Why industrial relations is Australia's everlasting battle

It's the economic debate that just won't die, even when it's dead, buried and cremated.

The fresh political war over penalty rates, and new ACTU Secretary Sally McManus' controversial comments about the rule of law, are just the latest flashpoints in a century-long and bitterly fought battle between Aussie bosses and their workers, which began when a bunch of sheep shearers gathered under a ghost gum tree in central Queensland in 1891 to strike for better conditions and ended up creating the Australian Labor Party.

Australia's one-of-a-kind industrial - or workplace - relations system has evolved over time into a set of rules, regulations and institutions designed to strike the best balance between the interests of employees and employers.

One worker's wage is, after all, another business person's cost of doing business.

Few disagree there is a need for workers to band together to overcome an inherent imbalance of information and negotiating power between capital (bosses) and labour (workers).

But it is possible for union power to go too far, just as it is possible for employers to screw workers down too far in the name of community standards.

As the Productivity Commission explained in its 2015 review of workplace laws: "Labour is not just an ordinary input. There are ethical and community norms about the way in which a country treats its employees."

Any economics textbook will tell you that if prices are set above market equilibrium, demand for that product will fall.

If wages rise too fast, there will be less demand for labour, leading to higher joblessness.

The commission again: "The challenge for a workplace relations framework is to develop a coherent system that provides balanced bargaining power between the parties, that encourages employment, and that enhances economic efficiency. It is easy to both over and under regulate."

Here's the rub. Because we're dealing with ethical and social norms, that balance is ever evolving. We used to think it was OK to have just one week's mandated annual leave. Maybe one day we'll think it inhumane to have a two-day weekend - not a three-day one.

At various points in our history, the balance of power between capital and labour has shifted.

For much of the early and mid-20th century, Australia was celebrated as a "workers' paradise". High trade tariff walls protected domestic industries - profits and wages alike - from foreign competition.

Joblessness was low, and workers were able to push for super-sized pay rises, usually by drawing on their collective power to strike.

Industrial action reached a peak in the first three months of 1974, when a record 2.5 million working days were lost to industrial disputes, be it strikes or lock-outs.

Higher wage demands from scarce labour fuelled double-digit inflation, which would peak at an eye-watering 17.7 per cent in 1975.

Realising there was a problem, the Whitlam government gave support to a new system of wage indexation.

But joblessness began to climb, from 2 per cent in the mid 1970s to 10 per cent by the early 1980s.

The Hawke-Keating era

In 1983, the newly elected Hawke government endorsed a Statement of Accord with the ACTU under which unions agreed to link pay increases to cost of living and productivity gains, in return for increased spending on social programs.

Meanwhile, the Hawke Government set about dismantling the wall of tariffs protecting Australian industry, exposing industries to fierce international competition.

The power once commanded by Australian industry to generate large economic rents was undercut, as was the ability of workers to lay claim to their share of the super-sized profits with super-sized wage demands.

In this new cut-throat competitive environment, industrial action became more damaging to the economy.

In 1993, the Keating government introduced a new "enterprise bargaining" system, which shifted to a more decentralised wage bargaining system, and also came with a new legal right for unions to strike, under certain conditions.

Strikes had, until this point, always been unlawful in virtually all cases. But rarely had employers ever sought to extract penalties from unions or workers for taking action.

This new right to legally strike came with harsher penalties for illegal strike action. Days lost to industrial disputes fell sharply as a result.

Post-accord era

Three years later, the newly elected Howard government formally abandoned the accord and introduced the first form of individual contracts to the workplace relations system.

A decade later, Howard swallowed his own political poison pill by passing the highly unpopular WorkChoices legislation, which removed a long standing "no disadvantage test", which ensured employers were unable to sign employees up to individual contracts which left them worse off.

The laws only stood for a year or so before the government re-instated, under employment minister Joe Hockey, a "fairness test" to protect workers.

The main principle behind the WorkChoices push was to make the industrial relations system more efficient by drastically reducing - from 4000 plus - the number of state and federal awards governing pay and conditions.

When the newly elected Rudd government abolished WorkChoices, it sought to continue this spirit of reform by securing agreement from state governments to reduce the number of awards down to about 122, which remains the case.

The Labor government's 2009 Fair Work Act also retained some of the WorkChoices-era reforms to strike laws - much to the frustration of unions. Rules requiring unions to hold a secret ballot before being able to legally strike remain in place.

Having promised that WorkChoices is "dead, buried and cremated", the Abbott and Turnbull governments have done little to meaningfully alter the balance of power between employers and employees, besides reinstating the Australian Building and Construction Commission and holding an inquiry into union corruption.

Employer groups still complain the Fair Work Act winds back the industrial relations clock to the pre Hawke/Keating era, with an excessively proceduralistic focus and by forcing employers to collectively bargain with their workers if they request it, whereas this was voluntary under Hawke/Keating. Unions, on the other hand, complain the act does not go far enough.

Where does this leave us today?

The Productivity Commission's 2015 review - which the Turnbull government is yet to respond to - broadly concluded that Australia's industrial relations system is relatively "harmonious" and "not dysfunctional".

"Contrary to perceptions, Australia's labour market performance and flexibility is relatively good by global standards, and many of the concerns that pervaded historical arrangements have now abated. Strike activity is low, wages are responsive to the economic cycle and there are multiple forms of employment arrangements that offer employees and employers flexible options for working."

Most controversially, the commission recommended reducing Sunday penalty rates to Saturday rates, as the Fair Work Commission has just mandated.

Australia's idiosyncratic system of awards still has some "undesirable inconsistencies and rigidities, but they are an important safety net and a useful benchmark for many employers".

And industrial disputes remain at historic lows.

"In the debates about regulation of industrial disputes, there is often a mantra that disputes are harmful to productivity and efficiency, and that there should therefore be more binding constraints on their use," the commission observed.

However, while this was possible, there was little evidence of material effects: "Many disputes are about who gets what portion of a cake, not the quantum of the cake."

Blame for failures to resolve industrial disputes, according to the commission, more often fell at the feet of individual unions and employers, than flaws in the system as a whole.

"In fact, a missing story is that the toxic relationships that can surface between employers and employees are sometimes the result of poor relationship management ??? a key skill for both employers and employee representatives ??? not a fault of the workplace system."

If the overriding goal of an industrial relations system is to balance the interests of workers and employers while resolving disputes quickly, efficiently and fairly - to avoid productivity-harming industrial action - then Australia is not too far from where it needs to be.

Amid the recent slump in wages growth to three-decade lows, it's certainly hard to argue workers have too much power.

When both sides of a deal are equally unhappy, that's usually the sign of a good bargain.

Let the battle continue.

This story Why industrial relations is Australia's everlasting battle first appeared on The Sydney Morning Herald.