Industry-Wide Bargaining Good for Efficiency, as Well as Equity

In this commentary, Centre for Future Work Associate Dr. Anis Chowdhury discusses the economic benefits of industry-wide collective bargaining. In addition to supporting wage growth, industry-wide wage agreements generate significant efficiency benefits, by pressuring lagging firms to improve their innovation and productivity performance. The experience of other countries (such as Germany and Singapore) suggests that this system promotes greater efficiency, as well as equity -- although other wealth-sharing policies are also needed.

Dr. Chowdhury's full comment is posted below.

Industry-Wide Bargaining Can Boost Efficiency As Well As Wages

by Dr. Anis Chowdhury

In an effort to reverse long-term wage stagnation, the ACTU is calling for an end to current industrial rules which effectively prohibit sector- or industry-wide wage bargaining. Predictably, the business community is opposed. Australian Industry Group chief executive, Innes Willox, said, “The ACTU’s latest proposals would destroy jobs and the competitiveness of Australian businesses…If the ACTU got its way, unions would be able to make unreasonable claims and cripple whole industries and supply chains until employers capitulated.”

No doubt, the issue will be a hot topic in the upcoming Federal Elections. The Labor Party conference is debating the ACTU’s call. And the Liberal-National Coalition will surely accuse Labor of capitulating to the vested interest of the union movement.

Mr. Willox’s claim that the sector-wide wage bargaining would destroy jobs and Australia’s competitiveness has no basis. A powerful example is provided by Germany, Europe’s strongest economy. In Germany, wages, hours, and other aspects of working conditions are decided by unions, work councils (organisations complementing unions by representing workers at the firm level in negotiations), and employers’ associations. Collective wage bargaining takes place not at the company or enterprise level but at the industry and regional levels, between unions and employers’ associations. If a company recognises the trade union, all of its workers are effectively covered by the union contract.

Yet, Germany’s competitiveness did not decline. On the contrary, Germany experiences both strong productivity growth and strong wage growth. Despite ongoing real wage improvements, unit labour costs are stable or even declining – further enhancing Germany’s competitiveness.

How is this possible? The answer was given by more than half a century ago by two leading Australian academics – WEG Salter and Eric Russel. By de-linking productivity-based wage increases at the enterprise level and adhering to the industry-wide average productivity-based wage increases, an industry bargaining system raises relative unit labour costs of firms with below-industry-average productivity, thereby forcing them to improve their productivity or else exit the industry. At the same time, firms with above-industry-average productivity enjoy lower unit labour costs, hence higher profit rates for reinvestment. Singapore also used this approach to restructure its industry in the 1980s towards higher value-added activities, with great success.

Trying to compete on the basis of low wages is a recipe for failure. As a matter of fact, low-wage countries typically demonstrate lower productivity; and research by a leading French economist, Edmond Malinvaud, showed that a reduction in the wage rates has a depressing effect on capital intensity. Salter’s research implies that the availability of a growing pool of low paid workers makes firms complacent with regard to innovation and technological or skill upgrading. Other researchers show that under-paid labour provides a way for inefficient producers and obsolete technologies to survive. Firms become caught in a low-level productivity trap from which they have little incentive to escape – a form of Gresham’s Law’ whereby bad labour standards drive out good. The discipline imposed on all firms as a result of negotiated industry-wide wage increases forces all of them to innovate and become more efficient.

So, sector-wide wage bargaining is good for the economy: favouring efficient firms, stimulating investment, and lifting wages. Of course, industry-wide bargaining alone cannot solve all the problems of wage inequity or wage stagnation. It must be part of a broader suite of policy measures, to provide all-round support for greater equality and inclusive prosperity.

In particular, we must address the system that produces sky-rocketing executive pays at the expense of workers. A lower marginal tax rate is one of the incentives for the executives to pay themselves heftily, while tax cuts are not found to boost growth or employment. Share options for CEOs, which encourage job cuts and discourage re-investment, also must be reined in. If anything that is making the Australian economy vulnerable, is growing economic disparity between self-serving executive compensation and stagnant wages for the rest of the population.

Reforms also need to address the macroeconomic policy paradigm, where fiscal policy is focused on creating needless budget surpluses by cutting social services and public infrastructure investment. Meanwhile, monetary policy is focused on a pre-determined inflation target regardless of the economic cycle. All of this stifles economic growth prospects and increases job insecurity – both of which are detrimental for wage recovery.


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