I used to teach labour economics to third-year economics students at Flinders University and the University of Adelaide. The interaction of supply and demand for workers gets you some way in understanding how labour markets work, but not nearly as far as in understanding how the car market, or the share market, or the vegetable market works.

A major reason for this is that an employment contract is about the value of the work a person does. The value of this work (the worker’s productivity) depends on a large number of idiosyncratic factors. These factors include: who the person is working with; how the group is organised; the equipment the group works with; how the group is managed, and so on.

Labour markets are idiosyncratic – particular employees have particular value to particular employers, and vice-versa.

After some initial searching about by workers looking for acceptable employers (and employers looking for acceptable employees), stable attachments tend to be formed between particular workers and particular employers. For example, more than 92 per cent of workers in Australia who have been with a particular employer for a year or more expect to continue with that employer for at least one more year.

More than half of male workers in Australia aged 55-59 years have been with their current employer for 10 years or more. The corresponding figure for female workers is more than 40 per cent. Seventy per cent of all workers in Australia can expect their current attachment to last five years or more.

Long-duration attachment is efficient for both employers and employees because long attachment increases the payoff to training and to the learning of work skills (including learning the best ways to work in each particular work environment), which increases each employee’s productivity.

Greater productivity enables an employee to earn more, while production costs are reduced at the same time – enhancing the competitiveness and profitability of the enterprise and the security of employment in it.

It also follows, if employment contracts are expected to be long lasting, the wage paid to an employee in any particular week or month or year need not be tightly bound to the state of the economy or the short-run fortunes of the enterprise.

With long-run employment attachments, wages can be set by agreement at a fixed rate over good and bad periods for the business so that what is lost on the swings is regained on the roundabouts. Wages can also be expected to be “sticky” in the face of short-run changes in supply and demand conditions, unlike what would be expected of prices in Adelaide’s Central Market or the stock exchange.

Wage stickiness of this kind does, in fact, characterise most economies, including Australia’s. It occurs because it is the most effective and productive arrangement for workers and businesses. The view that labour markets do not work because the wage structure is “sticky” misunderstands the importance and effects of long-run employment attachments.

For the same reason, it is not very surprising that wages do not fall when employment conditions become adverse, although employment contracts with newly-hired workers are likely to be less favourable to the new employees than they were to new staff in the past.

The social context in which long-run job attachments are exercised is also important in understanding labour markets and in designing effective industrial relations systems. The work that an individual does is generally part of a collective effort by all the people in his or her workplace directed towards producing some goods or services for which the group as a whole is rewarded. Each individual’s reward is simply a share of the collective reward from the collective product.

Since the tasks undertaken by each member of a production group are to some extent peculiar to the particular firm and work group, and because most workers in a production group have an expectation of a relatively long attachment, the precise distribution of rewards among the members of the group at any given moment can be different to some degree from the reward distribution in any other workplace.

The distribution of rewards within each work group is at least partly determined by the rules and norms that develop in the group concerning pay relativities, work classifications, tenure, promotion, work expectations, management prerogatives, union rights and so on. These rules and norms form the (explicit and implicit) contract of employment.

Industrial relations is essentially about the negotiation and renegotiation of these explicit and implicit terms and conditions of work. These negotiation processes can be undertaken in numerous ways at a variety of levels, but with different effects on the productivity and earnings potential of each work group (as well as on the distribution of earnings within it).

This is the critical point: different industrial relations systems are associated with different sorts of (explicit and implicit) employment “contracts” which have different effects on the productivity, competitiveness and profitability of enterprises, on the one hand, and on the earnings prospects of work groups, on the other.

It turns out that the best (explicit and implicit) employment contract – in terms of improving productivity, competitiveness and earnings prospects – is a collective contract between all the people in each workplace and their employer, based on mutual trust and group commitment. It is a social contract at the level of the enterprise.

Such contracts are better than individualistic contracts because of the need for co-operation between people within the enterprise to:

• Transmit their skills to other employees;
• Adapt work patterns to changes in markets for the outputs of the enterprise or in the personnel of the enterprise;
• Reduce the willingness of sub-groups within the enterprise to engage in self-motivated, manipulative behaviour;
• Overcome shirking on the job (and instil a desire to pull one’s weight instead); and,
• Improve the monitoring of work effort – by work colleagues, not by the boss.

Collective organisation at the level of the enterprise encourages individuals to contribute what they can to meeting the productive goals of the group as a whole, and rewards group members in a way that is regarded as fair by the group. Superior results for the whole group can be achieved when compared with contracts based on individual or sub-group interests.

For collective contracts to come into being, trust is needed among the members of the group – that each individual will be fairly treated and will receive due recognition for contributions to group performance and that honesty will prevail in intra-group relations. Such collective contracts are consistent with union representation of each workplace’s interests (but not interests that are inconsistent with each particular workplace’s interests).

The most effective form of industrial relations system, therefore, has the enterprise as its major focus, would foster enterprise unions rather than craft or industry unions, and would voluntarily use arbitrators like the Fair Work Commission simply in the role of honest brokers establishing facts relevant to the settlement of grievances and to the negotiation of fair and productive wages and conditions.

The Australian industrial relations system is, unfortunately, not like this. It is dominated by a mixture of craft and industry unions, which are not focused on the idiosyncratic workings and fortunes of each particular enterprise (or their particular members employed by each particular enterprise).

The reason for this lies in the history of class struggle in Britain and Australia in the 19^th Century. The British union movement has a structure that is not enterprise oriented, but broader-focused, along either craft or industry lines, as in Australia. As a result, these union movements take on an ideologically adversarial position to businesses. Enterprise unions are regarded with suspicion by the Australian labour movement.

Richard Blandy is an Adjunct Professor of Economics in the Business School at the University of South Australia and a weekly contributor to InDaily. He will continue his analysis of enterprise-based industrial relations in next week’s column.