The new Government has pledged to improve productivity by returning the industrial relations system to the "sensible centre", but there's little evidence it will work, writes Greg Jericho.

In the past week industrial relations has re-entered the debate, and once again it is dominated by false talk about productivity.

After spending most for the election campaign missing in action, the new Minister for Employment, Senator Eric Abetz, has in the past week become quite a bit more vocal. The catalyst was the introduction last week of the bill to restore the Australian Building and Construction Commission, but he has also made a number of speeches which suggest he desires to change the system very much in favour of business.

Senator Abetz and Tony Abbott have often talked about returning to the IR system "to the centre". Notionally they say this is to improve productivity. The only problem is there is next to no evidence to support their claims.

If we look at the period under Work Choices, we see nothing that suggests any kind of improvement in productivity growth. And while productivity has improved since the introduction of the Fair Work Act in July 2009, there is little evidence to suggest it improved because of that legislation:

Annual growth in labour productivity (quality adjusted hours worked)

Those who go round spouting that there is a need for IR flexibility to improve productivity are for the most part revealing only their ignorance of what productivity actually is. Far too often business leaders and politicians talk about productivity as though it relates to how much workers are paid rather than how much they produce.

The latest report by the Committee for Economic Development in Australia (CEDA) on "Optimising National Prosperity" rather nicely slaps this view. It notes:

A number of Australian businesses and their representative groups have blamed Labor’s IR policy for Australia’s decline in productivity growth. For example, the former BHP Billiton Chairman, Don Argus, criticised "the inflexible industrial relations laws for Australia’s lagging productivity" and the Australian Industry Group stated in 2012 that "the FW Act is hampering productivity growth, workplace flexibility, and competitiveness".

The report suggests that such comments reflect the view that "unions and regulation of pay and employment are the reason behind sluggish economic growth because they encourage labour market rigidity."

When the report tries to find some evidence to support this view, it concludes "Bargaining and productivity – a tenuous link".

The big problem is that the economy is not as simple as those often write and talk about productivity would have it.

The report notes that it takes about 5 to 10 years to identify any productivity growth trends. And within that 5 to 10 years, not surprisingly, there’s a lot going on that can affect productivity – capital investment (were new roads, ports, railways built?), level of education (has the labour force become smarter? Has it acquired new, productive skills?), and management expertise (has management decided to pursue less productive operations because they have become profitable?).

To suggest IR is the key is to defy reality, and to take such a simplistic view of the economy that you deserve to be, if not laughed at, at least subjected to some fairly loud sniggering.

The CEDA report concludes:

Although the picture regarding the exact impact of IR on productivity (whether positive or negative) is unclear, the consensus is that the effect is small... there is a yawning gap between the confidence with which the case for labour market deregulation has been asserted and the evidence that the regulating institutions are the culprits.

For Senator Abetz, the first battleground of his IR war is the construction industry. The reintroduction of the ABCC is contained in legislation rather wishfully titled Building and Construction Industry (Improving Productivity) Bill 2013.

Rather conveniently, Price Waterhouse Cooper’s most recent Productivity Scorecard released last month concerned the construction industry. It drew on a study by the Grattan Institute, which noted that not only is there no "clear link between labour productivity growth and IR laws" at a national level, but also that "at a firm level there is no obvious link between IR reform and productivity changes."

It also noted of a series of benchmarking studies commissioned by the ABCC and the Master Builders Association, which sought to portray the ABCC as the driver of improved productivity in the construction industry, that they "have been critiqued and the analysis found wanting on a number of methodological grounds".

Indeed, comparing the labour productivity of the construction industry against the manufacturing sector shows a less than clear picture.

In 2002, the precursor to the ABCC, the Building Industry Taskforce, was introduced, and the ABCC officially came into being in 2005.Since 2002, the construction sector has lagged slightly behind the manufacturing sector and all market sectors, though it has made up some ground in the last year. It would be tough to argue this improvement in 2011-12 is due to the ABCC being set up in 2005!

Labor productivity growth (2002-03 = 100)

Similarly if we look at wage increases in the construction sector over the past 15 years, we find that apart from a couple years in 2004 and 2005 they have been consistent with overall wage rises. And certainly there is no evidence in the past 4 years to suggest the Fair Work Act and any "watering down" of the ABCC has led to unions to getting bigger wage rises in the construction industry than in any other industry.

Annual wages price index growth

For business groups, if they're honest, the IR battleground is really not about productivity but profit – and who gets the share of it. Since 2002 the labour share of income in the construction industry has fallen from around 75 per cent to 70 per cent. In the same time the manufacturing sector was steady at 60 per cent until 2011-12 saw a big jump (or more accurately a decline in the capital share – due mostly to the rising Australian dollar).

Labour share of income

Ever since Paul Keating over 20 years shifted industrial relations to enterprise bargaining, any impact IR legislation has had and can have on productivity is at best marginal, at worst non-existent. To suggest otherwise is possible only if your view of the economy is absurdly simplistic.

Industrial relations has always been a fight over worker conditions, rights, wages and who gets what share of the business income. And we'd all be better off if those wishing to change the industrial relations law were more honest about it.

Greg Jericho writes weekly for The Drum. View his full profile here.