A Mess, But No Messiah

My AFR column today is on the myth that WorkChoices was good for productivity. I conclude with a few ideas about what we might do to raise productivity.
End Work Choices Myth, Australian Financial Review, 6 September 2011

In Monty Python’s The Life of Brian, a man is accidentally mistaken for the messiah. Despite all facts to the contrary, he is unable to persuade his devoted followers that he is not divine.

And so it is with WorkChoices. Over recent months, a steady drumbeat has been sounding through the Coalition and more extreme elements of the business community, claiming that a return to the industrial relations system that existed from 2006 to 2009 would boost productivity in Australia.

Alas, there’s precious little evidence to back this up. Productivity growth in Australia peaked in the early-2000s, and has been significantly lower in the naughties than it was in the nineties. If WorkChoices boosted productivity, you might have expected that Australia’s productivity would have soared in the period 2006-2009. But the opposite is true. In the WorkChoices era, labour productivity growth rates were lower than any 3-year period in recent times.

In a pair of papers presented to the Reserve Bank’s annual policy conference in August, these results were confirmed. In a splendid analysis of productivity, the Grattan Institute’s Saul Eslake concludes: ‘In particular, the workplace relations reforms introduced by the Howard Government under the title ‘WorkChoices’ in its last term in office were not, primarily, ‘productivity-enhancing’.’

The same holds true of unemployment. Looking at the jobless rate that prevails at a given level of inflation (the so-called ‘Phillips Curve’), Melbourne University’s Jeff Borland finds no evidence that WorkChoices reduced the unemployment rate.

None of this should have come as a surprise. Most of the WorkChoices package was not about labour market deregulation, but increasing the industrial relations power of the federal government and shifting the power balance from workers to employers (eg. by abolishing the no-disadvantage test and restricting union rights). Removing dismissals protection from small businesses greatly raised the chance of employees being treated unfairly, since small firms are least likely to have proper human resources processes.

Even when the Howard Government introduced the WorkChoices package, it struggled to provide evidence for its productivity-enhancing effects. In the Explanatory Memorandum, then-minister Kevin Andrews included a graph showing a negative relationship between an industry’s productivity growth from 1990-2004 and its award coverage rate in 2004. As Griffith University’s David Peetz pointed out, such an analysis only makes sense if time runs backwards. When Peetz used a measure of award coverage from an earlier year, the relationship falls apart.

But just because WorkChoices isn’t the answer, it doesn’t mean that the question isn’t important. In his study of productivity, Eslake notes that Australia’s productivity slowdown has been broadly-based, affecting most industries. He points out that Australian firms are less likely to introduce product innovations than companies in Japan, the US and the EU, and that many large Australian firms do not even bother to measure their productivity.

Among his favoured solutions, Eslake includes regulatory reform (eg. more competition in the pharmacy, newsagency and taxi markets) and tax reform (eg. removing tax loopholes and reforming inefficient state taxes such as stamp duty). He might also have mentioned policies to reduce congestion, which operates like a tax whose revenues are dumped into the ocean.

In my view, the most promising productivity-boosting reforms are in the area of education. With test scores having flatlined since the 1960s, it is vital to find ways of making our schools work better. Publishing test scores on the MySchool website, funding reforms in low-SES schools, and creating a system of teacher performance pay are among the promising policies that the Gillard Government is putting in place to raise school quality.

Alongside this, we need to increase the quantity of education that young Australians receive: through a higher school leaving age, more in-school trades training, and a demand-driven university system. Education reforms will take some years to affect productivity, but in the long-run, their value is likely to be higher than other productivity reforms.

Lastly, it’s important that more Australians have the chance to participate in the labour market. For example, we’re updating the disability impairment tables, and requiring that people try finding work before they sign up for the Disability Support Pension. Policies like this won’t raise average productivity (in fact, they’ll probably lower it a smidgin), but they’re unambiguously the right thing to do.

So by all means, let’s continue the national debate about productivity, but let’s drop the myth that WorkChoices will be the salvation all our productivity problems. As Brian’s mother finally tells the crowd: ‘e’s not the Messiah – e’s a very naughty boy’.

Andrew Leigh is the federal member for Fraser.

Thanks to the parliamentary library for research assistance on this issue. They also have useful chronologies of Fair Work and Work Choices.

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