Liberal Government’s labour market reforms looking shabbier –– so who’s to blame?

Gerard Jackson
BrookesNews.Com
Monday 14 November 2005

The Liberal Government has found itself on the intellectual ropes over its proposed labour market reform package. Its assertion that reform is “essential in ensuring future economic growth” is looking shabbier by the day along with its other assertion that reform is needed to lift productivity.

The Government does not seem to understand that some of its claims are bogus. Critics have rightly pointed out that the average annual growth of real GDP for the decade 1960 – 1969 was 5.1 percent, per capita growth was 3.1 percent and unemployment averaged about 1.6 percent. Are the Government and its advisers going to argue that labour markets were freer in the 1960s than they are today?

I have tried to impress on Liberal Party officials that their claims are not supported by economic history and economic theory. Julian Sheezel, State Director of the Liberal Party of Victoria, sent me a letter in which he parroted the Government line. When I showed that the claims are false his response was to tell me to take a hike. So much for the idea that Liberal Party officials are genuinely interested in an intelligent exchange of ideas.

It’s important to home in on Sheezel because he a Michael Kroger appointee. And Kroger belongs to a group which is responsible for the lousy economic advice the Liberal Party has been getting on labour market reforms. Hugh Morgan, who recently stepped down as BCA chairman, is another member of this shocking group. His idea of promoting labour market reform is to mindlessly push the line that the minimum wage is 58 percent of the median wage. And that’s it. Grant Belchamber, the ACTU’s chief research officer, would have this bloke for breakfast.

The result of the Government’s unholy mess that economic illiterates like the Krogers and Morgans have done so much to create is that two of the three pillars on which reform is being proposed turn out to be false.

What the Government and its advisers never do is tell people that economic laws really do exist and that one defies them at one’s peril. One fundamental law of vital importance is that if the cost of labour is raised above the value of its marginal product unemployment will emerge. This fact explains why unemployment was so low in the 1960s. That decade could, I suppose, be described as the golden age of Keynesianism in Australia.

Students are taught that Keynesian pump-priming lowers unemployment by raising “effective demand”. They are also taught that attempting to cure unemployment by cutting real wages will cut purchasing power and create even more unemployment. But in fact Keynesianism operates by using inflation to cut real wage rates.

What the economic commentariat, including Mr Hugh Morgan, do not understand is that the Keynesian process does not require a general rise in prices to work. (We can call this the macro approach). The actual process takes place at the level of the firm where the initial effect of monetary expansion –– the heart of Keynesianism –– is to raise the value of the workers’ marginal product in relation to their wage rate. This raises the demand for labour while releasing withheld capacity. (See William H. Hutt’s The Keynesian Episode: A Reassessment [LibertyPress 1979] for a detailed explanation of this process). This helps explains why the usual price effects of a sustained monetary expansion can be delayed for some time.

Therefore Keynesian policies kept unemployment exceptionally low in the 1960s by ensuring that wage rates lagged behind the growth in the value of the workers’ marginal product. Although the monetary policies of the Whitlam Government shattered this pattern it was, nevertheless, unsustainable. Sooner or later it was doomed to breakdown as inflationary pressures became more intense.

Two things are abundantly clear: Liberal Party apparatchiks and string-pullers have really learnt nothing about labour markets and, perhaps worst of all, are not prepared to learn anything. This has left labour market reform proposals looking more threadbare and self-serving with each passing day. For this appalling situation Party members can thank Mr Kroger and his pals.

No wonder the Labor Party is confident that it can keep its promise to repeal any labour market reforms the Government imposes.

Gerard Jackson is Brookes’ economics editor