Economic Growth and Higher Productivity: Some Union Solutions

Thank you for the invitation to address this luncheon today.

This is the first time I have spoken at a Committee for Economic Development of Australia event since I was elected ACTU President in the middle of last year, but I’ve long been aware of the important role that CEDA plays in fostering informed discussion about the big policy issues that shape Australia’s economic and social development.

I appreciate this invitation indeed, because it is vital to Australia’s future that working people are represented and heard when we talk about issues that will impact on them, such as economic growth.

The ACTU is the peak body of a movement that directly represents almost 2 million workers – about one in five employees. And there are millions more workers who may not be union members, but who benefit from and depend on the unions. No other movement can claim to have such broad representation.

The values of Australian unions are mainstream values. They are values such as a fair go and collective responsibility that are embedded in the Australian character. And I don’t need to remind anyone here that these values were endorsed by the majority of Australians in the “rights at work” election of 2007.

Over the past few decades, there has been a narrowing of perspectives in the national economic debate. Indeed, all too often it is viewed solely through the prism of big business and the corporate sector.

Workers, the community, even small business, hardly get a look in.

And this is unacceptable because we all have a stake in the development of our economy. Working people have a valuable contribution to make to these debates. We saw in the global economic downturn just what happens when workers are shut out.

So, for that reason I would encourage CEDA to open your doors to the union movement.

Today I would like to share some union solutions to economic growth and higher productivity.

My starting point in this discussion is that economic growth and higher productivity is not mutually exclusive from rights at work. Unfortunately, many in the corporate sector seem to think that the two concepts of rights and economic growth cannot co-exist. That there has to be some trade-off.

And unfortunately, there is also a sense in the business community that workers – and by extension, unions – are uninterested in productivity.

Nothing could be further from the truth. The union movement shares the Government’s aspiration to lift productivity after it has languished as a result of the Howard years. But employees do expect to be fairly rewarded for their efforts.

Experience from the last great productivity growth during the Hawke-Keating era shows that higher labour productivity will be encouraged when workers feel they will share fairly in the benefits of that growth.

Recently we have seen productivity rise faster than wages, resulting in real unit labour costs hitting an all-time low of more than 17% below what they were during the mid-1980s.

But like that other workplace catchphrase, flexibility, productivity is a word that has been hijacked to suit an agenda that has been to the detriment of workers and is not linked to the real challenges of workers.

In fact, it has been so misused by employers that whenever workers hear it today they fear that it is all downside and no upside for them.

I often read commentary pieces in newspapers about these issues of economic growth and productivity and I wonder who the authors are talking to – where they are getting their information – because they aren’t talking about the issues workers talk to me about, or the issues people who actually run real businesses talk to me about.

This happened recently, in fact – and the source of the article was one of your recent guests at CEDA. It was Peter Reith, the former Workplace Relations Minister in the Howard Government. Now, please don’t take this the wrong way, but why anyone would think Peter Reith has anything useful or credible to contribute to national debate today is beyond me. Balaclavas on the waterfront, children overboard, the Telecard scandal . . . need I go on?

But putting that aside, Reith’s comments once again reflected how the productivity debate has become so one-sided. Because Reith’s recipe for productivity growth was little more than a return to the failed policies of the Howard years, particularly the use of individual contracts which handed all power to employers to dictate wages and conditions.

Yet, Reith overlooked the inconvenient truth that under the policies he introduced, productivity in Australia stagnated. Rather than ushering in a period of productivity growth, Howard’s industrial relations policies saw its decline.

Unions welcome any form of national discussion about productivity and economic growth. But we will come to the table armed with facts and the concerns of workers from the factories, shops and offices of Australia.

And it has to be a two-way discussion.

In the spirit of open discussion, I offer two related points:

  • The first is that poor management decision-making is a significant impediment to identifying and implementing productivity improvements;
  • And secondly, that unions can help improve management decision-making and thereby can help contribute to economic growth. This growth, in turn, can then be shared fairly between capital and labour.
  • The true meaning of productivity
    But first, let me return to the true meaning of productivity. When the media reports on productivity data — particularly measures of labour productivity — the public thinks that productivity is a measure of how ‘hard’ employees are working.

    When the figures show low levels of productivity growth, the assumption is that employees are to blame — either they are slacking off in their work, or else they are getting greedy and asking for more pay for the same work.

    Usually, employers will be quick to proffer their opinion that it is unions, or Australia’s labour laws, which have, in turn, encouraged this bad behaviour on the part of workers.

    But ask any economist about productivity, and they will confirm how silly (and self-serving) this demonisation of workers and unions is. For an economist, productivity is simply an efficiency measure: it measures how efficient a business is at converting inputs — such as labour and capital — into outputs, such as goods and services.

    There is nothing special about the ‘labour productivity’ measure. It simply measures business outputs relative to one input into production, namely labour.

    It is just as valid to look at other business inputs, such as machinery or land, and economists often do.

    One can even devise a ‘paper clip productivity’ measure, which measures outputs relative to the number of paper clips used in the office. On this measure, a business which uses 1000 paper clips per year to generate $100 million in revenue is clearly more efficient, in paper clip terms, than a business which needs 2000 paper clips to generate the same revenue.

    The point of this analogy is to remind people of the limits of the usefulness of productivity data. If one uses a productivity measure that looks at only one business input, that input cannot be ‘blamed’ when the results are poor.

    In fact, obsessive focus on the paperclip productivity measure may detract from tackling the real source of the firm’s poor performance. What are those likely to be?

    The role of poor management
    In 2006, Proudfoot Consulting conducted a survey of more than 1000 mid-level managers around the world, asking them about key barriers to ‘productivity’.

    The most significant blockages were given as “Poor leadership”, “Inefficient management planning of work” and “internal communication problems between departments”, each identified by more than 40% of respondents as a key barrier to productivity growth.

    In other words, poor management was the biggest barrier to improving business performance.

    “Poor employee morale” and “employee turnover” were listed as key barriers by more than 30% of respondents. Once again, both these responses suggest management failure.

    A follow-up study in 2008 examined some of these issues in more detail.

    First of all, the 2008 study confirmed that the source of poor performance did not lie with employees or unions. Australian workers had the lowest level of so-called ‘unproductive time’ anywhere in the world. And workforce “resistance to change” was not identified as a problem: only 9% of managers in retail, for example, identified this as a problem.

    Secondly, the study suggests that poor quality mid-management is the problem. Twenty per cent of managers said that poor quality supervisors were a problem. However, before we blame the poor supervisors, let’s look at what the report actually found. It found that supervisors were spending so much time on largely administrative work that they had no time to manage effectively. This work was principally writing reports to more senior management.

    In terms of time wasted on administration, Australia was the worst country observed — supervisors spend 45% of their time doing report writing, compared to 37% in the USA. Overall, supervisors can only spend 6% of their time actively supervising staff, and only 2.5% training and mentoring staff. That’s less than one hour per week!

    Added to the problem of paperwork overload for supervisors was a lack of training. The report found that supervisors in Australia received just over 6 days of training per year, compared to more than 10 days’ elsewhere. Sixty percent of senior managers in Australia agreed that supervisors needed more training.

    So, given these recognised management failures, the report asked businesses what they planned to do to improve productivity. The good news is that more than 80% said they would invest in workforce training, as well as in management training.

    More worryingly, nobody said that they were interested in hearing ideas from the workforce, or unions, with their ideas for improving productivity — although, to be fair, that was not a question asked.

    Also worrying was the fact that 37% of Australian businesses said they would seek to improve productivity by lobbying government for less regulation — as if that was going to fix the management failures that they, themselves, admit lie behind their poor performance!

    But the most worrying result was that 45% of Australian managers said that their key means of improving productivity was to outsource or off-shore jobs. That’s a much higher figure than for other countries with similar levels of management failure, such as Germany — in that country, only a third of managers were considering off-shoring or outsourcing as a strategy for improving business performance.

    How unions can help overcome productivity blockages
    Having established that management failure is a significant productivity blockage in the economy, I want to set out how unions can play a vital role in overcoming this roadblock to improved business performance.

    First of all, unions can act as a bridge between management and the workforce. In the Proudfoot study, almost 20% of Australian senior managers said they found it difficult communicating with the workforce.

    Unions can obviously help to improve the way information flows from the top to the bottom in businesses.
    Secondly, unions can help information flow the other way, especially where employees may fear the consequences of reporting problems to management.

    Unions can help allay these fears by providing protection for employees against adverse consequences of bringing bad news to the attention of management. Equally, unions can help encourage employees to bring good news to the notice of the firm — such as a new idea for improving business processes.

    In many cases, the workers on the factory floor will have had much more of their careers invested in a business than senior management. Workers often have decades of experience in their company and industry – in sharp contrast to the modern management culture of limited tenure and short-term horizons, which has been worsened by the focus on bonuses as a key component of remuneration.

    Businesses clearly have an interest in encouraging workers to share their good ideas. But as I have suggested, this sharing will not happen without a degree of trust that any financial benefits that flow from idea will be shared. Unions can help build this trust.

    This is borne out by ABS figures on innovation. These show that small businesses, which are generally un-unionised, are only able to tap into employee ideas for innovation in 57% of cases. However, big businesses employing more than 200 workers, which are generally unionised, can access innovative ideas from staff in 83% of cases. The result is that big businesses are far more innovative than small businesses.

    It is this innovation which ultimately drives long-term productivity growth, and improvements to business performance.

    A third and final way that unions can help drive genuine productivity improvements in the workplace is through enterprise bargaining.

    Now, just like the broader productivity debate, a lot of the debate around the link between bargaining and productivity is misguided, if not deliberately misleading.

    Our opponents point to agreements containing good wage increases and scream: “where are the productivity offsets?”

    But this is not how bargaining works: it is not a zero sum game, where every dollar in wage increases is offset by an identifiable productivity trade-off. You never see agreements that expressly say: “In return for a 5% wage increase, employees must work 5% harder, or 5% smarter.” After all, how would you measure compliance with this obligation, let alone enforce it?

    The reality is that productivity improvements flow from workplace bargaining because of the improvements in workplace culture that flow from making the agreement.

    If a good agreement is made, with guaranteed pay increases, a strong dispute resolution mechanism, and a legitimate voice for workers and unions in the business, then employees have a tangible demonstration of trust from their employer, which in turn they can be confident to reciprocate.

    They know that their employer cares about them; that their union will look after them; and that they will have a share in the reward of their own hard work.

    That’s the way bargaining drives productivity improvements – not through cutting costs, or extracting ‘offsets’ for every extra dollar paid out in wages — but in the employer making a demonstrable commitment to fairness at the workplace.

    This isn’t intended to be a finger-pointing exercise. It gives me no pleasure to highlight some of the shortcomings of modern Australian management practice.

    As I said at the outset, unions welcome the opportunity to be part of a genuine, two-way national discussion about productivity and economic growth.

    But if we are going to have discussion about these issues, let us do it maturely and based on facts. And let us all acknowledge that there is no one simple gospel on these issues.

    What is missing from the debate about productivity is the voice of working people. It starts with respect, valuing their ideas, respecting their rights to join a union, and the role of collective bargaining in giving them a stake in their workplace. Then they are more likely to make a broader contribution to the health of the enterprise.

    In the search for better national productivity, we need to be open to the perspectives and solutions of workers. Let us continue this open and honest dialogue as we work towards a more productive, flexible and equitable workplace.

    Thank you for your time.