Public sector enterprise bargaining

An excellent article yesterday from the Canberra Times' Public Sector Informant. Paddy Gourley writes that:

It's hard to think of an area of policy that is more shambolic, fraudulent and counterproductive than the government's IR bargaining arrangements for the public service. It has been indulged for many years and is a proven failure. At huge extra costs, it has smothered productivity and efficiency, inhibited the movement of staff between agencies and wrecked the touted notion of ''One APS''.

Gourley's article provides an excellent synopsis of the failure of public sector enterprise bargaining, based as it has been since introduced by the Keating Government on the notion of productivity increases to offset pay increases. Any half decent economist will tell you that productivity increases are largely impossible to calculate in the public service because most public sector outputs cannot be measured. The Australian Bureau of Statistics values the outputs of the general government sector at their cost of production because there generally is no market price for those outputs. As productivity is simply the relationship between outputs and inputs, and public sector outputs equals inputs, then productivity in the public sector is always 1 - by definition, there can never be any productivity growth in the general government sector.

Because no one can measure public sector outputs, attempts by the public sector to justify increases in wages based on productivity improvements often become farcical. These justifications typically involve less staff providing 'the same' service at a higher per unit labour cost. However, inevitably the output is never 'the same' - typically, lower levels of staff input means increased rationing of outputs through reduced service standards, such as longer processing times, increased class sizes, or other types of reduced quality.

It is not possible to quantify this reduction in output value as a result of bargaining. However, one thing is clear - to the extent that there has been any reduction in the quality of outputs (and that must be the case in aggregate), then public sector 'productivity increases' are a real and direct cost to the consumers of government services.

Aside: The same logic applies to the imposition of efficiency dividends imposed on government agencies. Because governments are typically too spineless to cut bad-but-popular programs to make budget savings, they bleed departments of resources through 'efficiency dividends', which have the same effect in reducing service quality as do the 'productivity offsets'. They cut services without appearing to cut.

Worse still, the 'productivity offsets' mantra results in a plethora of more sinister public sector game playing in order to get around the enterprise bargaining yoke. Gourley nicely summarises the main incentive effects of the bargaining systems as:

• it rewards staff in unproductive agencies, who are more likely to get a pay increase than those in productive ones
• it tempts staff in productive agencies to create productivity-stifling practices that can be traded off for pay rises
• it works on the explicit understanding that one person's pay rise will mean another's job - such a sword of Damocles approach to personnel management is not the way to create a motivated and productive workforce; it will destroy it

To that list, I would perhaps add another. It could be regarded as a sub-category of Gourley's first and second points, but is significant enough to be noted separately. One aspect of unproductive behaviour is that of creating 'hollow logs'. That is, when bidding for new work, departments will typically either 'build in fat' or (if perchance they don't manage to get that past the Department of Finance) they will underprovide the service they were funded for. This activity is made easier if the new program is politically sensitive, where administration is a small component of the total outlay, or if the program is a Government favourite. In these cases there is little risk for the department, as the Government may be forced to provide supplementary funding to bring service standards back up to the level originally envisaged.

One note partly in favour of efficiency dividends is that they do at least confiscate some of these 'hollow logs'. However, they do it indiscriminantely - those agencies with no 'hollow logs' are as affected as those with large ones - and the efficiency dividends provide (or at least amplify) the incentive for the hollow logs in the first place!

Gourley estimates the cost of the failed enterprise bargaining policy at more than $200m since the early 1990s, with no attempt by any Government to promulgate any benefits from it. I wouldn't want to quibble with this admittedly rough calculation, except to note that it is likely to be conservative, as it only accounts for the direct administrative costs of the bargaining process and ignores the likely larger indirect costs from:

• the sinister game playing that goes on within agencies, between agencies, and between agencies and the Government
• the downward spiral in service standards for the consumers of government services

Finally, coming back to the issue of farcical arguments used to justify public sector wage increases, the Abbott Government has taken enterprise bargaining to new lows through its promotion of extra hours worked as one of a number of options available to achieve productivity offsets! Indeed, it would seem to be one of the few options remaining.

This absurdity simply demonstrates that Government, or at least its chief proponent Senator Abetz, does not even understand what productivity is - in simple terms productivity is the increase in output achieved over time by the same level of inputs, and it derives from working smarter - not by working longer!