What economics tells us about labour law

Harvard labour economist Richard Freeman recently visited Australia, and has written an article complaining about its labour law on VoxEU: From fair-go to rip-off: Australia’s new labour code. Freeman may well be right - but the current conservative government appears doomed at the forthcoming polls, so some roll-back is likely. What really caught my eye, though, was his comment about what economics tells us about labour law:

Whoever gets elected this fall should scrap Workchoices and take the opportunity to develop a truly modern labour code. Economics offers four principles for such a code.

First, the law should encourage efficient bargaining – that is, bargaining that “leaves no money on the table”. Per the Coase theorem, this means clear and simple regulations so that labour and management can bargain for maximum efficiency even as they fight over distribution. A few basic rules regarding the property rights to employment and workplace decisions in place of rules that are hundreds of pages of micro-managed dos and don’t dos.

Second, economics suggests keeping government officials out of the workplace bargaining. Hayek may have been a curmudgeonly conservative terrified by a now obsolete socialist threat, but he was right about lodging decisions with the people who have local information (subject to some concern about externalities). We want workers, unions, and management to have the scope to experiment with alternative contract provisions. We would encourage diversity on the notion that “one shoe does not fit all feet.” If your firm wants to include a clause in a contract that provides a remedy for harsh, unjust, or unreasonable dismissal of workers, you should have the right to do so.

Third, we would strive that the parties covered by the code agree on the rules rather than seek to impose them without major public support. If there is one lesson from human resource management, it is that workers participation in decisions -- their voice at workplaces -- is critical for a healthy and productive workplace. The Workchoices legislation is based on an outmoded control-and-command view of how workplaces operate. It is alien to the world in which firms operate on the basis of partnerships, group incentives, team production, profit-sharing, and employee-share ownership.

Fourth, economics suggests that any labour code build in some insurance for the protection of workers, even though such insurance may cost a bit of economic output. How much insurance to give workers is a matter of political debate and the weighing of alternative costs and benefits. The more leftwing view can be represented by the following statement: “Perhaps modest economic inefficiency is cost worth paying for if it prevents blatantly unfair behaviour by employers”. The rightwing view is: ”Perhaps some unfair behaviour by some employers is cost worth paying if it gets more jobs”. Different analysts can subscribe to either of these statements and remain true to the economics of weighing benefits and costs.

Three of his four points sound to me like a description of the British industrial relations system. We only fall down on the third - employee voice. Yet do economies like Germany, with Works Councils rampant, really have a better performing labour market?

Comments

[Meh]

1) "It is alien to the world in which firms operate on the basis of partnerships, group incentives, team production, profit-sharing, and employee-share ownership."

That doesn't sound like a call for work councils, per se. You can argue that some of these features are more present in the UK than Germany and this offsets the work councils...

2) Define "better performing labour market"?
In particular, what's your preferred measure that represents the functioning of the "labour market" as opposed to the general functioning of the economy? Or are we just comparing at a 10000 foot level?

It's also hard to strip out the distortions created by cultural issues. For example, German women have tended to drop out of the labour market after motherhood much more than British ones, but it's arguable whether that is directly a result of the industrial relations system. But it makes a massive difference in the number of part time workers available, which presumably could be construed to oil the wheels of the British labour market?

[New Economist]

Meh, on 'better' labour market performance I meant the usual - the employment rate and unemployment rate. The UK has a higher employment rate and lower unemployment rate than Germany. Labour productivity per worker is about the same, though German hourly labour productivity is higher than the UK.

My point was that having a whole swag of 'voice' mechanisms - including Works Councils - isn't much use if you don't have a job! Scandinavian economies, on the whole, manage to combine employee voice (including high unionisation rates) and good labour market performance. But not all European countries do, and the presence of one need not imply the other. In Britain there are fewer formal voice mechanisms, but it is easier for people to find another job if they don't like it ('exit', to use Hirschmann's term).

As to profit sharing, group incentives etc, these certainly have a place. But I am not aware of good international comparative data, so don't know how the UK fares vs the rest of Europe. Richard Freeman has recently co-written a paper on this in the UK which you may find of interest: Doing the right thing? Does fair share capitalism improve workplace performance?

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