Right now the IR system is working exactly as intended. Businesses should be happy that we have good employment and economic growth combined with record low wage increases, writes Greg Jericho.

When business leaders call for penalty rates to be cut and IR laws to be reformed, they're suggesting a fix to a problem that doesn't exist.

On the weekend, it will shock you to discover, the heads of the Australian Industry Group and the Business Council of Australia called for changes to the industrial relations system that would see the removal of penalty rates and a greater ability for employers to be able to change the rosters of workers' hours.

Of course they did.

The AiG and BCA call for "reform" of industrial relations in the same way that a worker on minimum wage at a fast food counter asks if you'd like fries with that. The line is a robotic response, and like the fries, the suggested IR changes are largely things which should be turned down if you want to improve your overall wellbeing.

But let's step back a little. Why do we need penalty rates to be cut? Why do we need employers to have greater flexibility to enforce their strictures upon employees?

What is the problem in the economy that needs to be fixed?

Let us observe that last week the ABS revealed that in 2015, GDP grew by 3.0 per cent in seasonally adjusted terms and by 2.8 per cent in trend terms. That's a touch below the long-term average, but given the massive collapse in mining investment, it's a pretty stunning result.

Our employment is also doing well - indeed, for much of last year, it did better than most economists expected it to do given the lower-than-average GDP growth.

And this is where we can start to talk about the concerns of our IR system and the need for "reform". Yes, GDP growth is a good measure of economic performance, and so too is unemployment, but it is the link between both that gives us an indication of whether or not things are amiss.

The relationship between GDP growth and unemployment is fairly well-established under a connection known as Okun's Law. It essentially suggests (there are different variants) that for the unemployment rate to remain steady, a certain level of GDP growth is required.

Given we're talking about economics, it's obviously not an inviolable law, but it holds well over the long-term. It's also useful for looking at the labour market to see if our current level of unemployment is what you would expect given our GDP growth.

Since 1980, the trend has been that for the unemployment rate to remain steady, we need GDP to be growing annually by around 3.1 per cent to 3.2 per cent.

If the economy is growing by that amount but unemployment is still rising, then something could be a bit out of whack.

And yet over the past 18 months we have seen the reverse.

Australia's unemployment rate in that time has performed as expected or much better than expected given its historical relationship of GDP growth:

Okun's law in Australia: 1980-2015

Normally annual GDP growth of 2.8 per cent would see a 12-month rise in the unemployment rate of 0.2 per cent points; instead, from December 2014 to December 2015, Australia's trend unemployment rate fell 0.36 per cent points (from 6.24 per cent to 5.88 per cent).

Such was the disconnect that it seemed that the thing which may be amiss was the employment data itself (certainly I was in this camp). Doubts around the accuracy of the employment data remain - the Treasury Secretary John Fraser noted at the recent Senate estimates hearing that "technical issues" with the labour force sample "may have made the employment data look a little bit better than would otherwise be the case".

But even if the employment data is a bit more joyful than it should be, there is still nothing to suggest that the labour market is reacting poorly with respect to the overall economic growth.

It is not just the relationship between GDP growth and employment that suggests the labour market is performing well - and perhaps even better than expected. The relationship between wages growth and employment is now seriously out of whack - and in a way which should see the AiG and BCA singing from the rafters rather than bemoaning the need to have to pay people to work.

The relationship between wages growth and unemployment is what is known as the Phillips Curve. As a general rule, it relies on the notion that if unemployment falls, it means there is strong demand for labour and thus wages will begin to rise faster. Thus, when unemployment falls, wage rises should increase and vice versa.

As with Okun's Law, it is a relationship not set in stone, and yet, from 1998 to 2012, there was a pretty clear connection.

But in the past two years wage rises have fallen dramatically - to the point where annual wage growth in 2015 was just 2.2 per cent in trend terms, the lowest recorded by the ABS.

Such a low wage rise would normally be associated with extremely high unemployment:

Wages growth and unemployment

Over the past 17 years, an unemployment rate of 5.9 per cent (as it was in December) would normally be associated with wage rises around 3.5 per cent. Instead, wages rose just 2.2 per cent.

Clearly, the IR system is showing ample flexibility to adapt to the current very low inflation period. There is no sense that under the Fair Work Act wages have been rising out of step with the rest of the economy - indeed they are, if anything, rising too slowly.

The RBA certainly sees no problem. It noted in its most recent Statement on Monetary Policy that "the decline [in wages growth] has been more pronounced than that implied by the historical relationship with the unemployment rate".

It suggested that one of the reasons for this was "what appears to have been an increase in labour market flexibility that may have provided firms with greater scope to adjust wages in response to a given change in demand for their goods and services".

Wages are now rising 1.3 per cent points slower than would normally be expected, but is there any celebration from the AiG or BCA that the system is working well? How about from the conservative media outlets?

Now, imagine if instead wages were rising 1.3 per cent points higher than would otherwise be expected. My god, the cries of wages boom and of unions holding the nation hostage would be thick and incessant.

The national accounts also showed that annual labour productivity growth has slowed sharply in the past 12 months. Certainly, slowing productivity growth is never good, but productivity is a pretty fickle thing and looking at annual growth is often fairly noisy, which is why a longer term view - such as a 5 year average growth - gives a better sense of what is happening:

On this score things look much better, and while you wouldn't get complacent about it, it is an altogether different thing to suggest that a change in penalty rates or other aspects of the workplace relations system will do anything.

Even the Productivity Commission noted in its report last year that "there is little robust evidence that the different variants of WR systems over the last 20 years have had detectable effects on measured economy-wide productivity".

Right now the IR system is working exactly as intended - and indeed, probably even better from an employers' point of view than business groups ever expected they would get under a system devised by the ALP.

We have solid employment growth and good economic growth combined with record low wages growth. The ones who should be complaining are not employers.

Greg Jericho writes weekly for The Drum. He tweets at @grogsgamut. His personal blog is Grog's Gamut.