Aggregate Supply policies    Goals of AS policies  Productivity v efficiency  Productivity v competitiveness  The impetus for AS policies  BP supply side initiatives  Industry policy  Microeconomic reforms  Labour market reforms  Benefits of LM flexibility  Trade liberalisation  MRPs and  internal stability  MRPs and  external stability  MRPs and equity  MRPs and living standards

Copyright © All rights reserved. Site administered by CPAP and content provided by Romeo Salla    


 Course notes quick navigation

1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11.Factors affecting economy  12  Fiscal/Budgetary policy  13  Monetary Policy   14 Aggregate Supply Policies  15 The Policy Mix

Next page

 1 Introductory concepts 2  Market mechanism  3 Elasticities  4 Market structures 5  Market failures  6  Macro economic activity/eco growth  7 Inflation 8  Employment & unemployment  9  External Stability  10  Income distribution 11  Fiscal/Budgetary policy  12  Monetary Policy  13 Aggregate Supply Policies  14 The Policy Mix


  Why is a more flexible labour market better for the economy?

Generally speaking, as the industrial relations system becomes more flexible it means that each employee's wages and conditions are more closely determined by their individual contribution to the enterprise and the economic conditions facing that enterprise.  If, for example, an enterprise experienced economic hardship, a flexible system would permit the employer and employees to quickly re-negotiate wages and conditions that ease labour costs for the business and protect both the viability of the business and jobs.  Similarly, a flexible system would make it easier for workers and employers to strike deals that link improvements in performance or productivity to wage increases.  For example, a firm may agree to increase wages providing that workers reduce break times during the day.  Further, the freedom to dismiss employees without reason gives businesses the flexibility to more closely tailor employment levels to business activity and to easily remove unproductive employees.  This has clear benefits for productivity and incentives to employ labour, but negative consequences for fairness and equity.  

Some of the arrangements outlined above could and did occur under the more centralised system, but it was a more cumbersome procedure, involving a greater degree of red tape.  In addition, the benefits gained in one industry or enterprise would sometimes flow onto other industries or enterprises, threatening a widespread increase in real unit labour costs.

Overall, a heavily decentralised industrial relations system favours those workers whose skills are in relative short supply because they have bargaining power over their employers.  However, it tends to disadvantage lower skilled employees with less bargaining power, leaving them exposed to employers who are invariably keen to minimise labour costs.  This was the main criticism leveled at Workchoices, which resulted in Australia's labour market more closely resembling a free market than has ever been the case since the early 1900s.  The Labour government reforms through the Workplace Relations Amendment Act and the Fair Work Act have clearly resulted in a small shift in the balance of power back towards employees.  However, as discussed on the previous page, the election of the new Liberal Government in late 2013 should see changes to the industrial relations system in 2014 and beyond.

How does labour market deregulation improve efficiency or productivity?

Labour market reforms generally reduce the real cost of employing labour (i.e. real unit labour costs) for employers and provides for wage rises to be more closely tied to productivity improvements.  Employees as a group, via enterprise agreements, or employees on individual contracts, can strike a deal with their employers to raise productivity in return for wage increases.  Quite simply, if employees gain (financially) from higher levels of productivity at workplaces, there is more incentive to reform or restructure workplace practices and to lift individual (or collective) effort and performance.  In addition, employees are much more accountable under a deregulated system and it increases the ability of each business to more adequately address market pressures (such as increased competition from overseas).  Accordingly, not only is there an increase in productivity over time, but the 'dynamic efficiency' of the labour market, and the economy more generally, is enhanced.

Test yourself Previous page