Let’s give workers some real bargaining power

The ACTU is currently running 12 days of marches and rallies around Australia in support of its “Change the Rules” campaign. Australia’s union leaders believe that Australia’s labour laws are short-changing workers.  Why? Because employers have too much power when it comes to negotiating pay and conditions, and the government is not doing enough to correct the imbalance.   

There is no doubt that unionists sincerely care about Australia’s workers, particularly the low-paid and unemployed.  And all right-thinking Australians share their concern. But are more and stronger labour laws, designed to give workers a leg-up in pay negotiations, really the best policy to help them?

The starting point in assessing any policy should be to ask why we have the policy in the first place.  Professor Andrew Stewart, one of the architects of the Fair Work Act, puts the argument for current labour laws this way:

“Clearly, some workers have the skills, confidence or mobility to negotiate with current or potential employers on more or less equal terms.  But, for most, the reality (or at least their perception, which is just as important) is that they must generally accept whatever terms are offered to them.  The need to do so may be exacerbated where (as in Australia) social security laws deny unemployment benefits to a job seeker who baulks at accepting particular conditions.”

This is a noble purpose, and there is no doubt that labour laws serve this purpose for many workers.  But do current laws give all workers greater bargaining power in their pay negotiations with employers?

Worker inequality

The centerpiece of Australia’s labour market policy for over a century has been the minimum wage.  At the Federal level, Australia in fact has 123 minimum wages, 122 for the lowest classification in each industry covered by a modern award, and one – the national minimum wage – for everyone else.   

A debate has been raging among economists world-wide for decades about the effects of minimum wages on employment.  Economists who support the minimum wage argue that increasing it tends to increase employment, as the higher wage induces more low-skilled individuals to join the workforce.  There is some empirical evidence to support this, particularly where the minimum wage is set at a low level, and increases are limited to modest increments.

But this remains very much the minority view among economists.  The dominant view, that is backed up by a sizeable body of global empirical evidence, is that minimum wage laws cause unemployment, to a greater or lesser degree.  They do this by prohibiting employers from paying many low-skilled workers the value of their labour.  Some jobs simply aren’t profitable enough, and some labour isn’t valuable enough, to justify paying those workers the minimum wage plus other costs that employers must bear for workers (e.g. payroll taxes, training costs, superannuation and other benefits).   

While the jury might remain out on the precise effects of minimum wages on overall employment, even their most avid proponents are forced to concede that minimum wages have a material disemployment effect on low-skilled workers, most of whom are young, that cannot be explained away by statistical variation.   

What explains the more pronounced disemployment effect of minimum wages on the low-skilled?  One factor at play is that minimum wages deprive low-skilled workers of the only real competitive advantage they have over the higher-skilled — the ability to offer to work for a low wage reflecting the lower value to employers of their skills.  In this way minimum wages can be seen to generate inequality of bargaining power between workers in the market for low-skill jobs – between the haves (experienced workers who have gained job skills) and the have-nots (inexperienced workers who have not yet gained such skills).  

By contrast, without minimum wage laws there would be equality of bargaining power between the higher-skilled haves and lower-skilled have-nots. It is tolerably clear that this would tend to yield a more equal distribution of job opportunities amongst all workers, whatever their skill level.  

Social security policy

The defence of minimum wages, therefore, must include a claim that their benefits outweigh their social cost in terms of their harm to the job prospects of low-skilled workers.  This claim cannot hold if there are policies other than minimum wages that could redress inequality of bargaining power between workers and employers at a lower social cost.

Professor Stewart recognises that the case for labour laws such as minimum wages  is linked, in part at least, to prevailing social security policy. Because unemployment benefits are conditional on willingness to accept work, Professor Stewart argues, workers are faced with a Hobsons Choice – accept the low wage on offer or go without an income altogether.  Minimum wages address this by forcing employers to lift the offered wage that the worker must either “take or leave”.

Looked at this way, Australia’s minimum wages policy, among other things, is a tool to protect workers from the adverse effects of social security policy.  We should then ask the question whether there is a reform to social security policy that could reduce worries about the social costs of unregulated bargaining between employers and workers, that in turn might provide a basis to reconsider the need for minimum wages, with their harmful and inequitable effects on the low-skilled.

Unconditional Basic Income

A welfare reform proposal that is not new, but has been receiving a lot of attention throughout the world lately, is an Unconditional Basic Income (UBI). The UBI is also known as the Universal Basic Income or Basic Income Guarantee.  The idea is simple. The government makes a cash payment to all adults that allows them and their children to meet their basic needs.  Unlike current social security (including unemployment) benefits, the payment is made without any means or activity tests.

While a UBI has drawn support from across the political spectrum, there is a sharp divide between the proponents of UBI as to its scope.  Social democrats see it as supplementing the welfare state, whereas libertarians see it as replacing all existing income transfers. There is also a debate whether a UBI should be integrated with the tax system, in the form of a Negative Income Tax – so the benefit phases out as income is earned – or kept separate from it.

Whichever form a UBI might take it has one feature crucial to the ongoing debate about labour market regulation.  A UBI would give the job-seeker absolute income security and thus a real practical alternative to any “take it or leave it” offer made by an employer.  

Under a UBI, inequality of bargaining power between employers and workers would be less of a concern because all workers would have the comfort of knowing that they can decline an unreasonably low wage offered by any employer and not starve.  The adoption of a UBI in whatever form, therefore, could be a game-changer in the on-going debate about labour market regulation in this country.

A realistic approach?

Many people see the UBI as an idea that makes enormous sense but at the end of the day is a pipe-dream that faces overwhelming political hurdles and will never come to fruition.  But the same might have been said about same-sex marriage 20 years ago.

Clearly, mainstream political opinion in Australia, as reflected in the policies of the major parties, remains hostile to a UBI.  That said, there are signs that a UBI is starting to gain some traction as a realistic policy option. Many governments, NGOs and private firms and individuals around the world are currently experimenting with a UBI, and in Australia the Greens, earlier this month, adopted a version of UBI as official party policy.  

In coming years, as the debate about social security policy continues to evolve, policy-makers should keep squarely in mind the UBI’s important implications for labour market policy.  That is, a UBI could create a sufficiently level playing field for bargaining between employers and workers to justify reconsidering the need for minimum wages at all, or at least at their current high levels.  

A move away from minimum wages would also have the benefit of releasing low-skilled workers (the have-nots) to compete for jobs with the higher-skilled (the haves) on a truly level playing field, addressing the unequal distribution of job opportunities that is inherent in the current system.

The unionists marching in the streets today are fighting the good fight, but it might be the wrong one.  Would they be better off rallying for a UBI with their Green fellow-travellers? This would seem to be the only way that they will ever achieve real bargaining power in pay negotiations with their employers, and do so without harming the low-skilled workers with whom they profess to stand in solidarity.

Mark Hemery

Mark Hemery

Mark Hemery is a partner in the Perth law firm of Hotchkin Hanly, specialising in employment law. He has over 30 years experience in legal practice, and holds a Bachelor of Laws with first class honours from the University of Western Australia and a Master of Laws from Melbourne University.
Mark Hemery

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