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The bright side of non-competitive IR federalism

Alexander Philipatos | 24 April 2014

alex-philipatosClassical liberals favour competitive federalism over national laws because competition between jurisdictions makes it harder for government to grow. If the tax or regulatory arrangements are more favourable in one state than another, citizens or corporations can, at a cost, vote with their feet and move to the lower tax and regulation jurisdiction.

Economically speaking, however, this could foster inefficiency. Having businesses relocate to take advantage of more favourable tax regulations or labour laws can divert economic activity away from where the returns are highest. It can also create mini economies based not on where costs are lowest, but where regulations are most favourable, with overall effect of increasing costs and lowering welfare.

In theory, competitive federalism can deliver smaller government, greater freedom, and more efficient allocation of resources. But in practice it can be simpler and more efficient to have some national laws. Given the pitfalls and complexities of Australia's Byzantine industrial relations system, it can make more sense to have national workplace laws.

The Rudd-Gillard government's award modernisation process has produced mixed results. It has simplified some 3,700 state and federal awards down to just 122 modern federal awards. Now that all states' private sectors are subject to the national laws, these awards apply to almost all businesses in the private sector.

For many businesses operating within one state and across state borders, the new system is simpler. There are fewer awards to adhere to, and each of those awards is easier to understand. Compliance costs are lower for businesses under the new national system.

On the other hand, minimum wages and penalty rates were hiked when the new awards were created, and this increased costs for many businesses.

The Howard government's WorkChoices legislation used the corporation's power in the Constitution to override state workplace regulations. Labor relied on this ruling to apply its Fair Work reforms nationally.

Arguably, the negative aspects of award modernisation would not have been felt nationally had the High Court sided with the states over the Commonwealth in the WorkChoices case. But we would still have a much more convoluted industrial relations system.

Had award modernisation simplified the various awards to the least costly and onerous award, the process would have been positive. As the law now stands, the objective is to relax national minimum wages and penalty rates, rather than revert to the myriad complex and inefficient state and federal awards.

Alexander Philipatos is a Policy Analyst at The Centre for Independent Studies.