Published in Asset Magazine, December 2005

The 2006 Industrial Relations Reforms: likely effects

Published in Asset magazine, December 2005

The biggest reform to industrial relations in Australia’s history is now in train - one that will impact on all employees and employers.

This Need to Know examines the likely effects of this reform and what happened in New Zealand when similar reforms were made there.

Under the shake-up, state industrial relations systems will effectively be abolished in favour of a single national regime, awards will be stripped back to basics, and more workers will be forced on to individual contracts.

Companies employing up to 100 staff will no longer be hamstrung by unfair dismissal laws and weekend and public holiday penalty rates can be traded away.

The Howard Government claims these changes will boost economic growth and productivity and produce lower unemployment.

Its opponents claim that they will end a century of attempts to ensure a “fair go” in our industrial relations by lowering the relative wages and employment conditions of less skilled employees and those with less bargaining power.

Q: Can we predict with any certainty what will happen?

A: No.

Unfortunately, economics is not like the real sciences where repeatable experiments are often possible to validate or invalidate theories. It deals with humans, rather than atoms or elements, who can both learn and forget, who do not possess perfect knowledge of the world in which they make economic decisions, and thus cannot always make economically rational decisions.

The effects of labour market reform are thus impossible to model, given that attitudinal change is so central to its success.

This has not stopped silly claims being made by the Government and the Business Council about the impact on growth, productivity and employment – with actual numbers attached.

All these dogmatic predictions do is to remind us that there is a lot of con in econometric exercises. Such key economic outcomes are a product of many factors besides just industrial regulation.

Q: What effect will the reforms have on less skilled employees and others such as single mothers and those in regional areas with limited bargaining power?

A: Dogmatic predictions are impossible here also.

Significantly, in introducing his 1996 reforms, the Prime Minister, Mr. Howard, promised that no worker would be worse off than what they were under the previous system but he has refused to make the same promise this time round.

Under the Work Choices Bill, minimum wages will no longer be set by the Australian Industrial Relations Commission. That power will instead be given to the Australian Fair Pay Commission, whose members are appointed by the Government, and the welfare lobby is concerned that the new body’s judgements will be less sympathetic to weaker groups of employees.

The rights of trade union officials to represent dismissed employees under the changed unfair dismissal rules could also prove to be a big issue.

Q: Is there a similar real world experience which might provide some guidance to both likely efficiency and equity effects?

A: The closest example of change in industrial relations arrangements to those about to be made in Australia were the New Zealand reforms of 1990.

Productivity growth did not live up to the reformers’ promises – averaging only around one per cent per annum over the next decade - and New Zealand’s GDP growth decelerated, rather than rose from the mid 1990s onwards

Most interestingly, the effects on wages were not dramatic, as the accompanying graph shows. But the reforms occurred at a time of solid economic growth.

Thus the biggest question hanging over the Howard reform is what will happen to less skilled and weaker groups of wage earners, when our “Long Boom” eventually ends, unemployment rises and the labour market is very different to that of today?

For example, a study of females already on Australian Workplace Agreements found that they are paid 11 per cent less than women on collective agreements and 49 per cent of them have no entitlement to annual leave at all.

Q: What are the particular New Zealand lessons for Australian employers and trade unions?

The major initial problem in New Zealand was not union opposition but the slowness with which employers adjusted to the radical new system.

Employers who have been used to industry level agreements thus will now have to spend a lot of time negotiating contracts with individual employees. This will be particularly difficult in industries with Prima Donna-like employees, such as the media and universities – and financial services?

The message for unions? In New Zealand, the unions which lost fewest members were the ones which decentralized their activities, jettisoned their concern with “big picture” issues, and forged closer links with the rank and file to help them negotiate with their employers.

It should also be noted that our reform package is much more cumbersome than the one across the Tasman. The Act is 550-odd pages long whilst New Zealand's more reformist Employment Contracts Act was 100 pages, with the core legislation only 20 pages.

In short, how successful the Howard Government reforms will be will depend largely on the willingness of both employees and employers to be more flexible and accepting of change, to learn new bargaining and negotiation skills, and to adjust their attitudes and practices - not according to some theoretical “vision” but to practical industrial relations realities.

Dr David Clark teaches Business Economics at the University of NSW.