The Case for Freedom in the Labour Market

It is a constant refrain in our current political debate that the Coalition needs an Industrial Relations policy to put before the electorate, and that its failure to do so is seen as an indication of incompetence or cowardice, or both. Pressure on the Coalition is coming from a wide range of employer groups and from individual CEOs. Central to their complaints is that the present federal workplace legislation, the Fair Work Act, is greatly impeding economic activity, international competitiveness and business profitability. The response from Tony Abbott and IR shadow minister Eric Abetz is that work on reform is proceeding and that a policy will be announced in good time.

The Qantas dispute showed the Australian people just how effective the current federal labour market regime really is. Its primary purpose is to restore and extend the legal privileges for the trade unions who can, under this new regime, engage in what would otherwise be unlawful behaviour (tortious activities designed to cause commercial damage to a business). The TWU engaged in activities which were designed to bring Qantas to the point of bankruptcy. Without immunity from tort, these activities would have resulted in huge damages being awarded to Qantas.

A guidebook to the Fair Work Act tells us that “the IR system has been completely overhauled. Old laws have been thrown out or altered significantly. New ones have been introduced. Much legal terminology has changed.”

In the context of the Fair Work Act and its consequences, and the Coalition’s inability to put to the Australian people, from a position of a huge advantage in the polls, a powerful and coherent response to the consequences of the legal privileges now enjoyed by the unions, coupled with the power of the arbitral tribunals which are a necessary consequence of those privileges, we need to go back to first principles, to see how we got to this appalling state of affairs.

The story begins at the Constitutional Convention of 1897. In the election of Victorian delegates to the 1897-98 Constitutional Convention, Henry Bournes Higgins won the tenth (and last) place. He scraped in because David Syme placed Higgins on the how-to-vote card published in the Melbourne Age, and we can presume that this happened because of Alfred Deakin’s influence. At the convention he succeeded, with Charles Kingston, in persuading the Convention (by twenty-two to nineteen) to adopt section 51(xxxv), the industrial relations power. Up till this point the constitutional framers had refused to entertain any such proposal but during the debate Sir John Forrest, the West Australian Premier, changed his mind over lunch, and persuaded other delegates from Western Australia to follow suit. So Australia became the victim of Deakin’s and Higgins’s schemes for regulatory control of the labour market, an outcome which has cost us dearly ever since.

At the time of federation, despite drought and gross financial mismanagement by the Victorian colonial government, Australians were still, in per capita terms, the most prosperous people in the world. Apart from the natural resources of gold, silver, lead and copper; the huge flocks of merino sheep; and the recent invention of shipboard refrigeration which opened up Britain as a market for chilled beef; we inherited from Britain a legal system which supported economic growth. During the nineteenth century the great common law judges of England laid down principles of contract and tort which underpinned the extraordinary economic growth which took place in that century throughout the English-speaking world. But towards the end of the century, colonial parliaments in Australia began to override the common law as it applied to the labour market, with the conceit that they knew better than the people themselves how their working lives should be organised. They were influenced by Marxist ideas of class struggle and the alleged powerlessness of employees. In the 1890s, Australian colonial parliaments began to interfere more and more with employment contracts, and at the constitutional convention in 1898 the industrial relations power was accepted. It was a serious mistake and we have paid dearly for it.

After considerable political difficulties the Commonwealth Conciliation and Arbitration Act was passed in 1904, and H.B. Higgins was appointed in 1906 as the second president of the Arbitration Court and conjointly as a judge of the High Court. The elder sister legislation to the Conciliation and Arbitration Act was the first Tariff Act, passed in 1902. These two Acts comprised a large part of the Deakin settlement, described by Paul Kelly in his magisterial book The End of Certainty as the Australian settlement. There were five pillars: White Australia, Industry Protection, Wage Arbitration, State Paternalism, and Imperial Benevolence. 

The twin policies of protection and arbitration led to a gradual decline in Australian living standards. At the time of federation Australians were either first or second in the global league ladder of per capita incomes. By the early 1980s we were twenty-first or twenty-second and falling. Higgins was a sad and lonely nutter who, convinced that the common law of property, contract and tort had failed to provide an effective legal framework for the labour market, proposed to establish instead a command-and control-regime for that market. In his view the contractual relationship between employer and employee had to be supervised and controlled by a righteous judge, and in his mind no one could rival himself in righteousness or judicial acumen.

What happened under these two policies, and the activities of arbitral tribunals both state and federal, was the transfer of huge resources, both income and capital, from the internationally competitive industries, pastoral, agricultural and mining, to highly uncompetitive industries, footwear and clothing and, most notably in the post-war era, auto-manufacturing. This led inevitably to the decapitalisation of the former industries and a flow of investment into the latter. We are still paying huge subsidies to the auto industry in order to keep them operating here, and this taxpayer support is reflected in the extraordinarily generous industrial awards which the auto companies have accepted.

These protected industries provided essential political support for Australia’s unique IR system. The arbitral tribunals were made up of former employer organisation representatives (mainly from the protected sector) as well as former union officials. So career paths were established and governments became accustomed to going cap-in-hand to the Arbitration Commission to argue for a lesser annual increase in the basic wage than that demanded by the trade unions. The arbitral tribunals supervised the transfer of funds from the export and import competing sector through the imposition of minimum wages and then further regulation of wage differentials between different categories of employees.

So the system was politically invulnerable until protectionism came to an end. After the end of protection no employer organisation whose members were exposed to international competition could support the system. All that was left to support the system were industries such as nursing, teaching, construction and retailing, industries immune from overseas competition.

In 1983 Fraser lost the election, in large part because inflation and trade union militancy were beyond the scope of his government to control. Bob Hawke won handsomely, and a large part of his appeal was his claim, through the Accord, to be able to tame the unions and control inflation. In 1985 the Hawke government established the Hancock Inquiry. Professor Keith Hancock, a leading academic in industrial relations, chaired the panel and he was joined by George Polites, the leader of the employer organisation network which provided one pillar of the system, and Charlie Fitzgibbon, formerly the leader of the Waterside Workers Federation and more recently an ACTU vice-president, which provided the other. Their report, perhaps inadvertently, laid bare the basis of how the system operated. In it we find the following statement: 

Trade unions are, to varying degrees, centres of power: they replace the powerlessness of individual workers with collective strength …
It is a mistaken view of the pluralist society to assume that every “subject” is equally dominated by the might of the State and its arms of enforcement. 

The great achievement of the Hawke–Keating governments, supported by the Howard-led Opposition, was the phasing out of protection and, although it was not realised by the political leaders of the day, the end of protection meant the end of trade unionism as a powerful political force, and consequently the end of the huge structure of wage and labour market regulation that had been built up over eight decades of protection and wage arbitration.

The key problem of wage arbitration and labour market regulation was the legal privileges granted to registered trade unions. These privileges, carefully selected, enabled trade unions to engage in tortious conduct without fear of being sued. In the UK the Trade Union Disputes Act of 1906 left the trade unions completely immune from tort action. This legislation initiated the sad decline of what had been the workshop of the world.

So state and federal legislation was passed which was designed to limit the abuse of power which freedom from tort bestowed upon the registered trade unions which enjoyed it. But the problem with power is that it is insatiable. Samuel Johnson described it best in “The Vanity of Human Wishes”: 

In full-blown dignity see Wolsey stand,
Law in his voice, and fortune in his hand!
To him the church, the realm, their powers consign,
Through him the rays of regal bounty shine;
Turn’d by his nod, the stream of honour flows,
His smile alone security bestows:
Still to new heights his restless wishes tower;
Claim leads to claim, and power advances power;
Till conquest unresisted ceased to please,
And rights submitted, left him none to seize.  

The arbitral tribunals were established to try to constrain the insatiability of the unions, but by the 1970s their authority had vanished. Unions ignored their rulings with impunity, leaving employers no choice but to comply. The Clarrie O’Shea case, the MCG tower lighting project in which the Cain government of Victoria finally obtained the deregistration of the Builders Labourers Federation and the immediate recommencement of work at the MCG, were characteristic examples of arbitral failure.

In a regime in which the tribunals established to constrain union power could no longer do so, the unions began to exercise more and more power, albeit de facto rather than de jure, and opportunities arose in which union power was exercised in such a way that appeal to the real courts became possible. So the Dollar Sweets case, the live sheep export case, the Gibbins case and the Mudginberri case ended up in the real courts, and the unions ended up either paying substantial damages or seeing decisions by the arbitral tribunals ignominiously overturned. 

A momentous consequence of John Howard’s electoral win in 2004, which to everyone’s surprise gave the government a majority in the Senate, was the federal WorkChoices Act of 2005, an Act which was upheld by the High Court in arguably its worst decision since the Engineers Case of 1921. The dissentients to the majority judgment were Justices Callinan and Kirby. The judgment by Ian Callinan is one of the best defences of our Constitution which has been written in recent decades. But the consequence of WorkChoices was that Howard became responsible for every imaginable act of apparent or alleged unfairness that took place anywhere in any workplace in Australia. WorkChoices was an attempt by Howard to centralise all labour market regulation in Canberra. Although he often commented on the sin of hubris, he failed to recognise that in WorkChoices he was calling up his own nemesis. He was the second prime minister to lose his seat in an election in which the Commonwealth role in labour market regulation was a key issue. (Stanley Bruce lost Flinders in the 1929 election, a fact endlessly repeated by IR Club members in defence of their role in Australian life.)

With WorkChoices the unions were given a new lease of life. They spent their last financial resources in a television campaign which the government was powerless to rebut. And, as in the global warming debate, Howard panicked and amended the legislation to provide for a no-disadvantage test which would be applied by a federal tribunal, and which effectively gutted the attempt of the legislation to instil “more flexibility” into employer–employee relations.

That the trade unions’ campaign against WorkChoices had an influence on the 2007 election result is accepted by most political observers. It certainly had an impact on the Coalition in opposition, since they did not oppose the Rudd government’s Fair Work Act either in public or in the parliament.

The Fair Work Act is the daughter of WorkChoices and relies on the High Court decision which legitimised that legislation. The consequences of Fair Work and the Canberra-based bureaucracy which enforces it, became manifest in Terang, a beautiful small country town about 200 kilometres south-west of Melbourne.

The largest employer in Terang is the Terang Co-op, a retail store owned by 1800 shareholders. For many years the manager of the Co-op, Charlie Duynhoven, had been employing teenagers for one and a half hours after school. This arrangement was in breach of the state award which specified a minimum working period of two hours, and, until the Commonwealth inspectors arrived, despite the three-hour minimum set down in Fair Work regulations.

The great advantage of the state awards system was that the regulations were enforced by the unions, and they were not interested in what was happening in rural retailing—there was no union membership to be gathered up in such places. And so the Terang Co-op had carried on its business regardless of the regulations, with complete satisfaction to everyone, until Canberra sent its inspectors in, and brought these arrangements to an end.

Julia Gillard was asked to intervene in her capacity as Minister for Workplace Relations. Her response was: 

The government does not think it’s unreasonable to have a set of minimum standards for employees, including the minimum number of hours they can work across Australia, as has been brought in under the simplified modern system. 

The case of the Terang Co-op demonstrates the essence of Tony Abbott’s problem. Any tribunal, state or federal, will make decisions which will impose a third party’s view of what the relationship between employee and employer should be. Any such decision will make the parties to the contract worse off than would be the case if they made their own arrangements. This is true because no outside authority can know better than the parties themselves what is in their own best interests. The whole point to the law of contract is that people enter into contracts in order to be better off than they were previously. The combined impact on the national economy of millions of such contracts is profound. That is why Hong Kong, which after the Second World War was one of the poorest places in the world, but which has enjoyed the common law unsullied by statutory interference, is now one of the richest places in the world. 

There is in Australia an assumption that regulation of the labour market by arbitral tribunals is necessary to prevent “exploitation”. That exploitation is the consequence, so the trade unions claim, of the power imbalance between employer and employee. When a Labor MP, Richard Marles, uses the example of a welder employed by the corporate giant BHP Billiton in the Pilbara on a salary of more than $250,000 as an example of power imbalance, we see the triumph of ideology over reality. To overcome this residual belief in the power imbalance argument, it will be necessary for a new Coalition government to emulate Bob Hawke’s example, and establish a wide-ranging inquiry into Australia’s labour market, in order to test the assumptions on which the trade unions’ claims to legal privilege are based.

One of the extraordinary labour market developments of recent years has been the growth of the numbers of people who have arranged their working lives as contractors or consultants rather than as employees. The IT industry for example is almost entirely based on contractual relationships, and the telecommunications industry is not far behind. Now something like 28 per cent of participants in the labour market are independent contractors and the number continues to rise, despite frantic attempts by the trade unions and the Gillard government to destroy independent contracting as an option for people who want to participate in the labour market, but not as employees.

The biggest problem with independent contracting as an answer to trade union power is the difficulty which young people have in setting up as independent contractors. An election promise to provide assistance for young people who wish to go down this road, but who lack the experience and confidence to so, would be very attractive. It would bring out the full fury of the trade unions’ hostility to any status in the labour market other than that of employee, and this would be a big electoral advantage to the Coalition.

So in order to win this debate Tony Abbott has to cast away the centralism of John Howard, and the corporatism of Bob Santamaria, and put on the armour of freedom in the workplace, but in doing so, bring the Australian people with him. This will require a long debate, and in order to get that debate running a wide-ranging inquiry is essential. It will be necessary to admit that federal regulation of the labour market, ever since 1904, has been characterised by a consistent record of failure. The great advantage of a federal system is that mistakes and misadventures can be distributed amongst many governments; and that those who pass state legislation, and those who administer it, actually live and work amongst the people who are affected by what legislators and arbitrators do.

Canberra is like Jonathan Swift’s Laputa, a flying island which its inhabitants can manoeuvre in any direction using magnetic levitation. Its population consists mainly of educated people, who are fond of mathematics, astronomy, music and technology, but fail to make practical use of their knowledge. They can subdue any city on the surface below by locating their flying island over the place and denying it sunshine and rain, and the use of that power results in misery and impoverishment below.

The Coalition now has a historic opportunity to return to the federalist basis of its philosophy and its early platforms. Federalism is popular in Australia, as the history of every referendum since 1901 demonstrates. An election policy reasserting federalism will heighten the Coalition’s standing in the electorate.

Ray Evans was president of the H.R. Nicholls Society from 1989 to 2009.