Grogonomics
Industrial relations

Australia with its largely decentralised bargaining system has gone too far down the ‘flexibility’ path

New research from the OECD has delivered a damning assessment of the drive for more flexibility in our industrial relations system. It found that such highly flexible systems with little centralised bargaining across sectors and industries delivers lower employment, higher unemployment, and greater wage inequality.
At the moment such is the desire to find wage growth improving that almost any signs will be taken as evidence of good news ahead. One of these signs is that the latest annual wage increase for enterprise bargaining agreements made in the March quarter this year was 2.7% – up from 2.5% in December last year and the record low of 2.2% in September.
It all seems rather promising and even had the Financial Review suggesting “Wage growth climbing across the industries”. Unfortunately while it is certainly nice that we are no longer setting record lows, it remains more in the “less bad” category than “good news”.
When we look at the chart of annual wage growth of EBA’s it’s clear that even though the 2.7% growth of agreements in March is an improvement it remains below the 2.8% average for all current EBA’s, meaning the overall average is likely to keep falling:
The other problem is that fewer people are being covered by EBAs – even compared with last year. The lowly 2.2% average annual wage growth for those EBA’s approved last September covered 236,200 workers compared to just 126,500 who are part of the EBAs that are getting the average of 2.7%.
In March just 1.78 million employees were covered by an EBA – the lowest level as a percentage of all employees since the mid 1990s:
This means that while union-negotiated EBAs generally produce higher annual wage growth than the average wage price index (2.8% compared with 2.1%), the impact of those higher wage rises is lessening across the labour market.
The good news for Australia is that the OECD found generally we were doing well compared to other nations.
Our levels of employment, unemployment were better than the OECD average, but out level of underutilisation – which takes into account underemployed workers was slightly worse than the average:
A major reason for this is that we were less affected by the GFC than most other nations in the OECD. The report notes that during the period of the GFC real wages in Australia actually “grew even while they shrank in most other countries”. But that relatively better performance has largely dissipated, and now our wage growth “remains lower than it was before the crisis for comparable levels of unemployment”.
If we look at Australia from 1998 to 2012 (which was the point at which our wages growth began to slide in much the same way as the rest of the OECD), if we had an unemployment rate of 5%, then wages would likely be growing at around 3.7%; if unemployment rose to 7%, then wages growth would slow to around 3.1%.
It wasn’t a perfect linear trend but it held up pretty well.
What a downward shift means is that for each rate of unemployment the expected wage growth would be lower.
We have seen signs of that since mid 2016. Then trend of the past two years is such that an unemployment rate of 5% would now only be expected to deliver wage growth of around 2.5%:
It also notes that there has been a “a significant worsening in the average earnings from part-time jobs relative to that of full-time jobs, which is associated with the rise of involuntary part-time employment”.
But where the OECD’s report really hit home is when it looks at the role of collective bargaining.
It notes that more decentralised (or firm-level, flexible) bargaining systems are linked with greater levels of productivity, but also crucially “poorer labour market outcomes.”
The trick is to find the sweet spot, and the OECD’s report suggests that “largely decentralised bargaining systems” such as in Australia – where there is barely any cross sector links other than a minimum wage and certainly no bargaining across sectors or industries – have gone too far down the “flexibility” path.
The report notes that “systems that co-ordinate wages across sectors tend to be linked with lower wage inequality and better employment outcomes, including for vulnerable groups”.
Such a centralised system, which allows for cross-industry bargaining “increases solidarity between workers in different sectors and helps ensure that collective bargaining improves employment by taking due account of macroeconomic conditions”.
It notes that the “organised decentralisation” system – such as occurs in Germany, the Netherlands, Norway and Sweden – “tends to deliver good employment performance, better productivity outcomes and higher wages for covered workers”.
Damningly however, it found that the more decentralised systems like Australia’s “tend to be associated with somewhat poorer labour market outcomes” – for example having higher rates of unemployment’s for “youth, women and low-skilled workers” and also a higher “share of involuntary part-time workers”.
The good news is Australia’s outcome have not been as bad as those in fully decentralised systems, but it serves as a warning to those believing the answer is yet more flexibility.
Yes, greater flexibility may bring more productivity, but the OECD’s research shows it comes at the cost of lower employment from many groups, higher overall unemployment, greater underemployment and definitely not better wage growth. In effect such a move would deliver exactly the opposite of what we need right now.

• Greg Jericho is a Guardian Australia columnist