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Liberal Party sabotaging its own labour market deregulation policy
Gerard Jackson
What gives with the Liberal Government? Evan as it preaches the benefits of deregulating Australian labour markets it is busy burdening small and medium sized firms with complex reporting regulations, even though these are the firms that create most of the country’s jobs. A Liberal Party insider tells me that the Government is panicking because it fears that the union movement’s propaganda machine will be effectively exploit any “embarrassing industrial relations stories”. So a Liberal Government’s response is to make it even more difficult to dismiss unsatisfactory employees.
Not even my informant realised that by imposing more regulations the Government is admitting that it has no genuine understanding of how labour markets work. For instance, it was advised numerous times that deregulating labour markets would raise productivity and thereby stimulate economic growth and employment. The problem for the Government is that labour productivity measured as GDP per hour worked has been comparatively flat for 3 years. Chart 1 shows that in March 1996 — when Howard won the election — productivity was 83.3: by September 2003 it had risen to 99.7, a 20 per cent increase. However, by June 2006 it stood at only 100.4. Chart 2 shows that the unemployment rate has been on a downward trend since 1994. This trend emerged before Howard’s industrial relations reforms were implemented
BrookesNews.Com
Monday 25 September 2006
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In a number of articles I tried to warn Liberal Party politicians that though a more deregulated labour market is conducive to a lower rate of unemployment it has basically nothing to do with productivity and economic growth. I stressed that if they continued to parrot the nonsense that free labour markets would continue to raise productivity they would end up taking an egg bath — which is precisely what they are doing. The problem is that these politicians and their staffers lack the necessary economics to know when they are being sold snake oil.
The economic illiteracy of Liberal Party apparatchiks and politicians is truly depressing. Last June I personally warned Julian Sheezel, director of the Victoria State Liberal Party, that the argument that deregulated labour markets holds the key to productivity was fallacious. He responded with the view that deregulation is “essential to economic growth”. After I pointed out to him that history shows otherwise I was virtually told to drop dead. So much for the Party’s functionaries respect for facts. Because of the all too evident intellectual shortcomings of Mr Sheezel and his fellow panjandrums the Liberal Party was denied empirical evidence and economic analysis that has a strong bearing on the Government’s labour market reforms.
I pointed out that the average unemployment rate for the period 1962 – 1972 was about 1.6 per cent, less than half of the US rate. Furthermore, Australia’s average growth rate in the 1960s was 5.5 per cent whereas for the 1990s it was 3.5 per cent. Average per capita growth was 2.2 per cent for the 1990s but averaged 3.5 per cent for the 1960s while productivity growth averaged 2.7 per cent. For the 1990s productivity averaged 2.8 per cent. Now if Mr Sheezel and his advisers were right then the economic results flowing from Howard’s industrial relations reforms should have greatly exceeded the performance of the 1960s. They didn’t.
History is as close to a laboratory as economics can get. Yet Liberal Party MPs are completely unaware of the embarrassing fact that the historical data refutes most of their arguments for deregulation of our labour markets. (It also refutes the unions’ argument that they are responsible for raising real wages). History demonstrates that productivity can rise even in badly hampered labour markets. A fact that is well known to those economists and economic historians who have made a study of labour markets. In his book Capital, Expectations, and the Market Process (Sheed Andrews and McMeel Inc. 1977) Ludwig M. Lachman remarked on this phenomenon.
Sydney Pollard’s The Development of the British Economy, Third Edition 1914-1918 (Edward Arnold 1988) drew attention to the fact that UK productivity grew in the 1920s and 1930s despite the high levels of unemployment. William Ashworth, a noted British historian, observed that regardless of the heavy unemployment real national income in England rose by 40 per cent from 1920 to 1939, and that in 1936 productivity was about 20 per cent higher than in 1929 (An Economic History of England 1870-1939, Methuen and Co. LTD, 1982). We find the same phenomenon in the United States. From 1933 to 1938 US productivity increased by 22 per cent though net invest dropped throughout the ‘30s and unemployment averaged 18 per cent. (Historical Statistics of the United States: Colonial Times to 1970, Washington DC, US Department of Commerce, 1975, p. 948). Chart 3 solves the US productivity conundrum. The grey area for the 1930s shows hourly wage rates exceeding productivity. (For a more detailed view see Richard K. Vedder and Lowell E. Gallaway’s Out of Work for a devastating statistical critique of this period).
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Liberal Party advisers are so bad that they cannot effectively defend labour market ‘deregulation’. For instance, Professor Bob Gregory has argued that the demand for unskilled labour is so insensitive to changes in wage rates that it would take something like an 80 per cent wage cut to reduce unemployment by 100,000. This is a ludicrous argument and I have explained why*. Nevertheless, Liberal Party advisers remained mute, preferring to parrot nonsense about productivity. We now discover that in the three months to July the economy created something like 159,000 jobs. Needless to say there were no massive wage cuts. In fact there appears to have been a modest rise in wages.
One would imagine that the Party’s ‘thinkers’ would have immediately latched on to this empirical refutation of Gregory’s unemployment thesis. Every blessed one of them missed it, including Mr Sheezel. Now Sheezel is paid nearly $4,000 a week. I am not the only one in the Party who reckons that this is $4,000 a week too much. If Sheezel and his colleagues refuse to do the necessary work to advance the interests of the Liberal Party then what the hell are they being paid to do? In the meantime the Government is busy trying to protect its backside by imposing more burdens on those businesses that are least able to afford them.
*Minimum wages and capital accumulation: lefty economists fail again
Gerard Jackson is Brookes’ economics editor