Volume 4 NOV 2008

Feature articles

Big brother or a fair go
Graham Sewell

When a firm is market-oriented
Bryan A. Lukas

Accounting induced performance anxiety
Anne Lillis

Understanding global imbalances
Richard N. Cooper

An interview with Robert E. Lucas Jnr.
Ian King

Closing the gap?
Paul Smyth

Forward with fairness
John W. H. Denton

The use and misuse of intelligent systems in accounting
Stewart Leech

New agenda for prosperity
Stephen Sedgwick

Alumni refresher lecture series

Real options analysis and investment appraisal
Bruce D. Grundy

Inflation targeting
Guay C. Lim

New economic geography and manufacturing
Russel Hillberry

For love or money?
Anthony Scott

Innovation
Danny Samson

Neuromarketing
Phil Harris

 

by John W. H. Denton

Introduction

As Chair of the Rudd Government’s Business Advisory Group, I have been concerned to ensure that the voice of the business community is heard as the Government translates its Forward with Fairness policy into legislation.

However, rather than going into the detail of the current reform process in this paper, I want to take a broader view of how this process fits within both the historical and global contexts.

 

Key objectives of workplace reform

I can discern three clear objectives from Labor’s Forward with Fairness policy. The Government aims to come up with a workplace relations system that balances the need for:

• National competitiveness;
  
• Fairness for employees; and
  
• The flexibility and productivity needs of businesses.

Reconciling this troika of competing objectives is no easy task. But it is a project that is critical to Australia’s future economic and social prosperity. For example, the importance of labour market flexibility as a determinant of national competitiveness is highlighted by the World Economic Forum’s most recent ‘Global Competitiveness Index’ (GCI). While Australia is ranked 13th in the GCI on labour market efficiency, restrictive labour regulations were identified as the third-most problematic factor for doing business in Australia.

I will now focus more closely on the objectives of workplace reform that I have identified, by developing two key themes.

 

1. The lessons of history

In determining the shape of workplace regulation, it is important to consider how businesses are structured, how they operate, and what the broader economy looks like.

 

The economic and workplace setting in ‘Fortress Australia’

If we step back in time to the late 1890s/early 1900s, we can see that the federal conciliation and arbitration system that emerged in 1904 was closely linked to – and designed to meet the needs of – contemporary business and economic conditions.

At the turn of the last century, the Australian economy was characterised by:

• A relatively under-developed manufacturing sector;
  
• Numerous small single-product businesses that served local markets; and
  
• The exporting of raw materials for processing/ production by foreign manufacturers, which were imported back to Australian retailers.

In 1901, the pastoral, agricultural and mining industries made up 30 per cent of GDP; service industries for the import and export trades (e.g. government, finance, distribution), only a third of GDP; and manufacturing, only 12 per cent of GDP.

The policy-makers of the fledgling Federation settled upon ‘New Protection’ as the preferred model for ordering the national economy, with two intertwined elements:

• First, significant tariff protections for manufacturers along with various types of subsidies for the farming sector; and
• Second, the compulsory conciliation and arbitration system: workers shared in the rents generated by the wedge between domestic and import prices through a centralised wage fixing system that tied minimum wages to price increases.

Much has been written about the origins and nature of Australian conciliation and arbitration, so I will simply emphasise a few key points here. The bitter industrial battles of the 1890s led the framers of the Australian Constitution to make provision for federal legislative power over interstate industrial disputes. The Conciliation and Arbitration Act 1904 (Cth) instituted the concepts of the ‘living wage’ and ‘wage justice’, based on uniquely Australian notions of egalitarianism and a ‘fair go’.

It is clear – as The Hon Justice Kirby has put it – that ‘The 1904 Act grew out of the legal and economic environment of the late nineteenth century.’ However, in my view, Australia’s system of workplace regulation has failed to keep pace with changes in both the economy and the world of work.

 

The economic and workplace setting in ‘Networked Australia’

Since the 1980s, the Australian economy has been transformed from the isolated protectionism of the Federation era. The tariff walls have been virtually dismantled in the interests of making local firms more efficient and internationally competitive. As a consequence, manufacturing industry has declined from its peak in the early 1960s (when it accounted for more than a quarter of GDP) – by 2005, the manufacturing sector represented less than 12 per cent of output and employment. Agriculture and mining accounted for 8.5 per cent of Australia’s output in 2005, five per cent of the workforce, and 55 per cent of exports – while services made up more than 70 per cent of GDP and almost three-quarters of the workforce.

Increasingly, Australian companies – like those in many other countries – are operating in global supply chains, or ‘transnational production networks’ based around multinational corporations. Globalisation has also brought with it greater international financial integration, foreign investment, trade liberalisation – and new forms and structures of work that reflect the new globalised businesses.

Some examples of the changed nature of employment relations in the global workplace include:

• A shift from internal labour markets to much looser connections between firms and workers focused on cross-utilisation of employees and recognition of their ‘intellectual capital’;
  
• Abandonment of the implicit promise of employment security in favour of employability – the ability to acquire skills that will enhance employees’ opportunities not just in one firm but in the broader labour market
  as well; and
  
• As well as the multinationals, growing numbers of employers are small businesses with links to other firms through franchises and joint ventures – and increasingly, workers are engaged as casuals, homeworkers, subcontractors or on some other flexible basis.

This is the new world economic order that our system of workplace regulation has to adjust to, and it will be different again in five years’ time. Whatever system we have, it also has to cater for an ever more diverse workforce, with its complex age and generational mix, as well as workers who want flexibility in working time and remuneration arrangements to suit their aspirational, technologically-geared lifestyles.

 

Forward with Fairness ‘plus’: the further reforms Australia needs

I acknowledge that through the implementation of Forward with Fairness, the Government is trying to get the balance right in the system of workplace relations regulation. But in my view, the current reforms will not on their own:

• Deliver the kind of flexibility that the modern Australian workplace requires; nor
  
• Assist the project of boosting our national competitiveness.
  

They will therefore need to be reviewed over time.

Many would no doubt suggest that WorkChoices – and the High Court’s endorsement of it – was a ‘quantum leap’ away from the Federation-era IR system based on the constitutional labour power. And in some respects, I would agree with them.

However, just consider how much of the ‘old’ system – or the remnants of it – will still remain, even after Labor’s Forward with Fairness policy is fully implemented:

• Industrial awards – albeit ‘modernised’ ones – that will contain fairly detailed regulation of employment terms and conditions;
  
• An arbitral body of sorts – Fair Work Australia – with significant powers; and
  
• Extensive rules governing registered employee and employer organisations, union right of entry, freedom of association, and protected industrial action.

Added to this, we will have a swag of new provisions regulating bargaining – designed mainly to deal with agreement negotiations between employers and unions. This all adds up to a continuing regulatory focus on the concerns of a bygone industrial era – big institutions, employer bodies, and trade unions. But the Australian economy – and workforce – have moved on.

I am firmly of the view that in addition to the important changes to the legislative framework that Labor is implementing, further reforms will be needed to drive the productivity agenda that the Government is also committed to.

Starting right now, some serious thinking needs to be done about how governments can enable firms to pursue strategies of alignment and engagement with the workforce – and assist them to become the kind of innovative, ‘high performance’ organisations that will be critical to Australia’s future competitiveness. The Government should look closely at some overseas models here – such as Ireland’s National Centre for Partnership and Performance and New Zealand’s Workplace Productivity Project.

Reflecting international trends, the Rudd Government is embarking on a limited ‘re-regulation’ of our national labour laws – mainly, to restore a measure of fairness that the electorate has expressed that it wants to see in the workplace relations system.

However, this cannot be the end of the workplace reform process. Forward with Fairness should be seen as a bridge to the next generation of reform, and all stakeholders need to focus on how we will deliver the all-important flexibility/productivity and competitiveness components of the reform equation.

 

2. A global perspective

The current workplace reform debate in Australia is a local manifestation of the challenge policy-makers around the world have faced for some years – how to ‘humanise global capital’. This is now occurring in a context where leaders in public policy debate are, increasingly, questioning the benefits of globalisation.

Despite this, policy-makers in Australia must maintain our support for open trade and investment borders. The global engagement of Australian businesses generates higher levels of productivity, growth and living standards – along with access to new learning opportunities, technologies, ideas and skills for our people.

As well as acknowledging the international policy context in which changes to Australia’s workplace relations laws are occurring, it is useful to examine how policy-makers elsewhere are addressing these challenges. I will now examine how some governments overseas have sought to balance the objectives of competitiveness, fairness and flexibility.

 

China’s Labour Contract Law

China’s importance to Australia cannot be overstated. China is the key emerging power in the East Asian region – and Australian engagement with China is critical to our own economic success.

In June 2007, China adopted a new Labour Contract Law – in effect from 1 January 2008 – which has significantly increased the legal protections offered to employees, particularly in relation to job security, the payment of wages, and the rights of labour hire, casual and fixed-term employees. Importantly, the Labour Contract Law also seeks to address the concerns of business, especially the many multinational companies with operations in China – for example, it allows employers considerable latitude in the use of ‘restraint’ or ‘non-compete’ clauses in employment contracts.

Increased certainty in the content and enforcement of China’s labour regulation will assist the nation’s quest to remain a desirable location for foreign investment.

 

The UK: ‘regulating for competitiveness’

Under Britain’s ‘New Labour’ governments since 1997, deregulation of the labour market has continued at the same time as the introduction of significant new individual rights for employees – including a statutory minimum wage, greater protections for part-time and fixed-term workers, a right to request family-friendly working hours, and union recognition provisions. However, asProfessor Hugh Collins has observed, labour regulation in the Blair/Brown years has been motivated not so much by the traditional protective goals of labour law – but by an overriding concern ‘to improve the competitiveness of businesses’. ‘Regulating for competitiveness’ in the UK has been accompanied by a strong policy push in favour of ‘partnership’ relationships between management and unions.

A final feature of New Labour’s business-friendly approach to labour regulation has been its stance towards the EU. The trend here has generally been one of UK resistance to EU-level regulatory initiatives, and failing that, minimalist domestic implementation of EU directives. This approach reflects ongoing scepticism about the European social model, which the UK Government views as incompatible with the flexibility needed to meet the challenges of globalisation.

 

‘Flexicurity’ in the EU

I have also been critical of the inefficiencies and costs to stakeholders of the type of regulation imposed by the EU’s many work directives. However, since 1997, the European Commission has promoted ‘the importance of both flexibility and security for competitiveness and the modernisation of work organisation’. ‘Flexicurity’, as it has come to be described, is a means whereby employees and companies can better adapt to insecurities associated with global markets.

Some of the strategies that form part of the flexicurity approach are as follows:

• A focus on employment security, rather than job security – recognising that few workers stay in the same job for life;
  
• Enabling companies, especially small-to-medium enterprises, to adapt their workforce to changing economic conditions;
  
• Flexible/reliable contractual arrangements;
  
• Career progression through life-long learning programs, in-company training, and entrepreneurship – internal flexicurity;
  
• More dynamic labour markets, enabling workers to move easily between jobs – external flexicurity;
  
• Promoting gender equality and equal opportunities; and
  
• Modern social protection systems, namely, adequate income support for the unemployed.

Flexicurity generally has strong support among the European social partners, including the European Trade Union Confederation and employer bodies such as Business Europe. Adaptability to change through flexicurity is now an entrenched feature of EU social policy.

 

USA: the Employee Free Choice Act

Early last year, a bill was introduced into the US Congress that would significantly alter the current arrangements for union-based collective bargaining under the National Labor Relations Act (NLRA).

The ‘Employee Free Choice Act’ (EFCA) proposes three main changes to the NLRA:

1. Allowing unions to obtain collective bargaining rights without having to hold a secret ballot of employees in all cases;
   
2. Setting timelines for mediation and, if necessary, arbitration of a ‘first contract’
   (i.e. collective agreement); and
   
3. Introducing stronger penalties for employer violations of the NLRA.
   There are strongly divergent views about the EFCA, between its proponents in the US labour movement, on the one hand, and employer lobbyists, on the other. However, it is interesting to observe that even in the home of ‘muscular free enterprise’, a debate is currently taking place that in some ways reflects our own in Australia – about how to get the balance right between competitiveness, fairness and flexibility in labour regulation.

 

Further implications for Australia

A key concern for the countries I have examined, and the EU, is to ensure that workplace regulation fits with broader economic goals – enabling them to compete in globalised product and service markets, and ensuring they are able to attract international investment.
Australia faces the same challenges. But the experience of these other nations suggests that new approaches offer better prospects for resolving the tensions between competitiveness, flexibility and fairness, than traditional labour law frameworks.

The UK is perhaps the best exemplar of the kind of approach that Australia should adopt, by:

• Focusing labour regulation on a strong ‘floor’ of individual employment rights;
  
• Providing collective negotiation and bargaining processes for those that still want to use them (but not making them the primary focus of the regulatory system);
  
• Promoting cooperative workplace relationships rather than traditional adversarial posturing; and
  
• Subjecting all regulation to the overarching goal of competitiveness.

We can also learn a lot from the EU’s efforts to ‘fuse’ the goals of flexibility and fairness through the concept of flexicurity – and the harnessing of this concept to the project of enhancing the economic competitiveness of EU member states.

And, returning to the other main theme of this paper, China has shown that labour laws must keep pace with structural changes in the economy. Just as China’s new Labour Contract Law reflects the profound shift from a centrally-controlled to an open, market economy – so must Australia move away from an IR system grounded in its design in an economy and business approach that simply is no longer relevant for the majority of participants, to one that meets the needs of a fast-moving, globally-integrated economy.

 

Conclusion

In this paper, I have sought to outline two broad arguments that I think are critical – but largely neglected – in the current workplace reform debate in Australia:

• First, that the historical development of our system of industrial regulation limits our thinking about what is possible for the future – and we have to remove those historical ‘blinkers’ if we’re to move up the international ‘league tables’ of competitiveness.
• Second, that the recent experience of a number of other countries shows that the competing goals of national competitiveness, fairness for employees, and flexibility for businesses can be reconciled. And while this has involved a degree of re-regulation of the labour market, this has only occurred to the extent necessary to temper the sometimes harsh impacts of globalisation – but without abandoning the overall project of internationalist economic policy.

In summary, the big challenges for policy-makers in our field include the following:

• To continue to modernise our system of workplace regulation, balancing fairness with the flexibility that our firms need to compete globally – and that our increasingly savvy, knowledge-rich workforce demands;
  
• To develop an agenda for workplace reform that goes beyond statutory regulation – exploring other policy levers that could help drive productivity in Australian businesses;
  
• To stay the course in the global economic order, through a continued commitment to open trade and investment policies – this means resisting the clamouring of certain interest groups for a return to the cosseted comfort of protectionism; and
  
• To examine how other countries have gone about addressing these issues, learning from their successes and failures – and most importantly, coming up with solutions that will work for Australia.

 

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