Reforming Australian Industrial Relations

The substance of most previous Foenander Lectures has been in the nature of a review of the contemporary Australian industrial relations system. I propose to do the same on what is perhaps the most momentous change in the Australian system in 100 years. The significance of the question mark in the title of this lecture is that the word ‘reform’ used in the promotion of the WorkChoices legislation, is a loaded term, suggesting ‘improvement’. You will see from what I have to say that this is questionable.

Let me begin by posing a number of questions that underlie my paper: What can reasonably be said to be the requirements of an economically efficient and a socially fair industrial relations system? How important is the legislative framework for such a system? To what extent does the WorkChoices legislation meet the requirements of such a system?

The requirements

A number of conditions and assumptions of an economically efficient and a socially fair system need to be spelt out first. They are contestable, but for what they are worth, I have drawn them from my years of study and experience; and while you may disagree with them, they would at least identify the basis of any disagreement on the subject.

  1. A system that promotes economic growth through higher employment and productivity.
  2. Labour is not a commodity but a human resource. Economic considerations should be balanced against social considerations, especially in view of the imperfections of the market.
  3. Norms of fairness are a feature of most labour markets and need to be recognised in the interest of long term economic efficiency.
  4. There needs to be provision against unfair dismissal and discrimination. (ILO Convention 158)
  5. While there is a great deal of common interest between workers and their employers, there are generally differences on the terms of employment that need to be resolved.
  6. Generally, individual employees have weaker economic power than do employers. To rectify the unbalanced power, collective bargaining with the right, within limits, to industrial action, should be available to the parties. (Conventions 87 and 98)
  7. Legislation is necessary to provide limits on industrial action and to over-ride the strictures of the common law on unionism and effective collective bargaining.
  8. There should be machinery to mediate by compulsory conciliation and arbitration in industrial disputes

[Ed. This is a summary of the requirements as outlined in Isaac’s lecture. To read the longer versions of the above eight points please see the transcript of the full lecture here]

Australian conciliation and arbitration

At the turn of the last century, in the wake of big strikes and pressure from many employers for ‘freedom of contract’ — the equivalent of the current drive for individual agreements – Australia approached industrial conflict. This conflict held direct concern for the public interest, by establishing legally constituted tribunals to deal with industrial disputes by compulsory conciliation and arbitration. The ‘independent umpire’ concept, establishing effectively minimum industrial citizen rights of employees, has, until now, been part of our industrial history for a century.

A look at the recent history of the Australian industrial relations system is necessary to dispel the simplistic view sometimes asserted that our industrial relations system ‘was designed in the 1900s to solve the problems of the 1890s’.

There have been considerable changes in Australia to the operation of the federal industrial relations system with the deregulation of the financial market and the dismantling of trade protection in the mid-1980s under the Hawke government. This new economic environment produced circumstances calling for faster productivity growth. Conscious of the need for micro as well as macroeconomic objectives, the Australian Industrial Relations Commission (AIRC) responded by instituting a system of centrally managed decentralisation, extracting undertakings from the unions involved in each award and agreement to adhere to the wage fixing principles and to cooperate with employers to improve work practices. The Keating government’s 1993 Industrial Relations Reform Act gave statutory encouragement to enterprise collective bargaining, setting rules for collective bargaining. The right to strike was protected within limits dictated by the effect of industrial action on the economy, but only on interest matters pursuant to the making of collective agreement. Disputes on rights matters should be resolved through grievance processes, industrial action on such disputes being subject to penal sanctions.

The 1993 Act substantially met the conditions and assumptions of an economically efficient and a socially fair industrial relations system. Australia’s entry into global competition and appropriate monetary and fiscal settings provided adequate checks on wage inflationary pressures, but the Act left the door open to a more centralised approach to wage fixation if this was believed by the parties to be necessary. A safety net was available for those not engaged in collective bargaining and provided the basis for a ‘No Disadvantage Test’ to ensure fairness in the application of flexibility in conditions covered by agreements.

While Keating looked forward to collective bargaining with a reduced arbitral role for the Industrial Relations Commission, further changes, subject to the restraining hand of the Senate, were enacted in 1996 by the Howard Government. This included the restriction of awards to 20 specified ‘allowable’ items, the deletion of the requirement of ‘bargaining in good faith’ effectively made collective bargaining voluntary. Industrial action in pursuit of multi-employer agreements or industry bargaining used to standardise agreements among employers in the same industry, was removed.

If flexibility is the name of the federal Government’s game, then there are important advantages in allowing diverse bargaining arrangements to develop. In some industries, there is merit in multi-employer bargaining. The bargaining power of the parties is likely to be more balanced where several employers in the same industry face one or more unions. There are savings in transactions costs, while standardising wage rates is consistent with the outcome of an efficient market where the less efficient firms are not subsidised by lower wages and the more productive firms earn higher profits. It is also appropriate in certain types of employment — hairdressers, nurses, carers — where employment is scattered with small numbers in each enterprise. There are also advantages in terms of skill formation for certain industries.

However, a more radical change limiting the power of the tribunal has come about from the WorkChoices legislation which came into effect in March this year.


WorkChoices? What is the case for it?


Prime Minister John Howard says that the Australian economy has performed very strongly in recent years. Australians have enjoyed higher living standards from a combination of prudent economic management, strong jobs growth, higher real wages, low inflation and interest rates, lower taxes, increased family benefits and improved Government services.

If so, why do we need WorkChoices?

Mr Howard’s answer is that we ‘must press ahead with economic reform if we are to prosper in the 21st century. ………….. We do not believe the lemon has been squeezed dry in industrial relations reform.’ It is relevant to note that that the concept underlying this legislation is substantially in line with Mr Howard’s ‘JobsBack’ Industrial Relations Policy of October 1992. More than 20 years have passed without having to squeeze the lemon dry; yet the economy has prospered. Why should we accept that it is now necessary to squeeze the lemon dry to meet the next 20 years or more?

The Prime Minister further maintains that the measures in Work Choices

represent the next logical step towards a flexible, simple and fair system of workplace relations…Only through this will the full potential for productivity gains in the Australian economy be realised. (26 May 2005.)

As for the legislation being ‘simple’, anybody looking at the 1300 plus pages of the Act and Regulations can hardly believe that it is simple even for experienced labour lawyers. As for ‘flexibility’, I will argue presently that it is potentially more flexible but the choices are mainly for employers. However, the broad evidence by international standards is that Australia has done well on flexibility criteria.

  • We have the second highest proportion of part-time workers, a substantial proportion being casual. In addition, the numbers of independent contractors and labour hire workers are increasing. However, the downside of this flexibility is that it does not encourage employers to provide opportunities for skill formation, a critical element in productivity. OECD statistics show that we are above the OECD average in the proportion of low-skilled population, and well above those of the US, UK and many European countries.
  • Our average weekly hours of work are amongst the highest in the OECD
  • Our age-earnings profile is among the flattest of the OECD, i.e. seniority-based wages are not a feature of our labour market.
  • On the basis of strictness of employment protection, including difficulty of dismissal, we are below the OECD average and are among the six least restrictive countries.

The World Economic Forum has published two indices to compare international competitiveness, a compilation by Jeffrey Sachs and John Macarthur. The Growth Competitive Index for 2005, based on quality of the macroeconomic environment, the state of the country’s public institutions, and the level of technological ‘readiness’, puts Australia in the top 10 countries in the world and above the UK. Although the US is first on this list, countries above Australia, such as Finland, Sweden and Norway, are highly unionised and have more centralised wage fixing systems.

Another index, the Business Competitive Index, based on microeconomic factors which determine current sustainable levels of productivity and competitiveness, puts Australia 15th in the world league, again with the US on top but with a number of highly unionised and more centralised industrial relations systems ahead of us.

Combining the elements of both measure, we come out 6th in the world. All told, we are well-off in terms of our macro and micro policy and institutional settings.

Unions have been an important institution in Australian industrial relations. Conciliation and arbitration under the AIRC would have broken down without collective representation. Although there have been episodes in earlier times when unions have used the arbitration system when it suited them and defied orders they did not like, the pressures of an open economy has reduced this tendency The Accord has shown that the trade union movement is capable of a constructive role in promoting macro and micro economic objectives.

Thanks to Paul Batey

It is ironical that one of the stated objects of Work Choices is ‘to give effect to Australia’s international obligations in relation to labour standards’. Since 1996, the International Labour Organisation’s supervisory bodies have repeatedly asked the Australian Government to amend certain provisions, including Australian Workplace Agreements (AWAs), of the Workplace Relations Act because they violate the ILO’s collective bargaining Conventions. The Government has largely ignored these requests and has further greatly compounded its violations by WorkChoices.

The Government has said that the object of WorkChoices will not remove the right to join a union or take away the right to strike. From what I have shown, this is reminiscent of what Henry V is reported to have announced before the battle of Rouen:

Every one knows that I act in everything with kindness and mercy, for I am forcing Rouen into submission only by starvation, not by fire, sword or bloodshed.

Trade unions, collective bargaining and collective action have gone hand in hand to rectify the unbalanced bargaining power in favour employers under individual bargaining. In most countries, including Australia, this development has been supported by legislation. In Australia, the balance has also been underpinned by compulsory conciliation and arbitration. Overall, Australia has done well under these arrangements, especially in the last 30 years or so. Although there may be a case for improvements, what has prevailed until WorkChoices is not very far removed from the requirements of an economically efficient and socially fair industrial relations system I outlined at the opening of this Lecture. The object and philosophical basis of WorkChoices appears to be to unravel even this arrangement and open up the prospects for a return to the master and servant mentality of the 19th Century.

The Government asserts that WorkChoices will provide a ‘flexible, simple and fair system of workplace relations’. It is neither simple nor fair. Its legal provisions are complex. The previous award system, allowing flexibility through common law contracts, has had the endorsement of small and medium size businesses in past surveys, presumably on grounds of simplicity and the fairness of its application to all competitors. The assertion that only through WorkChoices will ‘the full potential of productivity gains’ be realised does not rest on any persuasive argument or economic evidence.

I have suggested that to assess its potential impact, the various elements of WorkChoices should be seen as a package of inter-related items. This package will change the balance of industrial power greatly in favour of employers by

  • reducing union power in various ways,
  • reducing the scope for collective bargaining,
  • reducing the scope of action by the traditional industrial umpire, and
  • reducing the coverage of the unfair dismissal provision.

Combined, these elements of WorkChoices will facilitate its objective of increasing the incidence of AWAs, the instrument through which these elements will be given effect. This, together with the reduced safety net, will provide the potential for a lower standard of pay and conditions for many more and produce greater pay inequality than would apply under the previous legislative regime. This is especially so if the AFPC lives up to the Government’s expectation of a more conservative policy on the minimum wage. The new regime will provide greater flexibility, but mainly to employers because bargaining power has been tipped in their favour through individualisation. It is unlikely to generate increased productivity. Indeed, it may even reduce the pressure for productivity growth and allow employers instead to rely on cost-cutting. Nor can we count on it to reduce unemployment unless wages, especially of the unskilled, are held back substantially. The number of award-protected workers will decline.

The new system goes against the Australian ethos of a fair society. It has the potential of being socially divisive. It will result in uncertainty and litigation. These consequences will not be evident for a year or two because a large number of agreements were processed before WorkChoices came into effect. However, the straws blowing in the wind since the new AWAs came into being give an indication of what could happen on a large scale.

I mentioned earlier that in 1992, Mr Howard, then in Opposition, announced JobsBack, an industrial relations programme substantially in line with WorkChoices. The implementation of this programme was frustrated by the Senate until now. Yet, since 1992, without that programme, economic growth and productivity have proceeded apace, unemployment and inflation have fallen, and industrial disputes have come down to a historical low level. There are no signs on the economic front in the medium term suggesting the case for such a radical change in our industrial relations system.

Why then, do we need these changes now? Perhaps the best answer was given by Mr Howard himself, who allegedly described the legislation as ‘an article of faith’.

This is an edited extract of Foenander Lecture delivered by Joe Isaac to the Centre for Human Resource Management on August 28 2006. The full transcript of his speech can be downloaded here




The Australian Chamber of Commerce and Industry, quoted by Minister Kevin Andrews in a speech to the National Press Club, 31/05/2005
This exposes the view that the lack of flexibility in work practices under the AIRC. It was inflexible only in regard to approving higher wage increases than was being sought.
The application of this test is not without deficiencies. See Merlo, O., 2000. ‘Flexibility and stretching rights: the No Disadvantage Test in Enterprising’, Australian Journal Of Labour Law, 13.Mitchell, R. et a l 2005, ‘What’s going on with the ‘No Disadvantage Test’?’.Centre for Employment and Labour Relations Law, March 2005.
See Chris Briggs, John Buchanan and Ian Watson, Wages Policy in an Era of Deepening Wage Inequality, Occasional Paper 1/2006, Policy Paper 34, The Academy of the Social Sciences in Australia, Canberra 2006.
The Minister for Employment and Workplace Relations has quoted with approval the BCA’s statement: ‘despite past reforms aimed at making Australia’s workplaces more flexible and responsive to change, overly complex, operationally detailed and prescriptive awards remain at the heart of Australian workplace relations.’ (K. Andrew’s Speech 27 Feb 2005, ‘Where do we want workplace relations to be in five years time?’) The BCA’s statement is curious in view of the fact that barely 20% of workers, mostly the less skilled, are on awards — 40% are on enterprise agreements and 40% are on common law contracts. The prize for overly prescriptive provisions must surely go to WorkChoices.
OECD, 2006:264. Employment Outlook
According to a recent Victorian Government report, a significant proportion of labour hire workers are in accident-prone activities. (Economic Development Committee, Inquiry into Labour Hire Employment in Victoria, June 2005. See also Elsa Underhill, 2002, Extending knowledge on occupational health & safety and labour hire arrangements: A literature review and analysis of Victorian Worker’s Compensation Claims. A Report Prepared for WorkSafe Victoria).
OECD, 2002, Education at a Glance.
OECD, 2006:265. Employment Outlook
OECD, 2005:103. Ageing and Employment Policies: Australia
OECD, 2006:96. Employment Outlook
Forsyth and Landau, op.cit. However, I have some difficulty with some of the pronouncements of the ILO’s supervisory bodies on the pre-WorkChoices legislation. See G. Biffl and J. Isaac, 2005, ‘Globalisation and Core Labour Standards: compliance problems with ILO Conventions 87 and 98′, The International Journal of Comparative Labour Law and Industrial Relation, Autumn 2005, pp.440-44
Prime Ministerial Statement, Parliament of Australia, 26 May 2005.
J E Isaac, 1993, Small Business and Industrial relations: Some Policy Issues, The Department of Industrial Relations; Alison Morehead et al, 1997, Changes at Work, Table 13.17.