The Lull Before the Industrial Relations Storm

On everything that matters, both social and economic, the Rudd–Gillard government has not taken a single major decision that I can agree with. Perhaps I am not trying hard enough, and maybe others have a more balanced view, but let me just briefly mention the major decisions that come readily to mind. 

The stimulus  

There was first the government’s response to the Global Financial Crisis. Let me be clear. I am no advocate of laissez-faire. There are active steps that I think a government can and should take when confronted by such a massive economic storm.

The problem was that markets had become disorganised while the financial system had lost its bearings. The right kinds of policies to follow were to lower taxes, especially business taxes, lower interest rates, increase central bank support for the financial system, ease labour cost pressures and do whatever else would allow businesses to find their feet again.

What should not have been done was wasteful and extravagant public spending. This should have played no part in any recovery program although there might have been a small role for genuinely value-adding public expenditure. The prosperity of the resources sector has disguised the harm done by the spending undertaken at the time.

We are talking about a $43 billion stimulus outlay that may have added a net 43,000 jobs. To calculate the cost per job added, take the $43 billion, and divide by the 43,000 jobs. That comes out at a net cost per job of around one million dollars each.

The only reason no one believes this number is because it is so hard to accept that our government could throw so much money away all at once on what has proven to be an almost complete waste. And if you are more charitable than I, and think that twice as many jobs were created than I am willing to give them credit for, the figure then comes in at $500,000 per job. More charitably still, supposing there were four times as many jobs created, say 170,000. Then the cost per job created was a quarter of a million.

It actually was around a million dollars per job, but even $250,000 is so disproportionately extravagant relative to the amount of good that was achieved that there really is no justification for it. But having spent money that will require years to repay, having created a deficit where none had existed before, the government has created a problem for itself so immense that it will be the deficit tail that wags the dog of fiscal restraint for years to come. We will be talking for a very long time about getting the budget back into surplus and covering the damage that the short-term extravagance has caused.

But what is worse is that rather than finding recognition growing that what the government did was utterly inappropriate, instead the government portrays itself as the saviour of the economy, a perspective accepted by all too many who ought to know better. The government’s supposedly lightning quick response in the face of these immense economic dangers has made its reputation as a competent economic manager, when what ought to have happened is that the government should now be recognised as bunglers and hysterics who overreacted to what was in reality a minor tempest without serious potential for long-term damage anywhere outside the United States.

We would be far more aware of just how large a hole has been dug were it not for the resources industry exports to China. It is our mineral exports that have made it appear that the actions taken were appropriate. From the stimulus we have nothing other than a few more school halls, less open space in many of the schoolyards of Australia and not a dollar’s worth of extra educational value or productivity. All that remains is the debt, which will be preventing more useful and productive kinds of expenditure for many years to come. 

Mining taxes  

But beyond the immediate consequences of the stimulus there is one that in particular stands out. The stimulus has created the need for the government to find an immense amount of money to cover its deficit. Mining taxes have become the means to cover the shortfall.

Every mining executive in the world has learned to deal with tinpot regimes who try to secure the highest possible rental payments for the resources that are taken from the ground. They are therefore accustomed to mining taxes being adjusted upwards in a kind of wayward fashion that follows the movement in the profitability of the mining activity. But who would have thought they would come across the same thing in Australia? Who would have thought that we would be changing the taxation rules midstream after the mining activity had begun?

The government apparently thought that mining companies, like banks, are seen as villains with no rights, only obligations. They thought that it would just take a bit of rhetoric about the resources of the nation belonging to the people and the entire country would welcome increased taxation on the resources industry.

That, however, is not how it worked out. There was a growing recognition that you do not encourage growth and prosperity by handicapping our most important export industry by adding taxes after the fact. Whether there was a further more sophisticated recognition that profitability is the feedstock of further private investment, this I cannot tell. But one can only hope that the community in general gets the idea that if it is a choice between private investment and public sector pseudo-investment, that we are better off letting the mining industry grow rather than let governments squander our limited savings on some pet project that has no merit other than that it might attract 50.1 per cent of the votes. 

The NBN  

Speaking of which, there is the National Broadband Network, the NBN. This is a technology that is almost already a white elephant. But at a cost initially estimated at $43 billion—oddly the same amount as the cost of the stimulus—the most notable aspect of the whole process has been the absolute refusal of the government to conduct a cost-benefit analysis. And what is clear without any room for doubt is that no private sector firm would touch this project. The cost is immense; the return a fraction of the outlay.

We merely impoverish ourselves by going anywhere near the NBN. And all the while the government is changing the rules of the communications system to reduce outside competition so that we will be driven to use its high-cost, third-rate technology. Moreover, as no government project comes in on budget or on time, we are certain to have the costs increase by leaps and bounds as the implementation of this project proceeds.

The NBN will end up looking like Victoria’s desalination plant, which is expected to cost us Victorians $24 billion whether or not it produces a single drop of water. 

Carbon taxes  

We then have carbon taxes to add to the mismanagement of the economy. Does the government not get the joke? No government in the whole world intends to lift a finger to reduce carbon dioxide emissions. For all their huffing and puffing, no one intends to do a thing.

The secret is getting out. Global warming is either a con or at best a modest and slow-paced change in temperatures that can easily be accommodated should it really be taking place. But the memo does not seem to have been passed on to our government. We are going to be the one nation in the world that will really take active steps to reduce carbon dioxide emissions. We are going to get rid of our coal-fired electricity generating capacity and rely on magic-lantern innovations to produce our power.

What are magic-lantern innovations? They are innovations that depend on rubbing a magic lantern and asking the genie to give us an entirely new and as yet undiscovered source of cheap and clean electricity. Do these people not know that there are immense incentives already for someone to come up with something? These already existing incentives do not require us to devastate our current electricity generating capacity to encourage the search for something better and less expensive.

What we are doing is a disaster in the making. Why it is not absolutely clear to everyone at the “elite opinion” end of the spectrum just how much damage to the individual lives of almost all of us these carbon taxes and green energy programs will cause I cannot fathom.

There are immense sovereign risk issues built into essentially ripping millions of dollars out of the value of power-generating businesses without a dollar of compensation. Why we are tempting ourselves into such a self-inflicted devastation of our economy for no benefit of any kind that I can see is totally beyond me. 

Industrial relations  

How has the government been doing in industrial relations? And let me just acknowledge that if the present government can be said to have had a mandate from their election in 2007 it was to amend the WorkChoices legislation.

To remind you, the aim of the Howard government’s industrial laws was to remove as much as possible the role of trade unions and industrial tribunals from the negotiations between employees and employers. This was especially emphasised by the amendments made in 2005. The elements were to: 

• get rid of unfair-dismissal legislation at the small-business end of the market

• remove the “no disadvantage test” so that comparisons did not have to be made employee by employee to ensure no one was worse off under a new agreement than they had been under their previous agreement

• remove the need for certified agreements to go through the Australian Industrial Relations Commission

• limit the use of strikes

• restrict the ability of unions to enter the workplace and to recruit new members

• replace the national wage case that had been conducted through the AIRC with a new body, the Fair Pay Commission, which would be asked to adjust the minimum wage 

The aim was to make the business environment more productive by encouraging flexibility and workplace change through workplace negotiations.

The world is in constant flux. Unless businesses can adapt in response to changes in the market, they cannot continue to add to employment and they cannot increase the real incomes of employees. WorkChoices was an attempt to enlist individual contracts and create an industrial environment where outcomes were driven by profitability and economic growth.

But by 2005, there were three problems that combined to undermine this attempt to entrench this series of workplace changes. They became the basis for much of the Labor campaign during the 2007 election. I will merely name the three problems without bothering to explain further: 

• Hardly anyone any longer remembers the 1970s and 1980s when industrial relations mayhem was the rule and not the exception.

• We take our prosperity for granted and seldom connect our own living standards with workplace outcomes.

• Hardly anyone trusts the market—very few employees really accept they are better off if their employers are better off. 

The 2007 election more or less determined that WorkChoices would disappear. The Opposition at the 2010 election made it clear that WorkChoices was dead, buried and cremated. 

Fair Work Act  

The Fair Work Act of 2009 was the legislation that replaced WorkChoices and may be near enough characterised as a compendium of the union movement’s wish-list. It appears to be based on a belief that union power holds no dangers for an economy. Rather than seeing that an extremely important part of what an industrial relations system does is put in a firewall against union industrial action, it acted as if unions were a benign force whose activities would only be for the good of society.

There is an absurd sentimentality that often attaches to dealing with unions that relates back to the working conditions at the start of the industrial revolution. Whether better could have been achieved at the time given how low productivity levels were is highly unlikely but is anyway entirely irrelevant 200 years later.

We have experienced union excess. We know what harm an unrestrained union movement can cause. There is no excuse for expecting anything other than a hard-nosed and hard-edged attitude from anyone representing a union.

Take this report from the Australian of February 16 dealing with a statement made by Paul Howes, the National Secretary of the Australian Workers Union. He is one of those New South Wales “power brokers” and faceless men who installed Julia Gillard as Prime Minister. Let me apologise in advance for the vulgar language in the story. It seems to come with the territory but it does help to make my point: 

Brandishing a copy of yesterday’s edition of the Australian and its front-page headline “Howes declares war on Rio Tinto”, Mr Howes told his national conference delegates: “This is more than just a headline. This is indeed a declaration, and we are going to follow through” …

Addressing his comments to the company, he warned: “You don’t own the government; you don’t own this country any more. We are going to take Rio Tinto on and make sure that they pay a liveable wage to the workers who make the wealth that these shiny arses sitting in the boardroom in London enjoy.”  

You may be sure that whatever else may be the case, the workers at Rio Tinto are not living on the bread line. This is the mentality and language of a loopy Marxism and the class war. These are people for whom maintaining a strong and vibrant economy, with labour costs aligned with productivity growth, is very low on their list of priorities. It is into the hands of these people that the Fair Work Act has placed our industrial future. 

Mines and Metals survey  

My pessimism in regard to the Fair Work Act is based on more than just my own personal reaction to the legislation. I have undertaken a survey-based analysis on behalf of the Australian Mines and Metals Association of the effect of the Fair Work Act on the resources sector. It is not a pretty picture.

The second report came out in February and runs to seventy pages so I will only discuss a few of the lowlights. But let me recommend the full report, which can be downloaded from the AMMA website. It is comprehensive in its scope, dealing with almost every issue of current interest. It will give you some idea of the dimension of the problem. I will begin with the introduction: 

As the Fair Work Act becomes more familiar and more entrenched in the workplaces of Australia’s resources sector, employers are becoming more, not less, concerned about key aspects of its operation.

While some improvement has been shown in some areas during the last six months, the key indicator on overall satisfaction with the industrial relations environment showed a substantial fall in this second and latest survey.

The satisfaction index fell from 75.9 for the survey period ending in April 2010 to 65.1 for the survey period ending in October 2010. Greater familiarity with the new system had led to a much lower level of satisfaction with the workplace relations system than had existed during the previous survey period when the Fair Work Act was first introduced.

While the data in the latest survey provide the framework for understanding this fall in satisfaction, the comments from those who attended the project’s focus group and who made comments as part of their response to the survey make clear there is a rising sense of anger and frustration at the system as it evolves.  

Here are some comments from the IR specialists who are on the front line in their dealings with the unions: 

“There is more of an ‘us and them’ mentality. This is something that did not exist under WorkChoices.”

“There is more union involvement through right of entry.”

“We are noticing greater flexing of muscles by the unions.”

“Unions are less inclined to follow the law.”

“It is taking longer to finalise greenfield agreements.”

“There has been increased agitation by unions wanting to get on site. Unions are trying to gain right of entry without following the legislative steps required.”

“Unions are competing for territory in areas that they have not traditionally had coverage.”  

The industrial landscape is becoming harder and more relentless. And as these comments indicate, “right of entry” is becoming ever more important. The Fair Work Act provides extensive right-of-entry provisions that allow unions to enter worksites whether there are union members on the premises or not. There is only a requirement that potential members be present for unions to gain entry. The result is that unions are now a constant presence. Greater access has turned into a greater level of disruption and in many cases an escalation of industrial discord. It has also led to the potential for demarcation disputes between unions, which were cited as a significant and emerging problem by survey respondents.

If you believe, as the government appears to believe, that a greater union presence is good for industry and only a positive for the economy, then there will be no problem. But if it crosses your mind that a greater union presence may have negative consequences, then it is a very different story. Or put it this way: if you think that having Paul Howes on site will improve workplace relations and raise productivity, then there is no problem at all. If you don’t, then there is. 

Adverse action  

Let me finish by discussing the new concept of “adverse action”. It was introduced with the Fair Work Act and is only just starting to do the rounds.

Adverse-action claims are designed to make every-one forget about unfair dismissal. If these adverse-action claims ever start rolling, employers will be wishing that the worst thing that ever happens at their workplace is a mere unfair dismissal claim. Adverse action begins from the premise that workers have legislative rights, such as the right to have a safe working environment. Suppose an employee complains about some safety matter. And suppose that at a later date that employee is demoted or transferred or dismissed, which can happen for any number of reasons utterly unrelated to the earlier complaint. An adverse-action claim allows the employee to sue the employer and if the employer cannot demonstrate that the prior complaint about safety issues had nothing to do with the demotion, transfer, dismissal or any other form of “adverse action”, then the adverse-action claim may be upheld. And note all of the following: 

• there is a reverse onus—the employer has to prove that the demotion, transfer or dismissal was not in any way because of the earlier complaint

• there are fines of up to $33,000

• potential compensation to the employee is uncapped. 

These are not like unfair dismissal, where there is a cost to be borne but which is unlikely to be ruinously expensive. Adverse actions have the potential to be phenomenally expensive in both outlay and managerial time. Most employers and employees have not heard about it because it is still largely untested in the courts.

The certainty is, however, that the incidence of adverse-action claims will grow. In the survey, 60.6 per cent of respondents stated that awareness of such a facility was at present “low” among their employees. When and if there are “successes” in the use of this provision of the Act, the level of awareness is bound to grow, as will its use. 

Conclusion  

Things do not fall apart all at once. We have a great deal of historic social capital to draw on. But this government is drawing on it, at a very rapid rate, and it is building nothing back in.

This is becoming a very expensive and risky country in which to run a business. We have a government that does not appear to understand what is needed to maintain and then increase real incomes. The Fair Work Act has handed the conduct of industrial relations over to some of the most economically illiterate people in the country, and in this the government believes it is acting on behalf of the workers.

Let me therefore just say that if the workers want rising incomes and secure jobs, and if they want the same for their children, then almost nothing that has been done by this government has moved us in that direction. And in the middle of all the changes the government has made, there is now the Fair Work Act. It is workplace poison. It is creating an industrial environment in which raising productivity will become more difficult. And it is breeding a new generation of militant trade unionists for whom the current legislative environment will be the easiest of pickings.

The H.R. Nicholls Society unfortunately cannot disband just yet. There is much work still to be done.

This was a presentation to the conference of the H.R. Nicholls Society on April 1. Steven Kates was for twenty-four years the Chief Economist of the Australian Chamber of Commerce and Industry and now teaches economics at RMIT University in Melbourne. His new book, Free Market Economics: An Introduction for the General Reader, will be published by Edward Elgar Publishing in June.

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