How exactly will workchoices boost the job market?

Coalition Ministers keep telling us that WorkChoices will boost workforce participation rates and that the job situation will be much better under WorkChoices than without it.

The âevidenceâ of the last twelve months is quite inconclusive: the small increase in workforce participation rates over the last twelve months is broadly in line with the trend growth of earlier years and the regional variations are too marked to suggest one common explanation.

So Ministers must turn to economic theory to explain how their workplace reforms will boost employment.

1. Mr. Hockey has offered one explanation â unfair dismissals.

2. Mr. Costello has offered a second â lower wage pressures (see today’s Australian).

3. And at various times Coalition ministers have given us a third explanation â that by allowing employers more resource management flexibility, they will become more efficient and this will improve their job creation capacity.

UNFAIR DISMISSALS is really a weak pillar to lean on. As derrida derider says (in a recent contribution to Kalimna), the empirical evidence on the relationship between employment protection legislation (regulations on hiring and firing) and aggregate employment, as recently outlined by OECD, is ambiguous. And the reason is that such policies impact on both inflows and outflows. As dirrida says, unfair dismissals may affect the composition of employment but that is not what the Coalition is on about.

On WAGE PRESSURES, there are three distinct stories to be told. One is that if nominal wages rise too fast relative to productivity they can stimulate inflation and eventually slow down the economy. But in a globalised, integrated world economy, is this a realistic scenario even without WorkChoices? After all, the first nine years of Howard were under a different IR regime and there were no signs of serious inflation.

The second story on wage pressures is that WorkChoices will lower REAL wages relative to what they might otherwise have been. I suspect this story is correct, in the short term at least. By I canât see the Coalition trumpeting this line.

The third story on wage pressures is that downward wage flexibility will make the economy more resilient to shocks in the even of a recession. I think this argument also has a lot going for it. But again it suggests lowering of real wages during a downturn. (By the way, Mr. Howard now tells us there are not going to be any recessions under his stewardship).

Finally there is the EFFICIENCY case for WorkChoices. I have argued in many recent papers (e.g. see Public Policy journal vol. 1 no 2 2006) that there are conflicting ways in which WorkChoices will affect productivity – some good and some bad. So one cannot form a definite view a priori on the issue. Certainly, if the Coalition wants to use this argument it can make a superficial case for it by selectively drawing on the literature but the true story is more complicated and unclear. Incidentally, there is so far no âevidenceâ from the experience of the last twelve months to back up the efficiency line.

In short, I believe a case can be made that WorkChoices will boost the job market in the long term but it is one which relies mainly on lower relative real wages. Similarly, the Government’s welfare to work measures will force many welfare workers into the workforce and help lift participation rates.

If I am right, it is an uncomfortable truth for the Coalition and it poses two questions.

First, is it fair to ask the poorest workers and benefit recipients in Australia to bear the cost of economic reform at a time when other Australians are enjoying incredible prosperity (with booming export prices adding $3000 to average per capita real incomes in recent years)?

Secondly, are there not fairer ways (through investment in human capital) for governments to achieve the desired employment outcomes? {Note that many countries with considerably higher levels of worker protection regulation than Australia, and some which have increased regulation in recent years such as NZ and UK, have all achieved ârecord lowâ jobless rates â indeed with higher participation rates than Australia.}

Most people know my views on both questions.

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Bring Back CL's Blog
Bring Back CL's Blog
14 years ago

Fred, good article.
I was under the impression from Mark Wooden’s article on JAPE that minimum wages would have to rise ( or welfare reduced) otherwise there would be little incentive over time for the unskilled to take up work.

Sacha
14 years ago

Yes, good article. I wonder if support such as earned income tax credits for low-income earners would help alleviate the lowest-paid bearing the burden of economic reform?

swio
swio
14 years ago

I wonder if there might be support for greater flexibility for employers if it was combined with more generous welfare benefits, perhaps related to the income someone was getting before they are let go by an employer. My impression is that people are generally sympathetic to the argument that business should be able to get rid of people but they feel that this will inevitably move the balance of power in favour of employers and they don’t trust all employers to be fair.

In Denmark they have Flexicurity. The concept is that employers have few restrictions on hiring and firing getting the flexibility that Howard is always going on about but to make it fair they have generous welfare benefits. Its certainly been shown to be successful at getting unemployment down. It might have been smart politics for Howard to try the same here. I don’t think Labour would be able to introduce Flexicurity as I doubt the unions would be in favour.

James Farrell
James Farrell
14 years ago

You’ve done a good job of untangling the issues here, Fred.

The first and second ‘stories’ about wage pressure are closely related. If you reduce labour’s bargaining power, that should result in either lower real wages at the existing employmemt level, or a lower NAIRU at the existing wage, or – most likely – some combination of lower wages and a a lower NAIRU. Lower unemployment is obviously a good thing; against this we have to consider (1) the affect on workers’ utility of reduced job security, especially in a downturn, and (2) the possibility that easier firing of workers amplifies the business cycle.

Anthony
Anthony
14 years ago

Flexibility is a fraught term. Analysts generally talk in terms of numerical flexibility, functional flexibility and temporal flexibility: in short, bosses

Andrew Norton
Andrew Norton
14 years ago

James – WorkChoices could also have smoothing effects on the business cycle. There are job losses in a downturn regardless of employment law – if there is no work ‘unfair’ dismissal law isn’t going to save your position. But if there is more scope for downward movements of real wages WorkChoices may reduce overall job loss. Labor’s use of the Accord to hold down real wages in the 1980s helped improve employment levels, but only after we had experienced heavy job losses in the early 1980s recession. It would be better to avoid some of the initial losses.

Dany le roux
Dany le roux
14 years ago

Crikey has been saying that during the last two years the number of s457 visa holders coming to Australia was 100,000 along with their partners and children all of whom can work here.The Centre for Full Employment at Newcastle Uni. says that there are really 1.7 million people on Newstart type allowances who could do with a job.If the s457 minimum wage rates are being rorted or ignored and checks to police the system are few and far between isn’t it just possible that Workchoices is not the real wages constrainer? The 1.7 million figure is many more than the ABS number of 4.5%.

Andrew Norton
Andrew Norton
14 years ago

Dany – People can work some hours without losing their entitlement to Centrelink unemployment benefits, while there are other people who are unemployed but are not receiving benefits. So the two unemployment numbers don’t precisely match.

James Farrell
James Farrell
14 years ago

Andrew, I was thinking of the greater redundancy obligations before WorkChoices rather than the unfair dismissal laws. And I don’t think downward movements in wages save too many jobs when firms just aren’t getting any orders. That doesn’t mean I think WorkChoices is an unmixed catastrophe. I’m sure that a few low-skilled workers, who would otherwise be unempoloyed, will get jobs with small business.

Dany le roux
Dany le roux
14 years ago

Andrew,
please tell me who these unskilled people are and how many of them are earning enough not to claim at least in part some Centrelink subsidy?There are very many people who work two days a week in jobs which essentially have been manufactured to get people off the books for three months with a lump sum going to the complicit employer and of course a fairly big bucket of money going to the Job Network provider.I know of a “factory” which has serially employed 17 different people for periods of about three months doing general duties.Another racket is the security guard course which is a month long followed by three months of employment which is inevitably terminated just as soon as the provider bounty matures especially if the security guard is female.Unemployed people over 55 of course can escape this bullshit if they do 15hrs/week voluntary work in areas such as taking wheelchair bound people on outings and doing meals on wheels and general shit kicking jobs in nursing homes.Doesn’t this keep wages down?
Single parents are now starting to use the Job Network providers to add to the 1.7 million making available even more shitkickers.Where do you people get your sanitised information?
This stuff is relevent to the Rudd proposed unfair dismissal regime outlined yesterday because it suits the Job Network (especially including Rudd’s wife’s network) to have their client araldited to the post for x months so that they can confidently collect their bounty.
James,
How sure are you that a few low skilled workers who would otherwise be unemployed are employed because of Workchoices?You don’t know the demographic because the stats are not promulgated or the mainstream commentators don’t give a shit.
We have an exteremely right wing goverment who do things for their wealthy demographic and do not give a tinker’s about telling anyone.They lie. Did you miss the last eleven years?They would rather have the huge numbers of people on welfare clawing each other for nonexistent jobs and claim just 4.5% unemployment than go to expense of re-educating those displaced by technological change.The s457 racket is the govt’s way of avoiding the expense of training.So it is not just Workchoices it is the unregulated s457 regime which is keeping wages down (and therefore inflation with an election approaching ).In fact Workchoices can only work to contain wages with s457 abuse being usual.The Job Network providers and Centelink contain the low income distress and institutionalise welfare level wages.
Tell me how it is otherwise. Please tell me how much attention you have given to the role of guest worker labour in coming to your conclusion.

Patrick
Patrick
14 years ago

Without even knowing Andrew N personally, Dany, I’d say the answer to your last question is more time than you have spent cogently thinking in the last year…

Andrew Norton
Andrew Norton
14 years ago

Dany – I was just making a statistical point. You get counted as ’employed’ by the ABS if you have worked one hour or more in the survey period (there is a separate under-unemployment survey). Obviously nobody can survive on the earnings of one hour per week, so people can stay on Newstart allowances despite working some hours. From the guide to social security law it looks like Newstart recipients can earn up to $62 a fortnight without affecting their payments, and then starting losing some of their payments as their earnings increase.

However other people who become unemployed on the ABS definition would not be entitled to Newstart at all because their other income or assets are too high. Such people (eg me) effectively have to self-insure against unemployment by having savings, which I do.

I agree that there are plenty of people who have less work than they want – discouraged jobseekers, those with jobs but too few hours, many of the people on ‘disability’ payments, and those in make-work schemes. This is all well-known and they have been the subject of much policy attention. Though the number has been dropping, it is still quite high.

Andrew Norton
Andrew Norton
14 years ago

My second paragraph is ambiguous – I am not unemployed, but I do have enough money put aside to finance myself for several months should I become unemployed.

Dany le roux
Dany le roux
14 years ago

Patrick,
if one thinks it is necessarily cogent but thank you for your tautologous contribution anyway.

Andrew,
thank you for your comment but I was hoping that someone would consider and comment on the effect of the quite shifty use of s457 visas to control wages and inflation.

Sacha
14 years ago

Just an observation – labour (as in people) is not necessarily perfectly mobile within Australia, and there may be geographic areas where there is a shortage of labour and other areas where there is an oversupply of labour.

An individual’s “effective mobility” (my own just made-up term) may be reduced through family situations (eg a partner has a job in one location and they don’t want to split up), dislike of moving, attachment to a particular location and lack of resources to move.

Just because there are unemployed people in the country does not mean that necessary every vacant job can or will be filled – apart from the imperfect mobility of labour, there may be mismatches between the skills of unemployed people and the skills required in the vacant positions.

Fred Argy
Fred Argy
14 years ago

Dany, I believe Andrew was making a perfectly valid statistical point.

But I agree wholeheartedly with your comments on S457 visas. In fact, the Howard Government is trying to increase wage flexibility in three ways. First, through WorkChoices. Secondly, through welfare to work policies. And thirdly through S457.

It is a pretty formidable attempt to increase the elasticity of labour supply. In narrow economic terms, it makes sense. But when one considers the policy alternatives, it is bad policy for society.

Sacha
14 years ago

Fred, would it be possible for a future govt to impose controls over S457 visas so that all wages and conditions of jobs under those visas were equivalent to similar non S457 visas? (I’m talking conceptually here, I don’t know how it might be done in practise).

Dany le roux
Dany le roux
14 years ago

Parick,
I noticed another one:if you know someone it is necessarily personal unless of course you so cherish the work of Miranda Devine that you cosider her to your soul sister just from having collected all her aticles in bound leather.
Fred,
Thank you.Perhaps you could start another post on this three pronged approach.

Fred Argy
Fred Argy
14 years ago

Sacha, as I understand it, people coming under the visas must now meet the minimum award wage and conditions. But (a) many employers are getting around those rules and (b) if market wage rates and conditions have tended to exceed the minimum, bringing visa workers on the minimum still amounts to under-cutting Aussie workers.

I really don’t know how one tightens up on both fronts but it should be feasible – if the government was concerned (which I suspect it is not)!

Sacha
14 years ago

Fred, I suspect the govt isn’t concerned – and wouldn’t be surprised if it’s using the visas as a way of reducing labour costs. As an anecdote, didn’t the Industry Minister say that labour costs in NZ were less than in Australia and that it would be good to reduce Australian labour costs to the NZ costs?

Dany le roux
Dany le roux
14 years ago

I hope this does not create copyright problems:

CRIKEY 19/03/07
You say migration, we say unlimited cheap labor
Michael Pascoe writes:
There

Dany le roux
Dany le roux
14 years ago

What have I done? Given everybody writer’s cramp?

Dany le roux
Dany le roux
14 years ago

Sorry Jacques,
your last remarks were not there when I last commented.The material from Crikey I saved at the time.It is the entire article so I am not sure what you want.Please tell me.I am sure the date is correct and it is from the suscribers’ version.Thank you.

Anthony
Anthony
14 years ago

Andrew N, you wrote:

‘However other people who become unemployed on the ABS definition would not be entitled to Newstart at all because their other income or assets are too high. Such people (eg me) effectively have to self-insure against unemployment by having savings, which I do’.

Haven’t you got the causation the wrong way around? You don’t ‘have to’ self-insure because Centrelink denies you benefits; Centrelink denies you benefits because you have ‘self-insured’.

And it’s not just self-insurance, but income from wages in lieu of notice, cashed out unused annual leave, and sometimes redundancy payments (there are complicated rules about the last of these) etc. In effect, long-term continuous work under an ongoing employment contract allows you to accrue some level of income protection against short-term unemployment – a bit like a social insurance system, I suppose.

Dany le roux
Dany le roux
14 years ago

My apologies but a review of the stuff should make everything OK.

My review of the Crikey stuff is that it seems to be unique in the media ,paper and electronic, in actually reporting the numbers of 457s coming into the country.
It also does not use euphemisms such as “flexibility” but tells it like it is for those whose employment is affected.
In fact it highlighted here the virtual overlooking of 457s as a wage restrainer.

In other words it shone a light on a subject that was hitherto virtually ignored .

Andrew Norton
Andrew Norton
14 years ago

Anthony – Partly, though my reading is that they also look at non-liquid assets such as housing. I’m not sure how many people have specifically self-insured against unemployment as opposed to simply accumulating assets for other reasons, which Centrelink requires them to use before providing income support.

Anthony
Anthony
14 years ago

‘simply accumulating assets for other reasons, which Centrelink requires them to use before providing income support’.

You’re right, I don’t think many people strategically ‘self-insure’. But we do have the situation whereby the government requires that people impoverish themselves before they are allowed to claim benefits. If we want to encourage savings and ‘asset-based welfare’, this doesn’t seem a particularly appropriate policy.

Dany le roux
Dany le roux
14 years ago

Anthony,
are you sure “impoverish themselves “is the right phrase? Perhaps this is a little hyped?
Isn’t “asset based welfare” more oxymoronic than a contradiction in terms?
I think some of you guys allow the fact of your substantial incomes and assets to turn a blind eye to economic reality of a lot of the population.
Apparently you can get a good plagiarism-free essay on line from India on any subject at reasonable rates so if you are in the trade of economics spruiker it is possible there could be a suitable s457 coming your way in the not too distant future.

Anthony
Anthony
14 years ago

Dany, yeah, it’s hyped. But it’s true. We have a very ‘targeted’ welfare system when it comes to the dole, that, as Andrew points out, is not only tightly means tested but, on first application, fairly tightly (liquid) assets tested.

As for asset-based welfare being ‘a contradiction in terms’ rather than ‘oxymoronic’, what’s the distinction?

‘Apparently you can get a good plagiarism-free essay on line from India on any subject at reasonable rates so if you are in the trade of economics spruiker it is possible there could be a suitable s457 coming your way in the not too distant future.’

Now what is the point of that comment? I mean, what is the point?

Dany le roux
Dany le roux
14 years ago

Anthony,
my lengthy response to you last night got censored/eaten whatever.

Sacha
14 years ago

I know that some people copy carefully composed long comments before submitting them in case they disppear!