Consent, Compassion and Coercion

Michael Warby

 

It is a sign of the perversity of much Australian political debate that those who wish to retain the fundamental structures of a labour market which has been producing mass unemployment since 1974---that is, 24 years without a break---are regarded as being 'compassionate' while those who wish to radically reform those same structures in order to set them on a path with a proven record of achieving full or near full employment are regarded as heartless.

It is the same process of linguistic perversity whereby the H R Nicholls society, which advocates radical change in order to bring Australia's labour market institutions more in line with those of many of our trading partners, is labelled by the ABC as 'ultra-conservative' when the real conservatives, and defenders of privilege, are the IR Club.

We live in a society when, despite taxes as a percentage of GDP being at a record level for peacetime, people decry the 'collapse' of the revenue base and the alleged frightful cutting of state activity. In the six years from 1990 to 1995, the Commonwealth Parliament passed more pages of legislation than it did from 1901 to 1974 combined. Six years, marked by no great national emergency or crisis, saw the passing of more pages of legislation than the setting up of the Commonwealth jurisdiction, both World Wars, the Great Depression and the period of postwar prosperity combined. Yet we are supposedly seeing a roll-back of the state and a triumph of markets.

Of course, if you deny people an accurate map, and they will be disoriented, and more open to easy solutions.

Yes, governments are less inclined to set quantities and prices directly in markets, with the continuing exception of the labour market. But no, we do not live in an age of deregulation. The visible hand of government---in terms of the size of the tax take, the scale of legislation, the proportion of the population on income support---is larger than ever before: yet so much of the tenor of public debate is about the alleged frightful results of smaller government. To have so much denunciation of the consequences of the shrinkage of something which is in fact continuing to grow is surely perverse.

What I want to do is to set out our situation in direct language and to come back to the perversion of language as a defence of privilege.

Mass unemployment persists in Australia because prices and conditions for labour are set too high for many Australians to find employment. They are set too high by the operation of the industrial relations system and by the welfare system.

This is easily illustrated.

The historical pattern of Australian unemployment is quite clear. The surge in real wages under Whitlam, coupled with deteriorating economic conditions, created a continuing rise in unemployment which took four years to work its way through the labour market. It raised the 'base level' of Australia's unemployment rate from less than two to about six per cent of the labour force.

Or, to put it another way, Australia's labour market institutions responded to economic conditions by producing increasing levels of unemployment.

Looking at the employment/population ratio---the proportion of the civilian population 15 and over in employment---makes the point even more strongly.

Despite the complaints of a young Paul Keating in his maiden speech about women displacing breadwinners from jobs, the movement of women into the workforce is NOT the cause of unemployment. That an increasing proportion of the work force is employed part-time reinforces how Australia's performance in employing people has deteriorated.

Having created a rise in what might be called the 'base level' of Australian unemployment from a rate of less than two percent to a rate of about six per cent of the labour force, our labour market institutions has since displayed what might be called the 'higher mountain' recession cycle.

Each recession creates a surge in unemployment, peaking at a level higher than the previous recession. Each growth period creates some recovery in unemployment, but ends at a level higher than, or at best equal to, the previous recovery.

This is the pattern of a society moving ever further away from the goal of full employment.

What we have to be quite clear is that this is the pattern of a society choosing to move every further away from full employment. There is nothing automatic or necessary about this pattern of labour market outcomes.

The point can be made simply by looking at some comparable countries. That Australia registered 7.9 per cent unemployment in April after 5 years of economic growth was regarded as an achievement. Yet look at what some OECD countries were achieving at the same time.

Just to emphasise the point, I have noted the last date at which Australia achieved an unemployment rate as low as these countries. Even taking the country with the unemployment rate closest to our in this group, it is eight years since our unemployment rate was as low.

Looking at employment/population ratios in the same way makes the point even more strongly (1996 is the latest comparable data I could get for OECD countries).

That New Zealand, in 1996, had an employment/population ratio we have not achieved for 24 years says a great deal. That the US employment/population ratio---which has since increased---is at a level that Australia has never achieved since regular labour force statistics first began to be collected in the early 1960s says even more. It also gives the lie to the Ken Davidson et al line that the US has such low unemployment rates because of the number of people in their defence forces and in incarceration (the number of people in the US in gaol, the defence forces or otherwise institutionalised has fallen from 6 million in 1970 to 3 million in 1997 while the proportion of American 16 and over in civilian employment has risen from 57 per cent to 60 per cent over the same period).(1)

As David Evans, the former Secretary of the Treasury said correctly some years ago, we have the level of unemployment we choose to have. By which he meant the level of unemployment our policy decisions mean we have.

An instance of such policy decisions are those we make with regard to our system of transfer payments. A simple example will suffice to show how the welfare system creates unemployment.

We can see that there would be some reason for having one or more children would inhibit one's ability to get a job to some degree---hence the slightly higher rate of unemployment of among members of couples with children compared to childless couples.

Once we get to 4 or more children, suddenly unemployment rates are much higher.

It is a matter of complete indifference to an employer how many children a prospective employee had. Yet unemployment rates for those with four or more children is notably higher than unemployment rates for those with one to three children. Why? Largely because the family income support arrangements create massive disincentives for those with 4 or more children to seek work---the welfare system effectively sets minimum wages, and it sets them higher the more children parents have.

We should not be too hard on these people---they are making choices which maximise the income received by their families. Just as one can be uncomfortable with crackdowns on 'dole cheats' in a situation where the law prices many people out of jobs.

And it is not merely official award rates which raise the price of labour. Other regulatory activities, such as unfair dismissal laws and increased employer liability for employee actions, which increase the risks of hiring, also do so. That the 555 page KernotReith Act is hailed in some quarters, and denounced in others, as an act of labour market deregulation is surely another case of perverse use of language.

Do we believe in full employment? As a society clearly not. Of course, many make noises about unemployment being terrible, but when it comes to actually doing anything about the shameful level of unemployment in Australia, it quickly becomes obvious that other things are much more important. Keeping one's own wages up, protecting unions, holding on to fond beliefs, preserving traditional institutions and privileges.... All these things are regularly revealed to be much more important than achieving full employment.

What do we have to do to achieve full employment? Allow the labour market to become a realm of capitalist acts between consenting adults. If we are concerned some of those capitalist acts may result in unacceptably low incomes (even though many low incomes contribute to high-income households), then incomes can be "topped up" through devices such as the Earned Income Tax Credit used in the US. And low-income jobs---which regularly lead to higher-income jobs---are much better than unemployment leading nowhere.

Those who decry the alleged results of a free labour market either are frightened of the price effects of competition for their own jobs or have an ideological preference for telling other people what to do rather than letting them make their own choices or have some other vested interest at stake. Thus, the opposition of the ACOSS, the Australian Council of Social Services, to labour market deregulation on the grounds that it allegedly creates 'working poor' is perfectly rational---having a large unemployed 'welfare peasantry' increases their client base. The 'poverty industry' has a particularly strong vested interest in opposition to market solutions to which they are at best irrelevant and which shrink their client base.

If the consenting adults of a free labour market wish to associate together they should have every right to do so. If they want to have recourse to arbitration procedures, these can be hired---there is no reason for the taxpayer to subsidise a monopoly provider. And, as the wharf dispute showed, real courts are perfectly capable of interpreting the law clearly and with speed (even law as unwieldy as the interaction between the 555 page Workplace Relations Act and corporate law).

The most important thing government needs to do to promote full employment is to stop doing things. To stop setting wages rates by law through the award system. To stop imposing a monopoly provider of arbitration services which plays grubby interest group politics under guise of being "the umpire" while sacrificing the prospects of the unemployed. To stop raising the risks of employing people by unfair dismissal laws (no employer can sue a worker who leaves at a crucial time, after all), increased employer liability for actions by employees, etc. To stop structuring the welfare system so it is destructive of the work ethic.

We can see the means by which unemployment is caused. We have unemployment not merely permitted, but actually created, by law.

But what causes these means to be so chosen? Why are so many actions by government so destructive of employment? Because of the essential irresponsibility of the political process.

Politics is an unrivalled mechanism for gaining benefits at someone else's expense. Government action is coercive action---you can force people to do things. Relieved of the need to gain their individual consent (unlike market exchanges), you can impose costs on them to gain benefits for yourself. Do it right, and it can be trumpeted as "democratic" and "in the public interest". Awards are great devices for pricing competitors out of labour markets---young people, migrants, women returning to the work force are likely to be less productive. So one sets award wages sufficiently high that they find it hard to compete---to the (short term) benefit of the unionised "insiders". It is no accident that women are concentrated in industries with low rates of unionisation.

And raising the costs of labour and the complexity of labour administration advantages large established firms over their competitors such as smaller firms and potential market entrants.

In the longer term, we all bear the costs of this: through higher taxes to support unemployment benefits; through living in a less productive, and a more insecure society---insecure both because of high unemployment and insecure because of the belief that we "can't really cut it" unless big brother is looking after us. But it looks like a good deal in the short term. And union members whose children have problems finding work have reasons not to put two and two together.

Which is not to say that there is nothing positive that governments can do---though extending economic freedom is pretty positive, actually. Workfare ("work for the dole"), done correctly, can be an excellent way of re-socialising the long term unemployed back into work and preserving incentives to look for work. It represents low-cost job creation.

But we should be very suspicious of grand plans to do more than that. Taxes are a very expensive way of funding something. Not only do we have to pay public servants to collect the money and hand it out, there are all those accountants, lawyers, etc. kept busy ensuring their clients comply with the law; all those commercial transactions which don't take place because of taxes; all those changes from preferred behaviour due to taxes. Because of these extra costs, we can only be confident of society winning on the deal if about $1.30 to $1.50 worth of value is created for every $1 of tax expenditure---and that is quite a big ask. (And the bigger government gets, the less likely this criteria is to be met---which is why it is not surprising a recent study(2) found a strong correlation between bigger government and lower economic growth.) Market exchanges are much cheaper.

And it is very unlikely that spending taxes (which themselves cost potential jobs) on creating jobs needed because other taxes have been spent on activities which destroy jobs represents a net beneficial use of social resources. Besides, which is likely to have more real value---work created for the sake of creating work organised by people who have no personal stake in the value of the output? Or something done because someone has voluntarily paid to have it done---and paid someone with a personal stake in keeping customers satisfied?

That markets generally work better than command-and-control systems is not a matter of ideology, but of the inherent characteristics of each.

The real area of political art required for achieving full employment is not to find ways of spending yet more taxpayers' money in socially destructive ways---the Commonwealth alone spends $8 to 10bn a year on labour market policies, or about $12,00 to $14,000 per unemployed person. The real political art is to justify stopping spending taxpayers' money in socially destructive ways. To convince people that full employment is the only proper goal. That a few sacrifices have to be made to achieve it, sacrifices that will be shown to have been a lot more apparent and transitory than real. That the labour market should indeed be the realm of capitalist acts between consenting adults---not coercive privilege masquerading as promotion of the public good.

Which is where issues of language and information come in.

Selling coercion and privilege is difficult---if you call it that. So you don't. You call it 'equity', 'social justice', 'democratic decision-making', 'concern for the national interest'. You don't call it using the coercive powers of the state to run people's employment affairs. So we end up with a situation where people are far, far freer to make decisions about marriage, parenting and ordinary purchasing than the arrangement of their employment.

Most of the time, people are rationally ignorant of political matters. It is not something where their capacity to influence events is worth major investment in information gathering and decision making. So they pay limited attention and work on ongoing sentiments. Which is why generating and reinforcing background assumptions in public debate is so important.

When people are confronted with a real decision---a vote in an election or referendum---that is different. Then they pay more attention, they gather more information, they consider matters more fully and their attitudes shift and firm.

Even so, there are still major information and attention problems to overcome. The result is that it is natural for public debate to be carried on, as much of it is, in terms of intentions and resources, rather than effects. Measuring results is difficult and costly---indeed, would be irrational expenditure of effort for most people most of the time---while intentions are easy to grasp, as are expenditures, at least in the comparative sense ($1m is a small programs, $1bn a large one, $500m is more than $300m and so on). Thus the 'outcomes = intent + resources' model of public policy---with effects being taken to flow fairly directly from intentions plus resources---is a way of dealing with ignorance. This allows easy display of moral purpose without the tedious business of working out actual effects.

Opposition to particular public policies is therefore easily construed as opposition to the official intent of such policies.

Such an approach makes life easier for bureaucrats---who can concentrate on questions of process and measures of activity rather than actual outcomes. It also makes life a lot easier for journalists. Scale and intent are easily conveyed; likely effects are much more difficult.

If you have a lazy, conformist and, in Christopher Pearson's words, 'invincibly intellectually incurious media', driven by deadlines, then such tendencies are magnified. The obvious 'pack mentality' of much of the Australian media is understandable in terms of the pressures of their job. The physical and social isolation of the Canberra Press Gallery further reinforces such pressures.

You may say it is the role of professionalism to realise and counterbalance such pressures. And you would be right. I leave my audience to make their own judgement about the level of professionalism amongst the Australian media.

The purpose of political leadership is to provide a bridge between enduring sentiments and the needs of the day. A key part of that is capturing the language of debate. One must get under, and shift, the underlying premises of debate. That is not the work of a 'trimmer'---adjusting sails to prevailing winds---the pre-emptive compromiser who gives away the high moral ground, and therefore the chance to push debate in a fundamentally different direction, before they begin.

It is the task of someone prepared to articulate a fundamentally new direction, based on different premises. To carry the debate all the way, without conceding key presumptions to their opponents, to the defenders of privilege and coercion.

The question genuine leadership should be able to pose is; do you want full employment? Really? What are you prepared to give up to achieve it? Are you brave enough---and do you care enough---to try a free labour market? Are not the adult citizens of a free society entitled to make their own decisions in such matters? Are we really that frightened a people? Do we not believe in ourselves?

Freedom should not really be such a hard sell. Not when coercion is so costly---in resources, in jobs, in opportunities and in self-respect.


Endnotes

1. Economic Report of the President, February 1998, pages 321--322.

2. Gwartney, J., Lawson, R., Holcombe, R., The Size and Functions of Government and Economic Growth, study prepared for Joint Economic Committee of the US Congress, April 1998.



Appendix

For a comprehensive table of Australian labour statistics from 1965 to the present, plese click here: Labour Statistics