An economist’s view of the proposed workplace reforms

While the workplace reform legislation has still not yet been passed, the intentions are clear. It is to increase labour market flexibility and increase workforce participation by:

• diminishing the protective umbrella provided by awards (with many entitlements, such as penalty rates, casual loadings, redundancy pay, up for renegotiation);
• reducing the role of the minimum wage
• removing the “no disadvantage” test (so an employer will not have to compensate employees who are worse off);
• stripping the unfair dismissals protection from 2/3 of the work force;
• weakening the trade union movement;
• lessening the role of collective bargaining; and
• strengthening managerial prerogative.

The workplace reforms will be associated with tough welfare rules to put more pressure on the jobless (the long-term unemployed, single parents, partially disabled workers) to accept whatever employment is on offer.

The Prime Minister has assured us that the minimum wage will not fall in nominal terms. That will provide a cushion: but the minimum wage has been declining relative to median earnings for some time and this will now accelerate markedly under the new laws. (Otherwise what is the point of creating a new wage-setting body?) And there is no doubt that the bargaining power of employers will greatly increase relative to unskilled, inexperienced workers even in a buoyant employment market. So over time, pay differentials will widen and the ranks of the working poor will be swelled.

But it is the quality of life of many workers that is more at risk. The workplace and welfare reforms will force many to accept less secure jobs with more unpredictable and less family-friendly working hours. Pru Goward has warned that many women already work pretty “rotten” and uncertain hours and they could be the worse affected.

In short, small business proprietors, managers, professionals and high-skilled persons will have more choice and many of them will be better off - but the most vulnerable in our community (the young, poorly educated or lacking fluency in English) will have less choice (on when to work, how many hours to work, ability to access unions and so on) and will find life much harder.

On conventional international criteria, Australia today is far from being an egalitarian society. We offer lower levels of employment protection than 23 out of 28 OECD countries; our unemployment benefits are among the meanest of all developed countries; and the incidence of poverty among working age Australian households is one of the highest. Once the new workplace and welfare regime is fully in place, our work environment will slowly but surely become one of the most unequal in the OECD after the US.

So what are the great economic and societal benefits we can expect which could justify such a long term social impact?

The jobless rate may be helped down a little. The gradual erosion of the minimum wage (which, in truth, is high by international standards and not well targeted at the poor) will have some effect but it will be small and very slow. If employers succeed in clawing back some current award provisions such as penalty rates and allowance, it might produce slight employment gains. Another more immediate impact may come from the dismantling of unfair dismissals protection; the professionals estimate the net gain in jobs at between zero and 12,000; even the latter would be a drop in the bucket compared with the estimated one million jobless Australians (active or inactive job seekers).

What about efficiency gains? As any honest CEO will readily concede, Australia’s present low level of regulation is not a serious impediment to workplace flexibility and international competitiveness - so the efficiency gains from further managerial flexibility will be small. And if you force marginal workers reluctantly into taking the first job available, it is likely to reduce average productivity, as the New Zealand experience shows. As well, lower labour costs may discourage labour-saving innovation and the reforms could impact negatively on the morale, trust and commitment of employed workers and hence on workplace harmony and efficiency.

In short, even the wildest optimist would have to agree that the net economic benefits from the workplace-welfare reforms will be at best small - hardly enough to justify the community anxiety it is causing and the long term effects on social cohesion.

Are there more effective ways of reducing Australia’s high jobless rate?

The Government could decide to step up wage deregulation and hang the social cost! But such a hard line strategy is not really what most Australians want.

A second alternative would be to step up wage deregulation but link it with compensatory measures such as means-tested family payments and earned income credits for low-paid workers. Such a package might well produce substantial employment gains with more limited social costs. But there are two problems. The compensation would only offset the erosion in relative earnings of low-paid workers. It would still leave vulnerable workers without control of their lives in the workplace. The second problem is that the compensation measures would be costly and require a deferment of tax cuts - which might be politically difficult in the current climate.

There is a third way of achieving good employment outcomes without much social sacrifice: it is to go part of the way down the Scandinavian route. For two decades, a string of Scandinavian and smaller European countries have been successfully using “active labour market” programs (for example retraining, work and mobility incentives, wage subsidies and selective job creation) to deliver comparable unemployment and economic outcomes to the US - but with much lower levels of income inequality and higher levels of social mobility. Unfortunately mainstream Australia is not culturally disposed towards the Scandinavian high-tax egalitarian model (even though it has been economically successful).

Who said policy reform was easy?