A Brief History of the Australian Labour Market

Tracing changes in Australia's labour market stance.

Insights

What has happened?

Why would the government intervene in the labour market?

There are several fundamental reasons the Government intervenes in the labour market

  1. To Address inflationary concerns, considering wage growth acts as a major influence on inflationary pressures.
  2. To Address low aggregate supply and low productivity growth that reduce Australia’s international competitiveness
  3. To Ensure a fair distribution of income and wealth 

Historically, Prior to the Hawke Government (1983-91) labour market reform, as contended by  Ken Henry Australia’s labour laws were "draconian" and "rigid" with wage determination being fairly centralised. 


Prior to the Hawke Government (1983-91), wages were for the majority determined by government and centralised meaning unions would have to dispute through lobbying the government for a pay rise. As a consequence of wage centralisation the distribution of average salaries was fairly consistent amongst all sectors creating a situation where there was reduced incentive for workers to increase productivity and improve their human capital through additional education and training qualifications, as well as a weaker allocation of resources and specifically human capital to industries with greater international competitiveness, safeguarding inefficient industry through disciencitving improvements in human capital.

Under this system of inefficiency, combined with rises in trade union density hovering around 50% between the 1970’s to 1990, Australia eventually developed a disastrous wage inflationary spiral causing inflation to rise in excess of 18% during 1975/6. Australia’s wage inflationary spiral arose because of strong union density which effectively mandated the government to increase wages every year, and as discussed above due to Australia’s inability to fairly compensate human capital and weak allocation of resources led to stagnant productivity growth creating a situation where Australian’s disposable income would rise every year, without a sufficient growth in output, creating demand pull inflation.


To achieve the more streamlined and flexible labour market we have today we have to thank, PM Bob Hawke addressed these growing productivity concerns starting with the Price and Incomes Accord Feb 1983. Essentially, Bob Hawke using the the Australian Labor Party history of a political party backed with strong union support negotiated a series of agreements with Australia’s largest union body ACTU where unions would agree to  forgo guaranteed wage indexation and reduce the number of strikes in exchange for better public health provision through Medicare, improvements to pensions and unemployment benefits, tax cuts, and  superannuation. The 6 subsequent Accords that were negotiated eventually ushered in the system of enterprise bargaining by 1991 were increase in wages were tied with productivity, accelerating Australia’s structural change, improving Australia’s international competitiveness and incentivising workers to increase their human capital a fairer system of wage compensation. 

Moreover, reform to Industrial Dispute via the  Industrial Relations Reform Act (IRRA) of 1993 was a second major reform to centralised wage fixing allowing workplace disputes to be settled by enterprise bargaining between employers and unions in the workplace. 

Further labour reforms such as Fair Work Act 2009, which streamlined the modern awards system reducing 4300 awards to 122 and strengthened workers safety net system with 10 National employment Standards, The BOOT test and

“ The world’s most generous minimum wage” (The Economist July 2019)

with the Current minimum wage at $19.49, growing faster than both inflation and broader wages growth with no discernible effect on UE has had a fundamental impact on the Australian labour market. As a result of effective policies and also the rise of casualisation the number of working days lost went from in 1980 40000 days lost to 2016, 40 days lost  as a result of strikes and Union density dropping considerably from 51% (1976) => 14% presently, further reducing wage inflationary concerns.

Syllabus Links

Productivity 

Overall labour market decentralisation has proven fairly successful with decentralisation in 1990s leading to productivity improvements with productivity levels at (1.1% in 1980s and 2.1% in 1990s). With significant gains in productivity felt by later governments (estimated that increases in productivity from 2000-2013 were responsible for 60% of economic growth). Considering 60% of a firm’s cost are in wages, Labour Market Decentralisation has had a significant impact containing cost push inflation. 

Impact of Productivity on per unit costs


Income Inequality 

Finally it is important to acknowledge that Labour Market Decentralisation has overall reduced the equality of income distribution. As a result of tieing wages to productivity the income distribution gap between skilled and unskilled worker has increased, with skilled workers able to negotiate higher pay since they are more productive and unskilled workers being unable to rely on strong union density to protect their bargaining power that skilled workers now posses, attributing to Australia’s Gini-coefficient rose from 0.29 in 1990 to 0.34 in 2018. Recently further government fiscal expenditure on vocational/educational training programs have attempted to address this inequality through providing training programs for the structurally unemployed. 

Lorenz Curve would move outwardly


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References

https://www.economist.com/asia/2019/07/20/australia-has-the-worlds-highest-minimum-wage

https://www.abc.net.au/news/2019-05-17/bob-hawke-economic-reform-analysis/11123976

https://www.smh.com.au/politics/federal/a-genius-who-made-australians-richer-hawke-s-economic-legacy-20190517-p51ojj.html