Submission 167 Australian Council of Trade Unions Workplace Relations Framework Public inquiry

A flexible labour market?

Should labour markets be flexible? This has been the mantra of the advocates of neoliberalism for several decades, crystallised in the OECD’s Jobs Study reports in the mid 1990s.⁴¹ Several of the PC questions in Issues Paper 1 suggest that labour market flexibility should be an outcome of the industrial relations system.

Leaving aside the more polemical aspects of flexibility it is clear that the labour market needs to be responsive to the business cycle. During booms, there are risks of inflation if the rate at which wage increase become excessive, and during recessions there are risks of long-term damage to households if unemployment persists. Both these risks can be minimised if the labour market can effectively adapt to the business cycle. We explore this responsiveness by looking at both hours and wages, the two staples of industrial relations. We show that they both provided employers with considerable flexibility over the 2000s, but that this came at considerable cost to their employees.

In addition, any casual observation of productivity performance by type of productivity shows that the productivity challenges we face are largely not related to labour market flexibility, but deficiencies in more ‘core’ drivers of productivity; management and to a lesser extent worker skills; workplace organisation, worker voice, innovation and capital and technological investment. This is evidenced by ABS data⁴² on productivity, which shows that while labour productivity has recorded strong average annual growth of 1.6% in the last 5 years, capital productivity has on average fallen by 2.8% while multifactor productivity has essentially remained flat recording average annual growth of -0.3%. For this reason, we view a lagging labour productivity growth motivation for the current inquiry to be disingenuous and misguided, a theme we return to below.

Hours

The core question around hours for industrial relations policy is the predicament that the efficiency outcomes for employers can come at the expense of fairness for employees. This is highlighted by looking at two extremes. On the on hand, we have seen the evolution of a system of just-in-time labour, where employers have sought to avoid commitments to permanent full-time employment in favour of buying labour inputs in small chunks. On the other hand, we have seen the evolution of systems where labour is bought in very large chunks: 12 hour shifts or longer have become common in many industries, while fly-in-fly out arrangements in industries like mining have jettisoned any notion of the standard working week. Both of these developments have produced adverse outcomes for many workers, while bringing considerable efficiencies to employers.

At a macro-economic level, the reconfiguration of working hours also means that traditional solutions to problems of fluctuating labour demand across the business cycle have fallen apart. One of the disturbing features of the Australian labour market during the 1990s was the response to the recession of 1991. For most of that period the labour market endured long periods of ‘jobless growth’, with the unemployment rate failing to fall below 7 per cent until the end of that decade. Good levels of GDP growth did not lead to the employment outcomes which policy-makers would have expected.

This is not to say that macro-economic responses to problems of falling labour demand will not work. Australia’s initial macro-economic response to the Global Financial Crisis (GFC) had an immediate impact. The fiscal stimulus of the Labor government during 2009–2010 assisted with a dramatic improvement in the unemployment situation, which had risen from a low of 4.1 per cent in 2008 to reach 5.8 per cent by 2009. Arresting the rise in the unemployment rate, and then reversing it, were remarkable accomplishments when set in their global context. As Borland observed:

“The strength of the Chinese economy, successful macroeconomic policy management and the Australian financial sector’s lack of exposure to toxic securities sheltered the Australian labour market from the forces that buffeted US and European labour markets.”⁴³

The successful weathering of the storm was testament to the timeliness of these fiscal stimulatory measures (“Go early, go hard, go households”, as Treasury put it).⁴⁴ However, the return of fiscal austerity so soon afterwards saw this revival stall, and the unemployment rate had returned to 5.8 per cent by 2013 and full-time employment growth begun to plateau.
In terms of the industrial relations system, flexibility around hours appears to have played an important role in avoiding large employment losses. Faced with massive uncertainty in the wake of the collapse of Lehman Brothers, and a tottering banking system, employers faced a dilemma. They had just weathered several years of a tight labour market, with high vacancy rates and sectoral skills shortages, and many were loathe to begin large-scale retrenchments. Instead, many opted for shortening the working hours of their existing employees or engaging new workers on a part-time basis. This strategy is evident in both the employment and hours data shown in Figure . It was a strategy facilitated by the industrial relations system, with both enterprise agreements and the award system sufficiently flexible to accommodate this situation.

Figure : Growth in employment (left) and hours worked (right), Australia 2000 to 2015

(Y-axis shows data indexed to 2000)

Borland has observed that this hours adjustment to downturns also took place during the early 2000s, in the wake of the ‘tech wreck’,⁴⁵ and he suggested that this represented a major departure from the recessions of the 1980s and 1990s.⁴⁶ Borland also pointed towards an interesting hours dimension in his discussion of the Phillips curve, which graphs the annual rate of growth in the consumer price index (CPI) against the unemployment rate. Looking at the period from 1978 to 2011, Borland first concluded that after the latter part of the 1990s the link between unemployment and inflation had weakened. In other words, the overall relationship between inflation and labour demand pressures had declined during the last 15 years. Borland then proceeded with an alternative approach, using a broader measure of labour underutilisation⁴⁷ as a proxy for labour demand rather than just the unemployment rate. He also included the rate of underemployment as an explanatory variable and found that it had a significant negative effect on inflation. This led him to conclude:

“The analysis of the Phillips curve therefore casts doubt on the suitability of the rate of unemployment as a proxy for demand pressures in the labour market. The increasing importance of hours adjustment in downturns, and hence the greater share of the cyclical response in labour underutilisation accounted for by underemployment, indicates that a broader measure of labour underutilisation may be appropriate.”⁴⁸

These insights are supported by examining the patterns in unemployment and underemployment over time. The growth in unemployment rates for both men and women have been sensitive to economic cycles, as one would expect, and the patterns have been similar for both men and women (Figure ). Unemployment declined from 1994 onward, though men enjoyed a larger improvement in the period leading up to the GFC. In the case of underemployment, the situation was quite different. It stayed high right through the period from 1994 through to about 2006, with the male rate spiking during the tech wreck of 2001 and the female rate spiking much later. The most dramatic changes, however, were during the GFC, when both male and female underemployment rates soared, particularly the male rates. While there was some improvement in the immediate aftermath, after 2011 both male and female underemployment became to climb again. For both men and women they remained, in 2013, at levels comparable to what prevailed during the GFC.

Figure : Underemployment and unemployment rates, Australia 1994 to 2013

Rates are indexed to 100 for 1994. Original series from ABS, Extended Labour Force Underutilisation Rate, Cat. No. 6105

In absolute terms while unemployment rates have much improved since the early 1990s, the situation for underemployment is worse. In 2013 the male unemployment rate remained at about 60 per cent of the rate that prevailed in 1994, and female unemployment remained at 63 per cent. On the other hand, male underemployment in 2013 was now 25 per cent higher than what prevailed in 1994 and female underemployment was 12 per cent higher.

These results, and particularly the experience of the GFC, suggest that there is a new dispensation at work in the labour market. Cyclical responses to demand are increasingly handled through variations in hours worked, rather than bodies on the shop floor. The widespread use of ‘just in time’ labour—through casuals and labour hire—and the ability of employers to reduce existing hours of work are both important elements of this new dispensation. Clearly, when it comes to the question of flexibility, these adjustment mechanisms are largely given free rein by the current industrial relations system. This has come at a cost to many workers who find themselves engaged in these forms of insecure employment.