Decentralisation of the Labour Market (HSC SSCE Economics): Revision Notes

Decentralisation of the Labour Market

Overview of Australia's industrial relations shift

Australia's industrial relations system has experienced a major transformation over recent decades. The country shifted from a highly centralised wage determination system that operated for most of the 20th century to a system where wages are now mostly determined through enterprise bargaining at individual businesses or workplaces. This change represents a move away from non-market forces toward greater reliance on market forces when setting wage outcomes.

Defining centralised and decentralised labour markets

Historical development of wage determination in Australia

In the early 20th century, Australia established a centralised wage determination system. This reflected the national culture of fairness and the widespread belief that workers should receive equal pay for equal work. The system also reflected the strong influence of the union movement, as most Australian workers belonged to a union during this period.

From 1904 to 1956, the national industrial tribunal was known as the Commonwealth Court of Conciliation and Arbitration (later renamed the Fair Work Commission). Similar tribunals also operated at the state level. Governments believed that allowing market forces to set wages would result in underpaid and exploited workers. Instead, they preferred a tribunal system that could deliver fairer and more consistent outcomes through a formal process where employer and union representatives presented arguments for or against wage increases or changes to working conditions.

The spectrum of wage determination systems

The diagram above illustrates the spectrum of wage-setting mechanisms from most centralised to most decentralised:

• Single national wage case (most centralised): One wage decision applies to all employees
• Industry or occupation-based awards: Wages set according to industry or occupation
• Enterprise bargaining: Wages negotiated at the workplace or company level
• Individual contracts (most decentralised): Wages negotiated between individual employees and employers

Arguments supporting decentralisation

Improved resource allocation and structural change

A decentralised system promotes more efficient resource allocation and facilitates structural change in the economy. More efficient firms can afford higher wages and therefore attract higher-skilled employees. In contrast, centralisation can slow structural change. When the same wage increases apply across all industries, it becomes difficult for more profitable and growing industries to attract highly skilled labour from less profitable and declining industries.

Enhanced productivity incentives

Decentralisation can promote productivity improvements. It gives employees direct incentive to work more efficiently because they can be rewarded through workplace-level arrangements for their productivity gains. Under a centralised wage determination system, employees in individual workplaces may lack sufficient incentive to implement productivity improvements if they are already guaranteed a uniform wage increase, regardless of whether they improve their skills or adopt more efficient work practices. Higher productivity also helps reduce inflationary pressures in the economy.

Greater wage flexibility during economic shocks

Wage flexibility helps the labour market adjust when negative economic shocks occur, which can keep unemployment lower. If a recession reduces aggregate demand for goods and services (decreasing labour demand), a flexible labour market can allow wages to fall while keeping people employed. This might minimise job losses or reductions in corporate profits during downturns.

Arguments against decentralisation

Increased wage inequality

Decentralisation tends to increase inequality through greater "wage dispersion". Workers performing the same job in different industries or firms may receive different pay and working conditions. This particularly affects low-skilled workers, who are easier to replace, may be less familiar with their workplace entitlements, and are less able to demand pay rises from their employers.

Imbalances in bargaining power

Enforcement challenges

Enforcing wage entitlements becomes more difficult under a decentralised system. In recent years, widespread underpayment of workers has emerged across many Australian industries. In 2023, Fair Work Australia secured undertakings to address underpayments from a wide range of businesses, including $32 million from Suncorp and $4 million from the University of Technology, Sydney. Even the Reserve Bank acknowledged over $1 million in underpayments in 2023.

Loss of policy tool for economic management

Centralised wage determination provides an additional policy tool for government to influence labour market outcomes and achieve economic policy goals such as lowering inflation. For example, government could restrain wages growth to avoid cost-push inflation, or trade off a tax cut in exchange for lower wage increases.

While economists generally favour more flexible and decentralised wage determination systems, the OECD Employment Outlook (2019) highlighted that some degree of centralisation allows governments to target labour market policies more effectively, including retraining, improving skills, adopting new technology and protecting employee rights.