Caution over government’s role in wage negotiations

Cameron Murray's picture

Australia has a long history of Union intervention, but the current reality is that only a small percentage of the workforce is represented by Union members. Cameron Murray argues that we should be looking to Germany when it comes to inspiration for our workplace relations.

Germany has a long history of organised labour wage bargaining, and a hands-off approach by government. This allowed the strong industry unions to negotiate their own wage agreements in response to sector specific conditions. This history explains why Germany is one of the nine OECD countries without a national statutory minimum wage. Yet union membership is falling, following a global trend, and as election time rolls around, Angela Merkel is proposing to adopt a national minimum wage for industries not covered by independently bargained wage agreements.

The global trend away from labour unions is requiring governments to play a more active role in wage negotiations. In Australia, a mere 18% of the workforce are union members, down from 50% in the early 1980s, despite a long history of government minimum wages intervention. Yet only a tiny fraction of the workforce is on minimum wages (stable around 3% of the workforce), and our minimum wage level is very high (as measured by the ratio of minimum wage to average wage). From this measure wage bargaining in Australia could be seen as successful, but we have seen some declines in relative minimum wage levels seen since 2000 (along with the US).

Germany is catching up to Australia in the trend away from unionism, with only 22% of the workforce now union members, which explains the growing expectations of government involvement in wage setting for low income earners. But there is still no agreement about how best for governments to set minimum wages, even in situations when they are called upon to arbitrate union disputes – a challenge now facing Fair Work Australia for the first time following the QANTAS dispute. 

In its most basic form, a minimum wage is a social choice within a welfare state. The existence of welfare (such as unemployment benefits) represents a de facto minimum wage, and any statutory minimum wage needs to stay ahead of the welfare curve. An effective welfare system needs a strong an incentive to work, and the minimum wage ensures a gap between earnings on welfare and the bottom rungs of the workforce, making the transition to work more attractive.

The level of this whole system of welfare is simply a social choice about the minimum standards of living expected in the country. Other social decisions include regulations of minimum working conditions, which are a form of non-financial ‘wage’ that costs the employer and benefits the employee.   None of these decisions are ‘optimal’ in any economic sense, but they are a bargained suboptimal outcome based on the trade-offs made by the institutions are the negotiating table.

Beyond this social framework, economists remain unconvinced of the market impacts of minimum wages in the real world.  Theory predicts strong impacts on unemployment from wage bargaining, but assumes a starting point of optimal wages. A number of world-class researchers are finding that the following effects often negate traditional supply and demand analysis of the labour market.

  1. Labour supply effects. A higher wage encourages labour supply from the margins (from the pool of unemployed).
  2. Investment effects. Employers may have monopsony power in the labour market (meaning wages are below the optimal level). Olaf Storbeck describes how this provides a disincentive for investment – "Imagine a fast food restaurant in a small city. Opening a second outlet might be profitable for the owner of the restaurant. However, he might have to pay higher wages for hiring the extra staff he needs in the second restaurant. Since he is not able to differentiate the wages between both restaurants, he would drive up his labour costs in the existing restaurant. This effect harms the profitability of the first restaurant less and might discourage the expansion of the business completely. However, if the government introduces a minimum wage, labour costs rise anyway and the second restaurant might become more attractive again."
  3. Demand effects. Low paid workers are earning more money and can then consume more and increase demand, boosting local economic activity.
On balance, the net employment and income effects from increasing minimum wages, and indeed bargaining for higher sector-specific wages, are anything but certain.

What that leaves is a simple bargain over the sharing of returns between business owners and the labour force, with no particular optimal point. There are a range of wages that could be bargained that will have little to no impact on output levels. A voluntary agreement is likely to fall within this range regardless of the bargaining power of each side.

Governments therefore need to be careful not to support a minimum wage above this range. But exactly how they are expected to know if you wages are beyond this point is anything but clear. In short, government negotiation is going to replicate the traditional union bargaining, yet they might not always have the incentives to find a minimum wage near the high end of the range. If concerns of ‘destroying jobs’ are sensitive in the electorate, they may bargain with less vigour, or when the industry holds electoral sway, they push for a wage that does crimp industry output.

Hence, in both cases, Australia and Germany, minimum wages in various sectors are more likely to be in the optimal range if the labour force of the industry itself has well organised representation rather than a government umpire. 
Cameron Murray is a professional economist, writer and blogger with a broad range of interests.  He writes a daily column as Rumplestatskin at MacroBusiness. Cameron’s background includes roles in property development, as a government economic advisor, and as a regulatory analyst. He holds a Bachelor of Applied Science (Property Economics) and Master of Business (Research) from Queensland University of Technology, and is a recognised environmental economics researcher and occasional lecturer at his alma mater.


 Over the last forty years

 Over the last forty years the general public have just got sick of trying to get decent living conditions from the governing by these parties, all in vain. I cannot deny that I also consider that all the members of the parties show that they have a much reduced capacity of intelligence and integrity. To join any of these existing parties, all you have to do, is sign a form “I promise to agree with the decisions of the majority of the party”.

I am not aware that the majority of any group of people is the intelligent ones, and I get the impression that over the years, the members have been getting more and more into the condition of being declared as “blockheads: or even “imbeciles”, and really I cannot see any signs to indicate that those remarks are out of order.

To start a party and have it put on the ballot paper to be eligible for a vote, the AEC demands that the intended persons or parties produce the constitution they are going to use. Unfortunately no party demands that their members obey that constitution, they should demand that all members sign that they will honour and obey it to join the party. I would dearly like to see a party who is honest, intelligent and has the ability to organise proper living conditions for the workers, and not be like those party members who only entered parliament to get those obscene benefits they have given themselves over the years including those unjustified trips they can and do take after retirement. They are and have been a total disgrace and should have been an embarrassment to the existing members and to the public.


If nothing else is controlled, why should wage earners?

Unfortunately, we do not have any laws to control anything else, such as the salaries of the CEO's etc, or costs of goods or services, so it is not an honest propersition, to then control the wages of the workers to what the "boss" thinks he needs to make a "decent profit", it is just not on. If wages are going to be controlled, then all salaries must the properly determined and controlled, and determined by fair consideration, all salaries have been distorted in value since inception, or at least over the last two hundred years, and the present Federal government has further destroyed the ability of comparison. There is probably no person who could competently determine an honest fair reward for all outputs from workers, executives, scientists and medical staff etc.

The working public can no

The working public can no longer put up with the conditions and particularly the obscene system of the present tax. While the workers are struggling to feed and clothe their family and attempt to either buy or rent a house, the members of parliament throw money to themselves as if they have nothing else to be concerned about. Since 1970, both the Liberal/National and Labor parties have both altered the tax base so that it is no longer possible for our workers to achieve any ability to properly care for their family. Since 1970 both the liberal/National and the Labor parties have consistently lowered the top tax so that we now have more than a reasonable numbers of millionaires and multi-millionaires as well an undesirable number of workers who can get work in factories for only two or three days a week. The top tax should be about 70% and there also should be zero tax on the first $30,000.

Both the Liberal/National and Labor parties have gone troppo over the export of our mined resources, it is trade, not sale, and the reciprocal goods we are getting are the goods our factories had been producing before our big companies determined to only bring in and sell Chinese or Japanese goods, and our factories are going down the drain and taking our workers with them. Have you ever attempted to find out how many factories have been lost over the last forty years? I suspect quite a few, I don’t remember seeing any of them that I used to deal with back in the ‘50’s and ‘60’s, and I don’t believe that they exist anymore.

Similarly, both the royalty on our resources is still too low, according to other figures, the Royalty on coal should be at least $100 more, and probably about twice as much on the other resources, it doesn’t matter a damn if other countries are suppling the coal, it is not a matter of life and death, when we run out of coal and iron ore or our other resources, we can no longer manufacture and we would then have to try to afford some way to purchase the resources we need from Cuba or whatever country that still has these resources. The company tax should also be increased so that Australia derives some profit from them; with an amount of about $750,000 devoid of tax so that we get some value from them and small business has a certain amount of protection.

I do not believe that the public is treating the Labor party unfairly, the Liberal party will resume where the Labor party has left off, they always do.

The main problem with all our political parties, is they have always failed to ensure and demand that all members must sign a promise that they will honour and obey the conditions of their constitution, and with this, I mean the constitution that was first presented to the authority to allow the names of the parties to appear on the ballot papers for the election. Unfortunately, since 1970, I have lost confidence in not only the ability of the parties to achieve a good economy for both the country and out workers, but also their desire to do so. Wayne definitely does not want our workers to be able to buy their own homes or to be able to properly cater for their own families, the ones you are counting on to provide for the future.