INTRODUCTION TO ECONOMICS 

Lesson 12

ECONOMICS OF WORKPLACE REFORM

There has been considerable discussion about Canberra’s proposed new Workplace Relations legislation.  Much of the discussion has centred on the direct and immediate consequences of the specific proposals, such as the likely effect on working hours, penalty rates, the process of hiring and firing, minimum wages, awards, the unions, individual contracts or Australian Workplace Agreements [“AWAs”] as they are called and so forth. 

Whilst the actual consequences of the proposed changes are undoubtedly of importance to all involved in the workplace, it is possible to discern within the proposals various underlying political, sociological, legal and economic arguments or views which provide the basis of the proposed changes.  Although they are largely intertwined some separation is possible such as to consider the economic aspects in isolation and to determine the economic reasoning behind the proposed changes.  Basically the thrust of the proposed changes appears to be to deregulate in order to introduce or increase competition within the labour market and create greater flexibility.  As so revealed there is a fundamental inconsistency in the proposed changes.

WHY CHANGE?

The process whereby labour is bought and sold comprises a market.  The Australian labour market, in so far as one exists as such, is generally regarded as high-priced.  Historically this has been balanced by the fact that productivity or output per worker has also been high and thus able to generate high wages and perquisites and generally sustain a high standard of living.

It is alleged, for instance by the Business Council of Australia, that the productivity of the labour market in Australia is falling [allegedly 1.4% in the last 12 months].  At the same time the productivity of overseas labour markets is rising.  In many instances the price of such labour is still considerably cheaper than in Australia.  It is argued Australian goods and services must sell in an increasingly competitive world and so in order to sustain our national standard of living and traditional way of life, the Australian labour market, it is claimed, needs to become more productive.  How then to increase productivity ?

COMPETITION

Competition is the act of striving against another person or force for dominance reward or a goal; the last can range from self-amusement to survival.  Most, but not all, economists see competition as central to economics itself. Competition between buyers and sellers, suppliers and consumers, determines price in a market.

Competition exists at various levels.  Direct competition is said to occur where goods and services that perform the same function compete against each other eg one brand of soap or one bricklayer competes against other brands of soap or other bricklayers.  Substitute competition occurs when products that are substitutes for another compete eg carpenters for bricklayers or chemical cleaners or deodorants for soap.  A third level of competition is called budget competition which virtually suggests that competition is universal encompassing anything on which a consumer might wish to spend his limited capital.

Most economists, certainly market economists, see competition as the stimulant to innovation, efficiency and lower prices and hence to increased living standards and faster economic growth.  Theoretically at least the unfettered free market is the most productive form of organisation and will produce an optimum output. 

A market is not a jungle.  There must exist some laws, rules and regulations that preclude violence and fraud and facilitate and protect cooperation.  Cooperation, in the sense of partnerships and combinations [or companies], and the entry into and performance of agreements is at least as important as competition in this regard.  It is the nature and extent of laws rules and regulations that apply or are imposed on a market that create and sustain many, if not most, arguments and disputes within a society.

For a variety of reasons the Australian labour market is subject to a number of laws, rules and regulations, which determine the manner in which it operates.   They include minimum wage laws, professional and occupational licencing laws, and a variety of employee and union legal protections and mandatory benefits such as unfair dismissal laws, penalty rates, long service leave, minimum holiday and sick leave entitlement and so forth.

The proposed workplace changes can thus be seen as an acceptance by the Commonwealth government of the economic argument that less regulation and control of the labour market will increase its competitiveness and that will in turn lead to greater productivity and hence prosperity.  Greater prosperity will then provide job security, not by making it more difficult to retrench workers from existing jobs but by providing more employment opportunities.

A SINGLE SYSTEM

The irony and contradiction in the proposed changes lies in the nature of government in Australia.  Australia is a federal rather than a unitary country ie it comprises a number of separate sovereign states that have joined together to create a central government with certain specified powers and functions, retaining the residue of governmental functions and powers to the States.

Under the Australian Constitution the Commonwealth does not possess an Industrial Relations power.  This is accordingly reserved to the States.  The Commonwealth’s present-day overwhelming power in this regard has been largely created by progressive and gradual accretions by Canberra, which have been successively endorsed by a sympathetic High Court, based on the constitutional power contained in S 51[xxxv] to conciliate and arbitrate to prevent and settle industrial disputes extending beyond the boundaries of a State. 

Presently the power to legislate and regulate with respect to industrial relations is split between the Commonwealth and the States [except for Victoria, which under Premier Kennett surrendered its Industrial Relations powers to the Commonwealth].  This has had the effect of creating competing systems.  To a large extent parties are free to switch between Commonwealth and individual State control so that Industrial Relations is not a monopoly.   A large number of industries, and their employers and employees, continue to be regulated by State, rather than Commonwealth laws, rules and regulations.

Ironically it would appear that the seeming basis of the proposed changes, namely the economic advantages and benefits to be gained by competition have been rejected by Canberra with respect to its own power and instead it seeks to eliminate competition.  Somewhat optimistically given the High Court’s record in such actions, the States have announced their intention to mount a High Court challenge to the proposed changes.  

      David Sharp

        October 2005   

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