Flexible labour laws saved jobs, says RBA report

The Australian, September 28, 2016:

Flexible workplace laws are likely to have helped companies reduce employee hours rather than cut jobs during recent economic downturns, a Reserve Bank ­of Australia discussion paper has suggested.

The paper says the shift from centralised-wage fixing to enterprise bargaining in workplaces made it easier for companies to negotiate directly with employees over pay and hours.

“This may have provided firms with more scope to reduce working hours in an effort to lower ­labour costs while retaining ­employees,” it says, adding that last decade was the first time the shift in workplace bargaining laws was tested during a downturn. In the global financial crisis, unions embarked on a co-­ordinated strategy to minimise job losses by negotiating with ­employers to have employee hours reduced rather than workers made redundant.

The paper by James Bishop, Linus Gustafsson and Michael Plumb says the “relatively short and shallow nature of the economic downturns in Australia since the late 1990s” has played a role in companies cutting hours rather than sacking workers.

“Had these downturns been more severe, like the recessions in the 1980s and 90s, firms eventually may have needed to shed more workers than they did,’’ it says.

“In other words, it is likely that both employment and average hours tend to adjust in the early stages of a downturn, but ­relatively more adjustment ­occurs through employment as the downturn persists and becomes more severe.

“It is also possible that labour market reforms over recent ­decades have provided firms with more scope to reduce their use of labour by reducing working hours rather than by ­redundancies.”

The paper says a possible ­explanation for employers­ ­cutting hours rather than jobs was that the shift to enterprise ­bargaining under the Hawke and Keating Labor governments “made it easier for firms to bargain directly with their employees over matters like wages and working hours”.

Costs associated with hiring and firing workers could have also had an impact. If they were high, companies might respond to weaker demand conditions by ­decreasing hours worked by existing staff.

While the average employment termination payment in Australia was almost $14,000 in 2012-13, redundancy costs in ­Australia were lower than most European countries, although higher than the US.

“In terms of hiring costs, the cost of screening and training ­labour is likely to have risen over time, given the increase in the number of jobs requiring specialist skills and training,’’ the paper says.

“Hiring costs are particularly high during periods of labour market tightness since firms face higher search costs to fill vacant jobs.

“This might suggest that higher hiring costs can explain part of the increase in the contribution of average hours adjustment over time.

“However, it cannot explain why average hours adjustments have become more important in Australia but not in other advanced economies, since these countries are also likely to have seen an increase in the cost of screening and training labour.”

Possible reasons why firms did not cut more jobs during the 2008-09 downturn was that employers had been finding it hard to recruit suitable labour and wanted to avoid the costly process of rehiring once demand recovered.

Workers were also very pessimistic about their future employment prospects during the 2008—09 downturn, with “self-reported perceptions about future un­employment prospects rising to unprecedented levels”.

“Therefore, employees may have been more reluctant to leave their jobs amid concerns about being able to find new ones, and more willing than usual to negotiate over working hours and other conditions in return for job security,’’ the paper says

During the global financial ­crisis, reductions in the hours of workers staying in the same job were largest in industries that had experienced skills shortages prior to the downturn.

“Firms in these industries may have been ‘overutilising’’ staff prior to the downturn, and started to reduce hours to more normal levels as demand eased,’’ the paper says.

“Firms may also have been ­reluctant to let go of skilled workers because labour had been so difficult to source just prior to the downturn.”