Another conservative front opening up – minimum wages

Today I have been reflecting on minimum wages and employment. As the Australian economy slides slowly along the bottom (close to zero growth), the conservative forces are mobilising to attack the changes that the current federal government made to the industrial relations laws when they won the last election. Ex-liberal party hack (advisor) and now Director of the conservative Sydney Institute and regular Sydney Morning Herald columnist Gerard Henderson is one person who is leading the charge. While the first of the changes will not come into effect until next month, employers who have revelled in the massive redistribution of national income that the deregulation the labour market delivered to them are already enraged and looking to commentators such as Henderson for succour. The problem is that there is no argument they can make that is defensible. This will become a new battlefront for unions who seek to defend the interests of the most disadvantaged workers in the land.

In his SMH article today – Labor’s good intentions fail to guarantee jobs for youth – Henderson claims that the retrenchment of the pernicious Work Choices laws (pernicious is my word not his) is undermining employment prospects.

He asserts that:

The fact Australia has one of the strongest economies in the OECD today is primarily due to the economic reforms undertaken over the past quarter-century by the governments led by Labor’s Bob Hawke and Paul Keating and the Coalition’s John Howard. The deregulation of Australia’s once highly regulated industrial relations system was a central part of this reform process … Kevin Rudd and his Minister for Workplace Relations, Julia Gillard, have been busy in the past two years re-regulating the Australian labour market. This procedure will be finalised in January when the Rudd Government’s Fair Work Act comes into effect.

This will at least take Australia’s industrial relations system back to March 1996, when the Howard government was elected.

The assertion that the Australian economy avoided the worst of the recession because it privatised, aggressively deregulated the labour market, cut real wages, introduced onerous welfare-to-work provisions, and ran budget surpluses for a decade or so is now often-repeated by all sides of politics in Australia.

My view is that it is an unfounded assertion that is not borne out by the data.

Consider my blog yesterday – Lesson for today: the public sector saved us – where I show using Australian Bureau of Statistics data that the private labour market shrunk dramatically and the loss in total employment between June 2008 and June 2009 was all down to the major increase in public sector employment.

I also used Treasury estimates to show that if the discretionary component of the fiscal intervention had not have been delivered then we would have had at least 3 quarters of “official” recession (measured in terms of GDP losses).

The secret of the relatively better (but still appalling) performance of the Australian economy in this downturn lies in the timing (early); the magnitude (several percent of GDP) and the composition (geared at directly boosting aggregate demand) of the fiscal intervention. Without it we would have looked fairly bleak.

Henderson then starts to take us to his main point – circuitously:

The evidence suggests that in contemporary Australia, the well-educated and well-off can look after themselves. Certainly, the global financial crisis has caused some hardship for all socio-economic levels of Australian society.

Yet this downturn – unemployment has increased in the past two years by nearly 50 per cent, from about 4 per cent to nearly 6 per cent – has hit hardest among “blue-collar” workers, especially those employed in manufacturing and construction.

In most economic downturns or recessions, the young are most disadvantaged since they find it difficult to obtain employment. Those with the least educational qualifications are usually the worst off. Their plight is frequently overlooked by journalists, who tend to be young but well-educated.

I agree with some of this description. Manufacturing employment in particular has been significantly cut losing 90 thousand jobs or nearly 8.3 per cent of its total employment since the downturn began in February 2008. However, this has been the common theme in previous recessions.

Henderson is however wrong in his statement about construction. It actually gained employment in the period since February 2008, which in part, is courtesy of the impact of the fiscal expansion on infrastructure development.

He is correct to say that the young and the low-skilled are dealt the worst blow in any downturn and are the last to really benefit from recovery. That is one of the reasons I advocate a Job Guarantee to ensure there are always jobs available for the least advantaged workers in the labour market.

Henderson then reported on an interview on the ABC Lateline’s Friday Forum broadcast on December 11, 2009.

The exact interchange Henderson mentions went as follows (Presenter is Leigh Sales, Mark Arbib is the Minister for Employment Participation and Scott Morrison is the Opposition’s spokesman on Immigration):

LEIGH SALES: OK. Now we’ve had – there’s been a lot going on this week and I wanna whip us throw a heap of things really quickly, so let’s move on. Unemployment: Mark Arbib, this week we saw the third consecutive gain in jobs in Australia. How much longer can Labor argue that the stimulus doesn’t need to be recalibrated given that it’s based on Treasury forecasts that haven’t been realised?

MARK ARBIB: Well, look, we welcome the drop in unemployment. But you gotta remember though there’s still 650,000 Australians that are outta work and there are probably 100,000 of them, even more, that are under-employed – people who were looking for more work, more hours, but can’t get it.

LEIGH SALES: But the results are coming in that are better than what you anticipated when you set up the stimulus package.

MARK ARBIB: Sure, but on the ground, when you go out to communities, and I’ve just got back from Cairns where unemployment is over 11 per cent; a month ago it was 14 per cent. We had a job expo up there. 400 jobs on offer. 5,000 came through the door. And I was talking to people who are distressed. Like we talk about unemployment, but we don’t talk about the effect it has on people. They are distressed. And there’s gonna be a lot of people, Leigh – it’s not just there; in south-west Sydney at the moment, 47 per cent of teenagers are unemployed. We need to act and we need to keep stimulating the economy with these infrastructure projects, keep people employed.

LEIGH SALES: Scott Morrison, there is no doubt that Australia has weathered the global financial crisis better than almost any other country in the world, probably better than any other in the country in the world. Will the Coalition give Labor credit for its management of the situation?

Henderson’s claims that that Arbib’s comment that “47 per cent of teenagers are unemployed” in a certain area of Sydney:

… should have ignited astonishment. But Sales ignored the point and then suggested to Liberal Party frontbencher Scott Morrison that the Coalition should give Labor credit for its management of the economy. It was as if Arbib had not mentioned the 47 per cent figure.

I agree with him. Leigh Sales should have hammered him on this point and the regional disparities in labour market outcomes generally. Please read my blog – Maybe the unemployment rate has peaked – for more discussion on the regional issue.

It is also clear that the way the current government has disregarded the teenagers during this recession is a national disgrace and represents the true intergenerational burden that will emerge from the downturn in economic activity.

The conservatives like to think the public debt increase will punish future generations. That claim of-course only belongs in the mythology of the ignorant. However, the true disadvantage lies in denying teenagers the opportunity to work if they do not wish to stay at school.

The following table is derived from ABS Labour Force data and shows the growth in employment (full-time, part-time, and total); unemployment and the labour force (per cent) and the percentage point change in the unemployment rate and the participation rate for the various age cohorts.

The selected periods are from February 2008 to November 2009 (the low-point unemployment month to the latest period) and from January 2009 to November 2009 (the period most affected by the fiscal stimulus).

The Table shows that the employment loss over the entire period of the downturn to date for teenagers has been 6.9 per cent compared to a modest rise in overall employment. Teenagers are losing full-time jobs at a faster rate than any other cohort and not enjoying the same growth in part-time employment as other groups.

The rise in the unemployment rate to date has been 1.7 per cent overall but for teenagers it has been 4.8 per cent. The impact of underemployment (not shown) has been very severe on the teenagers.

The reality is there are not enough jobs or hours of worked being created and when the labour market is rationed like that the employers use screening mechanisms to shuffle the jobless (and underemployment) queue. They use formal education, experience and other traits to ration the excess supply of labour.

Henderson then – finally – gets to his main issue. He says:

Before Sales diverted the conversation, Arbib suggested the only way to overcome high teenage unemployment was to “keep stimulating the economy with these infrastructure projects”. But this overlooks the fact most of the stimulus package has already been allocated. Also, the Rudd Government has already spent a significant amount of money in providing incentives for employers to hire apprentices.

Arbib’s concern about the high level of unemployment in Cairns and the large number of unemployed youth in south-west Sydney was genuine. But he failed to consider – and was not asked to consider – whether Labor’s re-regulation of the labour market may have contributed to the problem.

So you see the point. Henderson hates what he calls the “industrial relations club” which is characterised by labour laws that are administered through the unique wage tribunals we have in Australia and prevent the worst ravages of the competitive system.

It is true that “the stimulus package has already been allocated” and that the Federal government has “spent a significant amount of money in providing incentives for employers to hire apprentices”.

But Henderson’s argument is a non-argument. All he is telling us is that the amount and composition of the stimulus have been inadequate to reduce the rising joblessness in the face of the largest world downturn in 80 odd years.

In yesterday’s blog – Lesson for today: the public sector saved us – I showed how important public job creation has been in attenuating the rise in unemployment. Over the year to June 2009, private employment crashed (82 thousand jobs lost in net terms) while public employment growth was 3 per cent overall (adding 56 thousand net jobs).

It is clear that the Federal government could have added more jobs via a direct job creation strategy and targetted them at the youth. This would have significantly reduced their disadvantage.

The loss of jobs has nothing to do with the “re-regulation of the labour market” because the main provisions of that legislative change have not even taken effect (see below).

Mass unemployment arises from a lack of effective aggregate demand. Cutting wages in the face of a collapse of aggregate demand just makes the situation worse. Cutting specific age-related wages in the face of a collapse of demand will not have any impact on overall levels of employment but may at the margin shuffle the jobless queue – so the teenagers get employed on below-poverty line wages and the 20-24 year old group lose their jobs.

When there is a job ration operating wage cuts make the situation worse.

Henderson introduces the OECD Report Jobs for Youth: Australia which was released in April 2009. You can see a Summary of the report.

The main thrust of the Report was a review of the “transition of young Australians from school to work” and emphasised the need to improve educational attainment among the youth. As a legacy of the decade or more of conservative government and the neo-liberal policies of previous Labor governments, all obsessed with trying to run budget surpluses (by cutting its contribution to educational spending) Australia has:

• More chilren who leave school at 16 than in most other OECD nations.
• The percentage of young people leaving school early is higher than the OECD average.
• Employment and educational attainments are disturbingly low for Indigenous young people.
• For a minority of young people reliance on income support is the norm.
• Australia is the worst performer in terms of investment in early childhood education in the advanced world.

So when the labour market is rationed by inadequate aggregate demand (that is, not enough jobs being created) it is the youth that are most disadvantaged.

Henderson however focuses on one small section of the Report which talks about the industrial relations changes. The OECD said:

The Labour government has started removing some aspects of the WorkChoices legislation implemented by the former government. The new policy will include an enlarged safety net (reinstatement of dismissal rules for workers in firms with less than 100 employees and more minimum terms of employment and pay) and a phase-out of AWAs. Changes designed to protect vulnerable workers, including youth, who were found in some cases to be disadvantaged under WorkChoices bargaining arrangements, are welcome. However, care should be taken to avoid discouraging bargaining at the workplace level and pricing low-skilled youth out of entry-level jobs. The process of streamlining and modernising awards started under WorkChoices should also be continued.

AWAs were the Australian Workplace Agreements that the conservatives introduced to undermine pay and conditions. Workers were confronted with take-it-or-leave-it contracts and the rules allowed these contracts to reduce their existing conditions. Prior to the introduction of the Work Choices legislation bargaining could only improve overall conditions not reduce them.

The evidence is clear that the youth were savaged by Work Choices and it is one of the reasons they turned against the conservatives in the Federal Election in November 2007. It was an election fought on Work Choices and Climate Change (the most important of other issues). It is interesting that the same issues that the country overwhelmingly rejected in favour of more regulation and an interventionist approach are now emerging again as the key issues in the coming 2010 federal election campaign. The conservatives just do not get it – our nation does not want pernicious industrial relations rules that strip essential protections.

Anyway, Henderson picks up on the OECD statement that “care should be taken to avoid discouraging bargaining at the workplace level and pricing low-skilled youth out of entry-level jobs” and concludes that:

Small business is the main employer of young Australians. The re-regulation of the labour market, in particular the reintroduction of unfair dismissal legislation, has provided a disincentive for small businesses to employ young Australians. This is particularly the case with teenagers who have left school early and are not undertaking further education.

From next month most of Labor’s industrial relations agenda will be in place. The advent of Fair Work Australia will correspond with the seasonal entry of school leavers and young graduates into the workforce. Some will be taken on by the ever-growing public sector.

The main reason the teenagers do not have enough jobs is because there is deficient aggregate demand and they are disadvantaged in the shuffling of the jobless queue.

Henderson also says that “Arbib knows the problem but there is no evidence that he understands a possible solution” – thus trying to link the industrial relations issue back to the ABC interview I noted above. But the regional dispersion of unemployment and the age-cohort effects have occurred under the existing industrial rules that will be changed in January 2010.

That is, the new rules haven’t even been brought in. So that situation reflects the old rules. Why didn’t Henderson point that out rather than blurring the argument?

But there is a substantial body of evidence generated over a long period of time (including that produced by the OECD itself) that would reject the sort of conclusion Henderson is making.

For example, before the previous conservative government dismantled the judicial minimum wage setting process and installed a flakey employer-friendly process in its place, I was called regularly as an expert witness to the full bench proceedings.

In the May 2004 Federal National Safety Net decision (minimum wage hearing), the Full Bench of the Australian Industrial Relations Commission noted that

[163] Professor W Mitchell, Professor of Economics and Director of the Centre of Full Employment and Equity at the University of Newcastle, in a critique included in the ACTU’s reply submissions, raised a number of limitations in the methodology applied in regression analyses …

[166] Based on the material before us, we adhere to the conclusion reached in the May 2003 decision that it has not been demonstrated that there is a negative association between safety net adjustments and productivity growth. There is no necessary association between award coverage, safety net adjustments and productivity growth.

The last “national safety net” hearing in the AIRC before the conservatives dismantled the process was determined on June 7, 2005. The Reason for Decision the AIRC rejected the main employer groups claims that a rise in minimum wages is harmful with respect to employment. The Full Bench noted that:

[275] We do not propose to place any weight on the Commonwealth’s submission based on the data in Chart 14 above. The analysis undertaken by the Commonwealth relies on only a small number of observations. In the May 2004 decision, the Commission referred to the evidence of Professor Mitchell in which he raised a number of limitations in the methodology applied in regression analyses undertaken by the Commonwealth in those proceedings …

[276] It seems to us that at least the first two limitations identified apply with equal force to the Commonwealth’s analyses in these proceedings. Given the technical limitations of the exercise, the material does not allow us to reach any conclusions as to the impact of safety net adjustments on employee hours worked in the three most award-reliant industries …

[278] Based on the material before us, we are not persuaded that there is any necessary association between award coverage, safety net adjustments and employment growth.

I could quote several more instances where the claim that the coverage of awards undermines employment is rejected after exhaustive examination of the evidence before the AIRC.

There is also significant international evidence that rejects Henderson’s claims. In the face of the mounting criticism and empirical argument, the OECD begun to back away from its hardline Jobs Study position (that deregulation was essential).

In the 2004 Employment Outlook, the OECD (pages 81 and 165) admits that “the evidence of the role played by employment protection legislation on aggregate employment and unemployment remains mixed” and that the evidence supporting their Jobs Study view that high real wages cause unemployment “is somewhat fragile.”

In the 2006 OECD Employment Outlook entitled “Boosting Jobs and Incomes”, which is based on a comprehensive econometric analysis of employment outcomes across 20 OECD countries between 1983 and 2003. The sample includes those who have adopted the Jobs Study as a policy template and those who have resisted labour market deregulation. The report provides an assessment of the Jobs Study strategy to date and reveals significant shifts in the OECD position.

The OECD found that:

• There is no significant correlation between unemployment and employment protection legislation;
• The level of the minimum wage has no significant direct impact on unemployment; and
• Highly centralised wage bargaining significantly reduces unemployment.

The OECD (2006) found that unfair dismissal laws and related employment protection do not impact on the level of unemployment, merely the distribution. Critics of the OECD approach (including my own work) have consistently pointed this out.

In a job-rationed economy, supply-side characteristics will always serve to shuffle the queue. Internationally, there is a growing sentiment that paid employment measures must be a part of the employment policy mix.

The lack of consideration given to job creation strategies in the unemployment debate stands as a major oversight. There is growing recognition that programs to promote employability cannot, alone, restore full employment and that the national business cycle is the key determinant of regional employment outcomes.

In my recent book with Joan Muysken – Full Employment abandoned we consider the evidence in considerable detail.

There is also an interesting study from Stephen Machin entitled – Setting minimum wages in the UK: an example of evidence-based policy, which was presented to the Fair Pay Commission’s swansong research forum in Melbourne last year. In this volume you will also see an invited paper that I gave at the same forum.

Stephen Machin is Professor of Economics at University College London, Director of the Centre for the Economics of Education and a Programme Director (of the Skills and Education research programme) at the Centre for Economic Performance at the London School of Economics, an editor of the Economic Journal (one of the top academic journals), has been a visiting Professor at Harvard University and at MIT. So in mainstream terms he is thoroughly one of the orthodox club.

He examined the impact of the creation of the UK Low Pay Commission, which the Blair Labour Government established to try to remedy some of the worst excesses that the neo-liberal era had delivered to low wage workers. Both sides of politics in the UK from Thatcher onwards were remiss in this regard.

The UK Low Pay Commission (LPC) was established in 1997 and was given the task to define an effective National Minimum Wage (NMW). The following graph is taken from his Figure 1 (page 15) and is self explanatory.

Machin’s commentary is as follows:

The NMW was introduced in April 1999 at an hourly rate of £3.60 for those people over 21 years of age, with a development rate of £3.00 for those aged 18 to 21 years. The key economic question has been the impact of minimum wages on employment …

Over the period 1999 to 2007, the macroeconomic picture indicates that employment continued to grow as minimum wages rose (Figure 1).

What about effects on specific age cohorts. Machin concluded that:

Across all workers, there was no evidence of an adverse effect on employment resulting from the introduction of the NMW.

What about the effects in the most disadvantaged sectors? Machin reports on research that “searched for minimum wage effects in one of the sectors most vulnerable to employment losses induced by minimum wage introduction, the labour market for care assistants”.

He concluded that:

Even in this most vulnerable sector, it was hard to find employment losses due to the introduction of the minimum wage.

I would also note that a sophisticated society requires a decent minimum wage that is determined on the basis of what we want the floor in living standards to be. In the absence of regulation it is almost certain that the “market” would drive the wage below that level. In such cases, the employment is not desirable and so a Job Guarantee could set the minimum alternative employment that the private employers then have to better. They need to invest and ensure productivity can support the higher wage level. Its called a win-win.

Conclusion

Expect more from the conservatives on the industrial relations front. They lost the battle when the current federal government watered down the draconian legislation that gave employers a free for all.

Well lost the battle is a bit of an overstatement given that the current Labor government has hardly restored balance in the labour market. The rules are still biased towards the employers.

But the legislation did get rid of some of the major excesses in the conservative legislation that systematically undermined pay and conditions particularly those pertaining to the youth.

Digression: UK Opposition Shadow chancellor thinks they are part of the EMU

… or hasn’t got a clue where he is.

I lived in the UK for some time (studying for my PhD) during the dark years of Thatcher and the famous mining strike. But it seems that the conservatives are not as cunning anymore.

The Guardian carried this story today (December 21, 2009) – Osborne warns UK risks Greek-style crisis – where the probable future chancellor (George Osborne) thinks that “Britain is at risk of following Greece with rising interest rates and soaring debt repayments”.

In claiming the UK government needed a credible exit plan – the latest buzz phrase that is being bandied by conservatives everywhere – Osborne is quoted as saying that:

The people of Greece know what happens when the world loses confidence in your ability to pay your bills … It’s costing them an additional 2.5% on the interest rates they are paying to borrow.

Last time I looked into it, Greece was part of the EMU fixed-exchange rate system which places severe constraints on the independence of its fiscal policy and takes monetary policy out of their hands.

Further, I had not heard the news that Britain joined the EMU overnight. Maybe George knows something that no-one else in the World has worked out yet.

Pity our UK brethren if this character actually becomes Chancellor. Not that Alistair has much going for him given the state of the UK economy and his obsession with cutting public deficits even though the economy is still contracting.