Labour market reform and productivity

1. Labour market reform and productivity

2. Basis of labour market freedom • Freedom of employees and employees to contract, and agree, to their own employment conditions just as important as other economic freedoms. • ‘Labour market freedom’ a separate category in major economic freedom indexes. • John Locke - labour freedoms as natural rights • ‘Every man has a property in his own person: this no body has any right to but himself. The labour of his body, and the work of his hands, we may say, are properly his.’ • Herbert Spencer - praise for voluntary associations of labourers • ‘[Trade unions] seem natural to the passing phase of social evolution, and may have beneficial functions under existing conditions.’ • Milton Friedman – critic of modern union compulsion • ‘Unions have ... Not only harmed the public at large and workers as a whole by distorting the use of labour; they have also made the incomes of the working class more unequal by reducing the opportunities available to the most disadvantaged workers.’

3. Why labour market regulation? • Employers exploit employees • Karl Marx: ‘Capital is dead labour, that, vampire-like, only lives by sucking living labour, and lives the more, the more labour it sucks.’ • Ged Kearney: ‘We would rather that we didn’t have to deal with individual contracts because here’s why: because people having to deal with individual contracts ... they are open to exploitation.’ • Refutations • Marginal revolution in economics (circa 1870) showed labour theory of value is implausible (value not derived objectively, but subjectively). • Labour alone is insufficient to provide bounty of goods and services moderns take for granted. Labour often mixed with capital, to make capital operational and ensure that production provides mass necessities and conveniences for the living. • Restrictions on individual labour contracts strips away people’s fundamental rights to choose their favoured conditions for themselves, artificially bolstering union powers.

4. Why labour market regulation? • Unequal bargaining power between employers and employees • Marx (following Lassalle): capitalists will drive down labour wages to subsistence levels. • Jeff Lawrence: ‘I will always fight to maintain decent wages and comprehensive protections for those workers with less bargaining power.’ • Refutations • Combination of limited labour supply and competition between employers limits prevalence of unequal bargaining powers. • 750,000 businesses in Australia, whose representative organisations have been calling for more skilled labour in recent years. • Marxian immiseration thesis contradicted by substantial real wage improvements, driven by improved economic conditions and rising productivity. • Australian real AWE risen from $52 in 1861 to $570 in 2011, an eleven-fold increase. • Wages are lower in some industries than others. But is this evidence of unequal bargaining power? No. Industry wage differentials in long run (unhampered by regulations) reflect varying marginal products of labour. • Discriminatory employers are forced to incur greater costs to not employ discriminated groups of employees , such as minorities (Gary Becker).

5. Why labour market regulation? • Is demand for labour market regulation a manifestation of ‘employee mentality?’ (Hayek). • 1.98 million self-employed workers (incl. business owners) in Australia, compared with total employment of 11.5 million people. • Most adults prefer to become employees, preferring the security of working under a manager in a firm. • The risks, and the independence, of self-employment are foregone. • Hayek warned that mass employee mentality leads to societies tending to value security above risk-taking, and conformity above independence. • Employee mentality may also lead people to perceive entrepreneurs in antagonistic manner, dismissing the regulatory and other obstacles of entrepreneurship and competitive supply. • Employee mentality may also lead many to overstate the benefits of labour market regulations. • Perceptions exacerbated by union-manufactured ‘us versus them’ culture. • ‘It is precisely because the labour union attempts to take the employment relationship out of the market place that bitter personal conflict so often marks union-management relationships’ (Rogge).

6. Effects of labour market regulationsMinimum wage: Unemployment’s best friend • Effect of minimum wage is to increase unemployment. • The adverse employment effects of minimum wages are empirically overwhelming. • ‘The preponderance of the evidence points to disemployment effects’ (Neumark & Wascher, in Wilson). • Krueger & Card debate. Methodology of study heavily criticised at the time, and now seen as invalid. • It is estimated that 2.9 per cent minimum wage increase in June 2012 reduced employment by 100,000 people (Humphreys). • Minimum wages prevent low-skilled people, and others on the margins of the labour market, from easily finding employment.

7. Effects of labour market regulationsUnfair dismissals: Lawyers’ best friend • Unfair dismissal regulations commenced under Keating government in 1993, and persisted in varying forms. • Employer must have valid reason, or reasons, to terminate employee’s employment, connected with employee’s capacity or conduct, or operational requirements. • Main source of variation over time has been changes to small business exemptions from unfair dismissals. • Concerns that employees are claiming unfair dismissal for dismissals allowable under the regulation, imposing unnecessary costs upon employers. • Also a employment-deterrence effect, to extent that employers come to see employees as a potential source of litigation risk and compliance cost. • Only limited numbers of studies into the employment effects of unfair dismissal regulations. • 2005 parliamentary inquiry found exempting small businesses from regulation would increase employment by 77,000 people. • A study of severance pay systems in OECD found that countries with more flexible labour markets have higher employment rates (Di Tella & McCulloch).

8. Effects of labour market regulationsPenalty rates: Natural enemy of the customer • Under Fair Work Act 2009, employers are obligated to pay additional wages & salaries for hours worked by employees on weekends or during public holidays. • Penalty rates have increased employment costs and inhibited workplace productivity, especially in retail trade and accommodation, cafe & restaurant industries. • ‘Retailers raised various concerns about award provisions and their implications for employment costs and operational flexibility. A particular concern relates to increases in penalty rates as a result of award modernisation and as a consequence, the impact on a retailer’s ability to trade profitably at times many consumers now prefer to shop. High minimum award wages in Australia are also said to be constraining the ability of employers to restructure employee remuneration in ways that could enhance productivity, for example, through greater use of performance related commission or incentive payments. The award requirement that casuals be engaged for no less than three hours (currently under review) has also constrained workplace flexibility’ (Productivity Commission). • Penalty rates have also contributed to the ‘closed weekend retail’ effect, as shopkeepers cannot economically sustain inflated labour costs during penalty rate periods.

9. Effects of labour market regulationsWhat is the effect of regulations on productivity? • Some subscribe to view that more stringent labour market regulations will somehow improve productivity! • Kevin Rudd: ‘Under the Fair Work Act, labour productivity has been growing at 1.9 per cent, under WorkChoices it was 0.7 per cent.’ • Refutations • More centralised labour market regulations would adversely affect productivity, since unions secure labour cost increases less aligned with workplace productivity improvements. • In a centrally regulated labour market, employers’ response to higher labour costs is to make quantitative (i.e. employment) adjustments rather than price adjustments. • Australian unemployment rate has increased under FWA. • That said, many contributors to labour productivity trends. • Labour productivity not the only measure of productivity, and arguably not the most important. • Multi-factor productivity in decline since 2004-05, attributable in part to increasing regulatory burdens.

10. Toward labour market freedom: What must be done? • Declining Australian labour market freedom index values. • Fraser Institute: Scale from zero to ten. Higher index number signifies greater relative freedom.

11. Toward labour market freedom: What must be done? • Australia’s rising international labour costs • US Bureau of Labor Statistics (unit labour cost index, manufacturing; average annual cost growth, 2007 to 2011)

12. Toward labour market freedom: What must be done? • Labour markets just like any other market, and they, and the employees and employers within them, function best when freed. • Abolish minimum wages to let the poor climb ‘ladder of opportunity.’ • Abolish unfair dismissal provisions, penalty rates, ‘one-size-fits-all’ awards, and other legislative provisions that artificially raise labour costs. • Disputes between employees and employers to be resolved by private resolution procedures, or in courts. • Abolish occupational licensing regulations, which restrict labour supply and inflate prices borne by customers. • If there is any worthwhile residual policy or regulatory role for government, then decentralise industrial relations regulation back to states allowing for policy experimentation. • Reformers must consider IR/welfare state interactions. • Abolish government welfare state. • Encourages those can work to find work or make their own, and encourages charity/philanthropy for those who cannot.