From fair-go to rip-off: Australia’s new labour code

Richard Freeman 03 October 2007

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In 2006 on the other side of the world, where kangaroos and platypi dwell, an advanced democracy embarked on the most radical anti-labour policy in modern economic history. The government of John Howard enacted WorkChoices the previous year, nationalising labour law over the objections of the state governments who had been responsible for the labour code governing most workers. WorkChoices took effect in March 2006 when the Supreme Court of Australia declared this centralisation of power constitutional.

Like most people on this side of the globe, I have not paid much attention to Australia. In graduate school, I learned that Australia used industrial tribunals to set minimum standards in pay and working conditions in particular sectors. Whigged judges to determine pay and conditions instead of markets? Weird! But if somewhere far-away wants to be weird, or has "weird" practices (a.k.a. in the US as “un-American”), that’s its business.

But the new Australian labour code is such a massive break with Western labour traditions that it merits the attention even of those who eschew kangaroo stew, platypus pie, and other delicacies from down under. It was enacted in the midst of prosperity, without union or management excesses that endangered the economy, or public support. From the perspective of social science, we cannot get much closer to the ideal random assignment experiment at the national level than WorkChoices – an extreme change in law with no economic rationale or cause.

Historically, the labour laws of Australia, like those of other Western democracies, have protected the collective rights of workers and buttressed the position of workers in dealing with business, albeit while limiting the powers of unions to disrupt economic life and while guaranteeing the democratic rights of members.

WorkChoices is the polar opposite. It privileges individual contracts through “Australian Workplace Agreements” that have precedent over any collective contracts. This summer at the request of the Australian state governments, I analysed the economics of this legislation. Downloading the Workchoices legislation, I found a 687-page law with 565 pages of accompanying memorandum, all amending the government’s previous 861-page labour act.

It is filled with government-mandated “cannots” -- restrictions on the freedom of business and labour to negotiate contracts. For example, firms and workers cannot: provide for payroll deduction for union fees … indicate how a future agreement should be renegotiated... enable a union to participate in a dispute resolution procedure in its own right …restrict or regulate the conditions of independent contractors and labour hire workers … provide a remedy for unfair dismissal on the basis that it is harsh, unjust or unreasonable… and so on, for over 600 pages. One part empowers a government minister to set aside contract provisions that do not fit with the purposes of the law.

This is not Mrs. Thatcher’s labour-law reforms nor conservative deregulation to allow labour and management freedom to negotiate. Small wonder that it roused the near unanimous opposition of labour economists and labour-relations experts regardless of political ideology. It is the first major government effort since the early days of unionism to undermine collective action by workers and to regulate labour contracts in ways that increase the power of business relative to workers.

Parts of the law made so little economic sense that it seemed as if the Howard government had found a new band of whigged judges and labour lawyers to write it, on behalf of management. Which, in fact, I learned, was more or less how the law was developed. Writing the law was outsourced to the major Australian law firms that represented management. Thus, they produced pages and pages to give their clients greater power at the expense of workers.

As of this writing, Australian’s new labour code has made the Howard government so unpopular that it trails the opposition by unprecedented figures in the polls. The public has rejected the law as unfair to workers by roughly 3 to 2. A survey by the Institute of Management found that a majority of workers believed the law was going to harm wages and job security. And the first body of evidence, the first individual labour contracts post-Workchoices, show large losses of earnings for low-paid workers in the hospitality sector.

Employers do not bargain individually with workers. They write out minimal “Australian Workplace Agreements” and tell the workers to take it or leave it.

Recognising that its labour law has met with massive disapproval, the government tried to drop the “Workchoices” brand name but could not come up with an appealing alternative. Howard’s folly? The Big Rip-off? It has appointed an official to help workers treated unfairly under the new arrangements. Just call some government functionary in Canberra and she will take care of the problem.

The opposition promises to eliminate the Australian Workplace Agreements and to develop a new labour code, based on social consensus, over the next two years. The government is not saying what its plans will be. Whoever gets elected this fall should scrap Workchoices and take the opportunity to develop a truly modern labour code. Economics offers four principles for such a code.

  • First, the law should encourage efficient bargaining – that is, bargaining that “leaves no money on the table”. Per the Coase theorem, this means clear and simple regulations so that labour and management can bargain for maximum efficiency even as they fight over distribution. A few basic rules regarding the property rights to employment and workplace decisions in place of rules that are hundreds of pages of micro-managed dos and don’t dos.
  • Second, economics suggests keeping government officials out of the workplace bargaining. Hayek may have been a curmudgeonly conservative terrified by a now obsolete socialist threat, but he was right about lodging decisions with the people who have local information (subject to some concern about externalities). We want workers, unions, and management to have the scope to experiment with alternative contract provisions. We would encourage diversity on the notion that “one shoe does not fit all feet.” If your firm wants to include a clause in a contract that provides a remedy for harsh, unjust, or unreasonable dismissal of workers, you should have the right to do so.
  • Third, we would strive that the parties covered by the code agree on the rules rather than seek to impose them without major public support. If there is one lesson from human resource management, it is that workers participation in decisions -- their voice at workplaces -- is critical for a healthy and productive workplace. The Workchoices legislation is based on an outmoded control-and-command view of how workplaces operate. It is alien to the world in which firms operate on the basis of partnerships, group incentives, team production, profit-sharing, and employee-share ownership.
  • Fourth, economics suggests that any labour code build in some insurance for the protection of workers, even though such insurance may cost a bit of economic output. How much insurance to give workers is a matter of political debate and the weighing of alternative costs and benefits. The more leftwing view can be represented by the following statement: “Perhaps modest economic inefficiency is cost worth paying for if it prevents blatantly unfair behaviour by employers”. The rightwing view is: ”Perhaps some unfair behaviour by some employers is cost worth paying if it gets more jobs”. Different analysts can subscribe to either of these statements and remain true to the economics of weighing benefits and costs.

If re-elected this fall, the government will stay the course with Workchoices and we will see the results of this extraordinary effort to destroy collective action by workers. For the sake of social science, it would be great to see the experiment carried through to completion. For the sake of Australia, it would be great to see the election end the experiment. Pay attention to down under, mate.

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Topics:  Labour markets

Tags:  Australia, labour code

Professor of Economics at Harvard University, Co-Director of the Labor and Worklife Program at the Harvard Law School, Program Director of Labor Studies at the National Bureau of Economic Research, and Professorial Research Fellow at the Centre for Economic Performance, LSE

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