Andrew Leigh

TIME TO AXE THE COSY DEALS AND FIX THE LABOUR MARKET

The Sydney Morning Herald, 5 October 2019

When the Reserve Bank Governor is saying he’d like to see stronger wage growth, you know the problem has become dire. Over the past six years, real wages have grown at just 0.7 percent a year. In the six years before that – a period spanning the Global Financial Crisis – real wages grew at 1.8 percent annually. Among the likely culprits for the wages slowdown are poor productivity, declining union membership rates, wage theft scandals, penalty rate cuts, and public sector wage caps.

But another factor may also be to blame: constraints on job mobility. Standard economics tells us that wages increase when employees are in demand. If you have a dozen job offers, you’re likely to earn more than if you’re stuck with a single option. That’s part of the reason that people earn more in big cities, and less in one-company towns. Employees who switch firms tend to get a bigger pay bump than those who stay put.

Last year, Princeton economists Alan Krueger and Orley Ashenfelter uncovered a disturbing way that US firms had prevented job switching: clauses in franchise agreements that made it hard for workers to move between outlets in the same chain. Fully 58 percent of franchise agreements, they found, contained ‘no poach’ clauses, which barred franchisees from enticing workers to change stores. Among the biggest offenders were Burger King, Jiffy Lube and H&R Block.

Intrigued by the researchers’ findings, I wrote to some of the largest Australian franchises, to ask whether their standard agreements included ‘no poach’ clauses. Troublingly, it turned out that several did. McDonalds, Bakers Delight and Domino’s wrote back to me to say that their standard clauses prevent franchisees from hiring workers in other stores.

For example, each franchised McDonalds store in Australia must sign up a contract that says ‘Neither Licensee nor Principal shall employ or seek to employ any person who is at the time employed by McDonald’s or by Licensor or by any of the subsidiaries or associated or related companies of McDonald’s or Licensor or by any person who is at the time operating a McDonald’s restaurant, or otherwise induce, or attempt to induce, directly or indirectly, such person to leave such employment.’ Most McDonalds workers would have no idea about this clause, which directly affects their ability to get a better-paying job at another McDonalds store.

To their credit, at least these three retailers replied. Many of the large franchise chains simply ignored my request (two franchisors, Subway and 7-11, said that their agreements did not contain no-poach clauses). Unlike the United States, there is no requirement for their franchise contracts to be publicly lodged, so we can’t know the full extent to which other franchise chains are reducing the competition for workers.

Still, the big picture is clear. According to a report of the Parliamentary Joint Committee on Corporations and Financial Services, franchising accounts for 9 percent of the Australian economy. We also know that the national rate of job-switching has declined by about one-third since the start of the century.

Workers aren’t to blame. Instead, the research by Krueger and Ashenfelter – and my own findings for Australia – suggest that structural forces make it tough for employees to find better jobs. You can’t get a better job if your new employer is barred from hiring you.

After Krueger and Ashenfelter’s research was released in the United States, state Attorneys General began investigating whether no-poach clauses were anti-competitive. Quickly, several franchise chains announced that they would scrap no-poach clauses. But the problem runs deeper. Just as uncompetitive product markets hurt customers, uncompetitive labour markets hurt workers. Australia’s monopoly problem doesn’t merely mean we pay more out of their wallets for goods and services; it may also mean that workers get less into their wallet from their pay packets.

What can be done? To begin with, McDonalds, Bakers Delight and Domino should scrap no-poach clauses from their franchise agreements. Between them, these chains have over 2000 franchise stores, and tens of thousands of employees.

Other franchise networks doubtless have no-poach clauses too, yet are keeping them secret. They should update their agreements to make it clear that they won’t stop franchise operators from offering workers a better deal.

In addition, it’s time to shine a spotlight on outdated laws that restrict competition for workers. Too many employment agreements contain ‘non-compete’ clauses, which bar employees from starting a competing firm. Outside the franchise sector, we need to ensure that firms do not collude in refusing to hire each other’s employees.

Healthy competition for workers is good for wages. If we’re to reboot economic growth, it’s time to axe the cosy deals, and get more vibrancy into the labour market.

Andrew Leigh is the Shadow Assistant Minister for Treasury. Prior to Alan Krueger’s sudden death in March 2019, he provided assistance on this research, which is gratefully acknowledged.

Authorised by Paul Erickson, ALP, Canberra.