The Australian Conciliation and Arbitration Commission is the main obstacle to much-needed reform of industrial relations according to the author of this essay. A series of High Court interpretations of the Commission’s original mandate and the Commission’s own aggressively self-protective actions have lead to stronger, more militant unions, higher than necessary government expenditure, and a host of ‘interested parties’ who all depend for their existence and livelihood on the survival of the Commission.
The only hope for reform is to abolish the commission altogether.
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I. INTRODUCTION
The report of the Committee of Review into Australian Industrial Relations Law and Systems (the Hancock committee) is going to be the fundamental document in the discussion about reforming industrial relations. But by its nature the Hancock report does not present any radical analysis or suggestion for reform. Nor does it face up to the shambles which the centralised wage fixation system has become.
In particular, it cannot face up squarely to the central principles role in the Australian industrial relations system played by the Australian Conciliation and Arbitration Commission, the sacred cow of our politico-economic system.
As paid-up life members of the industrial relations club, the mutual admiration society of practitioners and experts in industrial relations, the three members of the committee necessarily start from the common presumption that the centralised system of wage-fixing under the Commission has worked pretty well and is in need of only minor reform. The members of the Committee are all deeply versed in the system over many years and enjoy a considerable degree of deserved public esteem. The Chairman, Professor Keith Hancock, is Vice-Chancellor of Flinders University in South Australia and has been a student of and authority in industrial relations all his professional life for many years. Mr George Polites was for many years chief employers’ representative to the Commission, and Mr Charlie Fitzgibbon is a former senior Vice-President of the Australian Council of Trade Unions, and for years secretary of the Waterside Workers Federation.
It can be argued that the system as it has grown up has become hopelessly corrupt, in the sense of being self-interested, and that the main obstacle to the reform of industrial relations in Australia is the Arbitration Commission itself.
The Arbitration Commission, by intervening in and regulating labour markets in ill-considered and ill-analysed ways, has done untold damage to the Australian economy. It has set wages to placate strong unions, it has become the major cause of poverty and unemployment, and, by establishing the apparatus of strict fiat, arbitrates between competing groups and sometimes takes the role of preventative of strike action.
The Arbitration Commission has acted always to preserve its own supremacy and prestige, and in so doing has effectively sabotaged the growth of collective bargaining procedures or workable decentralised labour market arrangements. Any approach to reform should have as its purpose the abolition of the arbitration system in its present form and the establishment of alternative arrangements that give some promise of operating to lessen strikes, boycotts, bans, limitations and other industrial conflict, and allowing the labour markets to work smoothly and flexibly.
The system has reached such a state of ineffectiveness and has strayed so far from the effective establishment of orderly industrial relations in the context of the present state of the law it is now the case that the most effective first step towards reform and the breaking down of the stronghold of the industrial relations club would be the abolition of the Arbitration Commission. It has degenerated beyond cure in its present form.
The aim of such reform, of course, should be to allow unions to concentrate on the protection of their members, especially the weak, while allowing the economic growth and the minimisation of unemployment.
One of the great myths of the present system is that there is no alternative to the Arbitration Commission federally and to the various other federal and State tribunals. In fact the constitutional head of power — Section 51(xxxv), which is the authority for the Conciliation and Arbitration Act — in no way requires anything like the present system. Nor need an alternative market-oriented system be disorderly and chaotic.
The period of disturbance and rapid wage growth that followed the abandonment in 1981 of wage indexation for increases in the Consumer Price Index is best seen as the result of an attempt by the Commission to sabotage possible alternatives to its central role. To this extent the Commission can be held largely responsible for the severity of the 1982 recession and record unemployment.
Naturally, the Arbitration Commission and the industrial relations club will fight strongly to preserve their central role, their importance, prestige, and, of course, incomes. The major concern of the Commission is to preserve its own power, and it has put this above the health of the economy and industrial peace in the long term. Every major case before it has manifested this imperative.
II. THE ‘INTERESTED’ PARTIES
In every matter that appears before the Australian Conciliation and Arbitration Commission, there are, as if in a real court, ‘parties’ who argue their cases. These will usually be the employers on one side, the unions on the other, and the Commonwealth and often State governments representing their interests or views. But of course it is immediately obvious that these parties do not exhaust the possible lines of argument on the merits of a particular wages or conditions claim. The unemployed are not present as a ‘party’, nor even is the social welfare lobby; still less is there present any genuine or self-styled representative of the public interest.
Number One
Perhaps the Commission itself might lay claim to this latter role. But the truth of the situation is that there is always one party before the Commission at all its hearings that is never explicitly named or referred to, and that is the Arbitration Commission itself. In every case the interests of the Commission are represented, and the form and nature of the final decision takes account of those interests. These are, of course, primarily the survival of the role and influence of the Commission, and second the expansion of the Commission’s pre-eminence in the labour market in Australia.
The tacking back and forth before prevailing winds of government policy, trade union militancy, and economic events by the Commission would be difficult to explain were it not for the fact that the Commission’s own interests are always relevant to the interpretation of its actions. There has been a degree of inconsistency in the actions and decisions of the Commission that cannot be adequately explained otherwise, either by changing circumstances, or by changing personnel, or by changing interpretations of what is happening in the Australian and world economies.
Perhaps the most obvious example of the Commission’s trimming is its series of decisions related to the existence of ‘earnings drift’. Earnings drift is a concept itself peculiar to the Australian arbitration system, and refers to the divergence of actual earnings above (never below) the award rates set by the Commission. From time to time, as a result of pressures in the labour market and successful bargaining on the firm and industry level, wages and salaries tend to increase faster than award rates. This might seem an unobjectionable development in normal times, since it would tend to establish a dual system whereby the Commission’s awards operated as a structure of minimum wages. But the reality, of total control of wages by granting increases that lift the award rates to something like the prevailing market rates. That is, it has consistently chased the market so as to give the impression that it is in control of the market rate.
On the other hand, in times of weakness in the labour market the Commission may accept that the rate of increase of award wages may be limited, but it is ready to accept devices such as wage indexation, which ensure that it continues to be seen by many in the community as playing an active and central role in granting wage increases and maintaining living standards in the face of opposition from employers and sometimes from governments. This was evident during the period of wage indexation between 1975 and 1981.
The Unions
The experience of indexation in the period 1975-81 is an excellent example of this, and of the way the Commission ignores the interests of the unemployed. This whole indexation experiment amounted to the deliberate maintenance of real wages set at the level of the late seventies wages explosion in the face of high unemployment. There is no doubt that in the years of recession wage levels would have fallen back even more substantially in real terms if it had not been for the Commission. The unions were not in a position to mount effective campaigns to raise money or to keep up with price inflation, and without the help of the Commission union leadership would have been subjected to increasing pressure and dissatisfaction from their members. Instead, however, they were given an easy run by the Commission, as the Commission was resentful or partial in the actions of the Arbitration Commission, with no attempt to explain the reasons for rising unemployment.
This experience suggests that the unions themselves have an ambiguous attitude towards the arbitration system. On the one hand, they benefit from the Commission’s willingness to maintain or raise award wages and conditions. On the other hand, the existence of a centralised arbitration system tends to weaken the unions’ own organisational strength and bargaining power at the enterprise and industry level.
The system encourages union leaders to rely on the Commission rather than on the mobilisation of their members. In doing so it promotes a form of industrial relations in which disputes are settled through legal and bureaucratic processes rather than through negotiation between employers and employees.
The result is a system in which the Commission acts as an intermediary between organised labour and employers, rather than allowing the parties themselves to negotiate outcomes. This tends to reinforce the central role of the Commission and the industrial relations bureaucracy while discouraging the development of flexible and responsive labour market arrangements.
In the long term this dependence on arbitration may undermine the vitality of trade unions themselves. If union leaders increasingly look to the Commission to deliver improvements in wages and conditions, they may neglect the task of strengthening their organisations and representing the interests of their members in the workplace.
For this reason the arbitration system does not necessarily serve the long-term interests of organised labour. While it may deliver short-term gains through centralised wage decisions, it risks weakening the institutional capacity of unions to operate effectively in a decentralised labour market.
The unions have, therefore, a dual interest in the system. On the one hand, they benefit from the existence of the Arbitration Commission as a means of achieving wage increases and improvements in working conditions without the need to organise and sustain prolonged industrial campaigns. On the other hand, the very existence of such a system reduces the incentives for unions to develop strong workplace organisation and effective bargaining structures.
This paradox has important consequences for the evolution of industrial relations in Australia. The arbitration system encourages unions to look to legal and bureaucratic mechanisms rather than to the mobilisation of their members. As a result, the system tends to promote a form of industrial relations that is heavily institutionalised and dependent upon official processes.
At the same time, the central role of the Commission discourages the development of direct bargaining between employers and employees. Instead of negotiating agreements that reflect the particular circumstances of individual workplaces or industries, the parties are encouraged to rely on general wage decisions handed down by the Commission.
The result is a system that is both rigid and unresponsive to changing economic conditions. Wage levels and employment conditions are determined through centralised processes that may bear little relation to the realities of particular industries or enterprises.
Such rigidity can have serious economic consequences. When wages are set at levels that do not reflect productivity or market conditions, the likely outcome is reduced employment opportunities and increased economic inefficiency. In this sense the arbitration system may inadvertently contribute to higher levels of unemployment and slower economic growth.
The Employers
The employers also have a complex relationship with the arbitration system. On the surface they often criticise the Commission for granting excessive wage increases or imposing restrictive conditions. Yet in practice many employers have adapted to the system and have come to rely on it.
For some employers the arbitration system provides a convenient means of resolving industrial disputes without direct confrontation with unions. By referring matters to the Commission they can avoid the costs and uncertainties of prolonged negotiations or industrial action.
At the same time, centralised wage fixing may reduce competitive pressures between firms. When wages and conditions are largely determined by awards handed down by the Commission, individual employers have limited scope to negotiate arrangements that reflect their own productivity levels or business circumstances.
This can create a form of implicit cartel among employers, in which competition through labour costs is minimised. While such an arrangement may provide short-term stability, it can also discourage innovation and efficiency within industries.
Moreover, employers who might otherwise wish to negotiate flexible arrangements with their workforce may find themselves constrained by award provisions and regulatory requirements established through the arbitration system.
Thus, although employers frequently criticise the Commission, many have become accustomed to operating within its framework and may be reluctant to support reforms that would require them to assume greater responsibility for direct negotiation and dispute resolution.
In these circumstances the arbitration system tends to perpetuate itself through the mutual interests of the parties involved. The unions, employers, and the Commission itself all derive certain advantages from the continuation of the existing arrangements.
This mutual dependence helps explain why the system has proved so resistant to reform. Even when its shortcomings are widely recognised, the institutional interests of those who participate in the system create strong incentives to maintain the status quo.
The arbitration system therefore functions not merely as a mechanism for resolving industrial disputes but also as an institutional structure that shapes the behaviour of unions, employers, and government authorities.
Over time this structure has encouraged the development of a highly centralised and bureaucratic form of industrial relations. Decisions about wages and working conditions are frequently determined through formal hearings and legal procedures rather than through negotiation between the parties directly concerned.
Such a system inevitably generates a large body of specialised practitioners—lawyers, advocates, consultants, and officials—whose professional activities depend upon the continuation of the arbitration process.
The existence of this “industrial relations club” further strengthens the inertia of the system. Those who derive their livelihood or professional status from the arbitration system have little incentive to support reforms that might reduce its importance or replace it with alternative arrangements.
For these reasons the arbitration system tends to persist even when it no longer serves the broader interests of the economy or of industrial peace.
III. THE PUBLIC INTEREST
The most striking feature of proceedings before the Arbitration Commission is the absence of any effective representation of the public interest. While employers, unions and governments appear as parties to cases before the Commission, the interests of the community as a whole are rarely articulated in any systematic way.
Yet the decisions of the Commission have consequences far beyond the parties immediately involved. Wage determinations affect the level of employment, the rate of inflation, the competitiveness of Australian industry and the overall performance of the economy.
In principle governments might be expected to represent the broader public interest in these proceedings. In practice, however, governments are often influenced by short-term political considerations and by the pressures exerted by organised interest groups.
As a result the interests of those who are not represented in the hearings—particularly the unemployed and potential future employees—receive little attention. Decisions that maintain or increase wage levels may benefit those who already have jobs, but they may also reduce the opportunities available to those seeking employment.
The structure of the arbitration system therefore tends to favour organised groups with the resources and incentives to participate in Commission proceedings. Those without such representation must bear the consequences of decisions in which they have had no voice.
In this sense the arbitration system may operate to the disadvantage of the broader community. By concentrating decision-making authority within a specialised institutional framework, it reduces the likelihood that the wider economic and social implications of wage decisions will be adequately considered.
The interests of the unemployed provide perhaps the clearest example of this problem. Individuals who are unable to find work have no organised representation before the Commission. Yet the level at which wages are fixed can have a decisive influence on their prospects of obtaining employment.
If wages are maintained at levels that exceed the productivity of some workers, employers may be unwilling to hire them. The result is that those with lower skills or limited work experience may be excluded from the labour market altogether.
In such circumstances the arbitration system may inadvertently contribute to the persistence of unemployment. While protecting the wages and conditions of those already employed, it may simultaneously reduce opportunities for those seeking to enter the workforce.
This outcome illustrates a fundamental weakness of the system. By focusing primarily on the claims of organised groups, the Commission may neglect the broader consequences of its decisions for the economy as a whole.
A system that aims to serve the public interest must take into account not only the demands of those directly involved in industrial disputes but also the interests of those whose livelihoods are indirectly affected by wage determinations. Without such consideration, the arbitration process risks producing outcomes that are socially and economically harmful.
These considerations suggest that the arbitration system is ill-suited to balancing the complex and often conflicting interests involved in wage determination. Because the Commission operates within a legalistic framework and responds primarily to the arguments presented by the parties before it, its decisions may fail to reflect the broader economic realities facing the community.
In particular, the system tends to emphasise distributive questions—how income should be divided between employers and employees—rather than the productive conditions that determine the size of the economic pie in the first place. Issues such as productivity, competitiveness and economic growth may therefore receive insufficient attention in the Commission’s deliberations.
The centralised nature of the system also limits the capacity of individual firms and industries to adjust wages and working conditions in response to changing circumstances. Instead of allowing flexible arrangements to emerge through negotiation, the arbitration process imposes uniform standards that may not suit the diverse conditions of different sectors of the economy.
Over time this rigidity can undermine the efficiency and adaptability of the labour market. Employers may find it difficult to respond to fluctuations in demand, technological change or shifts in international competition. Workers, in turn, may encounter fewer opportunities for employment or advancement in industries that are unable to adjust their cost structures.
These problems highlight the need to reconsider the institutional foundations of the Australian system of industrial relations. If the objective is to promote both economic efficiency and industrial harmony, alternative arrangements that allow greater flexibility and decentralised bargaining may provide a more effective framework than the existing arbitration system.
