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January 01st 2012 print

Steven Kates

A Free Market Defence of Industrial Tribunals

The recent Qantas lockout ought to have been an important teaching moment about Australia’s unique system of industrial tribunals but unfortunately was not. So let me point this out. The airline was shut down in its entirety by the Qantas management with only a single objective in mind: to have the dispute referred to Fair Work Australia for resolution. The company saw no advantage in being hung out to dry for months on end, to have the company “slow baked” by its unionised workforce. Instead, it sought to have the process of negotiation brought to a head through discussion where the union would have to justify its position before an industrial tribunal. Quite clearly the unions were not seeking a “free market” outcome in contrast to the employer who was looking for a state-imposed solution. It was merely that the unions believed themselves in a position to bludgeon Qantas non-stop over many months that made them so entirely opposed to the issues being brought before an industrial tribunal.

Yet how many people understand that a supposedly “free market” outcome, where unions are permitted to rip a business to shreds in pursuit of their own selfish ends—to ruin a business by preventing it from selling its goods—is in no sense a free market outcome at all. The system of tribunals we have developed in this economy is merely a thin red line in trying to deal with union “excess”. It will not work in all industrial climates and it requires legislation consistent with the core aims of IR policy for it to succeed, where these core aims are to deliver increased productivity in an environment that is fair to both employees and employers. But as anyone who has dealt with that cohort of often mindless and destructive union officials—a minority amongst all union officials, I here stress—perfectly well understands, the tribunal system we have developed in Australia creates a more productive industrial relations environment than any other set of arrangements given the circumstances businesses must face.

And while there have been many bad decisions over the years, if one weighs the good against the bad, these institutional arrangements have done an immense amount of good. I am therefore writing this article to appeal to those on the Right side of politics to understand how beneficial our tribunal system has been and can be made to be. There are many things about our industrial relations system that need to be fixed. The existence of IR tribunals and industrial judges is not amongst them.

So let me stress this. If we were in the best of all possible worlds, where unions could be depended on to behave in a responsible way, where the anonymous forces of the market would be the invisible hand leading the buyers and sellers of labour in a direction that guaranteed a productive compromise between competing claims, where the right not to join a union was as strongly supported as the right to organise, where the right to strike was balanced by an employer’s right to bring in new employees, where force was never used by unions to achieve their ends, then leaving outcomes to the market would be universally accepted. Industrial relations, which in the world we actually inhabit is a specialist area requiring specialist knowledge and expertise, would in a perfect world not exist. However, this far from perfect world requires people who actually understand what it takes to bring industrial conflict to an end.

I spent a quarter of a century in the middle of Australia’s industrial relations system working on behalf of national employers and can tell you from close observation that we in Australia have developed quite possibly the best industrial relations system in the world. I need hardly point out that very few others see it that way, but having the best system and some of the worst unions is quite a combination. The example I used to give to demonstrate the relative virtues of our system in comparison with others was that at the same time Rupert Murdoch was setting up his Fortress Wapping in the UK to allow him to bring new technology into the newspaper industry, he made the same transformation in Australia without, so far as I am aware, as much as a minute of lost time.

Listening over the years to what I consider misguided advice from people who are in every other way the best friends the business community has, hearing them argue that the best way to deal with industrial disputation is to rid ourselves of our system of tribunals, has left me with deep concerns. That is why I offer a different perspective. But if in your mind you cannot distinguish between members of industrial tribunals and the unions with which they deal, there is nothing more I feel I can say.

Whether anyone likes it or not, industrial relations will be a major issue at the next election. And there will no doubt be divisions in the Coalition over what ought to replace the Fair Work Act (an extremely flawed piece of legislation whose full inadequacies will only be revealed when the private sector finally recovers, or possibly even before). And while you may be sceptical about how well this system would work if it were properly designed, let me point out that none of the states, irrespective of the colour of their government, has ever tried to remove tribunals from having a role in their industrial relations jurisdictions. And the only two prime ministers who have ever sought to significantly diminish the role of tribunals from dealing with industrial relations have not only led their party to defeat at the subsequent election but have also lost their own parliamentary seats as well. 

The nature of the problem  

What follows below is a bill of particulars. Each of the issues discussed would need an article in itself, and on many of them entire books have been written. These, however, provide the outline of what really needs to be understood. If in the end you still think we would be better off without tribunals, I can only hope you are at least aware that getting rid of our tribunal system would not get rid of our unions. You would still have to explain why we would be better off with our unions still there in force but with no system of tribunals available to rein them in. 

Union power. The core problem of industrial relations comes from the existence of unions. Unions have exhibited all too regularly over all the years of their existence a disregard for every other interest but their own. Not every union, of course, and not in every dispute, and certainly not every union member. But when exercised to its full potential, the destructive power of unions has been disastrous for industry and our economic wellbeing.

It is, of course, not just that unions exist that matters but that they have power. This is a fact of life that can only be ignored at great peril to industry and the economy. This power enables unions to do immense harm, and the stronger the economy is the more harm they are often able to do. It is frequently stated that it is the tribunal system itself that gives unions their power, that if there were no tribunals, union power would subside. The reality is entirely the other way round, as a brief glance at the UK would reveal.

Unions have power because of their numbers, their position and their willingness to bludgeon when it suits them. It is the falsest of false beliefs to think union power is derived from the tribunals that have often granted unions what they have sought as a result of industrial action. Defiance of tribunal decisions by unions has been a feature of industrial relations in Australia from the start. And it need hardly be pointed out that unions in other countries where no such tribunals exist have been able to harness immense reserves of power to achieve the ends they seek. 

Union anti-capitalist ideology. Union militancy is, moreover, all too often heavily based on an anti-capitalist ideology which sees the workplace as a battle front in the class war. Driving many a union leader is an animosity to the free market itself and to the owners and managers of our domestic firms that makes resolution of disputes more difficult to achieve.

Nor is it just by chance that union leaders are often so stridently anti-free-market. Such dispositions make them better at their job in extracting concessions from employers. If they really could not care less about the success of the firm they are negotiating with—if they actually believe all profits are nothing but theft from the workers—they will have an ideological edge over others who might seek to represent their fellow workers in negotiations with employers.

The combination of the narrowest imaginable self-interest plus immense power plus as an optional extra an embedded class-war philosophy which makes a union prepared to continue a dispute to the bitter end has frequently led to a ruthless militancy by union leaders who have been prepared to damage every other social good to achieve their own objectives. There is no textbook answer to a dispute when “the troops are out on the grass”. 

Craft union structure and “comparative wage justice”. For historical reasons, the evolution of unions in Australia has been based on the UK’s craft union structure. The result is that in most enterprises of any serious size there are a number of unions, each one representing a different segment of the workforce. Finding a means to accommodate all unions at once has presented a formidable obstacle to industrial peace. If an electrician is paid $1 more than a carpenter and the carpenter receives a $10 increase, what’s next? You can tell the electricians’ union all you like that this is the market at work but it will satisfy no electrician and it will certainly not satisfy that electrician’s union rep.

The demands for “comparative wage justice”—where unions try to keep up with others in similar occupations in other enterprises or with related occupations in their own enterprise—cannot be eradicated. Unless checked by some countervailing force, the dynamic of comparative wage justice will cause a relentless upward movement in wages and conditions as each group of workers seeks improvements of their own based on the improvements in wages and conditions received by others. Union leaders are dependent on at least maintaining parities with other workers if they are to keep their own jobs. There is simply no market wage that exists for each employee that is known and accepted before the negotiating begins. 

The nature of the solution  

So what to do? Australia’s centralised system of industrial relations has been specifically designed as a counterweight to union power and would never have come into existence had there been no need to find some means to diminish the destructive forces that unions can unleash. It is worth reflecting on the early history of the development of the Australian system, where the maritime and shearers’ strikes of the 1890s did much to shape the system when it was first conceived. This has been well described in a recent Fair Work Australia publication, Waltzing Matilda and the Sunshine Harvester Factory, written by my former ACCI colleague Reg Hamilton. A shearers’ strike may seem somewhat quaint now but this country once rode on the sheep’s back. Maritime strikes seem all too much a part of the present.

The tribunal’s role is to act as a firewall against the worst rampages of industrial disputation and union-imposed harm. It is possible to argue that such a firewall is unnecessary, but to believe that it was not put in place in large part as a protection for industry is to ignore the lessons of our history.

Moreover, aside from the use of force, the only stock-in-trade an industrial relations system has is the perception of fairness to all parties. That the system was put in place to attempt to achieve fair dealing for employees as well as employers should be recognised not as some kind of sentimentality but as a genuine need in any such institution. And in recognising that this was part of the aim it should be understood that we are therefore dealing with an institution that helps make a market economy work. The owners of business come in many varieties and they face the full range of difficult economic circumstances. A system that seeks to provide fairness at the workplace makes the free market more acceptable.

One of the frequently stated facts about Australia is how conservative this country is. An important part of the reason for this conservatism is the existence of a tribunal system that attempts to find a fair outcome in what are very difficult circumstances. Unless one wishes to maintain that there can be no forms of injustice in the workplace, having a system that attempts to balance the various considerations takes some of the heat out of the politics of the workplace and therefore out of politics in general.

There are, moreover, genuine workplace grievances that require an institutional means of providing remedies in a timely and inexpensive way. If your answer is to leave all such matters to the market—which no economy does—you are only helping to create a breeding ground for unions of the most militant variety. 

The proper enabling legislation is essential. Tribunals do not, of course, spring up on their own. They are creations of legislation and are therefore circumscribed by further legislation that constrains the decisions that can legally be made. There have been large variations over the years in the nature of the legislation and it is here that the most important differences have been found. The centralised system of tribunals needs to be seen as the means to encourage both fairness and productivity. This is the golden mean in industrial relations policy and our tribunal system should be seen as part of that process.

But crucial to the system is that the black-letter law is properly crafted. The aim should be productivity growth, workplace flexibility, and managers able to manage in an environment where workers are treated fairly. Economic growth and national prosperity require workplace change, so that is what the legislation must enable. 

Tribunal appointments. If our tribunal system is to operate properly, the people who are appointed must be respected members from both sides of the industrial divide. No employer is likely to accept without resentment a decision handed down by a bench made up exclusively of union officials; nor are employees likely to accept a decision from a bench made up solely of employer reps.

Thus, as important as the legislation are the appointments made. The tradition has always been to appoint the best people from both sides. The union movement is filled with people who understand the needs of industry, just as businesses and business associations have many experienced industrial relations personnel who understand and sympathise with the concerns of workers. Appointments to industrial tribunals must be balanced between the two sides but also must be balanced so far as having an understanding about how an economy works and about the concerns and aspirations of working people. Appointing people who believe workers or employers can do no wrong will not serve the long-term interests of either side. 

Crafting the rules. The centralised system has always been more than just about giving away money, although that has tended to be what is most visible to its critics. Throughout the indexation period—which employers had bitterly opposed and never accepted as of any net benefit—there were two parts to every decision: the amount of money granted and the rules of wage fixation which were constantly amended as a result of the submissions by the parties. Moreover, the very existence of an indexation system was from its start to its end a reflection of the policies of the government of the day, and this included the Fraser government right up to its 1982 “wages pause”. But while most observers outside the industrial relations system only discussed the money amounts granted, those within the system were also concerned about the rules. It is the rules that often mattered most of all. 

Industrial relations and the market mechanism  

But when all is said and done, the determination of wages and conditions should be left to the market. There really is no better alternative than for management to sit down with their own employees to determine wages and conditions. And if workers wish to employ representative agents to conduct their negotiations, then in a free society they should be allowed to bring such agents to the table.

Market prices are, however, not handed down on tablets of stone but are the outcome of a process. Market-based outcomes often turn out to be the result of hard negotiations between buyer and seller, in the labour market as well as everywhere else.

The most useful economic concept, one that really does apply in an industrial relations setting, is self-interest. But what is found at the workplace amongst a significant proportion of union officials is seldom an enlightened self-interest but the raw desire that frequently comes with the ability to take whatever one wants by creating workplace havoc. The industrial tactic of turning a negotiation into a nice-little-place-you-have-here-it-would-be-a-shame-if-something-happened kind of discussion is not the way markets are supposed to work. What then is the answer?

Of great significance is that after more than a century of working within our tribunal system we have created a dispute resolution culture which we should do everything we can to preserve. Australia has seldom had to deal with long and protracted periods of disputation. This is partly because we were for so long an isolated people sparsely populating a large land mass so we did not have backup for services that were strikebound for extended periods on end. In the UK, alternative sources of supply for most goods and services were more likely to be at hand even during prolonged disputes. Here, alternative sources were not readily available. We could not afford to allow the parties to struggle on towards an eventual resolution as is the practice elsewhere.

But whatever the reason, our disputes are short. In the news we often hear of a dispute that has broken out that has been immediately referred to Fair Work Australia (or in the old days, to “the Commission”). Having a means and the collective will to short-circuit prolonged disputation is a genuine economic benefit that has made a difference. 

The Constitution and the limitations on government  

The industrial relations system in Australia developed as it did because of a number of historical forces, the two most important being the strikes of the 1890s and the constitutional limits put on the Commonwealth government. Although the Corporations Power has now allowed this limitation to be circumscribed, initially the federal government was only permitted to make laws with respect to “conciliation and arbitration for the prevention and settlement of industrial disputes extending beyond the limits of any one state”. The federal government was not permitted to legislate on industrial matters.

The result is that the Commonwealth government was once generally (although not entirely) unable to impose an outcome on the parties to a dispute, and to this day still does not attempt to impose such an outcome other than in a few designated areas of the safety net. Most safety net issues are arbitrated decisions in which the Commonwealth must argue its case, with unions and employers making their own separate submissions. For anyone with a conservative disposition, this is a remarkable and highly desirable feature of our system. Power is removed from the hands of governments. Industrial outcomes are the result of a tribunal decision where the government must argue its case in open court while those who are opposed can raise their objections and suggest alternatives.

One often hears how the decision had “split the difference”, but the splitting of the difference is often the government not getting everything it sought. There have been decisions where employers have persuaded tribunals not to adopt a government’s full policy proposal. That this is even possible makes our system of industrial tribunals an institution that anyone with a conservative disposition should value. Having written the employer submission in the great Productivity Case of 1986, where the Hawke government’s attempt to impose the superannuation guarantee through the awards system was rejected, I have been left with a lasting admiration for such a system.

Our system of tribunals is not an arm of government. It is an independent system with independent judges that can and does make this a freer society. We would be less free without it. Anyone of a conservative disposition should be extremely reluctant to dismantle an institution that has been shaped by more than a century of craftsmanship and political pressure and social and political evolution. Our centralised system of industrial relations, if I may adopt the words of Edmund Burke, is part of “the general bank and capital of [the Australian] nation”. Its durability is itself the sign that it must in important ways represent the collective values of the Australian nation. 

Markets work and should be left to themselves to allocate inputs and outputs. Wages should be determined in the market by the relative strengths of supply and demand. Unions have a role in representing their members in dealings with the businesses in which they are employed.

But we have an industrial relations apparatus because there is a general insistence across the community that dealings between employers and employees should be conducted fairly, that there should be a safety net of wages and conditions, and finally that if a dispute breaks out, there should be an institutional apparatus in existence that assists the parties to reach a mutually acceptable agreement as rapidly as possible, and in the case of disputes that harm the national interest, but only in such cases, that there is a means to bring the parties into an arbitrated settlement.

In Australia’s industrial system there are three key parts: the legislation, government policy and industrial tribunals. Often in the past, the focus of criticism has been on the tribunal for the decision it has made when the reason for the decision has been due to the legislation that it is acting within, or in response to the submissions from a government that has asked the tribunal to act in some particular way.

To make the industrial relations system work, the first essential is the legislation. Get that right. Limit the role of tribunals to safety net issues, the conciliation of disputes in general but with a reserve arbitral power for disputes which have a large impact on the national economy. And ensure that the aims of the Act include the imperative of doing what is needed to raise productivity and improve the flexibility of the workplace. Recognise that amongst the most important aspects of industrial legislation is the need to restrict the power of unions, not to increase it.

And when you see a decision you don’t like, that you think is bad for the economy or just plain bad industrial practice, do yourself a favour. Find out what the legislation requires or what the government of the day had asked for in its submissions. Look at the industrial circumstances in which the decision was made. At least in this way the blame can be appropriately assessed and properly apportioned to the parties who are actually responsible for the decision you see. 

Dr Steven Kates teaches economics at RMIT University in Melbourne. His Free Market Economics: An Introduction for the General Reader was published by Edward Elgar in 2011.