How manufacturing will survive the high dollar

Beware of dire predictions that manufacturers will be wiped out by the strong dollar unless they're propped up by the government. All our experience says it won't happen.

Manufacturers and their (highly vociferous) unions gave us the same warning in the 1980s when the Hawke-Keating government decided to take away their protection from imports. It didn't happen - the industry adapted, and survived to complain another day.

Though manufacturing's share of the nation's total output (gross domestic product) and total employment has been declining for the best part of 40 years, little of this is due to the removal of protection.

Most is explained by the services sector growing at a faster rate than manufacturing grew. On the employment side, it's also explained by computerisation and other technological advances raising the productivity of labour in manufacturing, so that the same quantity of output could be produced using fewer workers. (Agriculture and mining have the same characteristic, in contrast to the labour-intensive services sector.)

So it's only in recent years that the absolute quantity of Australia's manufacturing production has begun to decline. Manufacturing survived the removal of protection by rationalising its production, becoming leaner and fitter.

And probably by hastening its introduction of the latest labour-saving technology. When employers get their unions to pressure Labor governments to provide protection (or, these days, direct government grants), the workers imagine they're protecting jobs.

In truth, all they can protect is profits. That's certainly the history of what happened in manufacturing during protection's last hurrah in the decade before 1987.

One way manufacturing responded to the removal of protection was by getting into the business of export. That was utterly contrary to the prediction that without protection against imports it would cease to exist.

When vested interests make such claims they're playing on the public's lack of knowledge of economic history, lack of imagination and lack feel for how market forces work.

In a market economy, nothing stays static. Industries could just sit there doing nothing until their last customer leaves, but they don't. They take evasive action. They cut their coat according to their cloth. More formally, they adapt to their changed economic environment.

Individual firms may bite the dust, but the industry regroups and survives. Consider the advent of television from the mid-1950s. Many people imagined it would spell the end of radio.

Instead, radio changed its programming markedly and survived. It went from being something people sat in the living room listening to, to something they carried around with them, particularly in their cars. They listened to it while they were doing something else: driving somewhere or cooking the dinner.

Many people imagined television would spell the end of the cinema. It's true most of the cinemas in every suburb were converted to supermarkets, but then along came the video cassette recorder and video lending shops.

Finally, someone invented the multiplex cinema, a classic example of exploiting economies of scope (producing more than one product at the same plant). Today a wider range of movies would be showing in any city than when suburban cinemas were at their height.

So what can we say about how manufacturers may adapt to a prolonged high exchange rate? Well, one possibility is that they simply move their production abroad to where labour is dirt cheap.

You have to suffer all the illusions and delusions of protectionism and mercantilism to think that would be a terrible thing; that most of the displaced workers wouldn't be able to get work elsewhere in the economy. But, in any case, I doubt if nearly as much of it will happen as is feared.

So what else? People say the high dollar reduces the international competitiveness of our manufacturers. Actually, it reduces their price competitiveness. So one way to respond is to search for ways to reduce their production costs - by becoming yet more capital intensive (raising the productivity of their labour) or finding other efficiency improvements.

Another response is to find non-price ways to stay competitive. A reputation for high quality can justify pricing at a premium. Indeed, if you're smart you can get into the space where the causation is reversed: people take your higher price as a sign of higher quality (utterly contrary to the most basic assumptions of conventional economics).

You can use superior design to justify charging higher prices. You can beat the foreign mass-producers by being more carefully and quickly attuned to changing fashion. Or you can be more willing and adept at customising your product. If all else fails you can get yourself a reputation for giving good after-sales service.

This is an old Australian angle, but still relevant: look for niches to occupy. One advantage of our smallness relative to the rest of the world is that what seems too small to the big boys seems quite big to us.

If manufacturers are to get their cut from the much-foreshadowed blossoming of the Asian middle class, it's pretty safe to be in niche areas that are too small for our bigger rivals to worry about, or that somehow exploit the novelty of our Australianness.

I think this time it is quite likely manufacturing's output will decline. But it's even more likely we'll retain a manufacturing sector that's leaner and fitter than it is today.

If it does survive and prosper it will be because manufacturers and their employees find ways to raise their productivity and respond with a wave of innovation. There's nothing like having your back to the wall to call forth such an uncharacteristic response.

And it's a safe bet those firms that do best in adapting will be those that do best at enlisting the engagement and initiative of their employees.

Read more >>

Jobs aren't lost, just moved

As the media keep reminding us, the many pressures for change in the structure of our economy are causing some workers to be thrown out of their jobs. But this is unlikely to cause a decline in overall employment. Huh?

The structure of the economy - as represented by the relative sizes of the various industry sectors - is always changing. Normally the rate of change is so slow we don't notice it. At present, however, the pace of change is much quicker than usual.

These pressures are coming from outside Australia. Many are the consequence of the rapid transition of various populous economies from developing to developed. Some of these "emerging" economies are in South America; most are in Asia.

One big consequence of this development is that much of the manufacturing undertaken in the world is moving from the developed to the emerging economies, where labour is more abundant and thus cheaper. This is hitting manufacturing in all the developed economies, not just us. (They're not enjoying it, either.)

Because the emerging economies' immaturity means they're growing a lot faster than the rich economies, another consequence is that most of the growth in the global economy comes from them. That's been true for years; it will be even truer in the coming decade because the North Atlantic economies damaged their prospects so badly with their financial crisis.

A further consequence is that the cycle in the world prices of primary commodities - food and fibre, minerals and energy - is now driven more by the emerging economies than the rich economies.

And the different needs of the emerging economies - for energy, steel and high-protein foodstuffs - have produced a long-lasting change in the structure of world trade, where the demand for primary commodities is growing faster than the demand for manufactures, meaning the prices and volumes of commodities are growing faster than those for manufacturing.

Because the emerging economies have much more economic development to do, and because there's a pipeline of countries coming behind China and India, the increased global demand for commodities relative manufactures is likely to last for many moons.

This is bad news for the real incomes of most of the developed countries (which tend to import most of the primary commodities they use, while gaining most of their export income from manufactures), but great news for us, since our imports are mainly manufactures and our exports mainly commodities.

Of course, both the big advanced economies and we face painful structural change as a consequence of this shift in the structure of the global economy, but I know whose shoes I'd prefer to be in.

In Australia we have to shift resources of labour and capital to the expanding mining (and agricultural) sectors from the declining manufacturing sector and elsewhere in the economy.

The improvement in our trading fortunes relative to the rest of the world is reflected in our higher exchange rate - which is thus likely to stay high for the foreseeable future. To many people, this sounds like terribly bad luck (when they're not thinking about their next overseas holiday, that is).

To economists, however, it's all part of the same deal. Our trading position has improved, so our exchange rate has appreciated to help us bring about the change in the structure of our industries needed to fully exploit that improved position.

In other words, by making it harder for our manufacturers (and tourist operators and education providers) to compete on international markets, the higher dollar is helping shift resources out of manufacturing and into mining and elsewhere.

Of course, the era of the emerging economies isn't the only factor forcing change on our industries. The other big one is the continuing information technology revolution, which is presenting considerable challenges to our established media companies, the book industry, retailers and shopping-centre owners.

I started by asserting that the job losses being caused by structural change were unlikely to lead to a fall in employment overall. Why not? Because what creates jobs is the spending of income.

Starting with the mining boom, it's bringing a lot of additional income to Australia (first from higher prices per tonne, then from a lot more tonnes). But, people object, mining is highly capital intensive so it doesn't employ many people. It may account for 10 per cent of the value of all we produce (gross domestic product), but it accounts for only 2 per cent of total employment.

True, but what happens to all the income the miners earn that isn't paid to their employees? Some of it goes to foreign owners and is spent abroad, but the rest goes to local shareholders and local suppliers to the industry, with Australian governments also getting a big chunk (as they should).

When the local shareholders, suppliers and governments spend that income, jobs are created. Where? At present, a lot are in the construction industry but, more generally, all round the services sector.

How can I be so sure? Because the services sector (including construction) accounts for about 85 per cent of all employment and because it has accounted for all the net jobs growth for the past 40 years.

Next, the advent of new technology often prompts employers to retrench staff as machines replace workers. People imagine these jobs have been "lost", but economists know they've merely been "displaced" (moved).

Why? Because when companies make changes that improve their productivity (output per worker), they raise the economy's real income. The company shares the benefit from its higher productivity among its remaining workers, its shareholders and the taxman, but often competition forces the benefit through to its customers in the form of prices that are lower than they otherwise would be. And lower prices mean higher real incomes.

The point is that as this income is spent around the economy it creates jobs around the economy. Where? Somewhere in the services sector.

Ah, you say, but are all the workers "displaced" from manufacturing able to take up the new jobs in mining or the services sector? A lot more are than you imagine will be able to, but some will have a struggle and some individuals won't make it.

That's why the smart response from governments to pressures for structural change is not to help companies carry on as if nothing in the world had changed, but to help individual workers adjust to that change with help to retrain and relocate.

Read more >>

All hail mighty Aussie dollar, as it's here to stay

This year we'll see more painful evidence of Australian businesses accepting the new reality: our dollar is likely to stay uncomfortably high for years, even decades.

It has suited a lot of people to believe that just as the resources boom would be a relatively brief affair, so the high dollar it has brought about wouldn't last.

If there were no more to the resources boom than the skyrocketing of world prices for coal and iron ore, that might have been a reasonable expectation. But the extraordinary boom in the construction of new mining facilities makes it a very different story.

The construction boom is likely to run until at least the end of this decade, maybe a lot longer. The pipeline of projects isn't likely to be greatly reduced by any major setback in the world economy. That's particularly because so much of the pipeline is accounted for by the expansion of our capacity to export natural gas. The world's demand for gas is unlikely to diminish.

Last time I looked, the dollar was worth US105?, compared with its post-float average of about US75?. But that's not the full extent of its strength. At about 81 euro cents and 67 British pence it's the highest it's been against those currencies for at least the past 20 years.

In the context of the resources boom, the high exchange rate performs three economic functions. First, it helps to make the boom less inflationary, both directly by reducing the prices of imported goods and services and indirectly by lowering the international price competitiveness of our export- and import-competing industries.

Second, by lowering the prices of imports, it spreads some of the benefit from the miners' higher export prices throughout the economy. In effect, it transfers income from the miners to all those consumers and businesses that buy imports, which is all of them. So don't say you haven't had your cut.

Third, by reducing the price competitiveness of our export- and import-competing industries, it creates pressure for resources - capital and labour - to shift from manufacturing and service export industries to the expanding mining sector.

That is, it helps change the industry structure of the economy in response to Australia's changed "comparative advantage" - the things we do best among ourselves compared with the things other countries do best.

As businesses recognise the rise in the dollar is more structural than temporary and start adjusting to it, painful changes occur, including laying off workers. Paradoxically, this adjustment is likely to raise flagging productivity performance.

Economists have long understood that the exchange rate tends to move up or down according to movement in the terms of trade (the prices we receive for exports relative to the prices we pay for imports). This explains why the $A has been so strong, for most of the time, since the boom began in 2003.

But here's an interesting thing. In the December quarter of last year, our terms of trade deteriorated by about 5 per cent as the problems in Europe caused iron ore and other commodity prices to fall. They probably fell further this month.

This being so, you might have expected the $A to fall back a bit, but it's stayed strong and even strengthened a little. Why? Because when the terms of trade weakened, other factors strengthened. The main factor that's changed is the rest of the world's desire to acquire Australian dollars and use them to buy Australian government bonds.

Indeed, the desire to hold Australian bonds was so strong it more than fully financed the deficit on the current account of the balance of payments in the September quarter. It may have done the same in the December quarter. Among the foreigners more desirous of holding our bonds are various central banks.

Remember that, at the most basic level, what causes the value of the $A to rise on any day is that people want to buy more of them than other people want to sell. The price rises until supply increases and demand falls sufficiently to make the two forces equal.

So economists' theories about what drives the value of the $A are just after-the-fact attempts to explain why the currency moved the way it did. We know from long observation that there's a close correlation between our terms of trade and the $A.

But we also know this correlation is far from perfect. There have been times when the two parted company for a while. It's apparent the dollar is driven by different factors at different times.

And it now seems apparent that our relatively superior economic performance and prospects are taking over as the main factor driving the dollar higher (even though our terms of trade would have to deteriorate a mighty lot further before they were back to their long-term average).

There are various reasons why foreign investors (including central banks with currency reserves that have to be parked somewhere) would like to increase their holdings of Australian government bonds.

For a start, we're now one of the few "sovereigns" (national governments) still with a AAA credit rating. For another, the yield (effective interest rate) on Australian 10-year government bonds is almost 4 per cent, compared with about 2 per cent on US Treasury bonds or German bunds.

And the present and prospective state of our economy is a lot healthier than that of the North Atlantic and Japanese economies. Why are our prospects so much brighter and our interest rates higher? In short: the mining construction boom, of course.

It seems clear the world's financial investors are shifting their portfolios in favour of $A-denominated financial assets. And remember, because they're so much bigger than we are, what's only a small shift for them is a big deal for us.

All this suggests the Aussie will stay strong, even as our terms of trade fall back. Remember, too, the huge spending on mining construction over the years will require a lot of foreign financial capital to flow into Australia, helping keep upward pressure on the exchange rate.

This doesn't say the $A has become a safe-haven currency. Were some sudden disaster to occur in Europe it would probably take a dive as frightened investors rushed to the safe haven of US Treasury bonds.

But it probably wouldn't take long for the Aussie to recover - just as it didn't take long after the sudden disaster of the collapse of Lehman Brothers in 2008.

Read more >>

Why economists are obsessed by the resources boom

The world is throwing two big things at our economy. One is new, exciting, even frightening, and is getting all the headlines. The other is old news and getting boring. But get this: the boring one is by far the more important.

The new and exciting story is the increasingly worrying developments in the euro area. The old story is the resources boom. Both come to us from the rest of the world. In terms of their effect on our economic growth, the resources boom is a huge stimulus, whereas Europe's problems are a drag on our growth. That drag is small so far but, if the worst comes to the worst, could be a big negative.

Another reason the commodity boom is less exciting is that we've had plenty of them before over our history. But one reason we shouldn't underestimate the boom is that, paradoxically, previous booms have really stuffed up our economy. And these booms can be great for some parts of the economy while making life really tough for other parts.

This week Treasury's Dr David Gruen gave a speech to the Australian Business Economists in which he compared this commodity boom with the one we had in the early 1970s. It helps you see why the econocrats who manage our economy are positively obsessed by the need to make sure we don't stuff this one up.

In contrast to this one, the commodities boom of the early '70s involved big rises in the prices we were getting for our agricultural exports. It got going under the McMahon Coalition government and continued under the Whitlam Labor government.

Comparing the two booms, after the first three years our terms of trade - the prices we receive for our exports compared with the prices we pay for our imports - had improved by about the same extent. In the '70s, they then fell back. This time, however, they continued improving to now be almost 50 per cent better than their best then.

So this boom is a mighty lot bigger - Gruen calls it a ''once-in-a-lifetime boom'' - and a lot longer. This one's been building for eight years (with a brief interruption by the global financial crisis), whereas the earlier one lasted only about three years. The reason this boom is much bigger and longer is that it arises from a historic shift in the structure of the world economy - the industrialisation of Asia - whereas the '70s boom arose merely from an upswing in the rich countries' business cycle.

The greater size and length of this commodity boom has two important implications. First, it's given our miners both the incentive and the time to invest in hugely increasing their capacity to export coal, iron ore and now natural gas. That didn't happen with farmers in the '70s. This present investment boom has added an extra dimension to this boom, thus causing its effect on the economy to be bigger.

Second, the '70s boom was too small and short to have much effect on the industry structure of our economy. But this boom will leave us with a much bigger mining and mining-related sector, thus reducing the relative size of other sectors and putting a lot of pressure to adjust on some industries, particularly manufacturing, tourism and education. It's actually changing our economy's ''comparative advantage'' (what we're good at relative to other countries).

Naturally enough, both commodity booms caused the economy to grow faster. But in the '70s growth was a lot more variable. Real gross domestic product grew almost 9 per cent over the year to March 1973, but by 1975 the economy was contracting. It recovered, then contracted again in 1977. Unemployment, which had been very low for many years, shot up and stayed up. This time, growth has been strong but steady and unemployment has fallen and then stayed pretty low.

In the '70s, the inflation rate took off, reaching a peak of 17 per cent in the mid-1970s and staying pretty high until the mid-1990s. Obviously, the '70s commodities boom can't take all the blame for this long period of economic malfunctioning. But it should get a fair bit, and it certainly got the rot off to a good start.

There's one other big difference between the two booms that does a lot to explain why this boom hasn't caused nearly as much volatility, inflation and unemployment as the first one did: the exchange rate.

The present boom quickly brought about a rise in the value of our dollar. Since June 2002 it has risen by about 45 per cent against the trade-weighted index. In the '70s, the rise didn't happen nearly as quickly or smoothly.

Why not? Because then we had a fixed exchange rate. It could be changed only by a government decision. For political reasons, the two governments waited too long and didn't do enough to get the dollar up.

The point is that our floating currency acts as a shock-absorber when the economy is hit by some shock - favourable or unfavourable - from abroad. In this boom, the higher dollar has caused the Australian-dollar income of the miners to rise by less than it would have, and has effectively handed that reduction in their income to all the other industries and individuals who buy imports. How's it done that? By making imports cheaper.

By transferring income from the miners to the non-miners, the high dollar has helped ensure the rest of Australia gets its cut from the boom, but it's also reduced the size of the commodity boom's effect on the growth in gross domestic product by directing a fair bit of the increased demand into imports. This has caused the boom to generate less inflation pressure, as well as directly reducing the prices of imported goods and services.

So it's clear the present boom has had far more benign effects on the economy than the '70s one did. Our economic managers get a lot of the credit for that, but much credit is due simply to our floating exchange rate.

Gruen concludes, ''if a sizeable boom is being generated in one part of the economy, significant restraint needs to be imposed on other parts to ensure that the economy overall does not overheat''. See what he's saying? Yes, you're right, there is a multi-speed economy and manufacturers and service exporters are doing it tough. But that's not happening by unhappy accident, it's happening by design. Live with it.

Read more >>

Facts count, because what's mined is yours

By far the biggest development in the economy in recent years is the mining boom, and it's likely to roll on for at least the rest of this decade. But Australians are having a lot of trouble getting their minds around the boom's implications. The area abounds with worries and misperceptions.

Economists keep banging on about the mining boom because it's the biggest factor driving the economy's growth. We've had a surge in export income because the world is paying such high prices for our coal and iron ore. And we're also getting huge spending on the construction of new mines and natural gas facilities.

The other reason economists get so excited about the topic is that this is hardly the first commodities boom Australia has experienced (the first was the gold rush) and most of our previous booms have ended in tears. We've quickly spent all the extra money coming our way, but that's led to rapidly rising prices. The authorities' efforts to stamp out inflation have ended up causing a recession and rising unemployment.

The present managers of the economy are determined to ensure that doesn't happen this time by keeping spending and inflation under control. This explains why, until recently, the Reserve Bank was always thinking about putting up interest rates, and why the Gillard government has been so keen to get its budget back into surplus.

But all the fuss people like me have been making about the boom has left many Australians with a quite exaggerated impression of the size of our mining sector. According to a poll conducted by the Australia Institute, on average people imagine mining accounts for 35 per cent of the goods and services the nation produces (gross domestic product).

But while mining's share of national production has increased significantly in recent years, it's still up to only 10 per cent.

Many of us see the main pay-off from an expanding industry as all the jobs it generates. So what proportion of the workforce is employed in mining? According to the Australia Institute's polling, our average answer is 16 per cent.

The truth? Even after all that expansion, less than 2 per cent. How could an industry responsible for 10 per cent of our production account for just 2 per cent of employment? By being intensely ''capital-intensive'' - by using a lot of machines and not many workers.

So, does that mean mining isn't really worth all the fuss? A lot of its industrial rivals will tell you so, but it ain't true. The true test of the worth of an industry is not how many people it employs but how much income it generates. And, particularly at present, mining is generating huge income. Do you realise it accounts for more than half the nation's export income?

The reason income trumps employment is that as income is spent it generates jobs. When you spend a dollar it percolates through the economy, supporting and creating jobs as it goes. So if mining creates 10 per cent of national income but only 2 per cent of national employment directly, that just means it supports another 8 per cent of national employment indirectly, in other (labour-intensive) industries.

Which other industries? For the most part, service industries. How can I be sure? Because after you allow for the 2 per cent of Australians employed in mining, the 3 per cent in agriculture and the 9 per cent in manufacturing, the remaining 86 per cent are employed in the many service industries: wholesaling and retailing (15 per cent), healthcare (11 per cent), construction (9 per cent), education and training (8 per cent), the professions (8 per cent), hospitality (7 per cent), public administration (6 per cent), financial and business services (6 per cent), transport (5 per cent) and many more.

Another reason I can be sure most of the jobs created indirectly by mining are in the services sector is that, for at least the past 40 years, all the net increase in national employment has come from the services sector.
Am I touching a nerve here? A lot of people are uncomfortable about the mining boom because they see it as temporary and they see digging stuff out of the ground as a pretty unsophisticated way to make a living. What do we do when it's over and what else do we do to make a buck?

It's true the sky-high prices we're getting at present won't last, but nor will they crash back to what we used to get. And we'll have a much bigger mining industry selling a lot more of the stuff than we used to. They may be non-renewable resources, but we've got a mighty lot of 'em.

What else can we do? What most of us have always done: sell services to one another and to foreigners. In these days of the information and communication revolution, most of the highly skilled, highly paid jobs are in the services sector. Those who find this intangibility discomforting are hankering after a bygone century.

It is true, however, that we must ensure we end up with something to show for this boom and that too much of the huge profit being made doesn't just end up in the hands of the mining industry's owners (about 80 per cent of whom are foreign). After all, the minerals they're mining are owned by all Australians, not the miners.

That's why it's good to see Julia Gillard's profit-based mining tax finally being passed by the House of Representatives, even though Tony Abbott's mindless opposition to it allowed the three big foreign mining companies to butcher the tax.

Read more >>

Change is workers' only certainty

The shape of our economy is always changing, but lately the pace of change seems to have got a lot faster. Some industries are expanding, while others contract. Particular industries are having to change the way they operate - or the range of products they produce - in response to many pressures.

These changes almost always leave us better off materially. ''Structural change'', as economists call it, has been central to the process by which people in the developed world have become ever more affluent over the past 200 years.

The greatest force driving structural change is technological advance: the invention of better ways of doing things, new things to do and countless labour-saving machines. Globalisation has been driven partly by government policy, but mainly by the information and communications technology revolution, which has hugely increased the speed and reduced the cost at which information, money and people move around the world.

 

This has given us the global financial markets, but also the rise of the developing economies, particularly in Asia. Those countries' growing demand for our minerals and energy is bringing us great wealth but is also bringing intense pressure for change in the shape of our economy. Mining and the services sector are expanding, whereas manufacturing, the tourism industry and education exporters are being forced to adjust.

Then there are all the industries under pressure from the internet and the emergence of ''new media'': newspapers, free-to-air television, book publishing and book selling, and retailers whose customers have discovered how much more cheaply they can buy some things on the net.

The trouble with structural change, of course, is that the benefits go to the customers - new products, wider choice, lower prices - while all the problems go to the people working in the disrupted industries.

Managers have to find a new plan for their firm's survival. Meanwhile, workers go through considerable uncertainty and anxiety. At best, they have to shift to doing something completely different. They may be required to do a lot more for the same money. Perks may be cut. Or their prospects of advancement curtailed.

They may lose their status as permanents. At worst they get shown the door and take a long time to find another job. That job may well involve doing the same work for less money and poorer conditions - perhaps for the business to which their work was outsourced.

Managers have no choice but to face up to the business's changed conditions and cut their cloth accordingly. When they resist change or pretend it isn't happening they just make things worse. Non-unionised employees have to cop whatever solutions managers impose on them. But well-unionised employees have more power to resist, or at least have their viewpoint taken into account.

No firm fits this frame better than Qantas. It has lost its protected status as the nation's flag-carrier and must find a strategy for competing with myriad competitors, many of them low-cost. It can no longer afford the high salaries and cushy conditions its pilots, engineers and other employees have become accustomed to.

The problem at Qantas was not that workers wanted too much in pay rises - that's the standard stuff of such bargaining - but that they wanted to use their industrial muscle to force management to agree never to change the business in ways that disadvantaged their employees.

Sorry, but that's not possible. Here you see the grounds for business's latest complaint against Julia Gillard's Fair Work changes to industrial relations. Gillard has removed the list of ''prohibited content'' restricting the matters over which management and unions may bargain. This has permitted the unions to range far beyond claims about wages and conditions to issues that concern ''managerial prerogative'' and thus challenge ''management's right to manage''.

It's important to remember we're still engaged in the difficult transition from almost a century of compulsory arbitration - where, as soon as a strike began the umpire would step in to impose a settlement on both sides - to a new world of collective bargaining.

A central goal in making this transition - one expressed many times by the now-bellicose Peter Reith - is to encourage the two sides to bargain without external intervention. The goal was a new era of reduced industrial disruption as the parties recognised the great extent of their common interests and put less emphasis on their (undoubted) conflicting interests.

Right on. So I don't think banning debate about management decisions is the smart way to go. That would mean the law advantaging one side, giving managers permission to ride roughshod over the interests and even the opinions of their employees.

Half the trouble at Qantas is the employees' failure to recognise how the game has changed for their company, robbing them of their former bargaining power. The other half is the arrogance of management in their resort to ''managerial prerogative'', in their failure to explain and debate the new realities with their staff.

It's painfully clear management-employee relations within Qantas are utterly poisonous. The blame for that should be shared equally. The fate of Qantas is important in its own right, but it's more important as a case study in how big, unionised companies cope with structural change.

The industrial parties need to reach an accommodation, not rush to the ref. But I agree with Professor Paul Gollan, of Macquarie University, that Fair Work needs to provide a better mechanism to help the parties argue through their differences in cases where belligerence on either side threatens to impose unnecessary hardship on the parties and the public.

Read more >>