Australia's Ineffective Labour Market Reform

Surprise, surprise, the Liberal Party under the leadership of the highly principled Malcolm Turnbull has declared labour market reform dead in the water. Well, no one ever lost money betting on that party's lack of principles. What is truly repugnant about this betrayal is that Rudd is imposing job-destroying regulations on the economy even though it is now in recession. The result could be along the lines of the 1920s when unemployment averaged 8 per cent. Now there are two planks to the Labor Government's reasoning on labour markets:

1. Widespread persistent unemployment has nothing to do with labour costs
2. Regulations are necessary to alter the balance of power between capital and labour in labour's favour to prevent exploitation, except when the unionocracy is doing the exploiting.

Let us now do what the conceited and arrogant H. R. Nicholls Society was too damned incompetent to do, and that is make the case for free labour markets. It is axiomatic in economics that if any good or service is priced above its clearing market level, a surplus will emerge. In the case of labour we call this unemployment. It logically follows from this that labour will only be employed to the point where the value of its services will equal their costs. This is the market rate. Firms that pay labour in excess of the market rate will make losses. Therefore the question of an unemployment 'problem' is easily answered: lower labour costs to the point where they equal the value of labour's services.

At times the Australian Labor Party and its supporters, particularly in the media, refer to the "proud employment record" it achieved during most of the 1980s, and cites this as proof that free labour markets are not necessary to lower the unemployment rate. The hidden irony of this claim is that it confirms the 'orthodox' view of labour being priced out of work.

We have to start with Keating's 'fiscal policies' to grasp the relationship between the then level of unemployment and labour costs. Keating's first budget increased spending by $9.5 billion and his 1984 budget added another $6 billion. His first two budgets, therefore, saw spending increase by nearly $17 billion dollars. This big-spending policy had the hall mark of a desperate "dash-for-growth" tactic that was underpinned by an utterly reckless monetary policy.

Keating's tragic monetary policy - supported by the Treasury, no less - laid the foundations for the Keynesian disaster that became "the depression we had to have". From March 1983, when Hawke won the election, to March 1996, when Howard defeated the Keating Government, currency rose by 221 per cent, bank deposits by 400 per cent and M1 by 337 per cent. It is patently obvious that during this period the Reserve Bank had abandoned its duty to try and control money supply. (Needless to say, the significance of this monetary expansion completely eluded our economic commentariat.)

Money Supply March 1983-March 1996

Source: Reserve Bank of Australia The top line represents M1, the middle line is bank deposits and the bottom line is currency.

The connection between Keating's monetary explosion, falling unemployment and rising output seems too obscure for most of our economists to grasp, including our so-called free marketeers. The Keynesian assumption upon which the policy was based is simple enough: aggregate demand needed to be pumped up to reduce unemployment. However, as the Austrian school points out, monetary expansion only reduces unemployment by cutting the cost of labour relative to the value of its output, a fact that Keynes candidly, though indirectly, admitted. (See The General Theory of Employment, Interest and Money, Macmillan, St Martin's Press for the Royal Economic Society, 1973, p. 9.)

A very simple example will illustrate the point: if the cost of labour is 105 and the value of its product is 100, then monetary policy can eliminate the overpricing by raising the price of the product to 105 or higher. The process is complicated by the fact that monetary expansion could initially unlock resources in a way that would reduce the cost of labour with little or no effect on real wages.

By putting a floor under real wage movements, Labor's Accord with the unions ensured that widespread unemployment would be a permanent feature of the Australian economy, resulting in large-scale suboptimal work as those who were excluded from full-time employment took up part-time and casual work, and even self-employment. For example, from 1966 to 1984 part-time employment rose from 10 per cent of the workforce to 24 per cent: from 1986 to 1993 most of the growth in employment was part-time and casual.

The period from March 1993 to early 1995 brings this point home to us: 436,200 jobs were created during this period but 236,500 were part-time, i.e., 52.2 per cent. To make it worse, there were even fewer full-time workers in January 1995 than in September 1994. So we find that the rise in part-time work concealed a fall in full-time work. These are the sort of economic facts that critics of free labour markets choose ignore.

The significant growth in part-time and casual work suggests that the structure of employment had dramatically changed, leading to the supposition that most of those new jobs were in low-paying activities, what is called the service sector. This is the kind of thing a market economist would have been inclined to predict in the circumstances. Nevertheless, some have argued that the growth of employment in the service sector is the mark of a mature economy; as real incomes rise so does the demand for services. Three things:

1. This view is based on a complete misreading of the industrial revolution.
2. There is no economic law that says that manufacturing as a proportion of GDP should eventually decline with an increase in real incomes.
3. If these observations were correct then real wages in the service sector would have been rising, even for the unskilled - which doesn't seem to have been the case. (Of course, real wages can be raised for full-time workers by rendering other workers unemployed or forcing them into suboptimal employment.)

The basic mistake that critics of labour market deregulation make is to assume (albeit implicitly) that labour is immobile, that it is rigidly stratified. Hence, not only are the poor always with us, they are always the same poor. This is an absurd assumption to make, especially about the US. A graphic example of America's labour mobility is what happened to that country's lowest quintile (20 per cent) during the 1980s. Between 1980 and 1988, 86 per cent of this quintile had moved into higher income brackets; by 1988 16 per cent had joined the country's top 20 per cent of earners. It shouldn't need saying that an inflexible labour market is bound to restrict income mobility.

One need only look at America's astonishing - but only to economic illiterates - job record to realise how freer labour markets can create jobs. In 1970 there were 78.678 million Americans in jobs. By 2006 employment had climbed to 144.427 million. (These figures refer to the civilian labour force.) It is no exaggeration to state that the US is the greatest job-creating machine in history.

All of this now leaves us with the Liberal Party's complete abandonment of principles and sound economic policy. Any jobs policy that ignores labour costs is useless if not downright dangerous. Unfortunately the likes of Turnbull and Nelson haven't demonstrated any grasp of the real nature of the phenomenon of widespread persistent unemployment, which once again is very likely to emerge thanks to Rudd's economic illiteracy and those vainglorious twits who that make up the H. R. Nicholls Society's committee. If they had any sense of shame - which they don't - they wouldn't dare show their pompous faces in public again.