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Freeman, Harvard, NBER Centre for Economic Performance, LSE, Australia, Sept 2007 Economic Context Principles for Institutions WC Paths to Doing BetterWhy the “Real World” is Interested.: Why the “Real World” is Interested. Australia is model economy (~model species in biology), with distinct “experiments” from which we all learn. The policy to unravel collective action in the labour market absent economic crisis, consensus, or experimentation (but NZ 1991;Western Australia, Victoria) is unprecedented in a democracy. Comparable huge changes:1980s Uruguayan generals outlaw collective bargaining; dictatorial Korea before 1987; Sweden, union wage earner funds in 1973 Thank you, Mr. PM and parliament for conducting an extraordinary “pseudo-experiment” for social science. End of a Peculiar Set of Institutions: End of a Peculiar Set of Institutions Tribunals to award wages to workers? Too weird for words! As strange as kangaroos and platypuses It can’t work … But it did for about a century. But what the award system did is not so peculiar EU uses mandatory extension of contracts to guarantee everyone in a sector has similar wages/work conditions including nonunion workers and firms US – minimum wage, has separate state and federal protective labor legislation in particular areas, and has increased these protections in the past 30 yearsThe theme: The theme 1. Economic context for labour policies has created crisis in labour institutions in many countries; must evolve new policies/institutions. WC addresses need for change 2. But WC breaks most economic principles for institution-building; reflects a triumphalist market ideology from which its major global proponents – World Bank, IMF – have retreated. 3. The likely outcome is a more bifurcated society with wider dispersion among similar groups, between groups. 4. There are better “experiments” to find 21st century labour institutions. (and unlike Fermat, enough space in the ppt to say what I think they are). I. Economy Today differs from 20th century: I. Economy Today differs from 20th century 1) Doubling of global labour force shifts power to business: Collapse of Soviets, India’s turn from autarky, China’s shift to market capitalism 1.47 Billion workers join global economy. Absent them, global work force would be 1.46 Billion (2000). This reduced global capital/labor ratio that economics says is important determinant of wages. 2) Rising inequality within countries & greater informal work 3) Loss of union influence/power in pvt sector in most countries, especially “English-speaking” countries 4) Feminization of education (30-50% more women get bachelor’s degrees than men) and work 5) Growth of knowledge work and college graduate workersPolicy thinking about global capitalism has changed in two phases: Policy thinking about global capitalism has changed in two phases Phase 1: Our triumph over socialist planning period of market triumphalism about what to do. For developing countries, the Washington Consensus For OECD, Jobs Study deregulate labour/ flexibility Workchoices fits with this mode of thinking: replace labour law/institutions with simplified view of markets, ram the medicine down society’s throat in the belief that it works.Slide7: OECD 2004 Employment Outlook : “the evidence of the role played by EPL on … employment and unemployment rates remains mixed” … Favor “the plausibility of the Jobs Strategy diagnosis that excessively high aggregate wages and/or wage compression have been impediments” but “this evidence is somewhat fragile”; what collective bargaining does “appears to be contingent upon other institutional and policy factors that need to be clarified to provide robust policy advice”. OECD 2006 Employment Outlook notes that English-speaking and Nordic both produce high employment. Phase 2) Reality has forced economists and policy-makers to recognize that simple market medicine is not the panacea to economic problemsSlide8: “The Washington Consensus has been dead for years,” Wolfman I (the Australian Wolf, World Bank President Wolfensohn, 2004 Shanghai) ”expectations about the impact of reforms on growth were unrealistic … (we) should abandon formulaic policymaking in which "any reform goes" … our knowledge of economic growth is extremely incomplete. This calls for more humility in the manner in which economic policy advice is given, more recognition that an economic system may not always respond as predicted, and more economic rigor in the formulation of economic policy advice.-- Zagha, Nankini, & Gill (IMF, 2006)The invariant for successful capitalist economy is economic freedom but NOT labor institutions: Coefficients (Std Errors) for Regressions of annual growth rates on Fraser Institute Indices of Ec Freedom, 1970-2004 : The invariant for successful capitalist economy is economic freedom but NOT labor institutions: Coefficients (Std Errors) for Regressions of annual growth rates on Fraser Institute Indices of Ec Freedom, 1970-2004 Lagged ln GDP per capita -.066 (.007) OECD ecfreedom (non- labor) .009 (.003) OECD labor -.001 (.002) DC ecfreedom (non- labor) .010(.002) DC labor -.002(.002) Year Dummies yes Country Dummies yes Nob 314 # countries 85Slide10: Message: Time to leave the 1980s-1990s and catch up with 2000s thinking. Rethink what labour arrangements can work and what can’t. Creating 21st work life is not about old capital-labour-union fights. II) Economic Principles for Building Labour Institutions: II) Economic Principles for Building Labour Institutions First Principle: Encourage efficient Bargaining so that labour and management bargain for max efficiency even as they fight over distribution – Want them to “leave no money on the table” (Coase Theorem) Many disputes in labour laws/institutions are about property rights over job: Who owns job? ex: employment protection legislation; unfair dismissal; striker replacement. Coase Theorem says ownership affects distribution, not aggregate output or jobs.Efficient Bargaining not always work; but people/markets also not always work per economic analysis: Efficient Bargaining not always work; but people/markets also not always work per economic analysis Strikes are classic Hicks example; Almost all strikes reduce economic pie, so parties should avoid them. Disputing animals engage in “ritual display behavior” so that smaller, weaker, less agile, etc gives up, but they err also. Behavioral economics revolution shows that fairness enters many decisions; financial markets shows mania can run wild; neuro-economics brain scan evidence during ultimatum game to give biological basis to deviations from homo oeconomicusWhat facilitates efficient bargaining?: What facilitates efficient bargaining? No scientific consensus on what leads to efficient bargaining. Economics suggests : Clear rules about ownership and consensus over the rules Equal information – agreement about facts Don’t want fighting over ownership or reality Low administrative cost to negotiations/continual dialogue Knowing people small groups and countries Fair procedures --good faith bargaining? -- so emotional part of brain does not take overSecond Principle: Let the people who “live there” make decisions: Second Principle: Let the people who “live there” make decisions Local parties with local information know best (Hayek) Don’t prescribe/limit bargaining (except on socially agreed upon fundamentals – no slavery, discrimination) – but beyond these floors give parties scope Experiment and diversity – “one shoe does not fit all feet” so allow/encourage local deviations (including enterprise before industry; individual instead of state) With codicil for externalities/PD game problemsThird Principle: Participation, Incentives, Effort (PIE) produces bigger pie: Third Principle: Participation, Incentives, Effort (PIE) produces bigger pie Knowledge is inherently social -- teams but dependent on what goes on inside people’s heads and hearts. Firms struggle to find right incentives Financial incentives – mix of tournament/ group incentives such as profit-sharing Participation in decisions -- workers want voice – Involving workers in decisions costs time but benefit of implementation, and possibly wisdom of crowd Many ways for PIE – WC assumes control and command management rule is the only recipe when there are partnerships, group incentives, team production, …Moral Principle: Insurance to Protect Weak/Lean Against Market Winds: Moral Principle: Insurance to Protect Weak/Lean Against Market Winds Labour law/awards/institutions provide insurance to protect those ill-treated by business/market Labor/management imbalance is bcs one social construct, corporation, is successful (give or take a few Alan Bonds, and Enrons) while the other construct, trade union, is less successful. (WC under Corporation law, disavows Labour law) The insurance question for society is to decide between: Leftwing view “Perhaps modest inefficiency is cost worth paying if it prevents blatantly unfair behavior” Rightwing view:”Perhaps unfair behavior by some employers is cost worth paying if it gets more jobs”If continuous full employment for ALL, market balances power: If continuous full employment for ALL, market balances power Full employment and lots of quits – Denmark has no EPL, high turnover, and US level mobility of workers, lots of small firms, But also strong unions that make wages and conditions quite equal. But we tell our central banks to control inflation and protect finance not to guarantee full employment (and we don’t know what to do for low skilled), particularly with globalization of labour, shift in demand toward university graduates, etc. So regulations, institutions are insurance for them in downturn or other adverse situations. III. WORK CHOICE – er… WORK CHOICE –er … WC : III. WORK CHOICE – er… WORK CHOICE –er … WC Missed great opportunity to modernize labour code. The promissory note says simpler, fairer, more flexible and family-friendly. “Bargaining at the workplace level is particularly suited to tailoring working arrangements in ways that assist employees to balance work and family responsibilities” Sounds great. Just the kind of system your mother would want you to work under. But somehow, Cinderella’s Step mom seems to have written the law.Simpler? : Simpler? To test this hypothesis, I mapped the 687 pg law + 565 pg memo amending the 861 pg act into 3-space using Perelman’s recent proof of Poincare’s conjecture to prove this law is NOT a simple sphere. Filled with micro-managed restrictions on bargaining: Filled with micro-managed restrictions on bargaining YOU CANNOT: provide for payroll deduction for union fees; entitle employees to paid or unpaid trade union training leave; indicate how a future agreement should be renegotiated; enable a union to participate in a dispute resolution procedure in its own right (even in a union collective agreement); provide for right of entry for union officials; restrict or regulate the conditions of independent contractors and labour hire workers; provide for annual leave to be foregone other than in accordance with the AFPCS; provide for information about employees to be given to unions (other than where legislatively required); encourage or discourage union membership’; allow industrial action; prohibit disclosure of the details of an agreement; provide a remedy for unfair dismissal on the basis that it is harsh, unjust or unreasonable; include ‘objectionable provisions’ (provisions contrary to Part 16, which deals with freedom of association); directly or indirectly restrict the ability of a person bound by the agreement to offer, negotiate or enter into an AWA; or deal with matters that do not pertain to the employment relationship The Cannots forbid firms from agreeing to anything that might strengthen collective action by workersWC law undoes 100 years of privileging collective contracts to protect weaker party with rules that privilege individual contracts to enrich the stronger party. It increases scope for govt interventions.It replaces “the deadweight of labor’s highly regulated industrial relations system” with the deadweight of Mr. Howard’s highly regulated industrial relations system designed to constrain labor and bargaining: WC law undoes 100 years of privileging collective contracts to protect weaker party with rules that privilege individual contracts to enrich the stronger party. It increases scope for govt interventions. It replaces “the deadweight of labor’s highly regulated industrial relations system” with the deadweight of Mr. Howard’s highly regulated industrial relations system designed to constrain labor and bargaining MORE FLEXIBLE? Tell it to the Marines – er Labour Lawyers!Imagine similarly restricting business contracts : Imagine similarly restricting business contracts Would not know which side in transaction to limit bargaining – buyer/seller…bank or business? Minimum wage remains high by world standards but reduced award protections shift bargaining point for labor. Can go other way: New Zealand laws 1991 then 2000/2005 changes show the way society can tilt bargaining field WC violates the principle is that labour market participants should have the right to form organizations and bargain freely, with minimal restrictionsFairer? So why does only side think this: Fairer? So why does only side think this Most restrictions are one-sided; easy to lock out, hard to strike; rights of Ministers to intervene, no strike during contract built into law, rather than bargained; etc. Enforcement of fewer protections gets more ambiguous; pressure on worker to take action for enforcement So 151 IR experts judged it as unbalanced; and 0% of labour economists favour Workchoices, including relatively conservative folks. Many individual contracts, AWAs, are not bargained --one study reports that 70% just sign; Telstra has 9000 AWAs that are the same; large proportion of workers unlikely to have opportunity to negotiate Ask Mr. or Ms. Australia, who will have to work under it.Australian Institute of Management Survey 2006overall attitude toward WC: 3 to 2 against: Australian Institute of Management Survey 2006 overall attitude toward WC: 3 to 2 againstExpectations of What this will do?: Expectations of What this will do?Difference in views toward unfair dismissals by Age and Position: Difference in views toward unfair dismissals by Age and Position NO CONSENSUS: GOOD CHANCE YOU FAIL EVEN IF YOU HAVE GOOD CHANGESWC privileges individual contracts over collective contracts while weakening bargaining position of individuals : WC privileges individual contracts over collective contracts while weakening bargaining position of individuals Bargain, but not with your mates, even over public goods at workplace that apply to all, and not through pattern or industry-wide agreements (critical to small firms), and by the way, your bargaining position is from weaker starting point Whatever you make the default/status quo has great effect on decisions (saving behavior: do you join the good saving plan vs do you drop out?; labor behaviour – workers/ firms usually satisfied with what they have bcs people make it work) so once system gets going, likely to build up “support” unless used abusively. No intrinsic conflict between collective contract and individual contract. Entertainment, sports,US academeWC Does Not Reflect Conservative Values: WC Does Not Reflect Conservative Values Imposed over the opposition of states in the name of efficiency without evidence that separate systems were so complicated or expensive. Against classic conservative thinking that favours localism. Left usually favours big government; right favours federalism. But this has changed in US and Australia: whoever controls center, wants to centralize. Single systems lose ability to experiment; harder to judge since no good comparisons; risk huge errors. But Conservative governments do not have to tilt this far against labour: Canada; Sweden. And Left governments do not have to impose central rules to benefit workersWhy the Most Anti-Collectivist Labour Regulation in Advanced Countries?: Why the Most Anti-Collectivist Labour Regulation in Advanced Countries? Economic problems caused by unions, awards? Howard years have seeneconomic growth and productivity; industrial disputes declined; unions fading away. Address economic challenges of globalization, feminization, etc? Changing bargaining positions does little for jobs or productivity Fear that global competition means Australian workers have to take cuts in the future so this will make it easier? Pure redistribution to wealthy? Make Australia attractive to Rupert Murdoch? Ideological opposition to collective action? Not Australian union leaders and workers: Not Australian union leaders and workers Or fighting the last war? Australian union leaders and workersWait … there is a reason: Wait … there is a reason “Over there? The Australian Industrial Relations Commission has the missing WMDs? Are you sure, John?” “They’ve been hiding them in the Great Sandy Desert under hundreds of pages of awards! “ Bottom Line Economics Assessment: Bottom Line Economics Assessment Will WC help Australia deal with great doubling in globalization; rising informality/ inequality; weakening collective labor organizations; knowledge work. No! Will worsen some, do nothing on others. Will it promulgate family friendly arrangements? In UK and US family friendly rules found more in collectively bargained; Australia also but could be largely size of firm It will increase inequality among groups, across groups. Risk of meltdown in recession. Less insurance for those in need. The policy tack of WC is go with the wind of market forces and help those who don’t need help comparable to US tax cuts to the billionaires who don’t need the money. This is not labor relations policy for 21st century. What is it? Economic grandeeism -- a policy that goes with the wind of market forces in favor of the wealthy.Not a Grandee: Not a Grandee A GrandeeIV. Can Australia Do Better?: IV. Can Australia Do Better? Finding new labour institutions for modern economy is the most critical intellectual and political task in domestic policy. Goal should be to help workers, not unions, not firms. With reasonable rules, firms don’t need help; unions are useful only to help workers. If nonunion institutions (community groups, occupational associations, human resource departments) do better, power to them. Ask: What do workers want? : Ask: What do workers want? Business school specialists ask what benefits firm. But since workers want jobs, they want firms to prosper; since firms want workers, they want to give best deal at lowest cost. Thus, most economic models give same outcomes from either perspective -- efficient bargaining. Given choice, what do Australian workers want? Surveys for all English-speaking countries say all of our workers want something similar. cooperative relations with employers more union representation than they have nonunion mechanisms to discuss issues with employersPossible next steps: Rebalance the individual/collective choice: Possible next steps: Rebalance the individual/collective choice Strike a different balance per the New Zealand 2000 and 2004 laws, but these also micromanage duty to bargain giving courts greater control over managerial decisions. No surge in private sector bargaining (9%) with 60% bargaining coverage in public Go back to the states -- Canada allows provinces to make most labour law; and the small differences in their laws can matter: first contract arbitration; 10% nonunion committees; US states have many options to top up US labour regulations (such as minimum wage) but not on national collective bargaining. Allowable deviations. If you have CB allowed to self-enforce/out of regulations;Possible next steps: Stay the Course and Complete the Experiment: Possible next steps: Stay the Course and Complete the Experiment Will it kill collectivism? Pressure firms/workers to individual to establish new status quo/default, which will have some stability. But WC rejuvenated unionism and could create continual conflict Will it lower pay and maintain full employment? Need more time to see. Peetz finds some fall in hourly wage and increase in hours; but other factors dominate aggregate employment; next recession will tell Will it raise inequality? Awards get weaker so workers have lower bargaining pt; Expect minimal agreements for those without market power, some extra for those with. Great for the economic grandees. Is it stable? Dubious. When you generate such opposition, unlikely to remain.What might a modern labor code look like? : What might a modern labor code look like? Start by examining policies of modern high-tech firms Workers as part-owners and decision-makers IBM workers taking vacations but always on call Incentives instead of prescriptions for enterprise agreements. Encourage states, firms, unions to experiment by allowing exceptions. Stimulate unions to go beyond collective bargaining. Deep labour law question of whether state can balance power between firm and labor so that government just lets market and bargaining operate? (Scandinavian social partner view) Or whether state must play an active regulatory role? (traditional Australian awards view). Economics a priori favours former, but …????Pick up on missed opportunity:Shared Capitalist Alternatives: Pick up on missed opportunity: Shared Capitalist Alternatives Encourage firms to align financial interests via profit-sharing employee share ownership and to devolve decisions to workers US/UK success with employee involvement, trust, etc These combinations give >= on productivity and profits. Australia grants tax concessions on employee share schemes, but this could be made more worker/small firm friendly (Germans are discussing silent partners).Going beyond union-firm CB: Going beyond union-firm CB Standard union-firm CB is not broad solution. It does not fit small firms, nor many workers in private sector; Could encourage associations of small firms with industry bargaining (essentially outlawed by WC) Helping workers in small firms is critical …US experience is that working with the purchaser of their output is key: Post-doctorates; SIEU getting ; Campbell soup to take on extra cost of improving migrant labor conditions on small farms. Problem is if you lack government or courts for enforcement, who steps forward? Open source unions with help lines … chat rooms … US WorkingAmerica has 1.6 Million members Experiment and learn: Experiment and learn Don’t force policy down people’s throats nor lock labour issues into old industrial relations or 1990s failed market triumphalist thinking; College grad workers make up 1/3rd of work 25-34 yr olds, 40% are professonals/ managers; 45% are women, 15% are self-employed; Unions need to experiment more than any other organization to find new forms/models to do what society wants them to do: help workers traverse changing labour market and economy A citizens’ jury thinking through issues might help – a blue ribbon panel of normal workers would inform us all. You do not have the permission to view this presentation. In order to view it, please contact the author of the presentation.