IR reform should have same priority as tax reform

Jessica Irvine has a great piece in the News Limited media today on how Tony Abbott must act now to reverse Australia’s economic demise. I agree with her that reforming the tax system is extremely important, but I’m surprised she doesn’t see industrial relations reform as equally relevant. The Business Council of Australia, which has been pushing hard for IR reform (see Unions defiant on IR reform), will be unhappy with Jessica’s criticism that their prescriptions for growth fall short of the mark.

IR reform needs to focus on three main issues:

  • Australia’s minimum wage is high relative to average wages;
  • it’s difficult to dismiss poorly performing employees; and
  • penalty rates make it unviable for many businesses to extend their opening hours, which has been a major issue in the restaurant industry – although a recent Fair Work Commission ruling has provided some relief regarding penalty rates, a ruling which Unions appear to be contesting in the Federal Court (Hospitality union to take fight over weekend penalty rates to court).

I expect IR reform would benefit the economy through lower unemployment and improved productivity. I have no doubt WorkChoices partly contributed to the low rates of unemployment we saw prior to the financial crisis, including a Queensland unemployment rate between 3-4%, although the mining boom and the construction boom were obviously major influences. On productivity impacts, I’d refer to the excellent 2005 article Comparing Australian and US Productivity written by my former Treasury colleague Jyoti Rahman (N.B. MFP stands for multi-factor productivity):

Scarpetta and Tressel (2002) consider the impact of employment protection legislation on MFP. They find that a substantial liberalising of employment protection legislation would reduce Australia’s MFP gap with ‘the frontier economy’ by 10.8 per cent. This implies that, subject to the above caveats, reforming Australia’s employment protection legislation may reduce the productivity gap by about 2 percentage points, with likely significant beneficial impacts on living standards…

That would imply a productivity benefit per worker of around $1,000 per annum. Certainly IR reform would allow greater flexibility for businesses and would allow them to more readily replace poorly performing employees, so I expect productivity gains of this magnitude are plausible.

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