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Industrial relations reforms: boosting labour productivity?

Business leaders are citing impediments caused by the Fair Work legislation as a significant limit on labour productivity:
Mr Argus (former BHP Billiton chairman) ... warn(ed) of a return to "the dark days of the 1970s" if labour market flexibility was not boosted. He said under the Fair Work laws, unions were resisting "management attempts to achieve efficiency"... Bureau of Statistics data shows little change in labour productivity growth under the Fair Work Act when compared to the period under Work Choices, while other measures of productivity have also weakened since 2000.( ‘Labor woeful on economic reform, says Argus’)
The aim of such criticism, at a minimum, would be to widen ‘prohibited content’ in the matters addressed in enterprise bargaining, yet Australia has witnessed two decades of national industrial relations reform to make enterprise bargaining the centrepiece of our industrial relations system. It is thus reasonable to ask what were the IR reforms and have these influenced labour productivity?

Economists define productivity as the ratio of an index of outputs to an index of inputs. Labour productivity is the ratio of (the real value of) output to the input of labour. Labour productivity is defined as output (Y) per worker or per worker-hour (L).

Capital productivity is defined as output (Y) per unit of capital (K). However, capital productivity in Australia has not grown over 40 years (or fallen) and tends to be overlooked in the search for productivity solutions. Multi-factor productivity is a measure that attempts to account for all inputs into the production process. However the current debates focus on labour productivity above other measures. Reasons for this go to:

• labour productivity being easier to measure as it avoids the need to estimate capital inputs and avoids the need to aggregate capital estimates and hours worked
• a rough measure of labour productivity for the entire economy can be obtained by dividing GDP by official estimates of total hours worked in the economy (there are no official estimates of capital inputs for the whole economy), and
• it allows for a comparison of levels of labour productivity (value added per hour worked) between different parts of the economy or between different economies (Report of the inquiry into raising the productivity growth rate in the Australian economy, p.10)

From the 1970s (and before) a centralised wage fixation system operated through awards under the Australian Conciliation and Arbitration Commission (ACAC). There were 305 unions in 1970 with union membership about 50% of the workforce under award preference and effectively closed shops in some industries. State and federal industrial relations systems were distinct. Federally, wage indexation determined wage increases through the late 1970s until the 1982 recession.

In 1987, the ACAC introduced a two tier wage system with the second tier wage payment subject to restructuring and efficiency measures at the enterprise level. In 1988, the Australian Industrial Relations Commission (AIRC) adopted Structural Efficiency Principle for awards leading to career paths and multi-skilling. In 1991, the AIRC adopted enterprise bargaining as the main vehicle for determining employee remuneration. The Industrial Relations Legislation Amendment Act 1992 relaxed rules for making enterprise agreements (with unions) subject to an examination of whether employees’ terms had been reduced. The Industrial Relations Reform Act 1993 introduced: a non union agreement stream, protected industrial action in bargaining disputes (as well as employer lock outs) and a formal ‘No Disadvantage Test’ by the AIRC for approving certified agreements as well as new minimum standards such as national unfair dismissal laws in response to state legislation such as Victoria’s Employee Relations Act 1992.

The Workplace Relations Act 1996 introduced individual employment agreements, Australian Workplace Agreements which came to be regarded as a condition of employment for new starters. It narrowed the scope of national dismissal laws, removed award preference, introduced freedom of association and non-association and restricted union entry to workplaces. Victoria referred its employee relations system to the Commonwealth. Award simplification under the WR Act reduced award ‘allowable matters’ to 20 in 1998.

The Workplace Relations Amendment (Work Choices) Act 2005 expanded federal jurisdiction by its use of the Constitution’s corporations’ power. The Australian Fair Pay and Conditions Standard set certain standards for all employees under the Act. Workplaces with 100 employees or less were excluded from dismissal laws. Private sector state awards were transferred to the federal jurisdiction. The NDT was removed as the basis for workplace agreements meeting award standards, although a Fairness Test was later reintroduced (in 2007). Transmission of business rules had a limited 12 month effect until transferred employees’ pay reverted to the AFPC standard in the absence of a new agreement. Secret ballot provisions were required for protected industrial action. Other forms of industrial action were rendered illegal.

The Workplace Relations Amendment (Transition to Forward with Fairness) Act 2008 terminated the making of new AWAs and triggered award modernisation with broader award terms. The Fair Work Act 2009 increased minimum standards via the National Employment Standards. Low Pay bargaining provisions were introduced a well as good faith bargaining. States referred their remaining private sector IR systems to the Commonwealth (ex WA). Unions were given a right to represent member/s in bargaining. Dismissal laws were widened with greater access. Union membership/workforce fell to 20% (2011: 18%).

Can government initiatives, such as the industrial relations reforms above, influence labour productivity? The first graph below tracks Australia’s labour productivity since 1970 on a chain volume measure and the second by changes to annual labour productivity growth rates.

 Since 1970 the period of highest levels of labour productivity growth occurred under the centralised award system under the McMahon and Whitlam Governments.

The periods of sharpest decline in productivity growth occurred under the Fraser Government (1977-1982) also under a centralised award system, and under the Howard Government’s very decentralised wages system (2002-2007). The Hawke Government’s attempt to restore labour productivity growth produced mixed results but was arguably higher at the end of its term than at the beginning.

The Hawke and Keating Governments produced the most sustained increase in labour productivity, while the early period of the Howard Government continued to increase labour productivity albeit at a slower rate, before leading to significant decline. Overall, economists may conclude that industrial relations reform has produced diminishing marginal returns in respect of labour productivity growth. On the other hand, the House of Representatives report on productivity cited earlier, teases out more of the reasons for its decline and strategies for growth.

Steve O’Neill Economics Section and Guy Woods Statistics Section