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Don Argus blames IR for productivity slump - but are other factors at work?

Don Argus’s focus on industrial relations overlooks the real issues behind slowing productivity growth. AAP

Former BHP Billiton Chairman Don Argus has blamed inflexible industrial relations laws for Australia’s lagging productivity, describing the Gillard Government’s economic reform agenda as “lazy”.

Argus said in a speech to the Minerals Council of Australia that struggling industries should follow the example of the mining sector, which he said had enhanced productivity by moving most workers on to individual workplace agreements.

Much of the debate on productivity in recent months has been centred on apparent inefficiencies in Australia’s labour market.

But can industrial relations reform really boost Australia’s productivity growth?

We asked ANU labour economist and former Reserve Bank of Australia board member Professor Bob Gregory for his view.

Don Argus blames labour market inflexibility for the decline of productivity. Are his comments justified?

If we are interested in the productivity slowdown, it would be useful to look at the ABS data.

The worst-performing industry in terms of productivity decline over the last two and half decades is mining. Productivity is lower in that industry than in 1985.

The second worse performing industry is gas, water and electricity. Its productivity is lower than in 1986.

So the first question that needs to be asked is: Why is the productivity of these two important industries – one which is making record profits and one which has been privatised – declining so much?

In none of these cases does any change in industrial relations and labour flexibility laws over the last year or two seem to be the issue.

In these cases, it’s really a matter of declining productivity occurring because we are seeing a lot of investment that is yet to produce output.

Those groups of industry together probably (in my guess) account for somewhere between 40% to 60% of the entire productivity slowdown in Australia.

So it’s quite strange that people are not relating any of the facts to the discussion.

So why is Don Argus blaming productivity decline on labour issues?

I don’t why he hasn’t mentioned the impact of investment. He says that improved labour practices have been achieved in the mining industry, but productivity in that industry has been falling.

It is true that on the macroeconomic level productivity growth has been slowing in Australia, as it has around the world.

It would be nice to see some discussion examining why this broad productivity decline is occurring. People seem to be just making odd comments, and drawing strange conclusions.

For example, Reserve Bank Governor Glenn Stevens did not say that industrial relations had slowed productivity growth. His comment was that the business community had told him industrial relations was having an impact.

He was clear that he was not offering any independent opinion as to where the decline was occurring or what should be done.

I don’t think there is any data or evidence to support what the business community is saying.

Are Don Argus’s comments part of a push towards labour market deregulation?

It’s quite clear that from a business perspective, the more labour market deregulation the better.

However, it is unclear how a less regulated labour market will actually contribute to more productivity. There simply is not the research and data to suggest that.

When people call for reform, they need to provide evidence on how it will improve productivity. It would be nice if they could tell us what they have in mind.

In the past, the reform game was fairly easy. We knew that we needed – lower tariffs and less regulation and so on. Since there have already been significant economic reforms across the economy, it’s much harder now to know what will pay off.

Will more investment in skills and training boost productivity?

Surprisingly the evidence here is very weak. As a general rule, the amount of skills and training that a prosperous country delivers to the workforce does not noticeably impact on macro productivity growth.

Researchers have sought to find a relationship between training and productivity, but at the macro level they just can’t find a convincing case – a result which seems to go against common sense.

The Australian labour force has had more skills and training than ever before. We have imported large numbers of skilled migrants, university enrolments have increased, women are entering the workforce with high-level skills, and so on. And yet productivity growth has slowed.

Are the any positive aspects to low productivity growth?

The slowing of productivity growth is, in some ways, a good thing in the short run.

It helped Australia make its way through the global financial crisis by ensuring that we had higher employment than in an economy that responded with large productivity increases.

If we assume that the output growth from the global financial crisis would have been much the same over the last few years, then we would have had much more unemployment today.

The United States has very high unemployment rates, partly because their labour productivity has increased so much in response to the downturn. The US has laid a lot of people off, and has not been able to get them back into work by boosting output growth.

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