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Why Regulate the Labour Market?

Chapter Eight

Why Regulate the Labour Market?1

The appropriate extent and nature of regulation of the labour market in


Australia is controversial. Currently there is a dominant view in public debate
that deregulation has been and still is needed in order to improve the
functioning of the economy. This chapter challenges that view. It does so on a
number of grounds. It looks at the purposes which regulation was intended to
serve and argues that markets left to themselves are unlikely to achieve these
purposes. The purposes include reducing the degree of subordination of the
individual worker to the direction of the employer, and providing for some
degree of fairness in the conditions of employment of low wage workers and
those who are not prime age males in secure jobs. It briefly explores whether
such protections can be achieved in other ways and concludes that this is
unlikely. Reliance on the social welfare system, for example, would require a
large increase in the willingness of taxpayers to fund low wage workers,
including single people without dependents. Skills enhancement to raise the
market power of the unemployed can help but where there is substantial
unemployment it will not be enough to provide protection for all. The
arguments for deregulation rely heavily on the belief that this is necessary to
increase productivity and economic growth. The basis for this belief is shaky.
The chapter also argues that issues of who benefits and who suffers from any
such growth is an important and separate question: over the past 15 years, high
wage earners have benefited and low wage earners have paid the costs.

“Let it be granted, then, that as a rule workman and employer should make free
agreement, and in particular should freely agree as to wages; nevertheless there
is a dictate of Nature more imperious and ancient than any bargain between
man and man, that the remuneration must be enough to support the wage-
earner in reasonable and frugal comfort. If through necessity or fear of a worse
evil, the workman accepts harder conditions because an employer or contractor
will give him no better, he is the victim of force and injustice.”
Rerum Novarum (1891)

1 This chapter draws substantially from Richardson, S., (1999), “Regulation of the Labour Market”, in Richardson, S.
(ed), Reshaping the Labour Market, Cambridge University Press, Melbourne.
Why Regulate the Labour Market?

8.1 The Distinctive Character of distinctive characteristics provide good


Labour reasons for expecting that the best form
The labour market is a metaphor. There and extent of regulation of the labour
is in fact no market place for labour of market will differ from that for other
the classic form, where buyers and markets.
sellers come to transact over reasonably
homogeneous goods. And the
employment relation is much more 8.2 Problems in the Labour Market
complex than is implied by the market The labour market is the most
metaphor. Labour is different from problematic part of the economy today,
computers or fruit. The employer buys not only in Australia but also in most
not a specific skill or contribution to West European countries. Only the
output, but worker time and the right to USA, with its long and vigorous
command the application of that time. economic expansion, has a labour
Hence the employee relation is market which seems to be producing
inherently one of subordination. The good outcomes for most people. But
quality and quantity of work done by an even there, it is only in the last year or
employee depends on her or his two that the real wages of lower paid
motivation as well as abilities. Society workers have begun to rise, after 20
has a legitimate interest in whether high years of decline. All is not well in a
levels of motivation are accomplished by country where, over a 15 year period,
a climate of fear or by engendering more than all the growth in real GDP
willing co-operation. The experience of went to families in the top 5 per cent or
work has consequences also for the 10 per cent of the income distribution.
development of the skills and Those in the bottom half saw part of
personality of the worker. As Alfred their income being transferred to those
Marshall put it 60 years ago, “… the at the top, with the effect that the many
business by which a person earns his losers were worse off in real terms. And
livelihood fills his thoughts during by far the workers in the US continue to work very
greatest part of those hours in which his long hours on average, with consequent
mind is at its best: during them his character severe strains on families.
is being formed by the ways in which he uses
his faculties at work”. (Alfred Marshall, The major problems in the Australian
1938:1-2.). labour market include:

Workers also have an acute sense of • persistent high (though now


what is fair treatment (including that falling) levels of unemployment;
people doing similar work should • even worse, very high levels of
receive similar pay) and an appreciation long-term unemployment (over
that pay levels signify social status as 300,000 people have been out of
well as providing purchasing power. work continuously for more than a
Finally, society cares about the physical year);
well-being of workers and hence limits
the power of employers to command • the difficulty that young people
workers to do things which may be face in establishing themselves in
injurious to them. reasonable jobs with reliable
earnings;
None of the characteristics of workers • the many older men who have
which are presented above is true of been pushed out of the workforce
machines or of goods and services (the proportion of men aged 55-64
purchased in other markets. These who are in the labour force has
Why Regulate the Labour Market?

fallen from 88 per cent in 1960 to 62 Four hundred years ago, workers in
per cent in 1995); Britain who felt that the pressure for
• rising extremes of working lower wages had become intolerable
hours— both very long and very called on the government “… to appoint
short; certain grave and discreet persons to view
the straitness of works, [and] to assess rates
• rising insecurity in employment,
for wages according to the desert of their
through growth of part-time/
works”.2
casual/contract work in place of
continuing full-time jobs; and
The Australian industrial tribunals can
• a substantial rise in the inequality be seen as the contemporary
of wages, which is particularly embodiment of such grave and discreet
pronounced for men. persons.

Because of the unique features of labour, An alternative to regulation as a way to


regulation of the terms and conditions of take care of workers is the development
employment is ubiquitous among of trade unions. These seek to limit the
Western nations. The employment extent of employer power by
relation is not just a private matter; but confronting it with worker power. The
the role of regulation and its optimal subsequent clashes of two powerful
design are under challenge. Regulation groups can be costly and even
of the employment relation has evolved dangerous, not only to the parties
over time in response to changing social involved but to citizens at large. As
values about the rights and equality of with any locus of power, that power is
ordinary people, the nature of the constantly at risk of being abused, and
economy and the consequences of the in the case of both employers and
tussle for power between labour and unions, has been abused. Regulation is a
capital. It continues to evolve, with means to protect workers from the
contemporary pressure for fewer consequences of unequal power which
restrictions on the employers’ rights does not require them to collect
unilaterally to determine the terms and equivalent power in their own hands.
conditions of employment, often
referred to as deregulation. Whether by design or by evolution,
during the course of the twentieth
century Australia developed a system
8.3 Protection of Vulnerable Workers for the protection of workers’ incomes
Regulation has primarily (though not and other interests which, with
always) been used to enhance the hindsight, appears to have been
position of the worker. There has also integrated and quite effective. The
long been recognition that the system has been characterised by Castles
competitive pressures of supply and and Mitchell (1993) as ‘the workers’
demand may generate inefficiently low welfare state’. Its key features were:
wages and investment in the
development of worker skills. But even
if unregulated labour markets were
efficient, they need not thereby be fair.
As Amartya Sen (Nobel Prize winner in
Economics) put it so pithily, market
outcomes may be both perfectly efficient 2 A Petition to Fix Wages Addressed to the
and perfectly disgusting. Justices by the Textile Workers of Wiltshire,
1623, quoted in Bland, Brown and Tawney,
1914: 357.
Why Regulate the Labour Market?

• legal minimum wages which the need for workers to accept any
varied with the demands of the job terms, legal or not, because they had no
(and, for much of the period, with alternative source of income: the welfare
the sex of the worker); system increasingly came to provide a
• hours of work and other minimum ‘reservation wage’, below which
conditions of employment workers need not sink.
determined by independent
tribunals; Over the past twenty years there have
been three significant developments
• a substantial positive role for trade which have altered the system described
unions; above.
• tariff protection, which provided
an opportunity for firms to pay The first is the reduction in the
these wages and remain profitable; protection of capital and product
• wages which were sufficient to markets from international competition,
enable a full-time male employee and an increase in competitive pressures
to maintain himself and his family in domestic markets. Employers have
adequately according to the responded by seeking to reduce the
standards of the day (but were regulated restraints on the terms on
inadequate to enable a woman to which they employ their workers.
maintain a family);
The second is the blurring of the
• basic levels of support through the
distinction between households which
social welfare system for those
rely on earned income and households
who were unable to provide for
which rely on social welfare payments.
themselves due to old age,
Government financial support for
unemployment or disability; and
children, students and the costs of rental
• with the exception of payments for housing has been extended to families
dependent children, those in which rely predominantly on earned
employment and those in receipt of income. This intersection has been
social welfare payments were seen enlarged by the fall in the real earnings
to be distinct groups. of low wage, fully employed, men over
the past 20 years. Working families are
For those in employment (especially full- increasingly finding themselves eligible
time males), this system produced a for means tested social welfare benefits,
relatively fair and adequate pay partly because their incomes have been
structure, restrictions on the employers’ falling and partly because the range and
rights to command and the employee eligibility conditions of social welfare
self-confidence that came with a robust benefits has been expanding.
trade union movement. The trade
unions, among other things, played an The third is the decline in the strength
important role is ensuring that regulated and coverage of trade unions and the
pay and other conditions of employment expansion of employer prerogative in
were enforced in practice. This, together the determination of the conditions of
with the expansion of the social welfare employment.
system, removed two major sources of
harsh treatment of workers. One was One result of these changes has been the
the ‘race to the bottom’, whereby firms gradual replacement of the wage
which adhered to award conditions determination system by the social
might be put out of business by those welfare system as the instrument for
which breached them. The other was protecting the living standards, if not
Why Regulate the Labour Market?

other conditions of employment, of low suck more blood”. (1997, pp.


paid workers. 16-17).

A further argument, put forward by


8.4 Arguments About Deregulation libertarians and some other economists
The reasoning behind the call for more is that a contract freely entered into by
deregulation of the labour market in adults is always efficient and fair
Australia includes the increasing because if there was not gain to both
product and capital market competition parties then the bargain would not be
referred to above. It also includes the struck. Regulation which inhibits such
disappointing productivity performance bargains diminishes the freedom of
of the Australian economy in the period action of the people involved and
from 1975 to the early 1990s. It is argued prevents mutually advantageous
that regulation of the labour market arrangements. It is thus patronising and
imposes a set of restrictions which make inefficient. But the force of this
it difficult for firms to respond rapidly argument depends crucially on the
and in innovative ways to changes in the starting position of each party. Justice
product market. Despite the wide Higgins put the point succinctly when
support for this view, there is in fact he interjected in the Harvester Case of
very little evidence to support it as an 1907 to describe freedom of contract in
important phenomenon. Among OECD the workplace as being:
countries there is no correlation between
the degree of regulation of the labour “like the freedom of contract
market and overall economic between the wolf and the lamb”,
performance. Guy Standing’s views on ( McCarthy, 1969:23).
this matter apply, in my opinion, with
equal force to Australia: Any argument for or against regulation
of the labour market must first take
“An influential variant of the account of whether regulation has any
supply-side school has discernable effects. Has the system of
postulated that Europe has been labour market regulation in Australia
suffering from a virulent disease actually affected, for example, the
known as “Eurosclerosis”— a structure of pay? The strongest evidence
tightening of the arteries, a that it has can be seen in its influence on
flabbiness of the muscles and an the gender differences in pay; at first by
inability to move caused by keeping female wages substantially
excessive security and protective below those of males doing comparable
regulations. This delightful work and later by largely removing this
imagery has sunk deep into the bias. Where the tribunals have explicitly
European policymakers’ psyche. sought to alter the structure of pay, it
The mildly odd fact is that after has usually been to compress that
a decade and a half of explicit structure, especially at the bottom end.
and implicit erosion of protective It seems that they have had some
and pro-collective labour modest success in this, and greater
regulations, unemployment is success in improving the wages and
much higher than when the conditions of particular vulnerable
disease was diagnosed and the groups, such as part-time and casual
treatment started. One is workers (many of whom are women).
constantly reminded of medieval
quackery and the leeches: the A controversial dimension of the effects
patient has not recovered, so of the tribunals is whether, by excessive
Why Regulate the Labour Market?

compression of the wage structure, they


have caused unemployment among the
unskilled and among youth. The 8.5 Alternatives to Regulation
various Australian estimates of the wage The question should be asked whether
elasticity of demand for labour, both in the object of regulation, such as a floor to
aggregate and for particular groups, all wages, can be accomplished in a better
find it to be positive but the range of way. One alternative is to ensure that all
estimates is large and no single result workers are sufficiently productive so
can be accepted with confidence. Even if that the market will generate wages
the relatively high elasticity estimate of - which are above the floor. A second is
0.75 is adopted (and many would argue that the social welfare system may
that this estimate is too high), research provide an alternative source of income
by Borland and Woodbridge (1999) which enables workers to refuse to
concludes that adoption of US style accept wages which are below the floor.
minimal regulation of wages would
increase employment of low wage Chapman (1999) looks closely at
workers by only 25,000 to 50,000 (at a whether, through targeted skills
time when unemployment stood at enhancement of the long-term
800,000). unemployed or through an extension to
their general education, it is possible to
Who are the low wage workers whose increase their employment substantially,
wages may be increased by the work of within the prevailing wage structure.
the tribunals? There are several types of He concludes that some labour market
low wage worker. One type has her or programs work better than others.
his foot on the bottom of the wage When the most effective programs are
ladder and is preparing to climb it. used, they can make a substantial
These tend to be young people who are difference to total unemployment and
in the process of becoming established employment. A program targeted on
workers. A second type is on the snake the long-term unemployed could
coming down. These workers are often feasibly halve their number. But labour
middle aged and male and many have market programs are unlikely on their
trade qualifications. They are likely to own to provide a full solution to
have lost relatively well paid jobs in delivering jobs to the unemployed,
manufacturing and to have accepted low especially to the long-term unemployed.
wage jobs as better than nothing at all It is inescapable that the overall level of
(others of their type have indeed found demand for labour has a strong impact
nothing at all and have left the on the job prospects of the unemployed.
workforce). The third type of low wage
worker (probably the majority) is on the If everyone of working age were able to
merry-go-round. They are of prime age, receive an acceptable income regardless
not very well educated and are not of whether or not they were employed,
going anywhere, in a wage sense. They then employers would not be able to
are typically, but not exclusively, entice anyone to work for less than this
married women. Thus one cannot income (unless substantial skills
dismiss the low pay of workers at the development was offered as part of the
bottom end of the wage distribution as employment). Such an alternative
unimportant, because they go income would provide an effective floor
predominantly to young people who are below which wages would not fall, even
just getting established in the labour if there were no external regulation of
market and will be only a short-term wages. Does the social welfare system in
experience. Australia provide such a floor? Gregory
Why Regulate the Labour Market?

et al (1999) answer this question. They environment, when trade union


conclude that for some groups of membership is in decline. Australia has
workers, specifically, parents with traditionally relied upon (privately
dependent children on medium level funded) trade unions to enforce
wages, the interaction of the personal industrial law, or at least to bring
income tax and the income tests on breaches of such law to the attention of
social welfare payments are such as to the authorities. Regulation which is
make the disposable income of the unenforced is worse than no regulation
family almost independent of the level at all.
of wages earned. The range of earnings
for which this is true encompasses that The challenge is to protect workers from
received by a full-time low wage harsh employers while enabling good
worker. On the one hand, this makes employers to flourish. One valuable
the worker indifferent to the level of path to pursue is to take advantage of
wage received, within a range: a fall in the antiseptic properties of light. The
payment from the employer is almost conditions of employment at each
fully offset by a rise in payment from the workplace should be comprehensively
government. On the other hand, the exposed to public gaze. The conditions
worker has no incentive to work more should include not just wages and hours
hours, in terms of the income received. actually worked, but also average days
Both these effects have important of leave actually taken, accident rates,
implications. In the first case, an the rate at which workers quit, the rate
employer can reduce the wage offered in at which workers are fired, any
the knowledge that the obligation to successful actions for unfair dismissal or
provide an adequate income will be sexual harassment, average tenure in the
picked up by the taxpayer. This will job and so on.3 This information should
effect a redistribution from the taxpayer be posted on the equivalent of the
to the owners and customers of such employer’s front door, to inform both
firms, which in turn are likely to the public and potential employees.
multiply as a result of competition in the These disclosure requirements would be
product market. In the second case, the comparable to those imposed on
disincentive to work more than modest companies to disclose financial
part-time hours may engender information if they wish to raise money
resentment in taxpayers, welfare from the public. The public display of
dependency in the worker and intrusive, such information is likely to have a
expensive application of work tests by strong salutary effect on its own. People
the social welfare system. mostly do not like to be seen as public
pariahs. In addition, a requirement that
One major advantage of reliance on the it be provided to all actual and potential
welfare system to provide an effective employees would help overcome the
floor to what workers will accept from large information asymmetry which
employers is that it obviates the need for otherwise exists between employer and
enforcement of employer compliance employee, and which in part justifies a
with regulation of their wage and role for trade unions in the employee
conditions offers. Employers may be left relation. In this regard, it is highly
largely to themselves, in the knowledge regrettable that individual terms of
that no-one is forced to agree to employment determined under
unacceptably harsh employment terms Australian Workplace Agreements, and
‘through necessity or fear of a worse evil’
(Rerum Novarum, 1891). This is an
3 Our thanks to Nick Gruen for raising these
important point in the current ideas.
Why Regulate the Labour Market?

State equivalents, are kept secret, all and many little ones have remained
revealed only to the Workplace stuck in the mud - swamped, not lifted,
Advocate. It is also regrettable that by the incoming tide. I am unconvinced
employee ombudsmen and advocates that the tide has risen faster for those
can, at least in some jurisdictions, act countries with less regulated labour
only upon the complaint received by an markets. What is clear is that the
individual. uneven tide has propelled forward the
biggest and fattest boats the fastest.
But the employment relation is about Economic growth which rewards the
more than wages. A second reason for already affluent with still higher
regulation is to enhance the dignity of incomes, while diminishing the incomes,
the employee, by reducing the extent of dignity and prospects of many at the
the employer’s power to direct. The bottom, is not worth sacrificing
master: servant relation, or one where important social values for. The purpose
the employer has a wide domain over of the economy is to enhance the well-
which arbitrary power may be exercised, being of the people. It is not the purpose
has no place in a decent and socially of the people to provide the lowest cost
egalitarian society. Unless trade unions inputs for the economy. An already rich
are strong, it is the State which must nation should give a high purpose to
place limits on the employers’ power ensuring that work is adequately paid, is
over workers. not physically harmful, and enriches the
human capacities of the people who do
it. It is not progress to have a workforce
8.6 Conclusion in which increasing numbers are paid
Less regulation of the labour market is too little and are afraid, insecure, and
almost certainly associated with (and treated as readily disposable.
most probably causes) more inequality
in earnings and lower relative wages for Good institutions will not substantially
those at the bottom of the pay inhibit growth. But they will also pay
distribution and those who are not attention to who is benefiting from that
main-stream workers. Its consequences growth. There is nothing in unregulated
for employment, unemployment and markets which ensures that the gains
productivity are most uncertain. from growth are reasonably fairly
Deregulation thus involves a very distributed or that the costs of change
probable increase in inequality and a are tolerable for those who lose. That
very uncertain gain in efficiency and has been the function of the industrial
employment. For this reason alone, tribunals and the trade unions, as well as
regulation can be, and in the view of the government more directly. Ill-treatment
author, is, justified. It may well be of workers must not be allowed to
justified even if it could be shown to become profitable, or the forces of
reduce efficiency, because the competition will ensure that it spreads.
distribution of the dividend as well as its The economic environment has not
size are each to be taken into account in changed so much that the best we can do
assessing the consequences for overall to enhance the well-being of the
welfare. To repeat, market outcomes can workforce is to stand by and watch the
be perfectly efficient and perfectly market at work. The market alone will
disgusting. not remove unemployment and nor will
it ensure that the distribution of its
Over the past twenty years the rising product is fair and that the experience of
tide of economic growth has not lifted all work is enriching rather than shrivelling
boats. The big ones have risen fastest of
Why Regulate the Labour Market?

for the workers. The market needs a hand.

References

Bland, A.E., P.A. Brown, R.H. Tawney, (eds), (1914), English Economic History: select
documents, G. Bell and Sons, London.

Borland, J. and G. Woodbridge, (1999), “Wage regulation, low-wage workers and


employment” in S. Richardson (ed), Reshaping the Labour Market, Cambridge
University Press, Melbourne.

Castles, F. and D. Mitchell, (1993), “A radical world of welfare: the welfare state and
equality in the English-speaking family of nations”, in F. Castles (ed), Families of
Nations: Patterns of Public Policy in Western Democracies, Dartmouth.

Chapman, B., (1999), “Could increasing the skills of the jobless be the solution to
Australian unemployment?”, in S. Richardson (ed), Reshaping the Labour Market,
Cambridge University Press, Melbourne.

Gregory, R., E. Klug and Y.W. Martin, (1999), “Labour market deregulation, relative
wages and the social security system”, in S. Richardson (ed), Reshaping the Labour
Market, Cambridge University Press, Melbourne.

McCarthy, P., (1969), “Justice Higgins and the Harvester Judgment”, Australian Economic
History Review, pp. 17-38.

Standing, G., (1997), “Globalization, labour flexibility and insecurity: the era of market
regulation”, European Journal of Industrial Relations, Volume 3, pp. 7-37.

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