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A Response to the President of the Australian Council of Trade Unions (ACTU)
By David Burton
Director, Asia and Pacific Department, IMF
October 27, 2005

This letter was sent in response to a letter from Sharan Burrow, President of the ACTU, to the Managing Director of the IMF, which may be read at www.actu.asn.au, concerning the IMF's support for the federal government's recently proposed reforms of industrial relations in Australia.

Dear Ms. Burrow:

I greatly appreciated the opportunity to meet with you and Mr. Bakvis from the International Confederation of Free Trade Unions on October 6. This enabled us to discuss among other things the issues raised in your September 12 letter to IMF Managing Director, Mr. Rodrigo de Rato, expressing strong objections to the IMF's support for the federal government's recently proposed reforms of industrial relations in Australia.

As we discussed during our meeting, the key purpose of staff reports is to inform the IMF's Executive Board of macroeconomic developments and policies in member countries, and to give the IMF staff's assessment of these policies. Labor market policies are discussed in staff reports when they are critical to maintain or improve a country's macroeconomic performance, and I mentioned a number of other countries where the IMF staff had expressed forthright views on labor market policies. While your letter raised a concern that the IMF's support for labor market reforms was a "deplorable intervention in a controversial domestic policy debate in Australia," I hope that our discussion has clarified that IMF staff were meeting their responsibilities in a manner that is common practice for other member countries of the IMF.

In preparing its evaluation of the proposed industrial relations reforms, the IMF staff recognized that Australia has already made substantial progress towards a more flexible labor market.1 As noted in the staff report, this improvement in flexibility, supported by increased competition in goods markets and other structural reforms, has been an important contributor to Australia's excellent record of job creation and productivity growth during the past 14 years. I fully accept your point that the ACTU played a responsible and progressive role in these reforms, in particular through wage restraint under the Accord process.

Looking forward, the IMF staff views the proposed industrial relations reforms as further steps in the same direction, which will improve the functioning of the labor market and help sustain Australia's strong economic performance in future. In making this assessment, IMF staff took into consideration that strong protections for employees would remain in place.

Your letter was critical of the limited references to research on the impact of minimum wages in the staff report, aside from a reference to the government's submission to the Australian Industrial Relations Commission (AIRC). I mentioned during our meeting that staff reports are neither research papers nor surveys of the literature. We recognize that the theoretical and empirical literature is often inconclusive about the impact of minimum wages, especially in the United States where minimum wages are relatively low. However, there is stronger evidence that when minimum wages are at relatively high levels, they do tend to reduce employment, a conclusion accepted by the originators of the debate over the effect of minimum wages on employment.2 This international evidence is relevant to Australia, where minimum wages are high by industrial country standards.

Regarding the evidence on the effects of minimum wages in Australia, the staff report referenced the government's submission to the AIRC because it provided a convenient summary of the relevant research. All of these studies found a negative relationship between employment and wages in Australia. Of course, as in virtually all econometric work, the estimated elasticities are not all exactly the same; but in our view this fact does not provide a credible basis for concluding that the employment effects of a high minimum wage are negligible.

Although we consider that the high level of minimum wages is likely to reduce employment in Australia, the IMF's support for further reforms does not assume that minimum wages would be cut significantly in the medium term, contrary to the suggestion in your letter. As noted in the staff report, under the government's proposal to shift the determination of minimum wages to a new Fair Pay Commission, minimum wages would not be reduced from their current level. Rather, we expect that the welfare to work reforms would provide the main source of impetus for employment in the medium term, and we see room for further reform efforts to raise employment, especially among mature workers.

As I noted in our meeting, I believe that the IMF and the ACTU share many of the same objectives-increasing employment and standards of living, for example-but have differing views of the most efficient way to achieve those objectives. In general, the IMF favors safeguarding the adequacy of incomes through improved training and other measures to strengthen labor productivity and through the tax and transfer system rather than through direct interventions in the labor market.

Overall, the benefits of economic reforms in Australia, including improvements in the functioning of the labor market, have been substantial, and this gives a sound basis for expecting positive results from further labor market reforms. Hence, I can not accept the statement in your letter that the staff report's support for labor market reforms reflects poorly on the professionalism of the IMF review team. Nonetheless, I was much encouraged by our meeting, as you sought to establish a basis for a constructive and respectful dialogue in the future. The IMF team working on Australia will be following up on the steps we discussed to ensure a more effective exchange of views on industrial relations issues. Although there will clearly be some issues where disagreements will remain, I am sure that improving our dialogue will strengthen the IMF's ability to effectively fulfill its surveillance responsibilities in Australia.

Please do not hesitate to contact me or members of the IMF team on Australia if you would like to further discuss these issues. As agreed, this response will be made available on the IMF website.

David Burton
Director
Asia and Pacific Department




1 Australia's labor market reforms are reviewed by Felman, Brooks, and Callen, 1998, "The Labor Market," in Singh, Anoop, et al., Australia: Benefiting from Economic Reform, International Monetary Fund. A more recent review is provided by OECD, 2001, Innovations in Labor Market Policies: The Australian Way, Paris.

2 Card and Kruger, 1995, Myth and Measurement: The New Economics of the Minimum Wage, Princeton University Press.


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