ECW2141ECG9170

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ECW2141/ECG9170 Labour Economics Lecture
13 Revision
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Topic 4 Education, training and human capital
investment
Topic 5 Internal labour markets
Labour Economics
Topic 3 (Two weeks) Labour supply, labour demand
and market equilibrium
Topic 8 Trade unions
Topic 2 The supply of labour
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The supply of labour
Population Participation rate Work-leisure
choice
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Components of population growth
The supply of labour
Population growth

• Natural growth
• cultural, religious differences
• economic development
• health care
• Migration
• inter-national economic disparities
• national policies
• Regional disparities

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Factors of population growth
The supply of labour
Population growth

• Natural growth - a function of economic
  development
• long term evidence
• Can be studied based on comparison of
  contemporary societies at different levels of
  development

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The supply of labour
Participation rate
Refers to the number of persons in the labour
force not just the number of persons employed.
If an unemployed person actively seeking work
obtains employment there is no change in the
participation rate. Unemployment can increase
even if there is no reduction in employment, if
additional people seek work, that is if the
participation rate rises. Changes in the
participation rate may be as important a factor
in determining the unemployment rate as changes
in the number of jobs available.
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Factors affecting participation rate
The supply of labour
Participation rate

• The age distribution of the population
• Social conventions, (the school leaving age and
  the attitude towards married women holding paid
  employment)
• The structure of employment
• a rapid growth in part-time jobs and a relative
  decline in full-time employment
• the availability of part-time jobs is likely to
  attract new entrants to the labour market, thus
  changing the participation rate.

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The supply of labour
Average hours of work

• Labour supply is measured in number of hours of
  work supplied. Based on
• hours worked per period
• total number of persons in the workforce
• The long term trend to reduced working hours

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The supply of labour
Average hours of work

• Hours worked are a function, in part, of the
  level of wages
• This involves looking at the choice workers make
  between income (i.e. goods and services) and
  leisure.
• Leisure has a cost - the income lost by not
  working.

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The supply of labour
Average hours of work

• The effects of an increase in wages on average
  hours of work
• The cost of leisure has risen therefore workers
  will substitute work for leisure, i.e. the
  substitution effect is positive.
• The higher wage means real income has increased.
  
• Therefore workers can consume more goods, one of
  which may be leisure.
• Therefore the income effect of higher wages is
  negative.
• Whether or not an increase in wages leads to an
  increase or a decrease in the amount of labour
  supplied depends on the relative sizes of the
  substitution and income effect.

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A microeconomic approach
The supply of labour
Hours of work Theoretical aspects
The work-leisure choice

• AB is the budget constraint.
• OB is the total possible leisure hours (168 per
  week).
• OA is maximum possible income
• Utility is maximised with OD hours leisure and
  income OC. DB therefore represents hours of work
  per week.
• The model can be used to examine the impact of a
  number of factors on the work leisure choice.

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The supply of labour
Hours of work Theoretical aspects
The work-leisure choice
The effect of a change in the wage rate.

• An increase in the wage rate raises the maximum
  possible income from OA to OE.
• The budget constraint is now EB.
• Utility has increased to U3
• Income has increased to OG and
• Leisurer has reduced to OF.
• Increase in hours worked from DB to FB.

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The supply of labour
Hours of work Theoretical aspects
The work-leisure choice
The components of change.

• Substitution Effect decrease in leisure (MD)
• Income effect Increase in leisure (MF)
• Total effect - FD

N
M
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The supply of labour
Hours of work Theoretical aspects
The work-leisure choice
The effect of a change in the wage rate.

• The effect of a change in the wage rate on the
  quantity of labour supplied is ambiguous.
• A change in the wage rate will have both an
  income effect and a substitution effect, which
  tend to operate in opposite directions.
• The net result depends on the relative sizes of
  these effects.
• Where the income effect outweighs the
  substitution effect the labour supply curve will
  be negatively sloped, i.e. a rise in the wage
  rate will lower the labour supply, and vice versa.

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The supply of labour
Hours of work Theoretical aspects
The work-leisure choice
Effect of Taxation

• A proportional tax is imposed on income above OE
• Maximum potential income is now OG
• The budget constraint is now GFB.
• The new equilibrium is
• income OJ,
• leisure OH and
• a lower level of utility U3.
• Taxation has acted as a disincentive to work
  effort - working hours are reduced from DB to HB.

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The supply of labour
Hours of work Theoretical aspects
The work-leisure choice
Effect of Taxation

• The effect of taxation on work effort is unclear.
  
• Taxation reduces a workers disposable wage income
  
• However, the effect of a lower wage may be either
  an increase in the hours of work offered, or a
  decrease.
• The claim that higher taxes reduce work effort is
  only true if the substitution effect outweighs
  the income effect.
• It is not inconceivable that higher taxation
  could increase the supply of labour.

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Labour supply, demand and market equilibrium
Why do employers employ? How the equilibrium in
labour markets is established?
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Labour supply, labour demand and market
equilibrium
Supply to an industry

• To increase the supply of
• labour, an industry needs
• To attract workers by higher wages
• To offset the cost of
• reallocation
• retraining.
• For smaller industry segments the
• costs are lower and the supply curve is
• more elastic.

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Labour supply, labour demand and market
equilibrium
Supply to a firm

• Perfectly competitive firm
• Cant increase costs compared
• to competitors
• Employs only the number of
• workers significantly below the
• number of workers available in
• the industry at a given wage
• Wage rate taker -
• What if wage rate is set
• below the industry one?
• What if wage rate is set
• above the industry one?
• Therefore, faces perfectly
• elastic supply curve

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Labour supply, labour demand and market
equilibrium
Demand for labour
Common analytical tools
Three factors affecting the demand for
labour (a) physical output which labour can
produce, (b) price for which that output can be
sold, and (c) cost of labour.
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Labour supply, labour demand and market
equilibrium
Demand for labour
Common analytical tools
The measurement of the physical output which
labour can produce
average physical product of labour - the actual
physical

APPL
production which, on average, each unit of labour
produces. It is
equal to
Total
Output

Number
of
labour
units
employed
marginal physical product of labour -
the addition to

MPPL
output resulting from employment of the last (or
marginal) unit
of labour employed. It is equal to
?
Total
Output

?
Number

of
labour
units
employed
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Labour supply, labour demand and market
equilibrium
Demand for labour
Common analytical tools
The measurement of the revenue labour can deliver

AR


MR

MRPL


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Labour supply, labour demand and market
equilibrium
Demand for labour
Common analytical tools
The measurement of the revenue labour can deliver
- the addition to
marginal physical product of labour

MPPL
output resulting from employment of the last (or
marginal) unit
of labour employed. It is equal to

MR

marginal revenue - the addition to total sales
receipts of
selling the last (or marginal) unit of output. It
is equal to
MRPL

marginal revenue product of labour - the addition
to

revenue from employment of an extra unit of
labour. It is equal
to
?
Total
sales

revenue

?
Number
of
labour
units
employed
MPPLMR
sales

?

Total
revenue

?
Total
output
sales
?
revenue
Total


MRPL

?
Number

of
labour
units
employed
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Labour supply, labour demand and market
equilibrium
Demand for labour
Common analytical tools
The law of diminishing returns to the variable
factor (labour)

• Perfectly competitive firm
• MPPL declines, MRPconst.
• Therefore, MRPL declines.
• A firm exercising some monopoly power
• Both MPPL and declines, MR decline.
• Therefore, MRPL declines.

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Labour supply, labour demand and market
equilibrium
Demand for labour
Impact of productivity change
A productivity change can best be defined as a
change in output per unit of labour employed.
The source of productivity change is investment
in capital equipment which results in each worker
producing a greater output. The investment in
capital equipment which raises the value of
labour to the firm.
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Labour supply, labour demand and market
equilibrium
Demand for labour
Impact of productivity change

• A rise in labour productivity means the MPPL
  curve, and therefore the demand for labour (MRPL)
  shifts to the right.
• This shifts the demand curve D1 to D2.
• The industry wage rate rises from W1 to W2
• The industry employment rises from N1 to N2.
• For the firm its increased demand is reflected in
  the increased MRPL, from MRPL1 to MRPL2. It now
  faces the higher industry wage W2, so employment
  increases, F1 to F2.
• Another aspect - change in the quality of labour

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Labour supply, labour demand and market
equilibrium
Demand for labour
Demand for labour in the long-run
The demand for labour will be more responsive
to price changes in the long run than it is in
the short run when no substitutes are available.
The greater the degree of substitutability
the less elastic the demand for labour will be.
Normally, as a result of technical progress
substitutability initially decreases and then
increases
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Education, training and human capital investment
Why to study? Who should pay?
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Education, training and human capital investment
Investment in education
Costs and Benefits of Higher Education
Costs
Benefits
Tuition fees
Net additional life time earnings due to higher
education
Textbooks
The utility of education itself???
Other education related expenses
Opportunity cost of foregone earnings
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Education, training and human capital investment
Investment in education
Costs and Benefits of Higher Education
Benefits (from the proper accounting perspective
- see Norris, Ch. 4)

• It is invalid to simply compare monetary costs
  and benefits.
• Both costs incurred in the future and benefits
  received in the future are less in present value
  terms.
• It is necessary to compare the present value of
  additional future earnings, with the present
  value of costs incurred, using the appropriate
  discounting formula.
• Two methods.

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Education, training and human capital investment
Investment in education
Costs and Benefits of Higher Education
Benefits (from the proper accounting perspective
- see Norris, Ch. 4)

• Method 1
• Calculate the rate of discount which equates
  present value of future earnings with the present
  value of costs.
• Such a rate is rate is the private rate of return
  on education, and can be compared with the long
  term interest rate to decide if the investment
  in education is profitable.

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Education, training and human capital investment
Investment in education
Costs and Benefits of Higher Education
Benefits (from the proper accounting perspective
- see Norris, Ch. 4)

• Method 2
• Compare the present value of expected future
  earnings for
• (i) a person with higher education, and
• (ii) a person without higher education.

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Education, training and human capital investment
Investment in education
Costs and Benefits of Higher Education
Benefits (from the proper accounting perspective
- see Norris, Ch. 4)
BB illustrates the earning pattern of a person
whose education ceases at age 15. AA
represents a person whose education continues
until age 21. Between 15 years and 21 years
earnings are negative as direct costs are
involved in remaining in education. 1 - costs
of education. 2 - opportunity cost of staying
at school. 3 - eventual return on
education. If 3 gt 1 2 then the
additional education is worthwhile.
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Education, training and human capital investment
Social return to education
Free/non-free education debate

• For Non-free education
• Provided the social benefits of education are the
  same as the private benefits, then obviously the
  social rate of return will be less than the
  private rate of return.
• In strictly economic terms this suggests that
  higher education will be over provided.
• It also provides ammunition for those who argue
  that tuition fees should be charged.
• For free education
• Free higher education gives access to those who
  otherwise might leave school at the minimum age.
• Education involves positive externalities such
  that the benefits to society exceed the benefits
  to the individual.
• Certainly there are immense benefits to society
  in having a literate and numerate population, but
  whether or not, such benefits continue to accrue
  after the school leaving age of 15 is debatable

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Internal labour markets
Reasons for the existence
Types
Wage determination
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From neo-classical labour market to numerous
labour markets
Internal labour markets

• Labour market comprises a multitude of indistinct
  and often overlapping markets relating to
  particular job classifications
• There are numerous labour markets.
• Industries
• Professions
• Regions
• Levels of appointment
• All workers do not compete for all jobs.
• Why there is a shortage of labour and about 5
  unemployment simultaneously?

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From neo-classical labour market to numerous
labour markets (continued)
Internal labour markets

• An employer, seeking to hire, will have only a
  small percentage of the total labour supply to
  draw on.
• Most people will be excluded by factors such as
  geographical location, lack of or non-matching
  skills and training, lack of or different
  experience
• Markets will vary from job to job.

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Internal labour markets
The definition and the main features of internal
labour markets
Institutional labour market

• There exists an internal labour market specific
  to the institution.
• The institution is not completely closed.
• There are ports of entry into this internal
  labour market, often at the most junior level.
• The retirement of a senior employee may lead to
• a whole series of internal promotions, and
• recruitment of an extra worker from outside at a
  junior level.
• It is only at these ports of entry that the
  internal labour market meets the larger external
  market.
• (Another point of entry can be the most senior
  level, though)

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Internal labour markets
The definition and the main features of internal
labour markets
Internal labour market is one governed by
rules, either formal or informal.
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Internal labour markets
The definition and the main features of internal
labour markets
Internal labour market is one governed by
rules, either formal or informal.

• Gives rights and priorities to workers within the
  firm.
• Jobs are not open to be filled by whoever is
  willing to work for the lowest wage, as implied
  by the competitive model.
• Has structure, as opposed to the unstructured
  competitive markets.

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Internal labour markets
The definition and the main features of internal
labour markets
Internal labour market is one governed by
rules, either formal or informal.

• Internal markets are insulated, to greater or
  lesser degree, from competition from the external
  market.
• Competition is limited to competition for places
  at the port of entry, usually at the most
  junior or lowest paid level
• or, at times, at the most senior level
• Internal labour markets divide the workforce into
  non-competing groups
• both within organisations and between
  organisations
• .

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Internal labour markets
The definition and the main features of internal
labour markets
Internal labour market is one governed by
rules, either formal or informal.

• Within an internal market there is the tendency
  to replace competition with an hierarchical
  structure, where advancement is governed by clear
  rules.
• Internal labour markets are very widespread.
• While the degree of structure varies, there are
  almost no examples of completely unstructured
  markets.

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
Internal labour markets are favoured by both
employers and employees

• Benefits from the workers perspective
• greater stability of employment
• more certain promotion and
• the opportunity to create a wage structure based
  on factors other than pure market forces.

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
Internal labour markets are favoured by both
employers and employees

• Benefits from the employers perspective
• reduction in costs of
• training
• hiring on competitive basis
• appointment overheads.

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
Benefits from the employers perspective
The sources of cost reduction
Labour as a quasi-fixed factor
Idiosyncratic skills
Information
Custom and practice
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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
The sources of cost reduction
Labour as a quasi-fixed factor

• If a worker leaves (or is dismissed) after only
  a very short period of employment the investment
  in hiring and training is lost.
• The existence of fixed costs (hiring and
  training) has the effect of cushioning labour
  from changes in the labour market.
• Labour will continue to be employed as long as
  its output covers its variable costs rather than
  the full costs of production.
• A decision by a firm to retain labour in the face
  of a wage rise or a decline in demand may simply
  reflect this fixed factor.

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
The sources of cost reduction
Idiosyncratic skills

• To the extent that employees have skills which
  are specific to their current employer they enjoy
  the position of being a monopoly seller of their
  services.
• The employer has an incentive to try to prolong
  the length of employment.
• Where such skills have to be acquired on the job,
  
• an employer may find it necessary to create a
  structure which protects the position of existing
  incumbents in order to induce them to assist in
  the training of other workers
• (Additional payment for training service).

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
The sources of cost reduction
Information

• The firm has knowledge of its present employees.
• By promoting internally, it will save on
• screening costs, and
• other recruitment cost.

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Internal labour markets
The definition and the main features of internal
labour markets
Reasons for the existence
The sources of cost reduction
Custom and practice

• Employee morale improves with job stability and
  the certainty which comes from the application of
  known and accepted rules.
• Improved worker morale produces higher
  productivity
• Workers may be prepared to trade-off greater
  security for somewhat lower wages.
• (The extreme case of Japan)

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Internal labour markets
The definition and the main features of internal
labour markets
Types
The manorial market

• Enterprise based.
• Employees in these markets work for long periods
  for the same employer, although they might
  perform a variety of jobs.
• Often strongly hierarchical in structure, with an
  importance on seniority and rules of progression.
  
• Entry is usually at the junior level.

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Internal labour markets
The definition and the main features of internal
labour markets
Types
Guild market

• Occupationally based
• Often relating to skilled trades and professions
  where general training is important.
• Workers in these markets will often work for many
  employers.
• The tie is to the occupation, and seniority is
  gained by length of time in the occupation.
• Given that such markets can also be governed by
  administrative rules, for example, union
  membership as a precondition for employment, they
  can also be seen as a type of internal labour
  market.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination
Guild market

• The main effect of institutional rules is to
  regulate the supply of labour.
• A wage rate is determined through bargaining.
• Demand together with the wage rate determine the
  number of jobs available, and
• Control over supply (such as compulsory
  membership in a professional union) is used to
  preserve the wage rate.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination
The manorial market

• Industrial worker typically works for one
  employer for long periods.
• Preserving employment and rights of workers often
  involves attempts to stabilise demand.
• Therefore, even though such markets often have an
  elaborate structure of rules, e.g. regarding
  seniority rights,
• wage determination is much more sensitive to
  employment effects

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination

• Various institutional rules divorce the internal
  labour market from the external economic
  environment.
• The pressure of labour supply is reduced by the
  application of rules.
• A result of this is greater scope for factors
  apart from market forces to strongly influence
  wage rates.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination

• Wages within an internal labour market are likely
  to be
• far less flexible, and
• far less responsive to external market forces
• The institutional rules prevent the surplus
  labour supply from forcing down the wage rate
• the market operates in more or less a state of
  permanent disequilibrium.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination

• Internal markets introduce elements of monopoly.
• A worker with firm specific skills is in effect a
  monopoly seller of labour.
• The employer of those specific skills is a
  monopoly buyer.
• The outcome is therefore is a result of a
  bargaining process the outcome of it is
  indeterminate.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination

• How do adjustments take place within internal
  labour markets?
• The adjustment to be in terms of quantity.
• A fall in demand for the product, and therefore
  for labour, leads not to a fall in wages, but to
  a fall in employment.

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Internal labour markets
The definition and the main features of internal
labour markets
Wage determination

• How do adjustments take place within internal
  labour markets?
• Market adjustment may be through a series of
  wage-like adjustments rather than changes in
  the current wage rates.
• Reduced promotional opportunities will lower the
  expected long-term earnings of current employees
  and induce some to find alternative employment.
• Cutting overtime
• The brunt of adjustment in labour markets falls
  on new entrants through
• reduced recruitment,
• restricted promotional opportunities
• the application of rules such as last on, first
  off.

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Trade unions
Why do unions have bargaining power?
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Trade unions
A trade union is a type of monopoly - seller of
labour
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Trade unions
Key Questions

• What are the trade unions objectives?
• What does a trade union try to maximise?
• How do they behave?
• How will the pursuit of unions objectives
  affect the process of wage determination?

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Trade unions
The membership maximisation model

• Unions are analogous to a business enterprise.
• The difference was that whereas business tried to
  maximise profits, trade unions aimed to maximise
  their membership.
• They struggle for wage level that maximises
  union membership and that is likely to be higher
  than a market determined wage.

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Trade unions
The survival model

• Unions are not maximisers of anything.
• Trade union is a political organisation operating
  in an economic environment.
• The objectives tended to be defined by the union
  leadership, but their actions were constrained by
  threats to survival - of the union itself, and
  the union leaders.
• Leaders define and pursue the objectives, subject
  to minimum levels of performance required to
  ensure their own, and the unions survival.

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Trade unions
The union as a monopoly seller

• The trade union can behave as a monopoly seller
  of labour.
• That is the union chooses the wage rate at which
  it will supply labour, but the employer then
  decides how much labour to buy at that wage.

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Trade unions
The union as a monopoly seller

• The penalty for higher wages is a loss of
  employment.
• The extent of this penalty, and therefore the
  power of the union to raise wages, is governed by
  the elasticity of demand
• The goal of maximising the wage rate is absurd.
  The highest possible wage OA would mean zero
  employment.
• The wage will be higher than Wc, the competitive
  wage- otherwise there would be no benefit to
  workers in having a union.
• Where will the wage be?
• Wage W2 maximises the total wage payment to their
  members (not the wage rate) - (sales maximisation
  VS profit maximisation), or
• W1 which maximises economic rent payment over
  and above of the supply price for labour WC.

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Trade unions
Bargaining models
Efficient bargaining model

• The unions various levels of utility are a
  combination of both wages and employment.
• The employer will be indifferent between certain
  wage employment combinations, that yield equal
  profit.
• The union will be indifferent between certain
  wage/employment combinations, that is they yield
  equal utility.
• Other combinations will be more or less
  preferred.
• Union attempts to maximise utility subject to
  constraint.
• In this case the constraint is profit
  maximisation by the firm.

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Trade unions
Bargaining models
Efficient bargaining model
Wage
Demand for Labour
Employment
Norris - Figure 6.7
68
Trade unions
Bargaining models
Efficient bargaining model
Wage

• Iso-profit curves
• The employer will be indifferent between wage
  employment combinations along each of the curve,
  for those combinations yield equal profit.

I3
I2
I1
Demand for Labour
Employment
Norris - Figure 6.7
69
Trade unions
Bargaining models
Efficient bargaining model
U3
Wage
U2

• Union indifference curves
• The union will be indifferent between the
  wage/employment combinations along each of the
  curves for those combinations yield equal
  utility.

U1
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
Efficient bargaining model
U3
Wage

• If the firm determines the level of employment,
  the union chooses point A.
• Point B equally profitable to the firm, but may
  be not preferred by the union .
• Point C delivers equal utility to the union, but
  may yield less profit to the company
• CB - contract curve the range of possible
  agreements

U2
.
.
B
.
A
U1
C
I2
I1
Demand for Labour
Employment
Norris - Figure 6.7
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Trade unions
Bargaining models
A survival model

• The greatest threat to the survival of a union
  leader is a reduction in the status quo
• reduction in wages, or
• a fall in employment.
• Rise in wages is necessary to compensate for
  reduced employment.
• Large increase in employment is necessary to
  compensate for a fall in wages,
• i.e. wages and employment are not regarded by
  unions as good substitutes.
• That is, the unions preference functions, or
  indifference curves tend towards right angles,
  kinked at the current wage/employment level.

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Trade unions
Bargaining models
A survival model

• Wages and employment are not regarded by unions
  as good substitutes.
• The unions preference functions, or indifference
  curves tend towards right angles, kinked at the
  current wage/ employment level.

73
Trade unions
Bargaining models
A survival model

• If demand for labour increases, unions would
  prefer an increase in wages rather than a rise in
  employment.
• Similarly, if demand for labour falls, unions
  prefer a reduction in employment rather than
  wages.
• If a choice has to be made, unions regard the
  wage level as more important than the level of
  employment.
• Thus, a trade union preference function is kinked
  at the present wage/employment level.

74
Trade unions
Bargaining models
The bargaining process

• The source of union bargaining strength is the
  strike or work stoppage
• imposing of a cost on an employer who will not
  agree to union requests.
• In a dispute both sides in fact face costs
• For employers
• Cost of disagreeing - loss of profit during
  strike.
• Cost of agreeing - higher wage to pay in future.
• For unions
• Cost of disagreeing - loss of wages in a strike.
• Cost of agreeing - lesser wage in future.

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Trade unions
Bargaining models
The bargaining process

• If both parties weigh up the cost of disagreeing
  with the cost of agreeing, then a strike should
  only occur if
• for both parties.
• The tactics of bargaining involve measures by
  both sides
• to reduce their own costs in a stoppage, and
• to raise the costs of not settling for the other
  party.
• Skilful negotiation and compromise may persuade
  the other party that the cost of agreeing is less
  than they anticipated.

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Research question
The Australian system of wage determination
(Section D) is a research topic. You are supposed
to research in the current policy debate on the
industrial relations reforms proposed by the
Federal Government and prepare your answer to the
following question By introducing the
industrial relation reforms, the Federal
Government attempts increasing productivity and
competitiveness of the Australian economy.
Discuss the proposed measures using appropriate
elements of the economic theory. In your
opinion, will the government succeed in achieving
the goals of the reform? Why?
77
The reform of the Australian system of wage
determination
The award system
The reforms of 1990s
Proposed reforms
What do opponents say?
Which elements of the theory?
Sources
78
Historic background
The award system

• From early Federation years, Australian wages and
  work conditions were based on
• centrally determined awards,
• compulsory arbitration of the federal Australian
  Industrial Relations Commission and similar
  bodies in the states.
• Awards had become a major obstacle to higher
  company efficiency
• Centralized wage fixing
• Poorly linked to productivity
• Difficult for enterprises to adjust to a changing
  economic environment .
• In the period 1983 to 1993 Accord
• central wage determination
• wage growth moderation
• downward pressure on inflation.
• The inflation was tackled at the price of
  recession

79
Historic background
The reforms of 1990s

• From 1993 focus on microeconomic reform.
• Towards decentralized wage bargaining formally
  introduced by the Labor Government in 1993. The
  reforms aim to speed up this process.
• The expected outcome of the reforms was more a
  more flexible and decentralized system of
  determining wages and conditions.  context
• Movement towards a system conventional in OECD
  countries.

80
Historic background
The reforms of 1990s

• In 1996 further reform introduced by the
  Liberal Coalition Government
• The aim
• to increase the flexibility of wage and
  employment conditions.
• to provide a more favorable environment for
  enterprise level bargaining
• to simplify the award system
• to reduce it to safety net of fair and
  enforceable minimum standards including pay,
  leave and other key conditions.
• Other employment matters to be settled at
  enterprise or workplace levels
• to ban compulsory membership in unions

81
Historic background
The reforms of 1990s

• Opponents concerned about the possible impact
• on the strength of unions
• on the degree of protection in industries where
  workers have allegedly weak bargaining
  situations
• on the protection for workers in relation to
  unfair dismissal
• on potential loss of horizontal equity.

82
Proposed reforms

• One national industrial system to replace the
  separate state systems
• Negotiating with the states asking the to refer
  their power to the Commonwealth
• It is estimated that such a national system will
  then cover 85 per cent of Australian workers
• Establishment "Australian Fair Pay Commission" to
  replace the National Wage Cases of the Australian
  Industrial Relations Commission (AIRC)
• to adjust minimum award wage rates
• Award wages will not fall below the current one
• will be capable of future upwards adjustment
  by the AFPC  
• Decisions of the AFPC will be guided by the
  legislation to ensure minimum wages operate as a
  genuine safety net.
• The AFPC will not arbitrate claims and counter
  claims

83
Proposed reforms

• Stream-lining" of certified agreement and
  Australian Workplace Agreement making, including
  increasing the maximum agreement life from three
  years to five years
• The Government will legislate key minimums of
• annual leave,
• personal/carer's leave,
• parental leave (including maternity leave) and
• maximum ordinary hours of work.
• Reduction in allowable award matters
• Agreements
• The Australian Fair Pay and Conditions Standard
  will replace awards as the point of comparison
  for the no disadvantage test for all agreements.

84
Proposed reforms

• Change in the role of AIRC
• The AIRC's role will be refocused on dispute
  resolution.
• The AIRC's powers to end unlawful industrial
  action will be strengthened.
• The AIRC will retain its responsibilities
  regarding further simplified awards.
• Exempt companies with less than 100 employees
  from Unfair dismissal laws
• continue to providing a remedy for unlawful
  termination, which prohibits dismissal for
  discriminatory grounds such as
• race,
• sex,
• union membership,
• pregnancy and so on
• Laws placing more restrictions in relation to
  industrial action
• Secret ballots for industrial action

85
What do opponents say?

• The Keating era reforms have already created an
  efficient labor market - No further reforms
  undermining workers conditions are needed.
• The proposed reforms would
• decrease real wages
• further alienate the workers in the bottom of the
  labor market
• decrease job security
• Only target the bottom segment of the labor
  market.
• Will not affect structured/internal/professional
  labor markets
• While researching towards the question, please
  distinguish
• The criticism from the social/workers conditions
  perspective from
• Economics perspective.

86
Which elements of the theory?
Topic 6 Alternative models of the labour market
Topic 5 Internal labour markets
Topic 8 Trade unions
Labour Economics
Topic 9 Wage relativities and the personal
distribution of income
Topic 3 (Two weeks) Labour supply, labour demand
and market equilibrium
Topic 10 Wages, unemployment and inflation
87
Which elements of the theory?
Labour supply, labour demand and market
equilibrium
Wage per
Supply
unit ()
10
Wage fixing situation
8
6
4
2
Demand
0
50
100
150
200
250
300
350
400
Employment
88
Which elements of the theory?
Labour supply, labour demand and market
equilibrium

• Aligning wage with productivity

Employment
89
Which elements of the theory?
Topic 5 Internal labour markets
Topic 6 Alternative models of the labour market
Is there room for improvement in
internal/institutialized/structured/high-level
labor markets?
90
Which elements of the theory?
Topic 8 Trade unions
Will the reforms reduce the wage-fixing power of
unions?
91
Which elements of the theory?
Topic 9 Wage relativities and the personal
distribution of income
Will the reforms increase inequality? Is this
good or bad for productivity?
92
Which elements of the theory?
Topic 10 Wages, unemployment and inflation
The overall macroeconomic impact More labour
productivity Les inflation? Less purchasing or
more purchasing power?
93
Sources
http//www.workplace.gov.au/workplace/Category/Pol
icyReviews/WorkplaceRelationsReforms/ - the
official web site on the matter http//en.wikipedi
a.org/wiki/Australian_Industrial_Relations_Law_Ref
orm_2005 - information and links on Wikipedia
http//www.alp.org.au/media/0205/dsiirii220.php -
the ALP perspective https//secure3.vivid-design.c
om.au/cci/default.aspx?MenuID1375 The Australian
Chamber of Commerce and Industry perspective