IR reform again

This week’s column is about the politics of IR. I think it will be OK for the Government if the economy stays healthy. But if it doesn’t I think there’ll be hell to pay. Tim Colebatch has published on this issue before and had another go in the paper today.

I took the opportunity in the column to mention something that I worked on in the late 1990s. In some work I did for the Business Council, I suggested that avoiding the next recession might offer one of the most promising ways of getting unemployment down and proposed three ways in which we might reduce the chances of the next recession occuring, and if it did occur reduce the damage it did to our economy.

One of those was to increase the proportion of remuneration employees had at risk – that is to increase the use of bonuses in our pay structure. Bruce Chapman had pointed out to me the remarkable extent to which countries with widespread use of bonuses took downturns in their stride – because the burden of downturns (and the benefit of booms) was so widely shared within the economy – through bonuses. Remember, because the wage share is so much larger a part of the economy than the profit share, one only needs quite small risk taking by employees to get much more broadly based sharing of risk. And risk born in one way (pay risk) can avoid more devastating forms of risk (unemployment risk).

The first lot of charts below show ‘traditional labour markets’ in which a fall in economic growth produces a large rise in unemployment. Along the horizontal axis is plotted changes in GDP in any year and along the vertical axis, changes in unemployment.

Here are the US, Australian and UK diagrams (along with what was the worst labour market in the developed world at the time which had had unemployment of around 20% for over a decade – Spain).

Short term labour market efficiency.gif

I always thought that there was an opportunity for some small echo of the magic of the early Hawke years to somehow materialise, with discussions between business and the unions identifying sources of economic gain with some attempt to divide the spoils of the gains so that both parties were winners. The BCA certainly wasn’t wedded to the ideas. I suspect they were rather surprised when calling for new ideas that any materialised.

But from little things big things grow – or they can at any rate. Had anyone else shown a bit of enthusiasm, something might have come of it all. Of course there were risks in it for all. There always are. But there were also potentially large gains. And the skill of politics is to find a way through the risks and the downsides to win some of the benefits.

The unions were completely uninterested, and said that if the BCA wanted to promote bonuses they were perfectly happy to add them onto all their other claims. The Government were not interested, and neither were the Opposition.

An opportunity for mutual gain died. . . .

Anyway, the column doesn’t harp on about it – just mentions it in passing. It’s not said in a spirit of ‘I told you so’ because the unions would not have avoided the current round of IR deregulation by adopting the policy – but they would at least have substantially benefited their members (and the rest of us).

And the policy would have maximised a kind of flexibility in the workplace that does not depend on increased wage inequality as the current IR package does.

Scapegoat.gif
The scapegoat teaches Vasco Pyjama the art of “copping it sweet” . . . the opposite of self defence

Recessions, scapegoats and workplace relations

As we approach the 30th anniversary of the dismissal, I think of how one of Gough Whitlam’s best policies became a scapegoat. And of how the IR changes might end up being the mother of all scapegoats.

If the economy keeps humming along, I agree with John Howard’s analysis. The IR changes will be like the GST the object of fear and loathing before their introduction and of collective sighs of relief afterwards “What was all the fuss about?”.

There are other parallels with the GST A big, iconic, unpopular economic reform. And, by the time it’s legislated: a dog’s breakfast of compromises.

But Howard had to compromise to get his GST changes through the Senate. Now with control of the Senate we get the full four-course dog’s dinner. As the right-of-centre labour market economist Professor Mark Wooden puts it, the changes are driven too little by ideology rather than too much.

Shot through with exceptions and transitional provisions the legislation’s Explanatory Memorandum how it will replace today’s “complex and costly regulatory burden” over 565 pages and 3,851 explanatory paragraphs!

For all the rhetoric about the dearth of safeguards for workers, most workers will be fine if unemployment keeps falling. Businesses scrounging around for labour and poaching it from each other is the best protection workers can get.

But what if the economy turns nasty? An electorate in pain is an electorate bent on finding a scapegoat or as Wayne Goss put it in 1995, an electorate waiting on the porch with its baseball bat.

As Malcolm Fraser showed Gough Whitlam in 1975, tariff cuts make great scapegoats. Most job losses in 1975 actually came from the recession not tariff cuts. And where tariff cuts did create unemployment, Asian productivity growth and equal pay for women created more.

But, Fraser’s line ‘jobs not dogma’ sure beats ‘back to inequality’ as an election slogan.

To my eyes, the new IR regime looks even better than tariffs as a scapegoat. Firstly, where it took chutzpah for Malcolm Fraser to attack tariff cuts after lecturing us all on the importance of market forces, the ALP will attack the IR changes with real conviction.

More importantly, in a recession the new IR system will radiate economic pain.

 the new Fair Pay Commission could recommend lower minimum wage increases than its predecessor (and will be attacked for doing so even if it doesn’t!).

 it will facilitate pressure to bargain away iconic conditions that workers have collectively bargained for over the years like penalty rates and four weeks annual leave.

It’s hard to see those things going down too well amongst Howard’s supporters in struggle town.

There’s the irony. Although tariff cuts are a sideshow to the real story on unemployment in a downturn, a recession does at least provide a theoretical case for delaying tariff cuts because the workers thrown out of work by tariff cuts often cannot find alternative employment till recovery has taken hold.

By contrast, if there’s a best time for IR reform, it’s during a downturn. Because in a recession, the more the pain is spread around the less any single person has to bear it, the more existing job skills are preserved, so the stronger the economy can bounce back in recovery.

Still, if national income falls by say two percent which outcome would you prefer?

 That we all kept our jobs and took two percent less pay or

 That we round up two percent of the workforce around 200,000 of the least skilled and secure workers and sacked them.

We actually negotiated transitions like the first one with deals under the Accord between the ACTU and the ALP Government in the 1980s. But, however attractive to ease transition, centralised wage fixing runs into mounting difficulties over time.

The Accord was gradually unpicked by the Accord partners themselves. Unions were keen to return to their preferred role of negotiating wages and conditions within industries and enterprises. And after years of wage restraint, unions and management had a common interest increasing productivity and wages with enterprise bargaining.

In the absence of centralised wage fixing we could share the pain (and gain) of economic change much more broadly by expanding bonuses in enterprise remuneration. But, that was proposed in the late nineties by the Business Council of Australia and ignored by the Government and the unions.

That leaves further IR reform. It will impose greater sacrifices on the least well paid. But it will at least minimise their unemployment. So the scapegoat could be performing a very useful service.

And if the experience of the UK and New Zealand is anything to go by, an incoming Labor Government would make some changes to ritually slay the scapegoat and shore-up its union constituency. But its current bluster aside, it will leave lots of the changes intact.

Such is the crab walk of progress.
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PS. The Courier Mail put the heading “Pain will lead to blame” which made me think that a good heading would have been “No pain, no blame”.

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16 Responses to IR reform again

  1. Dave says:

    The problem with widespread bonuses in your wage structure is that it can make it hard to get out of a recession. As profits fall, and bonuses fall with them, the decrease in spending power of your workforce reduces consumer spending, making it harder to make a profit and pay the widespread bonuses.

    Which is pretty much what has happened to Japan. While the fact that wage costs fall in hard economic times (when you don’t have to pay bonuses) helps to slow the fall, it also makes it hard to turn things around.

  2. Rafe says:

    It’s all about incentives! (stupid:))

    I was gobsmacked to read Gerard Henderson’s interview with Arvo Parbi in “Australian Answers” (many other great interviews as well) and learn that the miners have always worked on piece-rates, paid according to productivity. Hence you can have a militant and radical union that remains productive because the incentives were right, contra the wharfies.

    Interesting passage in Alan Silletoe’s novel “Saturday Night and Sunday Morning” – the protagonist, hard drinking brawler, employed in a bicycle factory, wants to buy mother a nice present so he works a bit harder for a few days to make the extra money that he needs on top of his regular beer and ciggies money.

    The corresponding strategy to make extra money for Christmas and birthdays for technicians in the old PMG (pre Telstra) of unhappy memory was to work slower during the week and pick up the extra funds with overtime on the weekend.

  3. Homer Paxton says:

    yes agree on all of it.

    I remember talking about bonuses with the staff of the various mimisters at the time and whilst they agreed in theoretical terms they thought the practicalities were too hard.

    So much for their compassion for the unemployed

  4. Rafe, the argument for bonuses is not about incentives (it’s not a micro-argument). It’s essentially a macro argument about deepening the risk bearing capacity of the economy. On piece rates, you have to be careful, as they undermine the firm’s incentive to invest in enhancing productivity. Ask the meat processing industry. They’re also a nightmare when you want close co-operation within a team because you don’t want that undermined by bickering about who gets how much of the piece rate.

    The story of modern management is that incentives may matter, but they’re far from everything, and sometimes things which emerge from the ‘its all in the incentives school’ bugger things up for decades. Compare the Japanese and American car industries – with the Yanks still declining.

    (Reminds me of a story of the declining UK industry. In the 1970s a new Japanese factory was doing well in England whilst all about them were continuing to decline. On close investigation it was found that the Japanese factory had one dining area in which management and workers ate, while the British ones had management and workers’ dining rooms. Executive bonuses in the US industry are a little reminiscent, though of course many things are different.)

  5. Homer,

    Please tell me what the practical difficulties were. I expect people did say this, but didn’t quite have sufficient energy to come back with that response and then see what could be done about the problems.

  6. Ken Parish says:

    When I managed a couple of medium-sized (by Darwin standards law firms through the 1980s and early 90s, I utilised a base salary + performance-based bonus system for employed legal practitioners as a matter of course. It worked exteremely well. Private practice law, however, is especially suited to such a system, because the aspects of performance in which you’re centrally interested (billing and collection rates) are easily measured.

    But even then we needed to be careful. For a start, you still need to have a substantial base salary component. If the majority of a practitioner’s income is at risk, he/she may tend to focus on billing to the exclusion of ethics, excellence, professionalism and quality of service. And the bonus target needs to be reasonably but not too easily achievable, and not easily capable of being “rorted” (e.g. bunching all the practitioner’s billings into one bonus period to achieve a huge bonus, then decamping to work elsewhere).

    You can certainly design systems that take these (and other relevant factors) into account, but it isn’t as straightforward as it might seem at first blush. Moreover, there would be quite a few industries where performance on factors that are actually the most important is less easily measured in a reliable way. One of the more telling criticisms of new managerialism is that public sector managers typically attempt either to measure the unmeasurable or at least measure things that are dubiously relevant to their organisation’s main functions. This phenomenon is acutely prevalent at Australian universities. See this article (http://evatt.labor.net.au/news/95.html) by David Boyle on Evatt Foundation website:

    “We have been here before – especially in periods of great social hope such as the 1830s, when the followers of Jeremy Bentham rushed across the country in stagecoaches, armed with great bundles of tabular data and measuring everything they thought important: the number of cesspits (which they saw as an indicator of ill health), or pubs (an indicator of immorality), or the number of hymns that children could recite from memory.

    Then as now, the problem is that what really needs measuring is not countable. “So-called efficiency,” says Richard Scase, professor of organisational behaviour at the University of Kent at Canterbury, “takes the place of effectiveness, quantity of quality. The means become an end in themselves.” As anyone in local government will tell you, these numerical indicators are about management at a distance, and they will always miss the point: school league tables make teachers concentrate on borderline pupils at the expense of their weaker classmates; waiting-list targets persuade NHS managers to treat those with the quick, simple problems at the expense of everyone else.”

  7. Homer Paxton says:

    practicaal political difficulties of selling it.

    Few people thought aussies would like a large part of their renumeration as a bonus and a smaller part as wage/salary.

    Remember this is 80’s time not the longest recovery since WW2.
    The major thought was people would be wary of the bonus dropping when the economy went pearshaped.
    These ‘difficulties’ amy be easier to overcome.

    Also these advisors had experience like me in the late 70s when ‘compassionate’ workers voted for outlandish wage rises knowing full well a lot of people would be retrenched but not them.

    Again the last in first out policy has gone and this could be overcome.

    surely the preesnt government would favour this and I’m sorry for calling you surely

  8. Rafe says:

    I suppose my point is that you are going to get into trouble if you reward theft, sabotage and standover tactics in the workforce.

    If the work is a team effort you reward the whole team and get the players involved in the division of the benefits.

    I don’t see how piecerates undermine the incentive for management to invest to increase productivity, I would have thought increasing productivity with the right incentives in place is a win win situation.

  9. Rafe,

    Assume that you pay people $12 per hour and you need to invest a fair bit of money to double their productivity. They end up getting $24 per hour and and all they’ve done is learn to work the new machines. It is OK (though not particularly fair to lots of people outside the factory who still slave away at $12 per hour) for the workers in the factory if there is still surplus enough for the investment to go ahead. But often there isn’t These problems of incentive compatibility are far from trivial and dog lots of problems of remuneration even before various psychological considerations are taken into account.

    And yes, it is certainly possible to invent incentives that are even worse.

  10. Homer Paxton says:

    interesting to note that Alfred Deming the father of TQM was a vehement opponent of bonuses

  11. Yes that’s right Homer, though not I think profit sharing.

  12. Homer Paxton says:

    that’s right.
    He was quite prescient how it would change behaviour.

  13. Ken Parish says:

    Of course, the problem with defining bonus entitlement in terms of profit share lies in defining “profit”, and the related question of whether the employee can ever realistically find out whether the books are being cooked. A favourite trick of some mining companies when negotiating a “farm-out” agreement with an impecunious prospector who has found a rich deposit and taken out mining rights but can’t afford to develop the mine, is to convince the prospector to enter into a deal where the prospector’s remuneration is calculated as a share of profits. Miraculously the mine then never makes a “profit”, due to internal transfer pricing and a range of other easy-to-manipulate scams.

    One can confidently predict a similar phenomenon with at least some employers who convince workers to enter similar deals. If I was advising an employee presented with such a deal, I would counsel extreme caution. Far better an arrangement where the bonus benchmarks are clearly defined and incapable of manipulation by either employer or employee. That isn’t necessarily easy to achieve in some industries, but should usually be possible.

  14. Rafe says:

    I can see that there is no such thing as a perfect system, also that no idea is so good that some people will not find a way to screw it up. The point is to ensure that effort and initiative get some kind of recognition and reward, ahead of bludging and power trips.

    The other thing is the cultural context – and so rather different incentives may be needed in Japan vs the US for example

  15. Zag says:

    “…what was the worst labour market in the developed world at the time – Spain”. Yes. But for the first time in 40 years we are now below the EU average in terms of unemployment rate (yippee). This was achieved through labour market flexibilization and deregularization but, as a result, employees on a temporary basis in Spain represent 33% of the workforce. I believe that a system such as the one Gruen proposes would contribute greatly to creation of permanent work in Spain (employers would be more willing to offer permanent positions), improving not the quantity but the quality of work. These workers on permanent positions would have more confidence to spend or get into debt, more than offsetting the problem pointed out in the first comment that decrease in spending power of your workforce reduces consumer spending making it harder to get out of slow economic periods.

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