Friday, March 24, 2006

IR productivity gains?

The Australian today reports remarkable comments from a Commonwealth Treasury officer, Graeme Davis, that the Government's proposed industrial relations reforms , namely:
  • Forming a national industrial system to replace separate state and federal systems;
  • Establishing the "Australian Fair Pay Commission" to replace National Wage Cases at the Australian Industrial Relations Commission (AIRC);
  • Stream-lining of Certified Agreement and Australian Workplace Agreement making;
  • Including increasing the maximum agreement life from 3-5 years;
  • Reduction in allowable award matters;
  • Legislating 5 enforcable workplace conditions;
  • Exempting companies with less than 100 employees from unfair dismissal laws;
  • Exempting all companies from unfair dismissal laws if dismissal is for a bona fide operational reason;
  • Increasing restrictions on allowable industrial action;
  • Mandating secret ballots for industrial action;
  • Discouraging pattern bargaining and industry-wide industrial action.
will not boost Australia's workforce productivity. Instead he sees the major possible growth in productivity coming from mincreased investment in human and physical capital.

Davis claimed that Australian regulation of labour markets was only slightly more onerous than that of the US and that the extent of product market regulation was about the same. But Australian workers are less educated than US workers and industry was less capital intensive.

Treasurer Costello won't be pleased. Last year he said 'I can think of no single reform which would boost productivity in the Australian economy to the same extent as real, vigorous industrial relations reform'.

The comments were made at a Productivity Commission seminar. Apart from this abstract I couldn't find documentation but when I do I'll try to post an online link.

Update: The finding that productivity growth is not primarily related to microeconomic reforms was advanced by NOIE in 2004. Here the evidence was that investment in information and communications technology (ICT) is more important. The same conclusion has recently been reached in a March 2006 report to Minister Coonan by her Department of Communications, Information Technology and the Arts suggesting that ICT will be the main driver of productivity growth over the next 20 years. The authors of this report cautiously note that 'in order to realise the predicted productivity benefits it will be necessary to support an appropriate level of investment in skill formation and in ICT related R&D' (p. 6).


P.A. Coplay said...

The argument for this position could go as follows:

1. The Fair Pay Commission will lead to the employment of lower productivity workers - who are currently unemployed due to the minimum wage.

2. Additions to hours for existing workers are usually the less productive hours (e.g. longer hours at work) OR if additional shifts are used these workers tend to be less productive (there is empirical evidence for the latter for the US)

3. There are relatively little direct gains from reducing industrial action as there is so little now and little direct losses to output.

4. The unionised proportion of the workforce is now relatively small anyway.

The productivity gains (besides increased investment - which shouldn't be sneezed at) will probably come from the greater flexibility in workplace arrangements - and there is relatively little published general empirical evidence on the effects of this - though it is hard to think of good reasons for there not be not some productivity improvement (unless transaction costs increase substantially).

The unpublished evidence I have seen is that the last round of IR reforms led to substantial productivity gains in the unionised sector - and (if my memory is correct) greater investment. I don't know if the PC or Treasury has done the same exercise with the same data but not published it (probably not though). We can't say this will mean this round will have the same effects but there are some similarities with this round which are suggestive.

hc said...

p.a.c. Most of these suggestions sound sensible. Many wage and other employment negotiations seem to be bilateral bargaining situations where a firm has monopsonistic power. I think there are some losses to workers in terms of foregone bargaining power with these reforms.

I think unemployment is related to minimum wages but not that closely (the work of Card etc). The two arguments that I think are valid for minimum wages are that (i) they employ the bargaining power of the most marginalised workers and (ii) they can even provide efficiency gains if an employer has monopsonistic power - the latter stemming from the fact that a monopolist will overly restrict both output and input purchases.

But I like your arguments. If you go to the Productivity Commission website you will see that productivity gains and terms-of-trade improvements account for most real income growth in Australia in recent years.