origins of the system

Compulsory arbitration was established in Australia under conditions of chronic unemployment during and after the prolonged drought of the 1890s, when collective bargaining had ceased to function effectively and industrial unrest was widespread. Arbitration was seen as a means of eliminating extreme poverty and of avoiding violence. It was introduced under two rather different circumstances. First, in small-scale industries where labor had never been successfully organized, the disclosure of conditions of “sweated labor” led to public outcry, resulting in the establishment of Wages Boards corresponding to those set up for particular industries in the United Kingdom. Second, in the hitherto strongly unionized sectors, where protracted and unsuccessful strikes had so weakened the unions that they were no longer able to negotiate firm wage settlements with employers, the idea of compulsory arbitration was accepted as a “new province of law and order” to replace the “barbarous expedients” of strikes and lockouts. Thus, by the start of the twentieth century, a government was elected with a mandate to set up an industrial court modeled on that already established in New Zealand. The Commonwealth Court of Conciliation and Arbitration came into existence in 1904.

At first the employers were hostile to the arbitration system, regarding it as a means of limiting their management prerogatives and economic power. The new law forced employers to recognize the trade unions registered under the Act and empowered the unions to make claims on behalf of all employees in an industry. The unions were now able to take an employer to court, however unwilling he might be to negotiate; and once the Court of Conciliation and Arbitration had made an award (that is, a ruling on wages to be paid or other terms of employment) the union could get it legally enforced (Sykes, 1971). The new law thus fostered the rapid growth of unions (Buckley, 1971). The fact that compulsory arbitration was established in order to strengthen the wage earners’ bargaining position is an important reason for labor’s traditional support of the system.

Initially the Court was involved in fixing a minimum wage in the cases brought to it by the unions. The “basic wage,” which was set to cover the minimum needs of a family of five,² was applied to unskilled male workers in many fields, so that it became the accepted wage for unskilled work. Eventually the basic wage constituted both a floor under the entire wage structure and a major component of all award rates. The strong unions of skilled and semiskilled workers in the metal-working and engineering trades played a leading part in the development during the 1920s of a superstructure of margins for skill, based largely on historical differentials. During this period the granting of margins became a means of bringing award wages into line with actual rates of pay.

The Court acquired a key function in regulating the general level of wages and the structure of wage differentials through its decisions on the “basic wage” and “margins.” In 1966 these two elements were consolidated into the “total wage,” which thus became the legal minimum rate for the job. A national minimum wage, representing the lowest wage payable per standard workweek in any employment, was introduced at the same time.

The arbitration system includes both Commonwealth and state tribunals. Up to 1956 the Commonwealth Court of Conciliation and Arbitration carried out both arbitral and judicial functions. A new body—the Commonwealth Industrial Court—was set up in 1956 to administer the judicial provisions of the Conciliation and Arbitration Act, and the Court of Conciliation and Arbitration was renamed the Conciliation and Arbitration Commission.³ In 1968 the wages of 85 per cent of all employees were directly affected by the rulings of the Commission or of the tribunals set up to regulate and arbitrate industrial wages and conditions of work in each of the states, or by agreements concluded under their aegis. The decisions of the Commission apply to about 40 per cent of all employees. However, its rulings are usually followed by the state authorities and therefore influence the movement of most wages and salaries.

The Commission consists of the president, seven presidential members (who must have legal qualifications), and sixteen nonpresidential commissioners drawn from officials of the unions, employers’ associations, industrial managements, and government departments concerned with labor affairs (who need not be lawyers).⁴ Judges and commissioners are appointed by the Government as vacancies occur. The current president, who was appointed in 1956, has a lifetime appointment. Each commissioner has responsibility for a particular branch of industry. There are also four conciliators, who assist the Commission without arbitral powers. An appeal from a decision of any commissioner must be handled by a commission of three, including two presidential members. Major decisions affecting the general level of wages, hours of work, and annual leave are dealt with in presidential sessions and by at least three presidential members (Grunfeld, 1971).⁵

The Commission is empowered “to prevent or settle industrial disputes by conciliation or arbitration.” Under the federal constitution this power relates only to disputes extending into more than one state, but the more important cases fulfill this requirement or can be made to do so (Phelps Brown, 1971). Either party to a dispute may bring the case before the Commission, or the Commission may intervene of its own volition. Unlike the state tribunals, which can act even if no dispute exists and can extend their decisions to all parties under their jurisdictions, the Commonwealth authorities can intervene only if a “dispute” exists, must confine their rulings to the issues of that dispute, and can make the rulings binding only on the parties involved. Despite this, the powers of the Commission have become much more extensive than was originally intended, and the states have expressed concern at the continuing drift of control to the Commonwealth authority.

A commissioner has the authority to call the disputing parties to a compulsory conference presided over by himself or a conciliator and, if necessary, he can dictate a settlement of the dispute in the form of an award. His powers include the right to take evidence on oath, to call for documents, to make on-the-spot investigations, and to order a secret ballot to ascertain employees’ views (Grunfeld, 1971). Prearbitral negotiations are often useful in narrowing down the area of dispute, and they frequently produce an agreement which avoids arbitration. In such cases the settlement is “rubber stamped” by the Commission (or state body) as a “consent award.” If neither party decides to notify the tribunal and the tribunal does not exercise its right to intervene, an agreement can be kept outside the arbitration system⁶ (Yerbury and Isaac, 1971).

Once an award relating to wages, hours of work, or fringe benefits is made, it constitutes the legally binding minimum for that work; but there is nothing to prevent negotiations for higher wages or special conditions giving rise to “over-award” payments.⁷ Thus, collective bargaining influences the earnings of a considerable proportion of employees who are covered by arbitration awards. As over-award settlements frequently give rise to claims for similar absolute or relative increases in award wages, the dynamic influence of collective bargaining is quite disproportionate to the number of workers covered or to the share of wages actually determined outside the arbitration system.

sanctions for enforcement

Since the decisions of the Commonwealth Commission and the state tribunals are legally binding, breaches of awards are punishable by law. In practice, the binding character of the award has operated principally against the employer, because the rate awarded becomes the legal minimum for the job but the union is not debarred from negotiating for payment of a higher rate (Phelps Brown, 1971). The prohibition of strikes against awards under the Commonwealth arbitration law was repealed by a Labor Government in 1930. Penalties for strike action were, however, provided for under the “bans clause” procedure, which permitted the inclusion in an award of a clause forbidding any “ban” or restriction on the performance of work covered in the award. Until 1951 no effective sanctions were attached to such a clause.⁸ But, following numerous strikes and large wage increases at the time of the Korean conflict, a federal regulation was introduced to make it possible for an employer to apply to the Court for a legal injunction against a strike. If the Court made an order and normal working was not resumed, the union or workers involved became liable to large fines and costs. Thereafter, the bans clause was generally included in awards at the request of employers in industries subject to strikes (Sykes, 1971).

During the 1950s the new sanction was used very sparingly. Strikes were in the main confined to the highly organized sectors experiencing a severe shortage of skilled workers—notably metals, engineering, and construction. In these sectors, employers often agreed to over-award payments in order either to acquire and retain labor or in order to secure higher productivity. If an over-award claim was rejected, the union could submit the dispute to arbitration. As over-award payments grew in importance during the early 1960s, however, the arbitration authorities strengthened the employer’s hand by ruling in 1964 that it would be inappropriate for the Commission, having made an assessment of the award rate for a particular trade in a “work-value” inquiry, to exercise its arbitral powers in a dispute relating to an over-award claim unless both parties requested it to do so.⁹ This decision meant that if the existing award contained a bans clause, the union could be subject to heavy penalties for any strike relating to an over-award claim which the employer was prepared to resist.

The number of injunctions and of fines imposed because of strikes increased very considerably in the later 1960s, until the wholesale use of the bans clause procedure in early 1968 provided the unions with an opportunity for a confrontation on the issue of sanctions. In the outcome the penal sanctions proved to be unenforceable and the survival of the arbitration system seemed to be threatened by the conflict with the unions. Bans clause procedures were eased by the Commission in September 1969, and less powerful sanctions became law under an interim Act passed in 1970 (Mills, 1971).

developments from 1922 until the end of world war ii

From 1922 until 1953 the basic wage was adjusted quarterly for changes in retail prices, and until 1931 the arbitration authorities intervened only infrequently to change its real value. The pay of the great majority of wage earners was adjusted upward (or downward) for changes in the purchasing power of the basic wage component. Thus each wage earner received a fixed minimum real wage, plus additional purchasing power if he qualified for a margin, fixed in money terms and not adjusted for price changes.

The automatic adjustment of the basic wage had a number of side effects, some favorable, others less so. In general, it tended to promote appropriate movements in wages and prices relative to those abroad, so long as import prices were not moving very differently from export prices and neither was subject to extreme short-term fluctuations. But it meant that an autonomous inflationary (or deflationary) stimulus produced a chain reaction upon domestic costs and prices. The goal of the system was not price stability but near stability of real wages and flexibility of money wages and prices. The indexation of a large component of wages more or less eliminated the issue of compensation for price increases from wage claims and avoided the danger of unduly inflationary price expectations giving rise to large wage claims.¹⁰ However, in periods of rapidly rising prices, the automatic adjustment of the basic wage—but not of margins—had the unfortunate effect of narrowing differentials and hence provoking claims for increases in margins by the most highly organized groups of workers.

The determination of margins awards usually involved the principle of “comparative wage justice”—that is to say, the idea that the relative pay (or work value, in Australian parlance) of different jobs should correspond to their relative requirements in skill, training, responsibility, effort, and the like.¹¹ The principle that all workers doing similar work under similar conditions should receive the same rate of pay was generally accepted, at least in theory; this, of course, implied that margins should not reflect the differing “capacity to pay” or profitability of particular enterprises or branches of industry. In practice, however, the structure of margins that developed was determined by the economic circumstances of particular industries so long as considerable unemployment prevailed; the varying prosperity of different industries effectively limited the possibility of uniform changes in wages implied by the concept of comparative wage justice.

By the 1920s the wage structure comprised a basic money wage and a superstructure of wage differentials determined by the economic circumstances and strength of union bargaining power in particular industries. Award wages above the basic wage were in effect determined by much the same considerations as would have been the case if collective bargaining had applied. With considerable unemployment usually prevailing, employers had little incentive to offer over-award payments, and award wages closely determined actual earnings.

Throughout the 1920s the essential function of the arbitration tribunals remained that of determining specific wages in order to avoid or settle industrial disputes; but when export prices collapsed in 1930, and the employers sought a reduction of the basic wage in real terms, the Court was faced with the task of formulating a national wages policy: “A task commensurate in importance to deciding the exchange rate or the stance of fiscal or monetary policy” (Isaac, 1963).

The experience of the 1930s is described in a well-known article by Reddaway (1938) and need only be briefly summarized here. In January 1931 the Court ruled that, as an emergency measure, all wages under its jurisdiction should be cut by 10 per cent. In 1934, when the economic situation improved following a rise in export prices, the Court was faced with the choice of restoring the Harvester standard of “normal needs” in determining the basic wage (see footnote 2) or of abrogating that standard and declaring that henceforth the basic wage would be set with reference to the “economic capacity” of the economy. This would have involved the need to specify how “economic capacity” was to be assessed.

The Court, in fact, avoided the issue by an equivocal judgment intended to placate both the employers and labor (Hawke, 1956). Industrialists received an assurance that the level of the basic wage would depend “on the productive capacity of the economy as a whole.” The capacity of industry to pay the highest possible basic wage could only be approximated, but one way of assessing the capacity to pay was to ascertain the wages actually being paid to “well situated” laborers. The unions were granted a restoral of the basic wage to almost the same real value as in 1931, and the restoral in full of margins for skill. The principle of relating minimum wage rates to normal needs was reaffirmed by the decision that the basic wage would continue to be automatically adjusted for price changes. It was not until 1937 that the unions applied for and received an increase in wages on the grounds of increased capacity to pay.¹²

Writing in 1938, Reddaway concluded that the policy of reducing wages had made a very substantial contribution to the solution of the external difficulties. In a perfectly logical world the situation might have been met by exchange depreciation and a smaller cut in money wages, but at the time the case for exchange depreciation was not recognized. Developments during the 1930s established the principle that, although its statutory function was limited to the prevention and settlement of industrial disputes, the Court must give attention to considerations of national economic policy and that the “capacity to pay” of the economy must in certain circumstances be the decisive factor in basic wage decisions.¹³ The widespread belief that the arbitration system had contributed to the prosperity and freedom from industrial unrest of the 1920s, and that it had facilitated the recovery of employment after the depression of the 1930s, gave the Court great prestige, and after World War II it was expected to continue to play a key role in the economy. The Court’s authority was enhanced by the Government’s delegation to it of wartime emergency powers to set maximum as well as minimum wage rates.¹⁴

the postwar period: national wage decisions under full employment

The evolution of national wage decisions since World War II divides into three stages. The periods 1945–52, 1953–65, and 1966 to date can be characterized as follows :

(1) Return to the prewar procedures and concepts, until experience at the time of the Korean conflict demonstrated that the system was inappropriate for conditions of full employment and for a highly inflationary world situation.

(2) Modification of the traditional system by the abandonment of automatic indexation and the adoption of a procedure for comprehensive rather than piecemeal changes in margins. The logical conclusion of these changes was the elimination of the basic wage and margins and the fixing of total wages after 1966.

(3) Increasing stresses within the system, following an unsuccessful attempt to improve the relative structure of award wages in different industries and to reduce the scope for over-award increases by bringing award wages more closely into line with actual wages in the metal trades sector, until by 1970/71 the system was functioning as a form of “quasi-collective bargaining.”

Coordinated wage decisions in search of a policy, 1953–65

In the early 1950s the regulatory functions of the arbitration system were reinforced by the provision for legal sanctions against strikes, by the abolition of the automatic adjustment of the basic wage, and by the adoption of a procedure for granting simultaneous and uniform changes in margins under all awards in a very important decision in 1954.

Prior to 1954, the Court had not made any general ruling in respect of margins. In 1953, when differentials had been narrowed by the automatic adjustment of the basic wage for steeply rising prices in 1950–52,¹⁶ the unions claimed that all margins under the Metal Trades Award should be increased. The employers counterclaimed that margins for skilled workers should remain unchanged but that margins for semiskilled and unskilled workers should be reduced. The case was first adjourned on the grounds that the economic situation and the existing high level of labor costs did not permit a comprehensive increase. About a year later, the Court ruled that all margins should be set at the equivalent of two and a half times their 1937 level. This produced a marked increase in margins for skilled work, while the margins for less skilled workers were unchanged. Thus the decision represented a compromise between the claim of the unions for a uniform increase and the claim of the employers for a restoral of wider differentials by means of discriminatory reductions in wages. The Court expressly stated that its decision was to be taken as general guidance to all arbitration authorities and applied in other industries.

The 1954 decision was important both as an instance of the tendency to interpret comparative wage justice as implying that all award wages should increase in line over time and as a precedent that an increase in margins under the Metal Trades Award should be considered grounds for similar increases in margins in other sectors. While a change in this direction would probably have come about eventually under conditions of full employment, the decision may have led to a greater rigidity of the structure of award wages than would otherwise have existed in the 1950s and early 1960s. Furthermore, the freezing of the wage structure at something very like the pattern of 1937 was economically unjustified, since there was little reason to suppose that the value-productivity in different occupations and industries had remained the same as it was twenty years before, given the great changes in technology, in price relationships, and in the employment situation that had since taken place.

The increased rigidity of the wage structure under conditions of full employment ruled out the possibility of relating margins to the capacity to pay of particular industries through work value inquiries—as had been the practice before the war. Consequently, the judges were faced with the problem of allocating the “capacity to pay” between increasing the basic wage and increasing margins. However, this sensitive issue did not arise for several years, as there was no basic wage claim until 1956 and the general level of margins was not raised until 1959.

During the late 1950s and early 1960s the system showed a tendency to generate its own inflationary momentum. A rise in the basic wage caused a narrowing of differentials, resulting in over-award increases to restore relative rates of pay, and these in turn led to a claim for a general rise in margins. The resultant increase in average wages was likely to induce a rise in prices and another rise in the basic wage, starting the whole process over again. In 1959 a 6 per cent increase in the basic wage was followed by a large increase in margins later in the same year, underlining the need to consider the overall capacity to sustain wage increases of either type at the same time and causing the employers to press for adoption of the total wage concept. In 1965, the Commission held a joint inquiry into both the basic wage and the margins.

The 1961 decision that major reviews of the basic wage would henceforth be held at intervals of three or four years ¹⁷ introduced a further element of rigidity into the system and tended to encourage the growth of over-award payments, since during the interval industry’s willingness to pay higher wages was increasing with rising productivity. Award wages scarcely increased in 1962/63, when there were no decisions concerning the basic wage or margins in general, and award wages did not rise commensurately with the marked improvement in economic conditions in 1963/64, when the sharp increase in export prices would seem to have provided a suitable context for a general increase in wages. Wage drift was exceptionally heavy in both years, and the growth of over-award payments constituted a problem that had an important influence on the policies adopted over the next few years.

It seems clear that, under coordinated wage fixing, frequent small changes in wages are preferable to large changes at infrequent intervals; these are in themselves more likely to set off inflationary price expectations and pricing behavior and may also entail the building up of pressures within the system, or the granting of wage increases outside the system, during the intervals between decisions. Also, as the experience of the early 1960s illustrated, infrequent decisions may make it difficult to adjust wage developments to swiftly changing external conditions. Frequent wage changes may require the adoption of more or less automatic criteria for adjustments.

The procedure for making uniform changes in margins involved the Commission in routinely making far-reaching decisions of economic policy, a task for which it was largely unqualified and which it was to some extent unwilling to carry out. The arbitration judges continued to view their task as being to adjudicate between the disputing parties rather than to implement a national policy for wages consistent with other economic objectives. Thus the determination of capacity to pay remained a matter for ad hoc judgments on the basis of the evidence submitted by the parties concerned.¹⁸ However, when automatic adjustment was abandoned, it had been specifically laid down that the evidence in basic wage cases should be related to the “broader aspects of the economy” as indicated by employment, investment, production and productivity, overseas trade, overseas balances, competitive position of secondary industry, and retail trade.”

The question of the criteria to be employed in assessing the capacity to pay of the economy as a whole—and specifically the case for a guideline that all wages and salaries should rise in line with the growth in average per capita productivity—evoked growing interest among economists and businessmen from about 1959, although it was not until 1963 that overall productivity data began to be published. Up to 1965 capacity was in practice assessed mainly in the light of the state of economic activity prevailing or recently experienced (Boehm, 1971).

Different criteria were advocated by different groups. The employers pressed for a productivity-based guideline. The unions consistently claimed increases based on productivity growth and past change in prices. Academic and official economists, notably Downing (1960), Hancock (1960), Karmel (1959 and 1965), and Russell (1965), supported the concept of effective productivity gearing, that is, of allowing wages and salaries to rise in line with productivity growth adjusted for the change in export prices.

The concept of a pure productivity-based guideline was inappropriate for a world-wide situation of rising prices, and the union proposal for complete compensation for past price increases would have perpetuated any inflationary episode. While the “effective productivity” concept provided a valid notion of how the level of wages should be adjusted in the medium-to-long run, its application as a more or less automatic rule of short-term policy would probably have been unsatisfactory. For one thing, since the concept involved linking wages directly with export prices (a most unstable feature of the economy), it was likely to lead to the kind of difficulties experienced under the automatic cost of living adjustment in times of rapidly rising world prices. Also, like other criteria proposed, the productivity guideline involved linking wage changes with developments in the recent past which might not always be representative of the conditions to be foreseen in the near future.

By 1966, the need for a major change in procedures and principles had been reinforced by several circumstances. The rate of price increase had accelerated sharply in 1964, under the influence of an upturn in export prices, and industrial unrest was increasing (Charts 1 and 2). The Commission’s policies had been severely criticized in the Vernon Report dealing with aspects of the long-term growth of the economy (Report of the Committee of Economic Enquiry (1965), Vol. 1, pp. 122–47). In addition, the Commission had been involved in an important case regarding the interpretation of capacity to pay in a highly profitable enterprise.

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Australia: Export and Import Price Indices, 1949–72, and Annual Increases in Consumer Prices, 1949/50–1972/73

Citation: IMF Staff Papers 1974, 001; 10.5089/9781451956375.024.A007

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The Vernon Report suggested that the Commission had become a de facto instrument for incomes policy, even though its statutory duty was to settle disputes and urged that greater attention should be paid to ensuring price stability. “Capacity to pay” should be interpreted as capacity to pay higher wages without inflationary consequences, and the Commission should devote particular attention to the prospective growth of national productivity, in order to assess the effect of increases in award wages on prices. The Report exposed both the Commission’s lack of a clear concept of capacity to pay and the inflationary implications of its view that the payment of over-award wages should be taken to indicate the capacity to pay higher award wages.¹⁹ The recommendations were an important factor in causing the Commission (and also the Federal Government in its submission to the Commission) to relate wage increases to the concept of effective productivity after 1966 and to attempt to appraise the full effect of its decisions on the economy.

The Vernon Report also stressed the need for a widening of wage differentials in order to encourage the acquisition of skills, and suggested that claims for margins for particular skills should be judged on their merits and should not be granted quasi-automatically in line with increases in other margins.²⁰

A discussion of the case for more divergent relative wage movements in the 1964 Annual Report of the Commission had important repercussions. The President of the Commission advanced the view that in future the arbitration authorities should be increasingly occupied with conciliation and arbitration undertaken at the request of the parties concerned in disputes about over-award payments. He recognized that this could lead to “distortions in the pay of workers gaining over-award payments as against those who receive the minimum payments (that is, award rates) prescribed by the Commission.” But he suggested, “perhaps disparities are to some extent inevitable between those employed in particularly prosperous industries or undertakings and those not so well placed. They may in some cases even be desirable on economic grounds.”

Not unnaturally the unions read this passage as an invitation to test the Commission’s attitude to a wage claim based on the exceptional profitability of an individual enterprise or industry. Such a claim was made in the 1965 General Motors-Holden case.²¹ Although the claim was refused on the grounds of comparative wage justice, the desirability of altering that key principle was discussed at length in the ruling.

These major issues were reflected in far-reaching reforms of the system, adopted not altogether successfully, in the late 1960s.

The attempt at a wages policy and its repercussions, 1966–71

In 1966 the Commission announced its intention to abolish the basic wage and margins and to make total wage awards in future. These changes were deferred until 1967, pending consideration of the existing structure of margins which would be reflected in the total award wages of different occupations. The employers were thus to achieve their goal of a unified national wage hearing while the unions were to receive one last margins award—the disastrous 1967 metal trades work value ruling.²²

The stated intention of the work value review was to establish a “realistic and justifiable” structure of total wages; that is, to bring award wages more into line with actual earnings in that sector. The Commission may have been influenced in this direction by the argument that the persistence of heavy over-award payments and shortages of labor indicated that award wages were too low to ensure an adequate supply of skilled manpower. But it seems clear that the difficulty of justifying the decision in the General Motors-Holden case was also an important factor, creating the feeling that some action was needed to placate the unions. Most significantly, a deliberate effort was made to break the link between increases granted under the Metal Trades Award and those for other occupations. It was specifically laid down that the awards were not to set a pattern for other industries. Nevertheless, they did.

The ruling greatly widened the range of award wages, at the same time raising the entire structure of award wages for the sector.²³ The crucial feature of the award, which aroused the resentment of employers and unions alike, was the stipulation that the increases should absorb existing over-award payments. Past experience had shown that this objective was unlikely to be realized, and when the unions staged numerous strikes against absorption, the employers responded by widespread recourse to penal sanctions. The unions for their part resolved to destroy the system of sanctions by outright refusal to comply (Isaac and Ford, 1966). While proceedings relating to strike penalties were still going on in the Industrial Court, the Commission was obliged to back down on absorption in February 1968.

Although the increases awarded in national wage cases in 1967, 1968, and 1969 only slightly exceeded the growth in productivity, award wages continued to increase rapidly as a consequence of the Metal Trades Award and the flow-on to other industries. In 1969 the employers pressed for the restriction of work value reviews to a limited amount of reclassification, claiming that “the fruits of productivity should be distributed in national wage cases.” The Commission accepted this view and announced that henceforth major changes in wages would be confined to the annual national wage award, under which total wages for each job classification in each industry would be raised by uniform amounts or percentages.²⁴ Specific rulings concerning the relative level of pay for particular jobs would still be given, when warranted by the circumstances, but commissioners were instructed to restrict reviews to cases where there had been a change in work value factors (such as the skill, exertion, or length of training required), not to consider arguments relating to rates obtained elsewhere, and only rarely to adjust relativities because of the likelihood of inducing a flow-on of wage increases to other sectors.

The need to resolve the conflict with the unions which threatened the very existence of the arbitration system led to an easing of the penalties against strikes in September 1969. The employer, instead of being able to seek an injunction simply on proof of a stoppage, now had first to obtain from the Commission a certificate that conciliation had failed. Thus the commissioner was empowered to determine the merits of the case and in effect make a ruling to maintain or alter the existing award. Only if the union refused to comply with that decision would the Commission grant the employer the right to apply to the Industrial Court for penalties against the union. The amount chargeable in fines was also greatly reduced.

In theory, the new procedure was to allow the Commission to distinguish between stoppages that were rejections of an existing award and those concerning questions of interpretation or new issues (Phelps Brown, 1971). However, no guidelines for drawing such a distinction were laid down, and during 1970/71 the commissioners almost never treated a stoppage as a contravention of an existing award. Employers complained that the Commission was interpreting the new section of the act as though it imposed on them a statutory duty to settle industrial disputes by arbitration, even though conduct contrary to the existing award was being engaged in (Edwards, November 1971). In practice the new system gave the employees scope to seek a change in an existing award at any time. It deprived the employers of their protection against stoppages and gave them a stronger incentive to conclude agreements outside the arbitration system. This tendency was reflected in a much faster rise in earnings than in award wages during 1970, when the 3 per cent national wage award and 5.2 per cent increase in award rates were associated with a 9 per cent rise in earnings.

Industrial unrest and the climate of diminishing authority for the tribunals refocused attention on the arbitration system’s original role in lessening industrial strife, while the Commission’s new responsibilities under the 1970 Act also led to increasing emphasis on conciliation. The 1969 instructions on work value rulings were ignored in several important cases.²⁵

In the 1970 Oil Industry case, the Commission itself intervened to seek a voluntary settlement when a strike of maintenance workers threatened to disrupt industrial production. When no agreement was reached, the unions asked and the employers agreed that the dispute should be referred to the full Commission for arbitration. The unions then raised the same issue as in the General Motors-Holden decision. On this occasion, the Commission gave a ruling which represented a significant abandonment of the principle of comparative wage justice, stating that the capacity to pay of a specific enterprise or industry could be taken into consideration if both parties consented to the consideration of the capacity to pay criterion or if it had been the practice to consider capacity to pay in the collective bargaining that had led to earlier wage settlements (Nieuwenhuysen, 1970, p. 13).

When the 1970 national wage case came up, the previous award had accounted for less than one third of the actual rise in earnings experienced during the year and there was a widespread tendency to dismiss the national award as a mere irrelevancy (Edwards, November 1970). The Commission had two unpleasant options. It could (as it was expected to do by the Government and the press) again award a small increase, in which case it could claim not to have added to inflationary pressure, though it could not hope to reduce it.²⁶ However, by awarding a small increase the Commission would risk damaging its own authority, based on the public’s acceptance of it as an instrument for ensuring greater equity than would otherwise exist, by the all too obvious inconsistency between the national award and the rulings which its arbitrators were giving in special cases. Alternatively, the Commission could award a more realistic increase, at the danger of enhancing the prospective rate of wage increase and of laying itself open to blame for causing inflation. It chose the latter course and awarded a 6 per cent increase in all award rates except the minimum wage.

The decision appeared to recognize the contention of the unions that both productivity and the rate of price increase should be taken into account, since there was a reference to the 2.2 per cent increase in productivity over the preceding year and the 3.8 per cent rise in the consumer price index from September 1969 to September 1970. The Commission also referred to the 5.5 per cent increase in real gross national product forecast for 1970/71. But a factor which probably influenced the Commission’s decision to award a large increase was the granting by the Public Service Board (an autonomous body responsible to the Cabinet) of a 6.6 per cent increase in wage rates for blue collar workers to match over-award payments in private industry and to keep wages consistent with those in outside employment (Edwards, July 1970). The Board, which is the largest single employer in Australia, with nearly 10 per cent of the work force under its more or less direct control, has acquired a steadily growing influence upon wage determination throughout the economy—an influence which has not always been consistent with the national arbitration awards.

The 1970 national wage award produced a sharp rise in award wages and average earnings at the beginning of 1971, and the acceleration of wage increases continued as a result of an increase of about 10 per cent awarded in the Metal Trades case in July and its subsequent flow-on to other sectors. Employers in the metal trades were particularly affected by the collapse of the penal sanctions associated with the bans clause traditionally inserted in their awards; and in 1969 and 1970 they found themselves exposed to a rash of strikes directed at individual concerns, which were aimed at securing over-award increases from first one and then another concern. Early in 1971 the Metal Trades Employers’ Association apparently concluded that employers in other sectors were buying industrial peace with wage increases, leaving their members at a disadvantage. The association therefore decided to abandon the traditional practice of referring the union’s wage claim to arbitration, and to undertake direct negotiations instead, with the object of trading wage concessions for freedom from stoppages (Hancock, October 1971).²⁷ Following negotiations behind closed doors, the employers and unions requested the commissioner for the industry to make a consent award for a rise of approximately 10 per cent. Since the claim did not go to the Commission as usual, the Commonwealth Government was precluded from stating its opposition to such a large increase.

The Government seized the opportunity to state its position when the carpenters’ union claimed a comparable increase in September. But it was soon clear that the Metal Trades Award had been widely followed by similar increases. Subsequently, even larger increases (of 15 per cent and more) were awarded to senior officials in federal government service, to the armed forces, and to some top trade union officials. These large awards received much publicity. A survey of executive salaries in the private sector revealed that an attempt by many companies to hold the line on executive pay in 1970 and early 1971 had collapsed because of pressures generated by the increases in public sector salaries and blue collar wages.

In November the Australian Council of Trade Unions (ACTU) filed a claim for very large increases in the 1971 national wage case.²⁸ When the ACTU sought a postponement of its minimum wage claim, the Commission rejected its request for two separate hearings and postponed the national wage case hearings until February 1972. In May 1972 it awarded an increase of $2.00 in award wages, representing a rise of less than 3 per cent, and raised the minimum wage by $4.70.

In the meantime, the Government’s proposals for reform of the arbitration system were published at the end of 1971. They represented an attempt to reverse the forces that had modified the system of conciliation and arbitration over the last few years and closely followed the employers’ views on most vital issues,²⁹ setting the stage for a major confrontation with the unions in 1972, an election year.

The Liberal Party/Country Party Government was defeated in the elections and the Labor Government took office in December 1972. The new Government immediately announced its intention of establishing a body to review prices in key sectors, of reviewing tariff policy, and of strengthening measures to promote competition. Pending the establishment of the prices review body, the Government set up an inquiry into a proposed increase in steel prices, leading to a recommendation against the increase in February 1973.

Early in 1973 the Government presented a bill to end the Commission’s legal powers to ban strikes, and modify the law affecting trade unions, notably by removing the restrictions on amalgamations. On this occasion, the Minister of Labor stated the Government’s intention to promote freely negotiated voluntary wage settlements and provide that such agreements be certified and given the full force of an award under the Conciliation and Arbitration Act (Bentley, 1973, p. 264). The Government also announced its intention to set up a special committee of inquiry to study the whole institutional framework of industrial relations. The bill was rejected by the upper house, and its fate remains undecided at the time of writing.

This account of postwar experience would be incomplete without a reference to the good record with respect to price stability, high employment, and relative freedom from unrest up to 1969. With unemployment averaging only 1.5 per cent in 1960–69, consumer prices rose by 2.3 per cent a year—a lower rate of increase than that achieved by the United States, Canada, or West Germany; and strikes averaged 0.40 day per worker a year compared with 1.00 in the United States (Table 1).³⁰ Until recently, strikes constituted a means of protest against what workers considered inadequate wage awards but were rarely pushed to the point of causing economic disruption. In more than two thirds of the strikes, workers returned to work at their former wage after a brief stoppage. In certain sectors, notably mining, a high proportion of strikes represent protests against the strength of management’s prerogatives with respect to hiring and firing and discipline—which remain far greater in Australia than in most other highly unionized countries (Eltis, 1971).

Table 1.

Industrial Disputes in Australia and Other Countries, 1960–69

(Days lost per thousand workers)

Source: U.K. Department of Productivity Gazette (November 1969 and February 1971). Data relate to workers in manufacturing, construction, and transportation.

¹Excluding 1968.

Table 1.

Industrial Disputes in Australia and Other Countries, 1960–69

(Days lost per thousand workers)

Country	Average 1960–69	1968	1969
Switzerland	1	—	—
Sweden	17	—	30
Germany	22	—	20
Netherlands	37	10	10
Norway	108	10	—
New Zealand	198	310	300
Belgium	160	230	100
United Kingdom	268	360	510
Japan	250	160	200
France1	303		200
Finland	273	250	200
Australia	403	440	810
United States	997	1,600	1,390
Canada	1,008	1,670	2,550
Ireland	1,018	920	2,170
Italy	1,397	930	4,110

Source: U.K. Department of Productivity Gazette (November 1969 and February 1971). Data relate to workers in manufacturing, construction, and transportation.

¹Excluding 1968.

View Table

Table 1.

Industrial Disputes in Australia and Other Countries, 1960–69

(Days lost per thousand workers)

Country	Average 1960–69	1968	1969
Switzerland	1	—	—
Sweden	17	—	30
Germany	22	—	20
Netherlands	37	10	10
Norway	108	10	—
New Zealand	198	310	300
Belgium	160	230	100
United Kingdom	268	360	510
Japan	250	160	200
France1	303		200
Finland	273	250	200
Australia	403	440	810
United States	997	1,600	1,390
Canada	1,008	1,670	2,550
Ireland	1,018	920	2,170
Italy	1,397	930	4,110

Source: U.K. Department of Productivity Gazette (November 1969 and February 1971). Data relate to workers in manufacturing, construction, and transportation.

¹Excluding 1968.

wage developments in the 1960s and 1970s

The development of wages during the 1960s and early 1970s can be seen as a sequence of a perhaps unduly small rise in award wages during 1962/63 and 1963/64, associated with heavy wage drift, followed a few years later by the unsuccessful attempt to raise the level of award wages relative to actual earnings and so absorb into award wages the substantial over-award payments that arose in part from the earlier heavy wage drift. In 1967/68 and 1968/69, when the increases under the 1967 metal trades decision and the subsequent flow-on to other sectors took effect, the rise in award wages considerably exceeded that indicated by the strength of autonomous factors and was responsible for a quite dramatic rise in the rate of increase in average earnings relative to that indicator, wage drift being slight (see Charts 2 and 3 and Table 3).

Reacting to mounting criticism by the employers and the Government, the arbitrators enforced a reduction in the rate of increase in award wages in 1969/70, while the autonomous forces making for wage increases were strengthened by faster rising import prices. The increase in earnings continued to accelerate, with exceptional wage drift occurring in the context of the collapse of the penal sanctions against strikes and severe industrial unrest. Employers became less inclined than they were before to go to arbitration or to register settlements as awards. Consequently, earnings moved more sharply out of line with award rates than in any recent year, and the continuance of the arbitration system appeared to be threatened. The large national wage award of December 1970, the intervention of the Commission in the Oil Industry case on its own initiative, and the change in its approach described earlier constituted a dramatic response to this situation. As a result the relative movement of award wages and earnings during 1970/71 was very different from that in 1969/70. During the four quarters ended June 1971, award rates and earnings rose almost in line, award rates rising nearly twice as fast as provided by the national wage agreement. Award wages and earnings also rose almost in line from 1970/71 to 1971/72, when earnings drift was limited by reductions in overtime associated with the decline in activity and by the growing tendency for negotiated settlements to take place under the aegis of the arbitration system. A marked reduction in the rate of increase of award wages from 1971/72 to 1972/73 was associated with renewed drift (see Chart 3).

Table 3 compares wage developments during 1966/67 to 1971/72 with earlier experience. It shows that the increase in weekly earnings was on average 3.3 per cent higher during these years than during the early 1960s. The influence of autonomous factors and the slightly greater secular drift assumed accounted for about two thirds of the acceleration; the remainder was due to larger increases in award wages, in part offset by lower drift. Table 3 shows that this latter “excess” increase in earnings occurred in the four years 1967/68 to 1970/71, and it seems to support the interpretation that the excess increase was mainly a consequence of the nonenforcement of the 1967 metal trades decision and the collapse of penal sanctions. The unusually large increases in award wages in 1967/68 and 1968/69 were the direct result of the decision, while the unusually heavy drift of 1969/70 reflected the granting of increases on a similar scale to government employees and salary earners, as well as nonaward wage movements facilitated by the collapse of penal sanctions. The large 1970 national wage award and the continuing heavy wage drift in that year must also be seen in the context of the abnormal situation created by the collapse of penal sanctions. However, by 1971/72 and 1972/73 the faster rise in earnings than that during the early 1960s could be attributed almost entirely to autonomous economic forces.

Table 3.

Comparison of Wage Developments in 1966/67 to 1972/73 with Earlier Years

(Percentage increase over preceding year)

Sources: See Table 2. See also footnotes to Table 2.

¹Figures given in column D of Table 2, plus allowance for secular drift of 0.8 in 1954–66, 1.0 in more recent years.

²Wage drift shown in Table 2, less allowance for secular drift.

³Change in award wages less influence of autonomous factors (Column E in Table 2).

⁴Figures for first three quarters only.

Table 3.

Comparison of Wage Developments in 1966/67 to 1972/73 with Earlier Years

(Percentage increase over preceding year)

	A	B	C	D	E
Year (July/June)	Increase in Average Year Weekly Earnings	Influence of Autonomous Factors plus Secular Drift1	Difference (A – B) Due to D, E	Excess Wage Drift2	Excess Increase in Award Wages3
1953/54–1958/59 Avg.	4.6	3.7	0.9	0.9	—
1959/60–1965/66 Avg.	4.9	4.2	0.7	0.8	–0.1
1966/67–1971/72 Avg.	8.2	6.7	1.5	0.2	1.3
1966/67	6.5	6.9	–0.4	–0.6	0.2
1967/68	5.9	3.9	2.0	–0.1	2.1
1968/69	7.3	5.0	2.3	–0.5	2.8
1969/70	8.6	6.7	1.9	2.3	–0.4
1970/71	10.9	7.6	3.3	1.4	1.9
1971/72	10.0	10.0	—	–1.1	1.1
1972/73	9.64	10.6	–1.04	1.34	–2.34

Sources: See Table 2. See also footnotes to Table 2.

¹Figures given in column D of Table 2, plus allowance for secular drift of 0.8 in 1954–66, 1.0 in more recent years.

²Wage drift shown in Table 2, less allowance for secular drift.

³Change in award wages less influence of autonomous factors (Column E in Table 2).

⁴Figures for first three quarters only.

View Table

Table 3.

Comparison of Wage Developments in 1966/67 to 1972/73 with Earlier Years

(Percentage increase over preceding year)

	A	B	C	D	E
Year (July/June)	Increase in Average Year Weekly Earnings	Influence of Autonomous Factors plus Secular Drift1	Difference (A – B) Due to D, E	Excess Wage Drift2	Excess Increase in Award Wages3
1953/54–1958/59 Avg.	4.6	3.7	0.9	0.9	—
1959/60–1965/66 Avg.	4.9	4.2	0.7	0.8	–0.1
1966/67–1971/72 Avg.	8.2	6.7	1.5	0.2	1.3
1966/67	6.5	6.9	–0.4	–0.6	0.2
1967/68	5.9	3.9	2.0	–0.1	2.1
1968/69	7.3	5.0	2.3	–0.5	2.8
1969/70	8.6	6.7	1.9	2.3	–0.4
1970/71	10.9	7.6	3.3	1.4	1.9
1971/72	10.0	10.0	—	–1.1	1.1
1972/73	9.64	10.6	–1.04	1.34	–2.34

Sources: See Table 2. See also footnotes to Table 2.

¹Figures given in column D of Table 2, plus allowance for secular drift of 0.8 in 1954–66, 1.0 in more recent years.

²Wage drift shown in Table 2, less allowance for secular drift.

³Change in award wages less influence of autonomous factors (Column E in Table 2).

⁴Figures for first three quarters only.

findings of recent econometric studies

Since an earlier version of this study was circulated in 1972, it has become accepted that the movement of award wages must be regarded as largely endogenous. Until recently little work had been done on assessing the factors influencing award wages, and there was a widespread tendency to treat awards, implicitly or explicitly, as an exogenous factor determining changes in earnings. As Jonson and Mahar (1972) point out, this often led to the conclusion that judgments of the Commission could or should be manipulated as an instrument of economic policy. Opinion shifted after several econometric studies had traced the relation between price and pressure of demand or productivity variables and the size of changes in award wages. It is now accepted that in Australia the widely observed influence of prices upon earnings has operated mainly through movements in award rates (C. I. Higgins, 1973).

The exceptional wage developments of recent years, as described here, are reflected in the findings of recent econometric studies, which show a marked structural change after 1963 in equations explaining increases in earnings by changes in award wages and the direct influence of other variables, as well as in equations explaining the movement of award wages. While the analysts have pointed out the smaller apparent influence of economic variables over this period, they have not attributed this to a swamping of the normal effect of economic forces by the impact of the extraordinary situation created by the 1967 metal trades decision and the collapse of penal sanctions.³⁶

Over a longer period, C. I. Higgins (1973) and Jonson and Mahar (1973) have found that the size of awards in basic wage cases can be related to the rise in consumer prices and to the increase in productivity since the previous case, and have found a similar, though less marked, influence of prices on Metal Trades Awards. In an earlier study, in which the productivity variable was not included, C. I. Higgins (1971) concluded that, over the period 1956 to 1970, about two thirds of the variation in award wages arose from the variation in the size of these major national awards, 13 per cent was directly due to changes in consumer prices, and 6 per cent was directly due to pressure of demand variables, leaving 13 per cent unexplained. Since a considerable part of the variation in major awards was itself attributable to the movement in consumer prices and the pressure of demand, he suggested that price changes might account for 60 per cent and pressure of demand for a further 15 per cent of the variation in the rate of increase in award wages (somewhat less if productivity growth and other factors not included in the analysis were to be positively correlated with price changes).

Higgins also found that about 56 per cent of the variation in the rate of change of average weekly earnings was due to variations in the rate of change of award wages expressed as a percentage of earnings and 25 per cent was due to the pressure of demand variables, leaving 19 per cent unattributed. Altogether, because of the effects of the pressure of demand on major awards and on the movement of award wages over and above the changes in major award cases, about one third of the variation in the rate of increase in earnings was attributable to the changes in pressure of demand. Award changes were reflected in earnings with significant lags; absolute increases in awards were more than fully reflected in earnings changes, although the percentage increases in earnings were smaller because of the greater absolute value of average earnings than of average award wages.

autonomous influences on wage developments

The studies referred to shed some light on how the apparent responsiveness of award wages to autonomous factors, postulated here, comes about.

As has been seen, the movement of award wages comprises the predominant effect of major national awards plus the effect of other changes in award wages, both influenced by the recent movement of consumer prices and the current level of activity. If major awards reflect the rate of increase in consumer prices since the last decision, their size will be related to the changes over this period in import prices, export prices, and the movement of domestic prices—the latter mainly reflecting other changes in award wages and the movement of earnings relative to award wages, both influenced by the pressure of demand. Thus the movement of consumer prices itself will be largely explained by external price movements and the pressure of demand. The movement of award wages will be influenced by those factors through the change in consumer prices and also directly by the pressure of demand.

Now one can see how the movement of award wages is influenced by autonomous changes in export and import prices. When export prices are changing (as in the period up to 1965/66), the induced changes in the pressure of aggregate demand influence the rate of increase in award wages and earnings, both directly and indirectly through their effect on the rate of increase in consumer prices. When import prices are increasing (as in the late 1960s and early 1970s), this affects the rate of wage increase by its direct effect on consumer prices and by its indirect effects on increasing the capacity to pay of import competing industries or of industries whose prices are set in conformity with world market prices. The pressure of aggregate demand will exert less influence on the rate of wage increase than in the preceding case.

restraints imposed by the system

Several important influences served to restrain wage increases during the 1950s and early 1960s. The exceptionally high level of domestic labor costs relative to those abroad, which resulted from the automatic adjustment of wages for the explosive increase in consumer prices at the time of the Korean conflict, imposed a constraint. Falling farm prices and incomes moderated wage pressure by keeping down the cost of living and limiting demand in the rural sector. Net immigration was responsible for raising the number of persons of working age by some 1 per cent a year over this period; this was a factor tending to ease the strength of wage pressure by contributing a greater degree of flexibility to the labor market than would otherwise have existed with the high employment prevailing (Downing, 1971) and also by rendering it difficult for the unions to organize labor in some sectors. On the other hand, immigration contributed to the high level of aggregate demand by enhancing the demand for construction and public services.

Despite these favorable conditions, it appears that the arbitration system also helped to limit wage pressures in several ways:

(1) By creating a general consensus on the existence of some “justified” rate of increase in wages.

(2) By limiting the development of powerful unions for the purpose of collective bargaining, except in a few sectors (Isaac, 1971b).³⁷

(3) By imposing an “institutional drag” upon wage settlements, at times taking deliberate advantage of the power to delay awards.

(4) By limiting the use of strikes as an instrument for securing wage increases from individual employers, through the existence of legal sanctions against strikes.

The whole procedure of wage determination by means of national basic wage and margins cases, and by means of arbitration in specific disputes, almost certainly exercised a greater degree of constraint on the scale of particular wage increases than would have applied under collective bargaining.³⁸ At the same high level of employment, in the absence of compulsory arbitration there would probably have been more unrest and a faster increase in wages and prices in strongly unionized sectors than that which actually occurred, coupled with a tendency for real wages to decline in other lower wage sectors. Such a tendency might in turn have generated political pressures for the raising of low wage incomes.

Australian experience indicates the importance and the limitations of penal sanctions. The establishment of the bans clause procedure in 1951 gave the Commission some power to act as a compulsory wage-fixing authority during the 1950s and early 1960s, despite the fact that award wages were minimum and not maximum rates for the job, since the penalties for strikes limited the willingness of the unions to strike for over-award increases when the employers resisted their claims. Subsequent experience, however, demonstrated that, in a democratic environment, sanctions cannot be used to enforce a decision which unions or employers are united in opposing. The principal usefulness of sanctions in connection with incomes policy is, perhaps, as a weapon against particular unions or employers who contravene a generally accepted code of behavior with respect to wage decisions.

While compulsory arbitration served to moderate wage pressures, it was nevertheless a valuable feature of the system that the movement of arbitration wages was not strongly insulated from market forces. This came about partly because of the influence of over-award payments in stimulating claims for increases in award wages. The arbitration authorities were rightly concerned that award wages should not fall too far out of line with actual wages, since this would have led to increasing reliance on collective bargaining rather than arbitration and since it would have been unfair to those groups which were wholly dependent on award wages. This attitude amounted to recognition that the power of the system to prevent wages from rising was limited when the unions could secure higher wages outside the system, but it served to prevent the buildup of market forces which has sometimes occasioned the complete abandonment of restraint under more rigid systems of wage control.

The Australian case confirms the impression (which any observer of centralized wage determination must derive from a study of the institutions and procedures applied in the Scandinavian countries, the Netherlands, and elsewhere) that it is exceedingly difficult to appraise the advantages of different forms of centralized wage determination, because their effectiveness depends to a large extent on the political talents of the administrators. One can see only that certain situations may encourage a fruitful attitude of compromise or that the apparent opportunities for personal influence, rates of remuneration, and so on may or may not encourage the entry, or the development on the job, of exceptional talents within the wage-determining organizations. The existence of close and continuous personal contacts, on an almost day-to-day basis, between a relatively few individuals with considerable authority in the employers’ organizations, unions, and government departments concerned is undoubtedly of the greatest importance. Problems can then be discussed before they become major issues; the individuals know each other sufficiently well to interpret each other’s reactions correctly; and they acquire an understanding of the difficulties and attitudes of the other parties. Informally, at least, the issues can be discussed in practical terms rather than in political slogans. Such close personal relations are obviously easier to achieve in a small than in a large economy.

The work of the Commission should be viewed as a continuous process of arbitrating between the employers and the unions, with the Commission tending to support either the one or the other group when its position is difficult. The survival of the system weighed more heavily with the judges than the avoidance of inflation; they were fully aware that the Commission’s powers were circumscribed by the risk of withdrawal of one or other side from the system. Partial withdrawals have, in fact, occurred in recent years—in developments such as the widespread recourse of employees to unofficial or official strikes at the plant level in support of over-award claims, with the employers conceding increases for the sake of continued production under boom conditions, or the metal trades employers’ decision to opt out of the system in 1971. However, it would seem worth considerable effort to preserve those existing institutions in the wage-fixing sphere that command a strong measure of public support. Australian experience illustrates that it may be possible to adapt an existing institution to perform a completely different function, when it would be extraordinarily difficult to set up a new institution for that purpose in the absence of widespread support for its establishment.

problems of implementing incomes policy

The history of compulsory arbitration since World War II prompts some reflections on the nature of the problem of implementing an anti-inflationary incomes policy under full employment conditions.

Two basic propositions need to be borne in mind.

(1) In a changing economic environment there will be a tendency for money incomes to rise more rapidly at certain points in the system than at other points.

(2) Under a democratic government, it will be impossible to maintain any form of incomes policy restraining the rise in money incomes unless the policy is generally regarded as equitable. The most easily accepted notion of equity is that per capita incomes should rise in line.

In practice this notion of equity has the greatest force where direct comparison of rates of change is possible—for example, as between workers in the same factory, between wage settlements for different industries, or between pay increases granted to various groups of employees such as industrial workers, civil servants, municipal workers, the armed forces, and so on. This explains the great importance attached to the principle of comparative wage justice in the Australian system.

It is generally more difficult to compare the rates of change or relative levels of wages and salaries and other forms of income, such as profits and income from self-employment, because far less information is available concerning the latter. Besides this, profits, farm incomes, and the like are expected to fluctuate more than wages and salaries, and profit rates vary as between concerns. Nevertheless, considerations of equity are powerful here too. The vague concept of capacity to pay represents a strong requirement in Australian public opinion that the arbitration system should ensure an equitable development of wages and salaries versus other forms of income; and a belief that this implies that the share of wages and salaries in the national income should at least be maintained over a period of years.

When a very high rate of profit is known to be earned by the typical concern in an industry, or by a single very large enterprise (such as General Motors-Holden), this raises conflicting notions of equity. Wage and salary earners in the industry naturally take the high rate of profit to indicate that the capacity to pay higher wages exists, and that their earnings are inequitably low relative to those of the owners of the concern. If the arbitration system grants a substantial wage increase in these circumstances, based on a vertical comparison between wages and profits within the industry, this disturbs the horizontal relativities between wages in this industry and those elsewhere; it also sets in motion pressures for commensurate wage increases in other sectors. On the other hand, if the arbitrators withhold a large wage increase on the grounds of comparative wage justice for other workers, the employees concerned are likely to negotiate wage increases outside the arbitration system, producing evident inequity between employees who are or who are not able to secure over-award increases, and encouraging the spread of collective bargaining in place of arbitration procedures.

Thus the arbitration authorities (or incomes policymakers) face a continual series of challenges arising from the need to reconcile the tendency for incomes to rise more rapidly at certain points in the system than elsewhere, with the necessity of satisfying the public’s concept of an equitable development of incomes. Policymakers must be continually seeking an economically feasible and politically tolerable compromise. The force of the concept of comparative wage justice virtually compels any incomes policy authority to adopt a uniform guideline for wage increases (possibly with somewhat more favorable treatment of the lowest paid workers). But if it is to survive, an arbitration system or incomes policy will have to accommodate powerful pressures making for “above-norm” increases in wages in particular sectors, which would otherwise be satisfied outside the arbitration system or in contravention of the incomes policy. This means that success in achieving a moderate rate of wage increase under a system of coordinated wage fixing will be conditional upon limiting the tendencies making for above-norm increases in certain sectors and as far as possible avoiding situations encouraging rapid wage increases in particular sectors of the economy.

One implication of this is that a noninflationary development of wages and salaries is unlikely to be achieved under centralized wage determination if there are sharp reversals of economic policy aimed at securing a rapid recovery of employment in recessions by stimulating particular sectors, notably the construction sector. The successful maintenance of an incomes policy over a period of years may only be possible within the framework of a wider coordinated economic policy aiming consistently at certain goals, including the achievement of a reasonable degree of price stability.

Two areas of special concern in seeking to limit above-norm wage increases are (1) sectors of unusually rapid productivity growth within the economy, and (2) the impact of external price increases.

Industries of rapid productivity growth are often characterized by large-scale units of production, capital intensity, difficulty of entry for new producers, and high rates of investment based on high gross profit rates inclusive of depreciation. These same characteristics make for substantial bargaining power of labor and encourage the development of strong unions. When higher-than-average productivity growth occurs through the discrete application of new techniques or the commissioning of new capital, it requires changes in the methods of operation and a work force willing to adopt new methods. In these circumstances there will be a powerful incentive to grant above-norm increases, in order to secure the gains in productivity, or to avoid the risk of losses occasioned by shutdowns in highly capital-intensive industries. For the enterprise, “productivity bargaining” presents a means of achieving cost reductions by promoting higher productivity and better industrial relations. The problem of preventing such arrangements from stimulating similar large wage increases elsewhere in the economy has not been successfully resolved in any incomes policy to date. Nevertheless, it would appear that the gearing of some above-norm wage increases to changes in work practices is a necessary feature of any system of wage determination; and that any lasting incomes policy must seek to find a practicable compromise between the wish to restrain the rise of money incomes in general and the need to permit above-average increases in earnings as a means of securing cost reductions through improvements in productivity.

Newly established, capital-intensive industries pose a particular problem in this context. In Australia, one factor making it difficult in recent years to maintain an undifferentiated rise in all wages more or less in line with the growth of productivity has been the high rate of return in industries such as automobile, engineering, and oil, where the price level was set by international prices plus tariffs while the level of pay remained lower than that of similar workers in the United States or Europe. The high rate of return in such industries was the result of deliberate government policy to provide inducements for the establishment of new industries in order to foster greater self-sufficiency of the economy. However, it inevitably follows that Wage restraint tends to be lax, and the bargaining position of labor in these sectors is exceptionally favorable.

As a remedy, it has been proposed that industries or enterprises which grant wage increases in excess of the norm should be subject to selective price surveillance or control. The Commission should perhaps be enabled to refer wage claims relating to specific industries to an independent organization for investigation if any important issue of national interest were raised. Such an independent body could consider and report on the economic position, past productivity performance and prospective gains, pricing behavior and scope for price reductions in the industry, and, if necessary, could suggest methods of enforcing greater wage and/or price discipline by government action. A body similar to the U. K. National Prices and Incomes Board might play a useful role, in conjunction with compulsory arbitration.

The Commission has been severely criticized for the fuzziness of its concept of capacity to pay. However, the judges seem to have been more aware than their critics that the movement of wages in an open economy at close to full employment is likely to be strongly conditioned by external factors because the capacity to pay of business in general will be changing, even if domestic economic policies and the rise in productivity remain unchanged.

In discussions of national wage awards, needless confusion has been caused by the failure to differentiate clearly between the capacity of business to support an increase in money wages and the economists’ concept of the capacity of the economy to support an increase in real wages (permitting money wages to rise without causing a price increase). In an open economy the arbitration authorities or incomes policymakers must expect that there will, at times, be powerful forces originating abroad, making for price and wage increases in export or import competing sectors (Swan, 1960). Insofar as these pressures are not mitigated by economic policy, the arbitration system or incomes policy has to accommodate them or collapse. When external prices and wages are rising, the incomes policymakers have to decide not only the maximum rate of increase in prices and wages that should be tolerated, but also the minimum rate of increase that is feasible in the prospective external conditions.

Under fixed exchange rates, and within a given institutional framework,³⁹ in the absence of incomes policy there will be some natural rate of change in average money wages (occasioned by pressures for pay increases from specific groups of employees) corresponding to each level of aggregate demand and set of external conditions affecting world prices. When full employment is maintained and labor is organized, the natural rate of wage increase will be positive; and it will usually exceed the trend growth of productivity if export or import prices are rising, or if the balance of payments on current account improves sharply when world prices are stable. It may be possible to keep the rate of wage increase below the natural rate by incomes policy. However, the more ambitious is the goal with respect to the difference between the natural rate and the rate of increase that it is hoped to achieve, the more coercive the incomes policy will need to be with respect to mandatory price and wage controls and sanctions, and the more necessary it will be found to attempt to reduce the natural rate by changing the institutional conditions—for example, by legislation and other measures to foster greater competition and limit monopoly power of firms and unions; by compelling enterprises to divulge details of profits, wages paid, and pricing policy; and by intervening in the detailed operations of specific sectors.

Rising prices make it more difficult to secure cooperation in a system of compulsory arbitration, as the willingness of employees to forego strike action in support of wage claims is decreased when enterprises are freely raising prices. It may therefore be an essential condition for securing benefits for a compulsory arbitration system, in the form of good industrial relations and moderation of wage pressures, that the system should be shielded from the impact of strong inflationary forces from abroad.

application of the system in other countries

In concluding, it is worth considering briefly whether the Australian system of compulsory arbitration could be adopted with advantage by other countries.

It is clearly necessary in this context to distinguish between countries in which collective bargaining is strongly developed and those in which wage determination procedures are still largely undeveloped. The Australian system originated in circumstances not dissimilar from those existing in a number of less industrialized countries today, and Australian experience supports the view that compulsory arbitration may be a highly useful device in a country undergoing industrial development. In a less developed country, where labor is not yet strongly organized in most sectors, and where the judiciate or the civil service is generally respected (an important qualification), the establishment of an arbitration system on the Australian model could be important as a means of avoiding an increasingly inequitable distribution of income, as between groups of workers in a position to capitalize on their market power by organization and those unable to do so (notably the self-employed or unemployed and employees of small-scale industry). As Turner (1965, pp. 69–70) has pointed out, the early stages of the development of collective bargaining are often accompanied by violent disturbances, with disruptive effects on the economy; and collective bargaining in a key major sector may produce such pressure on the general level of wages that it creates a strong inflationary tendency throughout the economy. The government may not choose to be directly involved in the thorny issue of wage determination, and it may lack sufficient trained administrators to undertake detailed responsibility for wage determination outside the public sector. An independent tribunal can, however, make detailed decisions on the basis of testimony presented by the employers’ and workers’ representatives, who will be fairly expert concerning conditions and problems in their particular industries, and so it can gradually acquire a general knowledge of the wage problems of the economy. Turner also refers to the advantages of a system of a basic minimum wage and margins as a means of establishing a favorable structure of relative wages such as to provide the necessary incentives to newly entered and inexperienced industrial wage earners to improve their individual capacity and efficiency.

The establishment of compulsory arbitration in industrialized countries is more problematical. Wage developments in Australia since the extension of collective bargaining, and labor’s increasing power to secure over-award payments at the local level, do not suggest that the establishment of compulsory arbitration alone would ensure any marked easing of wage pressures at close to full employment in countries where the unions and the workers on the shop floor are already strongly organized as bargaining units. Nevertheless, a permanent independent arbitration tribunal could play a certain role among the institutions of an economy in the circumstances just described. Even if its decisions were in the main accommodative, such a body would be better placed to achieve a consistent set of wage decisions and to promote the gradual development of less strongly sectional influences upon wage determination than would a series of ad hoc tribunals commonly resorted to as a means of settling major disputes. Such bodies are often either ignorant of, or determined to disregard, decisions in earlier cases. The advantages of having some permanent independent institution to adjudicate on particular wage decisions, and perhaps to set the general policy on wages in the light of advice from the Government, have been stressed as a means of avoiding political difficulties occasioned by the Government’s direct involvement in incomes policy and of lessening the danger of the unjustified relaxation of restraint before elections.

Reference was made at the beginning of this section to the benefits derived from the system of compulsory arbitration as an instrument of industrial relations. The influence of the compulsory arbitration system in restraining inflationary forces by lessening social frictions cannot be measured. To the extent that such a system can limit the tendency for the various social groups to compete against each other in the scale and timing of their pay claims and the tendency for businesses to become more inclined to raise prices in the expectation of rising costs and rising money demand, it can contribute substantially to making the economy less prone to accelerating price inflation. Over and above this direct gain it can contribute greatly to political stability and economic efficiency by avoiding the socially abrasive climate which is the greatest real cost of such an inflationary situation.