A New Province for Law and Order

Competition Between the States in Labour Market De-Regulation

Graham Smith

Introduction

Prior to the election of the Kennett Victorian government on October 3 1992 I said on national television that if the coalition was elected in Victoria, and implemented its industrial relations policies, that those policies would have a domino like effect around the rest of the country. I call this the "domino effect" although your President Ray Evans likes to call it the "Probate effect". The meaning is the same. What we are both talking about is the competitive advantage that a State can achieve through either deregulating a sector of the State's economy or removing an impost which discourages business investment.

In spectacular style, the Kennett government has not only deregulated the labour market (at least as from 1 March 1993) by creating a new system of individual contracting in employment relations, but it has also removed imposts (or "employee entitlements") which have analogies with the old probate taxes. I am of course here speaking of the 17½% leave loading and the removal of award obligations to pay penalty rates for ordinary time earnings on weekends.

If we assume that the Kennett government is able to bed down its reforms, even after a period of considerable industrial dislocation, so that there is indeed "a new province of law and order" as the theme of this conference suggests, an issue of great interest and concern is as to the flow on effects in other States and at Commonwealth level.

It seems to me that as we look into the crystal ball the outcomes will depend upon the following factors. First of all there is the possibility of the "boomerang effect". The boomerang effect refers to the shock waves sent out by the Kennett reforms which might result in the election of a Keating government at the next federal election. The second critical factor will be the response of large employers which do business on a national scale. Third there is the question of the actual extent to which the Victorian deregulatory policies will change investment decisions---in particular whether they are enough to tip the balance against the otherwise competitive advantage of other States such as Queensland. A fourth and final factor is one of perception. If we ever have economic recovery, and particularly if it comes in late 1993, or early 1994, and is stronger in Victoria, then inevitably the Victorian government's industrial relations reforms will be perceived to have been instrumental in that recovery. A strong perception along these lines when added to the existing perception that similar reforms have added to New Zealand's recent economic recovery, would bring about an irresistible tide for change.

The Boomerang effect

My original domino concept was one of all of the other state industrial award systems eventually falling over due to the irresistible competitive force of a contract system. But of course we live in a federal system and more particularly one where the Constitution gives pre-eminence to federal laws. For decades we have had a cosy relationship between federal and state industrial tribunals which has been partly attitudinal and partly brought about by provisions such as section 111(1)(g) of the Federal Industrial Relations Act. In more recent years this cosy relationship has been given the title of co-operative federalism in industrial relations, but what it has meant in practice has been a carving up, or demarcation, of responsibility for industrial regulation as between the federal and the various state tribunals. So many areas such as retailing, hospitality and tourism and health services have been left as appropriate for regulation by state industrial tribunals. To these of course we could add the state public services. But these are also the areas which will be affected by the Kennett government reforms and if they can escape into the federal system then the competitive advantage of the Kennett system will evaporate. We now know that Senator Cook is planning amendments to the Federal Industrial Relations Act to, as he puts it, remove the road blocks to getting there.

The escape route itself would of course evaporate on the election of a Hewson government if it were able to implement its Jobsback! policies and it is here that the boomerang effect is showing signs of operating. The perception that the Kennett government reforms go well beyond its mandate (which is arguably untrue), and the fear campaign being whipped up around the country by Labor politicians, has already boosted the electoral prospects of the Keating government. So the impact of the reforms, far from being domino like in effect, could be a boomerang which comes back and flattens the reforms themselves.

The Role of National Employers

Notwithstanding what happens federally the domino effect, if it operates at all, depends upon the strategies adopted by national employers. Employers have the ability through legal challenges to delay for considerable periods of time the transfer of industrial coverage from state awards to federal awards. In the intervening period they have a window of opportunity to significantly increase the competitive advantage of their Victorian operations and for many there is also the fear that if they don't take advantage of these opportunities, their competitors will. Even in situations where employers operating in Victoria have a substantial market share and are large enough to command discounted supply contracts, there is a fear that small operators will be able to substantially reduce prices by cutting labour costs. The only employers who can realistically withstand these competitive pressures are those that have a dominant position in a product market and other advantages over their competitors through specialised technologies or production techniques. The critical feature of the new system is that the level playing field of the common rule award is removed and employers who can drive their labour costs down the most have a competitive advantage.

One option for large national employers which have operations in Victoria, and which might be threatened by small competitors with lower labour costs, is to in fact support the extension of federal awards through out that industry in Victoria. Thus restoring the so called level playing field of award regulation. Another option is to use the period leading up to the next federal election as a window of opportunity to wrest maximum concessions from federal unions desperate to move to the federal system---and to embed those concessions in section 134 agreements under the federal Industrial Relations Act. The trouble with this option is that the federal option is a one way street.

So it can be seen that large employers operating in Victoria have a variety of options. Clearly these options will be diminished (or at least the federal option strengthened) if Senator Cook is able to enact his proposed legislation.

Investment Decision Making

Another way in which the domino effect could operate is if the opportunity of lower labour costs, or significantly increased flexibility in employment conditions, leads to increased investment in Victoria. With the abolition, at least in the longer term, of weekend penalty rates, the removal of the holiday leave loading and, in respect of new employees, the virtual removal of many award conditions such as redundancy pay and fixed hours of work, the incentive to invest in jobs in Victoria should be increased. I can envisage circumstances where companies will retrench clerical workers in other states and employ new clerical workers to do the same work in Victoria. With the advent of fax machines and other communications technologies clerical and administrative work not requiring a direct client interface can be relocated readily to Victoria. The tourism and hospitalities industries are more problematic. It might become cheaper to stay in a hotel in Victoria but I doubt whether Melbourne can ever compete with Queensland's climate!

Nevertheless if the Kennett government reforms lead to increased investment and increased jobs in Victoria at the expense of other states the pressure to deregulate in other states may become irresistible.

It is significant that the Tasmanian government has recently moved to reform its industrial relations system. Tasmania in particular stands to lose if Victorian industry suddenly becomes much more competitive. It has significantly higher transport costs and is otherwise further from markets. Whether the Tasmanian reforms go far enough is, however, questionable. My understanding is that they are more like the New South Wales opt out provisions.

Forthcoming elections in both Western Australia and South Australia and their outcomes are also critical to the domino effect. My understanding is that the Western Australian Opposition has already moved to announce policies on industrial relations reform similar to the Kennett reforms. If the Coalition wins government in South Australia and Western Australia and enacts legislation similar to the Kennett reforms two things will happen. First of all the federal Tribunal will be rushed with a flood of applications to extend federal award coverage. The proportion of employees covered by State awards compared to federal awards is much greater in Western Australia and South Australia than it is in Victoria. In Victoria only 28% of employees are covered by State awards compared to 45% covered by federal awards. In South Australia the breakdown is 36.5% State award and 41% federal award. In Western Australia 50% are covered by State awards and only 25% by federal awards. Western Australia also has the highest percentage not covered by awards---24.5%. (Source: Australian Bureau of Statistics, Award Coverage Australia, May 1990, ABS Cat. No. 6315.0, at page 5). In other words a rapid move to a contracting system in Western Australia will have a far more dramatic effect than is the case in Victoria.

The second effect of moves to a contracting system in Western Australia and South Australia on top of the Victorian revolution is that in an industrial relations sense New South Wales and Queensland will be effectively isolated. Whether they can withstand the competitive pressures for long would be an interesting scenario to watch. If the federal Coalition is elected and is also able to implement Jobsback!, I doubt whether Queensland and New South Wales could resist the tide for very long at all. Even Queensland's enormous advantage in terms of resources and climate would not be enough.

Perception

I said at the beginning that a critical issue would be perception, both national and international, of the impact and future effect of the Kennett reforms. In the short term the fear of extensive and continuing industrial action may well frighten off significant foreign investment. It may also lead to a reluctance on the part of Australian investors to invest in Victoria. If that happens, the Kennett government may even have to back down.

On the other hand if industrial action can be quelled and economic recovery in a year or so's time is stronger in Victoria that elsewhere the perception that the industrial relations reforms contributed to this recovery would bring about an irresistible tide for change.

Conclusion

If the domino effect rather than the boomerang effect comes to fruition, Australian industry will certainly be more competitive. There are however dangers which need to be dealt with. The first is the possibility that market forces will not, when recovery comes, be sufficient to deter excessive wage increases. As Roger Boland, National Industrial Relations Director, MTIA recently said:

"When the economy does eventually emerge from the recession and employers are competing for scarce skilled labour, a deregulated labour market will meet its true test. In this regard, the United Kingdom has not done so well in recent times. One simply cannot ignore the fact that unions like the Metals and Engineering Working Union are very strong unions even by world standards. Its members will not desert it as a consequence of a change of government and whether its members opt to remain under award coverage or move to a system of workplace agreements, the MEWU's role and influence will not decline---certainly not in the short term as the New Zealand experience confirms. Indeed, it is quite possible that unions like the MEWU as well organised as they are, with strong grass roots support, will be even more effective in the environment of a deregulated labour market given the implied right to strike once a workplace agreement has expired". ("Changes to Industrial Relations Laws and Practices in New Zealand and their Implications" by Roger Boland, Metal Trades Industry Association of Australia, paper delivered at the University of Sydney, 30/10/92 at p.36-7).

The second danger is that the new system could lead to a low wage/low skill economy. In the same paper I have referred to above, Roger Boland quotes a Massachussetts Institute of Technology Commission on Industry Product Activity publication, "Made in America. Regaining the Productive Edge" as stating:

"The history of the American textile industry is essentially a search for low wages...but the quest for cheap labour has not brought success in the marketplace. Apparel imports have gone from 2% in 1963 to 50% today. The route to success in the modern garment trade is not low wages. West Germany, for example, is the world's third largest exporter of textiles in spite of wages that are now substantially higher than those in the United States. Indeed, European producers have been successful with more handicaps than the American. Unions are stronger in Europe and labour legislation is more constraining". (page 16).

A good firm is not one that pays low wages, it is a firm that has the productivity to pay high wages so that it can hire skilled individuals to operate sophisticated machinery (page 17).

The third danger is that the Kennett reforms and similar reforms in other states, operating in a context of uncertainty over what is going to happen federally, could stop dead the existing workplace reform process. Employers will adopt a wait and see approach, and agree to only short term federal enterprise agreements or solutions. Unions will adopt a "hold on to everything we've got at all cost" approach. If the Coalition is elected at the next federal election but is unable to get Jobsback! through the Senate (or is substantially delayed) then the reform impasse could go on for several years.

I remain to be convinced that anyone on either side of politics has the answers or remedies to these dangers. They are simply part of the great unknown that confronts us. The new contracting system is essentially a leap of faith and a hope that it will all turn out alright in the end. Speaking as a lawyer however, I am certain of one thing. That is that the next few years will be an exciting and busy time for industrial law practices like mine.