The Index of Economic freedom compiled by the Heritage Foundation and Wall Street Journal has come out with its 2006 index of economic freedom. It again claims that the higher the rating the better the economic performance (measured by per capita incomes). But it uses a composite un-weighted index of several indicators. Some of these indicators such as business freedom (meaning how free entrepreneurs are to start a business), property rights, trade freedom, investment freedom and freedom from corruption are clearly correlated to economic growth. However, size of government (tax levels and progressiveness and levels of government expenditures) is not correlated with growth. Nor is labour freedom (restrictions on wages, hours and on hiring and firing) a strong predictor of economic growth once a certain level of freedom has been attained. But the Heritage Foundation insists on weighting all the indicators equally. Its main rationale is that it is interested in liberty â not just economics. Fair enough but disappointing to an economists
My aim here is not to revive the earlier debate I started in an earlier posting a few weeks ago on hard liberalism versus economic liberalism. My aim is to point out one stark fact. The compilers of the Index of Economic Freedom have Australia as number three in the freedom league â just below Hong Kong and Singapore. And the main reason is that we have an extraordinary high rating for labour freedom. Australia here is ranked higher than USA or UK or New Zealand.
This does not surprise me as many OECD publications rated Australia as a âvery lightâ labour market regulator even before WorkChoices. But surely Coalition politicians and right wing commentators must stop arguing that we still have a highly regulated labour market.
For example, Peter Saunders, from the Center for Independent Studies, is quoted in The Australian yesterday as saying that âlooking around at other Western countries, we still have one of the most regulated labour marketsâ. As a generalization, this is quite incorrect. It is true that, by international standards, Australia still has a high statutory minimum wage relative to median earnings (although that ratio is shrinking every year). But when one looks at overall worker protection regulation, including unfair dismissals and access to trade unions for example, we are leaders in the freedom league. Even short term immigrant flows are being liberalized.
So letâs have no more of these claims that we are still over-regulated as far as labour markets are concerned.