The campaign by The Australian newspaper against the Fair Work Act has had a few phases. I’d like to go through a few of their key claims and evaluate them against recent data.
The wages breakout
The first big claim after the Act came in was that it was causing, or would soon cause, a ‘wages breakout’. I understand this to mean a situation in which real wages rise at a rate well in excess of productivity growth over an extended period, thus increasing labour’s share of income and reducing the profits share. This could also result in an inflationary spiral.
The Australian spent much of 2010 and early 2011 warning of this breakout. In a particularly strident editorial, the paper warned that “the economy, unfortunately, is facing an economically irrational assault on a scale we have not witnessed for a quarter of a century.” You would think that, in the fact of an ‘assault’ of this nature, that we would’ve seen overall wages growth start to soar by this point, given that the Fair Work Act has been in place for nearly four years now. Instead, the WPI has been growing by a little less than its average pace.
Wage Price Index
Source: ABS 6345
Today, the RBA said “growth in wages in the December quarter continued at around the same rate seen in the September quarter, which was lower than that of recent years, in line with softer conditions in the labour market over the past year”. No wages breakout to be seen here. In fact, in the past decade or so we’ve had the opposite of a ‘wages breakout’, as I explain in a recent paper. Inflation is also well contained, with no signs of an unsustainable wage-price spiral.
Strangely enough, The Australian seems to have forgotten about the wages breakout. Google can only find three instances of the phrase “wages breakout” at the Oz in the past year – one of them is a reference to my paper, another is a speech given by my boss, and the third pertains to the Fraser Government.
Instead, the line of attack has shifted. The problem, we are now told, is that the new IR laws are suppressing the rate of productivity growth. For businesses and the economy as a whole, this isn’t too much different to a wages breakout – sluggish productivity growth or elevated wages growth both result in a rise in the cost of producing a given unit of output (‘unit labour costs’).
Although the claims regarding productivity haven’t disappeared, as with the ‘wages breakout’ warnings, they have become somewhat more muted in recent months. The reason for that is that labour productivity growth has picked up, growing faster in 2012 than it had in a decade.
Labour productivity – GDP per hour worked
Source: ABS 5206.
Now, to be sure, labour productivity doesn’t tell the whole story. Multi-factor productivity, which takes into account increases in the capital stock as well as increases in hours worked, has been more sluggish, although we only have figures up to June of last year. This sluggishness is a long-running phenomenon – productivity growth slowed at around the turn of the century, many years before the Fair Work Act came into effect.
I don’t suggest that the recent increase in labour productivity growth is due to the IR legislation, just as I don’t think that the presence of Work Choices was a major cause of weak growth in the mid-2000s. In both periods, there have been far bigger forces at play. We’ve had a mining investment boom that sucks up inputs during projects’ construction phase, thereby depressing productivity growth in the short run and boosting it when projects start to generate output. We’ve had big investments in utilities capacity that haven’t resulted in a proportionate increase in output. We had droughts in the 2000s that damaged agricultural productivity. In short, I’m not convinced that the sort of IR changes we’ve had, at least in the past couple of decades, make much of a difference one way or the other to our rate of productivity growth.
Labour productivity growth over the past twenty years
(dotted lines are averages during the period)
Source: ABS 5206.
The RBA has noticed the increase in labour productivity growth. Today the Bank said: “Despite a pick-up in the December quarter, growth in unit labour costs remained relatively slow over 2012, reflecting continued strong growth in labour productivity. Measured non-farm labour productivity growth over 2012 was well above its average of the past 20 years.”
Productivity is looking like more difficult terrain for The Australian to wage its campaign against the Fair Work Act.
A third area on which The Australian has focused is the number of industrial disputes. It’s true that disputes are a little more common than they were during the Work Choices period, but they are still near record lows. This chart puts things in perspective:
Days lost to industrial disputes
Source: ABS 6321.0.55.001.
Since the Fair Work Act came into effect, there has been an average of 5.1 working days lost per 1000 workers per quarter. This is a little higher than the 3.4 day average under Work Choices, but well below the 13.7 day average over the life of the Howard Government. In the 1994-96 period, when the Keating Government’s IR laws were in place, the average was 22.9 days. With these figures, you also need to bear in mind that many recent, large disputes have been in the State public sectors – the workers in these sectors (with the exception of Victoria) are regulated by State legislation, not the Fair Work Act.
Today, the RBA characterised the data as follows: “ABS data indicate that the number of working days lost per employee as a result of industrial disputes in the December quarter fell back to a very low level.” This is not a compelling basis for a continued campaign.
Of course, none of the above proves that the Fair Work Act is not having the effects that The Australian and others have spent the past few years warning about. It’s possible that in the absence of the legislation, wages growth would be even further below its long-run average, or that labour productivity growth would be even faster than its decade-high pace, or that we wouldn’t have anyone going on strike at all. But at this point, I think it’s fair to say that the onus of proof rests firmly with those who are claiming that the Act is having a seriously negative effect on the economy.