Friday 26 March 2010

Why people kept jobs in this recession: Uh oh! Here we go again...

So, the name of the game is workplace flexibility. Why I am not surprised?

The esteemed Business Council of Australia asks for continued "support FLEXIBILITY in workplace relations policy, given its importance to the economy". [1]

Surprisingly, the opposition leader, Mr. Abbott, agrees with the BCA: "The phrase Work Choices is dead. No one will ever mention it again, but, look, we have to have a free and FLEXIBLE economy." [2]

After being credited with saving Australia from an economic collapse and devastating unemployment, the RBA seems to recognize that this wasn't quite so: "This outcome [low unemployment] is partly explained by the greater degree of FLEXIBILITY in employment and wage-setting practices, compared with those in the 1980s and 1990s recessions". [3]

And even our leftist journalists, as Ross Gittins, seem to be warming to this flexibility thing: "Why did employers respond to the downturn so differently this time? The Reserve says the first reason is because they could: reforms of the labour market going back even before the Keating government's shift of bargaining to the enterprise level have made relations more FLEXIBLE, thus making lesser-of-two-evils style deals more possible". [4]

Will surprises never end?

The bureaucrats.

Let's start with the RBA:

"This outcome [lower unemployment] is partly explained by the greater degree of flexibility in employment and wage-setting practices, compared with those in the 1980s and 1990s recessions. Following a succession of reforms over recent decades, rigidities in the labour market were significantly reduced. THIS MADE IT EASIER FOR FIRMS AND EMPLOYEES TO NEGOTIATE WORK AND PAY ARRANGEMENTS THAT ENABLED FIRMS TO PRESERVE JOBS during a period of subdued activity, partly by reducing average hours worked. While lower hours reduce compensation per employee, they avoid the significant social and economic costs associated with unemployment, including detachment from the labour force, skill atrophy and reliance on government assistance." [5]

So, this miracle was the product of a mutually beneficial agreement between employees and employers: before sacking their staff when the downturn started, employers consulted them and offered them a reduction in working times/wages as an alternative.

After a negotiation, employees decided to take on the offer.

This might sound absurd to anyone who has actually worked for a living, but I am sure the RBA has the statistics at hand to prove that these negotiations took place.

Or maybe not.

The Journo.

This might be why Mr. Gittins found it necessary to introduce his own explanation: "If you work 38 hours a week and I put you onto a four-day week, that means you change categories from full-time to part-time". [6]

So, it wasn't so much a negotiation, but a decision coming from "above": you go part-time or "you're fired".

Regardless, old Ms. A was working full-time until the crisis, was forced to accept a part-time, but she at least is still working. Everyone is happy. And this is what the RBA and ABS say, right?

Not quite. The exact same result (almost stable employment) could be achieved if old Ms. A was given the flick and remained unemployed, but her position was taken up by young B, who was unemployed, but is now replacing Ms. A, only on a part-time or even casual basis, on lower wages: less hours worked, but the same number of people employed(*).

Mr. Gittins recognizes this possibility, but draws a questionable conclusion from it: "reforms of the labour market (...) have made relations more flexible, thus making LESSER-OF-TWO-EVILS style deals more possible". [7]

Maybe Mr. Gittins should ask Ms. A her opinion: I can't see why this is so hot for her. In fact, I don't think young B is doing that well, either: part-time and lower wages.

On the other hand, I can understand why Ms. B's former employer is so enthusiastic about this. This whole thing might well be the lesser of two evils for Ms. A and young B, but it sure sounds good to their employer!

Perhaps is that just me?

Evidence to the contrary.

Well, not really. Other media and journalists have focused on this topic:

"Announcing its latest first half profit - a record $100 million - the retailer David Jones confirmed that a variation on this strategy [replace full-time workers with part-time/casuals] was the key to its profits during the downturn. DJ's chief executive Mark McInnes said the company hasn't employed a single full-time retail salesperson since 2004 - so it's been able to adjust the working hours of it store staff to match sales volumes". [8]

Imagine that Ms. A was sacked last June, and young B was hired around that time. They could have been working for DJ!

Academic circles, even in Australian limestone universities, have reported on this in releases widely available to the public:

"During the global financial crisis workers who stayed in their jobs did not reduce their working hours, despite widespread government and commentator claims that cuts in hours had helped stem job losses during the downturn. (…)The study found no evidence to support the contention that job losses have been mitigated by de facto work-sharing. The most significant change in work hours was experienced by those who changed jobs. Workers who entered new jobs during the study period were also worse off in other ways, the researchers found. Some 35 per cent of those who changed jobs experienced a cut in pay. Workers who entered the job market or who changed jobs in the past year were also more likely than other workers to enter into precarious forms of employment, such as casual jobs without entitlements to paid leave." [9]

A copious body of scientific literature, analyzing both the Australian and overseas cases, has been produced since at least 10 years ago, warning of the consequences of this "workplace flexibility":

"Since the beginning of the 1990s Australia has experienced a gradual but far-reaching process of labour market deregulation. (...) Labour market deregulation is amplifying existing trends to growth in precarious employment, wage dispersion and the development of a low-pay sector amongst full-time employees". [10]

Even private sector experts have warned that this phenomenon is real and is affecting the Australian workforce. [11]

And, in spite of the evidence, we find business circles, political parties, governments and regulators remain oblivious to the noxious effects of these policies.

It's understandable that business interests, and their direct promoters in Parliament, have incentives to ignore the devastating effects these policies have for a large (maybe the largest) proportion of the population. In other words: they can't hear, because they don't want to.

It's much less understandable that regulators, bureaucrats, and journalists still repeat the same mumbo jumbo as if it was the truth revealed by god on Mount Sinai.

Regulators and bureaucrats are supposed to be public servants, and they are failing in their duty to serve the whole public. Maybe this is a product of ideological blindness. I would like to be proven wrong here, but I am afraid I don't trust their competence.

But it's in Mr. Gittins' case, that this becomes particularly disappointing, as I am sure he means well. I would not like to use the words "gullibility", and "sloppiness" in relation to Mr. Gittins, but what alternative is left?

PS: I would advise Australian workers to learn yoga, not only to learn how to contort their bodies (and maybe, just maybe, get a job in the Cirque du Solei), but also for the ability to withstand deprivation.

NOTE: (*) Correction added, with thanks to Sean Carmody.


[1] BCA President Graham Bradley's interview on the Sky News 'PM Agenda' Program. BCA. 05/03/2010.

[2] Jacob Saulwick. Forgive my sins and let me start anew, leader says. SMH. 02/12/2009.

[3] Michael Plumb, Mark Baker and Gareth Spence. The labour market during the 2008-2009 downturn. RBA Bulletin - March Quarter 2010.

[4] Ross Gittins. Why people kept jobs in this recession SMH. 27/03/2010.

[5] Plumb, Baker and Spence. Op. cit. page 2.

[6] Gittins. Op cit.

[7] Gittins. Op cit.

[8] Stephen Long. Employment myths cloud Social Trends Survey. ABC. 25/11/2009.

[9] Australia at work: in a changing world. Workplace Research Centre, The University of Sydney. 26/11/2009.

[10] Iain Campbell, Peter Brosnan. Labour market deregulation in Australia: the slow combustion approach to workplace change. International Review of Applied Economics, 1999, vol. 13, issue 3, pages 353-394

[11] Australia's underemployment rate growing: experts. SMH 26/03/2010.


  1. If Ms A. is out of a job and Ms. B has changed jobs, reducing hours, wouldn't hours worked and number of people employed both be down?

    To give the RBA the benefit of the doubt, I would have thought that they would have thought reduced hours is not a case of "everybody happy", more the lesser of two evils compared to losing a job completely.

    Of course, that doesn't take away from the key issue you identify: there seems to be an ongoing structural shift to casual/part-time work as opposed to ebbs and flows along with the economic cycle.

  2. I see what you mean. The (unstated) idea is that B was unemployed. So what the whole thing achieves is to change the identities of those employed and unemployed (plus shorter times/less dough)

    Thanks for that. I'll fix that up.

    But I am not so forgiving with the RBA. First, this is not something new, that has never been commented before (although I would gladly take the credit!): they have been warned (there is all that literature on the effects of workplace flexibility on employment I mention here).

    Second, during the 1980s the Federal Government reduced the length of the work week (to 38 hours). This somewhat cushioned the loss of jobs. In the RBA paper and in Ross Gittins' article this is mentioned. So, couldn't the RBA propose it to the Federal Government?

    In any case, there is a conference on these matters scheduled for next week (if I'm not mistaken). I don't think all the singing and dancing those academics and researchers will do will mean diddly squat to the RBA.

    But, trust me on this, no one would be happier to be proved wrong.

  3. Thanks Aussie Magpie. This quote was quite enlightening.

    "Labour market deregulation is amplifying existing trends to growth in precarious employment, wage dispersion and the development of a low-pay sector amongst full-time employees."

    So what do you think explains why Australia didn't go into recession when countries with more flexibility like the US and parts of Europe did?

  4. John,

    Thanks for your comments.

    Regarding your question: I'm no expert, John. So, you better take my opinion as just that: opinion.

    There is the fact that Australia seems to be shifting from the Western sphere of influence, towards the China/India one. It seems the advocates of the decoupling Australia/US theory were right.

    This has allowed a continuous growth in the primary sector (mining). During the post recession, this shift was already manifesting itself.

    And there is also the Federal Government/RBA intervention to prop up aggregate demand. If you like, they successfully repeated the Keynesian "emergency room" prescription to keep the capitalism patient alive.

    How long this patching up will last is anyone's guess, but I believe it will be temporary.

    For one, we have already discussed the new moves by local capital to extract greater profits (through taxation and now industrial relations reform). This will have effects on aggregate demand and this form of capitalism is particularly dependent on aggregate demand.

    We are also sitting on top of a housing bubble, which is very dependent on the capacity of mortgagors to service their debt. The RBA policy of deflating the bubble seems quite risky, to say the least.

    This bubble could explode at any moment: next month or within 10 years.

    But even within the mainstream commentariat there is concern that the triggers of this last crisis were not addressed:

    Nightmare scenario: too big to fail, too quick to forget, by Ian Verrender. SMH. March 27, 2010

    And there is the thing that the rest of the world is not yet out of the woods (even if we in Oz were near).

    At the risk of being tiresome and repetitive: I think we are in for some hard times.

    These are my two cents worth, anyway.

    PS: Good luck in the conference.

  5. You wrote: "It’s interesting how the period 70s-80s keep appearing everywhere I look at." at Stubborn Mule. I kept saying the same thing, and then I started to read about postmodernism. This is what happened in the 70's and 80's - and it affected everything.