Tuesday, June 20, 2006

Mid-week review

I've been trying to get my head around the debate on industrial relations reform. As a supporter of the conservative side of politics I am untroubled by Kim Beazley's pact with the unions to emphasise the role of collective bargaining. With only 20% of the workforce unionised it won't work - it got the thumbs-down with voters in this morning's opinion polls even though many voters are influenced by Labor's scare campaign. The Coalition would easily win a Federal election now with more than twice as many (at 55%) supporting John Howard than Kim Beazley. The Australian electorate will be reluctant to support a leader who seeks to abandon our American allies and leave Iraq to a terrorist fate.

I am interested in some of the IR arguments being used to try to injure John Howard. One of the silliest to me is the claim that collective bargaining will induce greater productivity gains than individual contracts. How paying workers with different skills the same wage will improve productivity defies logic. In addition, some have argued that such uniform payments to all will reduce inequality in Australian wage outcomes. But paying everyone the same regardless of skills will reduce employment and increase inequality between prioveledged workers and those thrown on the unemployed scrapheap. The best employment outcomes that Australia has enjoyed for 30 years are threatened by these fantastic theories.

The best way to deal with inequality is via the tax/transfer mechanism not by forcing firms to pay wages in excess of productivity. It is embarrassing to have to state this to good economists who allow their politics to cloud their judgement.

In the limit the case for collective bargaining is false - if all unionised workers were paid the same wage the outcome would be massive inefficiency and unemployment.

The best way the welfare of the Australian workforce can be improved is to reduce unemployment to a low level and to increase the competitiveness of labour markets.

These claims seem to me to be self-evident. The counter-claim is that OECD labour market reports provide 'evidence' that minimum wages, employment protection and centralised bargaining do not adversely impact on unemployment. I'll look at this evidence over the next few weeks (it seems more ambivalent than commonly supposed) and report back but I must acknowledge my prior prejudices. I don't pay much attention to evidence unsupported by logic - it is just so difficult to isolate the effects.

In the meantime I am completing work on alcohol policy and have completed presentations for the Econometric Society in Alice Springs next month and the Economic Society of Australia in Perth in September. The illicit drugs research group of which I am a member will send 4 speakers in all to each conference. With the Australian Professional Society on Alcohol and Other Drugs (APSAD) Conference in Cairns in November I have much to do over the coming months. I am also doing consulting work on transport economics.

This is my informal weekly discussion and it is full of personal pronouns. I am interested in how your week has gone, your take on current industrial relations issues and on the political scene.


Fred Argy said...

Harry, I don't wish to restart our earlier tedious debate. But here are some quick comments. First, please do not set up straw men. No economist in his right mind is arguing that "paying workers with different skills the same wage will improve productivity".

Most of us (like the majority of Australians) are concerned about equality of opportunity (income mobility) and I have argued in my latest Australia Institute discussion paper that labour market deregulation has at least as many minuses for social mobility as it has pluses.

Thirdly, on your claim that the tax/transfer system is superior for promoting inequality, may I reproduce my comments on that in a recent talk I gave. It is set out below

"Economists never tire of warning that regulation is a less efficient method of social protection than direct taxes and transfers. And it is true that regulation, apart from being less transparent and less well targeted, has more by-product efficiency costs than direct budget transfers because it interferes more with the price mechanism (shifting the relative prices of various goods and services in ways which are unrelated to the social opportunity cost of producing those goods and services). I have put this argument up myself endless times (starting with the 1981 Campbell Committee report).

There are two practical constraints on the use of fiscal compensation (through the tax/transfer system): the hostile attitude of Australians to passive welfare for working age Australians and the inability of fiscal policy to compensate for threats to quality of life. Moreover passive welfare does nothing for income mobility.

Practical considerations aside, I believe (and here I may be at odds here with many of my fellow economists), it no longer makes economic sense - much less social sense - to keep retreating from worker protection regulation and then relying on budgetary measures to ease the pain down the road.

To begin with, after the major changes of the past three decades, levels of worker protection regulation in Australia are among the very lowest in the developed world. Starting from such a low base, the potential economic returns (in terms of employer flexibility and efficiency) from further labour market deregulation are much smaller than when Hawke and Keating began to reform the IR system. I believe that by the end of the 1990’s, most of the “low hanging fruit” had already been picked.

Secondly, having gone as far as we have down the deregulation route, reductions in worker protection are actually starting to generate efficiency costs by making the playing field between employers and employees much more uneven and increasing the potential severity of the short term economic adjustment costs (e.g. arising from more frequent retrenchments). These efficiency costs need to be weighed against the efficiency costs of regulation.

Thirdly, with the ageing of the population, a primary economic policy goal should be to increase workforce participation. But this goal will be impeded if fiscal policy is asked to take an ever-increasing role in social protection to offset the effects of deregulation because it means higher taxes. This does not matter at the higher end of the income spectrum, where tax disincentive effects are small, but the level of taxes and transfers does matter at the lower end where the work disincentive effects can be considerable.

In short, the economic advantages of using fiscal measures rather than labour market regulation to advance social goals have now largely disappeared in Australia.

Of course one could deregulate without worrying about fiscal compensation and our cultural climate may one day make this harsh policy approach acceptable, but it remains politically difficult in the short term. in any case, redistribution from rich to poor has a cost for economic welfare which needs to be considered, quite apart from the impact on social cohesion." End of quote

Fred Argy said...

Sorry my last sentence should have read "redistribution from poor to rich" (which is what to expect if one deregulates without fiscal compensation) has economic welfare costs.

Christian said...

Collective bargaining does not mean that people with the same skills are paid the same wage (it's a common myth put forward by opponents of collective bargaining). Just look at any collective agreement, take for example the Victorian Public Service or the Australian Public Service agreement (which I refer to because they are publically available and easy to get a hold of) - It has a number of different levels of pay in it. A particular employee's level of pay is determined on an individual basis within the framework of the collective agreement, depending on the demands of the job and the skills of the employee, it is actually very flexible and you will find that most other collective agreements have a similar structure.

hc said...

Fred, I didn't find the earlier debate tedious probably because I have not been arguing these points since 1981 as you have. If you had a link to your complete paper I'd appreciate it - it was referred to in AFR on a news website but I couldn't find it there.

I still don't understand how collective bargaining will promote income mobility. It will protect the jobs of those with jobs and, if anything, prevent newcomers from getting jobs. Individual contracts that admit diversity of skills should provide better employment outcomes.

Tax reform at low income levels that approximates a negative income tax would provide good incentives to reduce social welfare dependence and join the workforce. It would eliminate the very high effective marginal tax rates that those currently receiving social security are subject to. And on this we seem to agree (refer your third last para).

You say I am setting up a straw men model of collective bargaining where averages are rewarded not individuals but I don't see this. It is literally what a number of commentators have suggested. That somehow negotiating on a team basis will produce better outcomes for workers. Everything I understand from agency theory tells me this is implausible.

Of course you can introduce bargaining and game theoretic ideas to show that trade restrictions might make sense in a bilateral relation between a worker and his or her boss but none of these results are robust. With low unemployment employers just don't have much monopsony power and no smart employer will sack a worker earning their keep.

Christian said...

One correction to my comment from before - First line should read: "Collective bargaining does not mean that people with different skills are paid the same wage".

Fred Argy said...

Harry, my argument about the effects of the recent workplace and welfare reforms on social mobility are complex (with both positives and negatives spelt out) and spread over pages 22-26 of my Australia Institute paper. I can't email it to you but if you are keen you can get the full paper on request from The Australia institute. I think they charge $21 (I get no rolyalties by the way.

As to the relative effects of collective and individual bargaining on productivity, I am not saying the answer is clear-cut. I believe there are arguments on both sides. The positive effects of collective bargaining on productivity arise for many reasons. Here are some. A negotiated settlement leads to improved morale. trust, commitment and team spirit. Moreover "take it or leave it" AWA's (with no disadvantage test) often involve straight cost-cutting and this discourages efforts at greater efficiency and helps to artificially prop up industries which are non-viable relative to other industries. There is also a potentially negative effect on productivity if, as a result of AWA's and tough welfare measures, marginal workers are forced into jobs without the opportunity for training and counselling (note the NZ experience). These are some of the productivity-related concerns I have with the new workplace and welfare reforms. There are of course arguments the other way too - which is why I end up aggnostic. I believe it is largely a non-issue.

Andrew Leigh said...

Interesting discussion. Harry, perhaps you can be the one who convinces Howard & Costello that they ought to consider an EITC?

As to who's going to win the next election, I'm following the betting markets, which favour Howard. But if you believe polls, surely you have to say that a 51/49 Newspoll is a statistical deadheat.

hc said...

Andrew, I assume polls include a protest element against the elections and that the Coalition would skate in. People may disapprove of the war in Iraq (not me) but they want to retain the American Alliance. Likewise they might fear IR reform but they are smart enough to look at the government's wonderful economic record. Most people are doing very well economically. A severe economic hiccup is Mr Beazley's only chance and that would be a longshot.

I've always thought an EITC makes sense to conservative politicians. Its a conservative policy.

Getting people back into the workforce by offering them incentives to do extra work has never sounded like radical politics to me. Just common sense.

An EITC won't sell but reform of the tax scales at low income levels which approximates the same thing might.

Bring Back EP at LP said...

Harry you make the mistake in believing the present government is a conservative one.
It isn't and never was.
If it was it would have reformed the tax system instead of tinkering with it and would have deregulated the labour market instead of re-regulating it.

The polls do not support your easy win for the government.

just for the recoed in the 5 election campaigns Howard has fought as leader only ONE has he increased the liberal vote, that was the last one which leads me to think it was a borbidge result and thus a fluke

Patrick said...

Homer, you make two errors! The first negates the error you attribute to Harry - I don't believe you are across the meaning of the word conservative - tinkering, as opposed to reform, is conservative policy par excellence.

The second is that the polls, as Andrew Leigh has been going on about, don't mean a lot - the betting markets mean a fair bit more, and they say a comfortable win.

Fred, what do you mean by your thing about 'the potential severity of the short term economic adjustment costs' - I always thought that one of the chief virtues of deregulated labor (and insolvency, etc) was that it allowed greater short term costs so as to avoid the vastly greater long term ones. Do you mean that we have reached a point where the long term costs will never again be so high and thus further reform is redundant?

Descending to an even lower level of colloquiality, is not the great evil of job protection that it keeps a few more people employed a little longer so as to see many more people sacked for much longer?

Patrick said...

Oops - PS: harry, I'll be interested to see what you come up with on the literature - last time I looked I came away with the rough understanding that within reasonable limits minimum wages were of little effect (along, presumably, Coasean lines) but that employment rigidity was of significant effect. But I was only looking at employment, not economic growth, wages growth, productivity or any other measures.

Bring Back EP at LP said...

Harry makes his electoral prediction based on polls badly but nevertheless polls.

Let us disagree about what a conservative is

hc said...

Homer, I think that if the polls give it to the Libs at this stage they must be favoured to win.

I think the Government is conservative not 'liberal' and I am happy with that because it reflects my own brand of pragmatism.

Thre government has gone a fair way to deregulating labour markets - I am not sure what you mean here.

I am not a strong supporter of tax cuts for middle and high income earners and support Fred in wanting greater equality of opportunity. I think we have the same objective but I would go about it deeply.

Bring Back EP at LP said...

without going into the vagaries of the margin of error only one poll has the coalition in front.
The other two have the ALP in front.

The IR laws are not deregulation simply a different form of regulation

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