, as one commentator put it: 'the more wages are cut, the closer
they come to bumping up against welfare benefits and the less incentive people
have to take jobs'.[153]
3.31
The committee believes that the Government is taking an
unnecessary risk with the economy with its WorkChoices legislation. It has
failed to make an empirical economic case for its industrial relations reforms.
It has failed to explain why a large unprotected underclass of workers and a widening
gap between skilled and unskilled labour must be the price for its narrowly
conceived vision of improved economic performance. The committee is concerned
by the prospect that WorkChoices will be a blueprint for undoing the economic
gains made over the last 15 years and will seriously threaten the quality of
life and Australian society. It may even be a trigger for an economic downturn.
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