The Third Way: Welcome to the Third World

Labour Market Reform in the 1990s

David Henderson

Introduction

It is both an honour and a pleasure for me to be invited to speak here this evening. It is an honour because, ever since discovering the Society, through Ray Evans, I have been an admirer of what you are doing. It is a pleasure because I know that I shall enjoy and benefit from the discussion here. As a last-minute substitute for your opening speaker this evening, I have to offer a talk which is less closely tailored to the occasion than I would wish, but I hope it will serve both as background and as an introduction to your agenda.

The main theme of this year's conference is a sombre one. You are concerned about the possibility that the trend in Australia towards making labour markets freer and less regulated, a trend which on the whole (I would say) has been maintained up to now, may be reversed. What is happening in Queensland is clear evidence of the danger; and Ken Phillips, in his interesting paper for this conference, has taken the ACIRRT book Australia At Work as symptomatic of a line of thinking which may become increasingly influential. I am sure you are right to take seriously the possibility that in Australia today, at any rate in the area of labour market policies, there could now be a change of course, and a move back towards interventionism.

As to assessing what is now happening here, in Queensland and more generally, I can't speak from close knowledge. Instead, I would like to set this question of a possible change of direction in a wider context.

Point of departure

By way of background, let me put before you three propositions from my book, The Changing Fortunes of Economic Liberalism.(1) The first two are encouraging from your standpoint and mine, the third is less so.

Proposition One. Over the past two decades, economic policies across the world, and economic systems with them, have changed their character and complexion. To an extent that few anticipated before the event, a large and growing array of governments have adopted measures, and in some cases whole programmes, with the intention and the effect of making their economies freer, more open and less regulated: both individually and in concert, they have taken the path of economic reform. Clearly this is true of Australia.

Proposition Two. There are few countries, if any, in which, over this 20-year period, the direction of change, once explicitly set on a reforming course, has been deliberately and consciously reversed. This also holds good for Australia, though the main question before this conference is whether and to what extent it will continue to hold good.

Proposition Three needs a word of explanation. I came to it by way of reacting against the rather cheering main thesis of Francis Fukuyama's book, The End of History and the Last Man. Fukuyama argues that the 'world-wide liberal revolution' that he sees as now in progress represents the latest phase of a centuries-old tendency which can be confidently projected into the future:

...the growth of liberal democracy, together with its companion, economic liberalism, has been the most remarkable macropolitical phenomenon of the past four hundred years... the current liberal revolution ... constitutes further evidence that there is a fundamental process at work that dictates a common evolutionary pattern for all human societies---in short, something like a Universal History of mankind in the direction of liberal democracy. The existence of peaks and troughs in this development is undeniable. But ... cycles and discontinuities in themselves are not incompatible with a history that is directional and universal.

In part at least, this is misleading. Such a view of the past may be valid for liberal democracy, but does not at all apply to its 'companion'. Economic liberalism has existed as a well-specified doctrine and blueprint since the mid-18th century. Over these 250 years as a whole, contrary to Fukuyama's thesis, there has been no consistent trend towards its realisation in practice. True, there was such a tendency from the latter part of the 18th century onwards; but as from the late 19th century, with 1880 as an approximate turning point, the general direction of change was reversed. The reversal extended to, but went well beyond, policies with respect to labour markets. This was not just a temporary disturbance, a matter of 'cycles and discontinuities', to use Fukuyama's phrase. By the end of the 1970s, when the present trend towards economic reform began to show itself, and even allowing for external liberalisation on the part of most OECD countries in the decades following the Second World War, economic liberalism had been in decline for a century. This suggests that history is not necessarily on its side.

Against this background, let me say a word about the evolution of labour market policies in the OECD countries, viewing Australia as one among many.

The OECD Jobs Strategy

Here I draw on the work of my former colleagues in the OECD Secretariat. In 1992, just after I ceased to be a salaryman, Ministers called on the OECD to prepare a study of the problems of employment and unemployment in member countries; and two years later, after a difficult and sometimes contentious drafting process, the Jobs Study was published. Three points about this document are worth making.

• Although the Study in its final form was published on the authority of the OECD's Secretary-General, as is normal with OECD documents, it had been extensively discussed and reviewed in committee by officials from member countries.
• In the review process, delegates from the ministries responsible for the general oversight of economic policies---in Australia, of course, the Treasury---had worked closely, sometimes through joint meetings, with their counterparts from ministries of labour and employment.
• The final product took a clear stand in favour of greater freedom in labour markets as a means of increasing job opportunities and bringing down persistently high rates of so-called 'structural' (as distinct from 'cyclical') unemployment. This can be seen in the ten-point 'Jobs Strategy' which member governments agreed to adopt, and which has since guided the work of the OECD Secretariat and the committees mainly concerned.

Under this latter heading, let me quote four elements of the Strategy, specifically relating to labour markets, which accord well with H.R. Nicholls Society ideas:

• 'Increase flexibility of working-time (both short-term and lifetime) voluntarily sought by workers and employers'.
• 'Make wage and labour costs more flexible by removing restrictions that prevent wages from reflecting local conditions and individual skill levels, in particular of younger workers'.
• 'Reform employment security provisions that inhibit the expansion of employment in the private sector'.
• 'Reform unemployment and related benefit systems---and their interactions with the tax system---such that societies' fundamental equity goals are achieved in ways that impinge far less on the efficient functioning of labour markets'.

In addition, you would, I think, approve at any rate some of the recommendations that are made under the two other broad headings of the strategy, namely, 'education and training' and 'business environment'. In general, albeit with some qualifications, this is a market-oriented document.

Since 1994, the OECD has carried out a programme of systematic inquiry into the extent to which the policies followed by member governments have conformed to, and carried into effect, the Jobs Strategy. This has been made a common theme in all the OECD country economic surveys, and each survey makes specific policy recommendations under this head. Note that the work here is not just an exercise of initiative on the Secretariat's part: it has reflected the wishes of member governments, which have directed the Secretariat accordingly. This is a sign of the continuing commitment of these governments, at any rate in formal terms, to the philosophy that the Jobs Strategy gives expression to.

Of course, one should not place too much weight on this. What governments actually do remains their own responsibility, and I doubt whether Mr Beattie would be much impressed if you wrote to tell him that the Queensland Industrial Relations Act 1999 is inconsistent with the OECD Jobs Strategy which the Commonwealth Government has endorsed. All the same, that the OECD countries have approved this orientation of policy, and maintained---or at least not withdrawn---their approval, is not an insignificant matter.

The evolution of policies

The latest OECD Economic Outlook includes a special chapter reviewing the extent to which governments have implemented the Jobs Strategy, and gives an assessment of the interactions between labour market policies and actual outcomes. It analyses labour market developments across the OECD, and considers how far these developments may be linked to policy measures that conform with the Strategy. Let me give you just a flavour of what is said, both in general and with reference to Australia.

In looking at labour market developments in relation to the possible effects of reform, an obvious problem is that the behaviour of employment and unemployment is affected by short-term conjunctural influences. The OECD Secretariat has dealt with this, displaying what looks to me like skilful econometric footwork, by estimating for each member country the trend rate of unemployment as distinct from the actual rate. It has also arrived at a measure for each member country of the extent to which changes in official policies, taking account of events before as well as after the adoption of the Jobs Strategy, have been in line with the Strategy's recommendations. For 19 member countries, the change in the estimated trend unemployment rates is plotted against a number which gives what the Secretariat terms the 'follow-through rate of recommendations' with respect to labour markets. This latter statistic emerges as a percentage from a process that I have not as yet managed to get wholly clear.

Australia through Secretariat eyes

Before looking at these numbers, a word on the extent of follow-through in Australia. The Outlook has an informative box, covering all member countries, on 'key structural policy reforms in the 1990s'. Within this, here are the references that relate to Australia when it comes to labour markets as distinct from the two other main headings of the Jobs Strategy,---i.e., 'education and training' and 'business environment'---where this country features more prominently:

• Transfers and taxes. No reference
• Employment protection legislation. No reference.
• Wage formation. 'Australia...promoted enterprise-level bargaining'.
• Active labour market policies. 'As a notable policy change, Australia made the market for employment services fully contestable'.

All this does not seem to amount to a great deal, and I had the feeling that it failed to do justice to the provisions of Peter Reith's Workplace Relations and Other Legislation Amending Act 1996. In search of further official guidance, I turned to the most recent country economic survey of Australia, the text of which was finalised at the end of November 1998. Here, in a table on 'implementing structural reform', the 1996 Act is listed, because it 'provides a more favourable environment for enterprise-level bargaining'. (To be fair, the Act is dealt with in the text as well, where simplification of awards is also brought in.) Two other items listed in this table are also worth noting. Under the heading of 'reform of employment protection legislation', the survey comments, 'Federal government is conducting a review of current arrangements' (presumably this is still in progress). Second, and less encouraging, a positive development of not so long ago, which is taken up in the text as well as included in the table, now appears sadly dated. The survey mentions an event that took place in 1997, which it terms 'a substantial step forward', namely, 'the provision of comprehensive complementary legislation by the state of Queensland to support the operation of the federal Act...' Recent developments in Brisbane have brought a reversal of trend.

From all this material it came as a mild surprise to me that in the rankings of the 19 countries for which 'follow-through' measures have been calculated, Australia comes third, after New Zealand and the UK, with a rating of no less than 73.7 per cent.

Areas of reform and non-reform in OECD member countries

Let me turn now to the OECD as a whole, and mention, first, some areas of labour market policies in which reforms have been especially notable, and second, those where much less has been done. The three fronts on which advances have apparently been greatest are, in descending order:

• the easing of regulation on temporary contracts;
• reforms of the public employment service; and
• tightening the eligibility and availability of unemployment benefits.

At the bottom of the list, again in descending order, are:

• easing of employment protection legislation, whether in general or for regular contracts;
• measures to increase relative wage flexibility; and
• revisions to the minimum wage (this is the only case where regress rather than advance is recorded).

The impact of policies

From its estimates for the 19 countries, the OECD Secretariat reaches some cautiously optimistic conclusions about the effects of the various policy reforms. It appears that the countries that have been most successful in reducing structural (or trend) unemployment and achieving improvements with respect to employment opportunities have in general been those that have gone furthest in implementing the Jobs Strategy. These include the UK, Denmark, Ireland, the Netherlands and New Zealand, with Canada and Australia as more recent entrants to the list. By contrast, countries which have high and/or rising trend unemployment rates tend to be those where governments have been more hesitant about reform. The main instances here appear to be (going from to lower to higher increases in the trend unemployment rate, and hence in descending order of performance) Italy, Japan, France, Greece, Germany, Switzerland and Sweden.

Conclusion: Three words of caution on the OECD story

By way of concluding, let me add three personal qualifications to the analysis and conclusions of the OECD Secretariat as summarised above.

First, despite what appears as a generally positive association between reforms and performance in labour markets, there are cases and comparisons which do not fit the pattern well. Among the relative success stories, consider Australia and New Zealand on the one hand, and Ireland on the other. New Zealand has a follow-through percentage of 87 and a reduction in trend unemployment of 1 percentage point between 1990 and 1998, while Australia has a follow-through percentage of 74 and a reduction in trend unemployment of half a percentage point. Ireland comes below both in follow-through, with 64 per cent, but for the estimated reduction in trend unemployment it comes easily top of the OECD list, with a figure of 7.5 percentage points which represents a much more notable achievement than those of Australia and New Zealand. At the other end of the table, the comparison between Norway and Sweden, two generally similar neighbouring countries, is striking. As noted, Sweden has the worst record with respect to unemployment: its estimated trend rate increased by over 4 percentage points. By contrast, the Norwegian figure shows a small reduction, not an increase, of 0.4 percentage points: by this test, its labour market performance was substantially better than that of Sweden. Yet when it comes to estimated follow-through, Norway is right at the bottom of the 19 countries, with only 17 per cent, whereas Sweden is the median country in the group, tenth out of 19, with a figure of 44 per cent.

Second, the Secretariat focuses chiefly on individual member countries. It has little to say about the European Community and the European Commission, where recent developments are for the most part not encouraging. Ken Phillips, in his paper for this conference, draws a parallel between Brisbane and Brussels. Here let me just note (1) that the present British government, unlike its predecessor, has signed up to the Social Chapter, the provisions of which now bear the status of formal treaty obligations; (2) that the OECD Secretariat notes, in its review of labour market developments in the 1990s, that 'an overall maximum on weekly work hours was introduced at the EU level'; (3) that out of 12 continental EU member countries listed in the relevant OECD table, seven show a rise in trend unemployment in the 1990s and only three a fall; and (4) that the legislation to establish the 35-hour week is now going through in France.

Third, and reverting to my inability to share the interpretation of history and resulting optimism of Francis Fukuyama, let me make the point that, in labour market policies as elsewhere, the continuing power and influence of anti-liberal ideas and preconceptions is everywhere to be seen. This applies to the OECD member countries in general, and is obviously the case for Australia. The notion that, at any rate since the collapse of communism, liberalism has triumphed over rival doctrines, so that interventionism is now in continuing retreat across the world and in all areas of policy, is well wide of the mark.(2)

Endnotes

1. David Henderson, The Changing Fortunes of Economic Liberalism: Yesterday, Today and Tomorrow, London, Institute of Economic Affairs, 1998, and Melbourne, Institute of Public Affairs and New Zealand Business Roundtable, 1999.

2. Variations on this theme of anti-liberalism are to be found in three recent publications of mine. One is The Changing Fortunes of Economic Liberalism, referred to above. Second is The MAI Affair: A Story and Its Lessons, published in Australia as Pelham Paper Number Five from the Centre for the Practice of International Trade at the Melbourne Business School. Third is a review article, to be published soon in the journal International Finance, titled 'The Changing International Economic Order: Rival Visions for the New Millennium'.