Workplace ‘reform’ won’t cure our ailing productivity

Cutting penalty rates and reviving individual workplace agreements will have no impact on productivity. AAP

Business leaders are insisting changes be made to the Fair Work Act to boost productivity.

Retailers apparently face a crisis because of penalty rates, and an MP agrees that penalty rates stymie productivity. Manufacturing companies claim collective bargaining hampers productivity. Newspaper editorials echo the calls.

All these voices agree we need individual contracts back, to regain Australia’s halcyon days of high productivity growth.

It is easy enough to check the data about the truth of these claims. But before we do that, we need to clear up some misunderstandings.

Productivity is a relatively straightforward concept, often used incorrectly. Put simply, productivity is the amount of output produced per unit of input. Input is most commonly measured in hours of labour.

Labour productivity is the quantity of output (say, the number of meals produced by a restaurant’s staff) divided by the quantity of hours worked (in producing those meals).

Some measures of productivity also look at capital inputs, though these are harder to measure.

The key thing is: productivity is not about wages, nor penalty rates for working nights or weekends. If the cost of paying waitresses goes up, it has no immediate impact on measured productivity.

Higher wages may reduce profits, but they do not reduce productivity. Nor is productivity about the price of the product.

So it is not surprising that some people are confusing productivity and wages. The last national workplace industrial relations survey, conducted in 1995, found that only two thirds of workplace managers thought they measured productivity, and only 31 per cent of those actually compared quantities of output to quantities of inputs.

The rest were measuring something else and calling it productivity.

So what do the official data tell us about output per hour worked in Australia? The chart below shows how it has moved in the market sector since 1994.

You’ll notice that every so often it drops, before rising again, as business cycles come and go.

You’ll also notice that it has dropped in a couple of recent quarters, and then partially recovered, and that these recent movements were comparable to what happened in earlier business cycles.

Look closely again, and you’ll also see that the underlying growth that appeared to be happening through the 1990s started to tail off in the mid 2000s as labour market “reform” intensified.

By a year after WorkChoices was introduced, from March quarter 2007, labour productivity growth was virtually flat-lining. It only resumed growth around March quarter 2009, nearly a year after Australian Workplace Agreements (AWAs) were abolished.

If individual contracts were the route to higher productivity, this is the exact opposite of what should have happened.

A look at that chart also tells us how hard it is to make judgements about productivity over short periods of time.

As the ABS says, “year-to-year changes in measured productivity may reflect changes that are conceptually distinct from the notion of productivity.” This is because any year’s productivity growth is very sensitive to the stage of the economy’s growth cycle.

It slumps as the economy reaches a peak in the business cycle or slows down; and it surges when the economy emerges from a trough.

So the ABS deals with this by averaging productivity growth rates over the whole of a “growth cycle” lasting several years.

This tells us about underlying productivity growth. The chart below shows labour productivity growth across the economy in all completed growth cycles since measurements started, nearly half a century ago.

Two things stand out.

The growth cycle during which individual contracts reached their peak, and WorkChoices was introduced, was also a period with very low labour productivity growth.

In fact, it had the lowest productivity growth of any of the nine cycles since measurement started. Again, the exact opposite of what would be predicted if individual contracts were the way to boost productivity.

Second, there was a brief spurt of increased productivity growth in the 1993-94 to 1998-99 period, following the introduction of collective enterprise bargaining and the passage of Paul Keating’s Industrial Relations Reform Act 1993.

But it only lasted one growth cycle. After that, productivity growth slowed to be below the level achieved before 1984.

Indeed, the longest period of sustained productivity growth happened before the shift to enterprise bargaining or the old prices and incomes accord. It occurred under the traditional award system, it lasted two decades from 1964-65 to 1984-85, and it delivered average productivity growth of 2.4 per cent.

Those halcyon decades of the traditional award system, which delivered far greater privileges to unions than the Fair Work Act, but with no AWAs, also delivered double the 1.2 per cent productivity growth of the WorkChoices growth cycle.

This is not to argue that the slump in productivity growth in the WorkChoices growth cycle was principally caused by industrial relations deregulation.

While it may have depressed productivity a little – those waitresses whose penalty rates were cut would not exactly have been motivated to work harder – other influences were likely more important, such as plummeting productivity in mining (incidentally, the heaviest user of AWAs) and in the privatised electricity and gas sector. Those sectors are still a drag on labour productivity growth.

But the point is this: if industrial relations “reforms” like individual contracting are the key to higher productivity, there would have been a surge in productivity under WorkChoices. There wasn’t. They aren’t.