Should labour markets be flexible? This has been the mantra of the advocates of neoliberalism for several decades, crystallised in the OECD’s Jobs Study reports in the mid 1990s.41 Several of the PC questions in Issues Paper 1 suggest that labour market flexibility should be an outcome of the industrial relations system.
Leaving aside the more polemical aspects of flexibility it is clear that the labour market needs to be responsive to the business cycle. During booms, there are risks of inflation if the rate at which wage increase become excessive, and during recessions there are risks of long-term damage to households if unemployment persists. Both these risks can be minimised if the labour market can effectively adapt to the business cycle. We explore this responsiveness by looking at both hours and wages, the two staples of industrial relations. We show that they both provided employers with considerable flexibility over the 2000s, but that this came at considerable cost to their employees.
In addition, any casual observation of productivity performance by type of productivity shows that the productivity challenges we face are largely not related to labour market flexibility, but deficiencies in more ‘core’ drivers of productivity; management and to a lesser extent worker skills; workplace organisation, worker voice, innovation and capital and technological investment. This is evidenced by ABS data42on productivity, which shows that while labour productivity has recorded strong average annual growth of 1.6% in the last 5 years, capital productivity has on average fallen by 2.8% while multifactor productivity has essentially remained flat recording average annual growth of -0.3%. For this reason, we view a lagging labour productivity growth motivation for the current inquiry to be disingenuous and misguided, a theme we return to below.