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Summer 2005

Howard Argument Contradicted by International Evidence

What is the crux of the Government's case for its industrial relations reforms? In statements by senior ministers over the past few weeks, one point comes up repeatedly: that the only way to maintain employment growth is to reduce protection for employees. It's one of those “commonsense claims” that often aren't examined too closely. And there's no evidence to suggest that it's true.

John Howard phrases his argument carefully. "The reality," he told ABC Radio earlier this month, "is that countries like Germany, that have very highly regulated labour markets, have double the unemployment rates of countries like Britain and New Zealand and the United States, that have less regulated labour markets."

Even superficially, this is unconvincing. Labour market regulations in Germany and France are so notoriously rigid that they are virtually irrelevant to the present debate, and Germany has the added burden of having taken on the post-communist economic problems of East Germany.

At the opposite end of the spectrum, the United States, Britain and New Zealand provide notoriously few protections to employees -- with, as we'll see, not especially outstanding results. What's happening between these two extremes is much more significant.

But there's a more important problem in the way Howard argues his case. Unemployment rates are a highly unreliable indicator for comparing the health of labour markets between countries. They are fatally flawed because they can leave out a large group of potential employees: those individuals who have dropped out of the jobless statistics.

A much more reliable measure is the proportion of the working-age population in each country who have a job. The OECD provides these figures for each of its member countries.

The OECD has also developed an index of employment protection, designed to measure "the strictness of employment protection legislation" for each of these countries.

According to the organisation, the index takes into account "regulations governing the terms and conditions of permanent contracts in case of individual dismissals; additional provisions in the face of mass lay-offs; and regulations governing the possibility of hiring on temporary contracts".

When we match up the two sets of figures -- employment rates and the job protection index -- for Australia and 16 comparable OECD countries an interesting pattern emerges, and it doesn't offer much support to the Government. Australia is already in the bottom half of the job protection range -- 1.5 in an index that ranges from 0.7 (for the US) to 3.1 (Spain), and we're a shade above average on the employment scale (69.5 per cent). The four countries below us on the index -- the US, Canada, Britain and New Zealand -- do have higher percentages of working-age people in employment. But so do five other countries with higher levels of employment protection: Switzerland (77.4 per cent in employment), the Netherlands (73.1), Norway (75.6), Sweden (73.5) and Denmark (76).