Sunday, May 13, 2007

Saturday Forum: What if Paul Keating is right?

There is a truth about the budget that no politician from either side dares speak.

It is that Paul Keating might be right.

Productivity is the engine that drives our future prosperity.

The Treasurer’s budget papers reveal that it has stopped growing.

But you won’t hear that admission from the mouth of the Treasurer himself.

Asked two days after the budget whether the government was behind the eight ball on productivity he replied with one word: “No"...

He was asked again: “I mean, it has been mouldering in the low ones for most of this decade and the investments that the Government was outlining in the budget mightn’t pay off for some years yet. So, has the Government been behind the eight-ball on productivity?” Again the usually-expansive Treasurer replied with just one word: “No.”

A day later after Kevin Rudd had taken up the issue, the Treasurer was asked whether the Labor leader was correct – did the budget papers show that Australia’s rate of productivity growth would fall to zero?

He replied: “No, again you see, Mr Rudd hasn’t done his homework. It is a nonsense to say that productivity will fall to zero”.

When asked why it was nonsense, he replied: “Well, you can look all the way through the Budget papers and you won’t find any figure like that”.

The Treasurer is wrong. He will find the figure on page 4-30 of Budget Paper No. 1.

On that page there is a graph of productivity, defined by his Treasury as real GDP produced per hour worked. It shows it absolutely flat in the current financial year. This is both a projection (there are still a few months of the current financial year to go) and a statement of reality as already reported by the Australian Bureau of Statistics.

The ABS figures are set out in an accompanying graph on this page. They show that Australia’s quarterly trend growth in productivity went negative in the June quarter of 2006.
It is the kind of dramatic reversal of economic fortune that you might expect Australia’s Treasurer to be addressing head-on. All the more so because on the (admittedly erratic) Bureau of Statistics quarterly figures, Australia’s productivity growth went negative in the June quarter, immediately after the introduction of WorkChoices.

Percentage increase in GDP per hour worked, March quarter 2005 to December quarter 2006.

Because quarterly movements can be erratic, economists such as Saul Eslake at the ANZ update a four-year moving average of the annual productivity growth each quarter. The ANZ’s graph, also on this page, shows Australia’s productivity growth soaring throughout the 1990’s and then collapsing from the turn of the century.

You would think that this would alarm a Treasurer concerned about the link between work practices and productivity.

His Prime Minister promised in the lead-up to WorkChoices that it would “unleash a new burst of productivity growth”.

It hasn’t. If WorkChoices has done anything it has sent productivity sharply backwards.

The former politician who no-one from either side of politics these days seems to want to quote with approval has a perfectly plausible explanation as to why this should be the case.

WorkChoices was not, as is widely believed, introduced primarily to move workers off inflexible centralised awards.

Workers were already moving off awards onto newly-created enterprise agreements at a fast rate.

Paul Keating legislated for enterprise agreements at the start of the 1990’s with the explicit aim of building productivity.

Instead of having a distant umpire set the same wage rate for all, say, engineers of a certain standard, wherever they worked, the wages of the engineers in each enterprise would be negotiated separately within the enterprise every few years at the same time as the wages for their colleagues doing other jobs.

This meant that in order to get a wage rise the workers in each enterprise needed to co-operate with each other and with the management in order to work out how they could make the enterprise more profitable. Sometimes it meant breaking down demarcation lines. In the case of Adelaide’s car industry it was as simple as agreeing to run two shifts each day. Previously cars had only been made in one shift each day during traditional working hours, leaving expensive equipment lying idle.

Every three years or so when a new agreement was negotiated the workers and the management had to co-operate again to come up with further productivity gains. The ANZ’s graph illustrates how productivity soared during the 1990’s.

Economists would call what happened: “increasing the size of the cake”. The extra slices were split between workers, through higher wages, and the company’s owners through higher profits.

By contrast Australian Workplace Agreements, introduced after the Howard government took office in 1996 and accelerated with the introduction of WorkChoices last year, are more about dividing the cake up.

As essentially secret one-on-one negotiations, with management on one side and each individual worker on the other, AWAs are less likely to engender co-operation among workers to bring about enterprise wide improvements in productivity.

The architect of the enterprise bargaining system, the former Labor Prime Minister Paul Keating explained the difference this way to the ABC radio’s Eleanor Hall one week before the budget.

“On this floor at the ABC here, there must be 150 people. If you went out there and said to them, look we're going to make an agreement for the next three years or four with the ABC and we want 3 per cent productivity a year out of it, or 2 per cent productivity, together you could all do something.

“But if they just take Eleanor Hall by herself and say, you will give us an increase in productivity, how can you, individually? How can you? What are you going to do, talk louder? Talk more? Be at work earlier?”

The graphs shown on this page are potent with the suggestion that the former Prime Minister is correct - that the system of enterprise bargaining introduced in the 1990’s made Australia’s workplace productivity soar and that the system of individual bargaining introduced to eclipse it is winding those gains back.

Paul Keating has some support. Peter Costello’s Treasury agrees that that by encouraging a more co-operative workplace enterprise bargaining boosted productivity.

In Budget Statement 4 it notes that “the OECD has stated that the increasing scope for direct negotiations between employers and employees has probably also helped to raise productivity, as enterprise bargaining allows firms to adopt productivity enhancing practices and promotes a more co-operative work environment where performance and reward are more closely linked.”

The Treasury says the Coalition’s changes to the industrial relations system are to be applauded to the extent that they reduce the importance of awards. Perhaps significantly it does not say that they should be applauded to the extent that they reduce the importance of enterprise agreements.

Labor’s industrial relations policy is about restoring the primacy of Keating-style enterprise agreements. It is not, as Government ministers frequently claim, about a return to the centralised system of wage fixing that existed before them.

The government’s own figures suggest that Keating-style enterprise agreements paid Australia huge productivity dividends. They suggest that moving away from them has set our productivity performance back.

And yet, Labor’s leader Kevin Rudd and its deputy leader and industrial relations spokesman Julia Gillard have been reluctant to make that case. They have been reluctant to mount the very plausible argument that Keating-style agreements enhance productivity growth whereas Howard-style agreements hold it back.

It is an argument waiting to be made, by someone other than Keating himself.

But to make it would involve invoking the former Prime Minister’s name and associating themselves with him. So instead they, like the Treasurer and the Prime Minister, this week scarcely mentioned the link between wage-setting and productivity.

Only one shadow minister is speaking out consistently about productivity. Craig Emerson, who has a PhD in economics and has responsibility for the service economy, small business and independent contractors has written a manifesto on the topic.

In it he quotes the words of the venerable US economist Paul Krugman who says that “productivity isn’t everything, but in the long run it is almost everything”.

In Krugman’s words: “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise its output per worker”.