The ludicrous, harmful thinking behind public sector pay policy

Linking remuneration to productivity improvement at the government agency level is bad economics.

For more than 10 years, this column has got itself into a terrific lather about the absurdity of remuneration policy in the Australian Public Service.

Agency-based productivity bargaining was introduced by the Keating government in the early 1990s. It was intended as a temporary measure to allow agencies to improve productivity in ways that were difficult under single, service-wide industrial agreements, to which the Keating government reverted in its declining years.

In 1996, the Howard government reintroduced agency-based bargaining under a pretence that improvements in remuneration would be linked to productivity gains. This policy was essentially maintained by the Rudd and Gillard governments.

While costing hundreds of millions of dollars more in operating costs than the rational alternative model (a single, APS bargain based on market rates), the Howard-Rudd-Gillard policy has been immensely damaging. For example, it has:

  • Corrupted the service's classification structure by promoting significantly different levels of pay for positions classified at the same levels. This in turn has undermined the promotion and transfer system.
  • Encouraged an unhealthy degree of competition for staff between agencies, resulting in a largely unjustified increase in middle and senior level positions at a huge cost.
  • Lessened the prospects of staff mobility between agencies and caused ill-feeling among staff who cannot see why an APS6 in one department should be paid more than in any other. That is, the much touted notion of "One APS" has become a joke.
  • Made machinery of government changes, where staff on different terms and conditions are required to cohabit in a single agency, much more fraught.

Worst of all, the remuneration policy has survived by fraudulent means that defy public service values emphasising honesty, trustworthiness and integrity.

If remuneration policy had been achieving its objectives, labour productivity should have increased at an annual rate of at least 1 per cent. That would have been sufficient, allowing for a modest increase in outputs, to keep the number of staff in the APS at about the same level since 1997. Instead, since then, the number of staff has increased by about 25 per cent. That is, labour productivity has almost certainly gone down.

When the Abbott government took over, it had ample evidence of the damage done by the Howard-Rudd-Gillard governments. What did it do? It extended the inherited remuneration policy and made it worse. Despite the government's aversion to regulation and its evil consequences, the minister for the public service, Eric Abetz, has bound agencies up in dozens of pages of red tape, the essence of which is that remuneration increases "must be offset by genuine productivity gains" – and the minister says these offsets must be 100 per cent. Piling on the stupidity, Abetz's rules say that "arbitrary reductions in staffing are not considered genuine productivity gains" even though arbitrary staff reductions may well be a significant source of productivity improvement.

Apart from sounding earnest, it's possible Abetz has some abilities although, when it comes to employment policy, he has all the nous of Mickey Mouse.

Linking remuneration to productivity improvement at the enterprise level is bad economics. For example:

  • It allows unproductive enterprises with things to bargain away to gain labour market advantages over productive and often critical ones with little to bargain about.
  • It creates incentives for employers, unions and staff to store up restrictive work practices for bargaining into the never never.
  • It requires enterprises to turn a blind eye to that which is most important to their productivity: the ability to maintain remuneration at a competitive position in the labour market.
  • Consistent application of the policy would require pay reductions in enterprises where productivity goes down.

Industrial relations should seek to promote enterprise productivity. However, linking remuneration increases to productivity improvements at the enterprise level won't do that and is likely to make more difficult the maintenance of a sensible relation between labour productivity and wage increases in the economy as a whole.

Further, in most public service organisations, it's just not possible to measure or anticipate productivity change with precision. That is, employers can say it's X and staff and unions can say it's Y and there's no way of knowing or establishing who is right or wrong. Negotiations are thus debased to shouting matches of unprovable assertions, the end point of which is impasse. In Commonwealth employment, it has now come to that.

What's to be done? Abetz seems hell-bent on continuing to defraud the system, if what's going on in his Employment Department is anything to go by.

The Canberra Times has reported the department is now consulting staff about two pay offers: one of 1.7 per cent and another of 2.8 per cent, both for three-year periods. The 1.7 per cent offer is based on the removal of a half-day pre-Christmas close-down and a "health allowance", slower incremental pay progression and tighter rules on higher duties allowances. For the juicy prospect of 2.8 per cent over three years, staff are asked to agree to all of the above plus 30 minutes more work a week and the loss of 46 staff to be achieved by natural attrition, i.e. an arbitrary cut.

Let's be absolutely clear: except for the staff reduction, none of these measures has anything whatsoever to do with productivity improvement. While such cheese-paring may save a small amount of money and even marginally increase output, it is highly likely to reduce the department's productivity. Moreover, the minister's bargaining regulations say that "arbitrary staff reductions are not considered genuine productivity gains". That is, Abetz has waved through an enterprise agreement for his department that is utterly inconsistent with the policy requirements he has imposed on all public service agencies.

Abetz, the ADF and the Defence Force Remuneration Tribunal have also fluffed, in more ways than one, pay increases for the military. The productivity measures served up by Abetz and the Australian Defence Force to justify the increase determined (1.5 per cent a year) were the removal of a one-day stand-down, ceasing of a commanders' discretion to approve extra recreation leave, increasing the higher duties qualifying period and increasing allowable driving limits. Other non-productivity savings were claimed from replacing a food allowance with a "one-off larder allowance" and adjusting rates of vehicle allowance. An attempt was made to burnish these insignificant changes by airy references to deployment capability, which is said to have been "factored into the productivity analysis". How all of this adds up to the $617 million cost for the ADF pay increases is only to be marvelled about. And only one of the listed matters is in any way relevant to productivity in the ADF and that marginally so. That is, the defence tribunal has allowed itself to be duped and the ADF has been given a paltry pay increase for reasons inconsistent with government policy.

By way of an aside, when this column asked for a copy of the joint defence-government submission to the tribunal, the tribunal suggested the request be put to the Defence Department. Defence said it wouldn't cooperate because the tribunal doesn't make "evidentiary material" it receives available to "third parties", which just happens not to be true. So much for open government on a matter of intense public interest.

Productivity is about how many widgets (or whatever) can be made in an hour. Fooling around with conditions of employment or imposing longer working hours is worse than irrelevant to productivity. Reducing employment conditions will not make staff work harder or smarter and so produce more per hour. Flogging reduces productivity. The same is so with longer working hours because growing tiredness means fewer widgets will be produced in later hours of the work day than in earlier hours.

What does the minister think he's up to with all his cack-handed dissimulation? The only end seems to be reducing government spending from what rational policy might require so that he can make a contribution to fixing a "debt and deficit disaster" that doesn't exist.

So, what can Abetz do?

First, he could hang on to his policy and let things get worse and worse, with more and more cheating to get piddling remuneration increases. At the same time, remuneration for civilian and military staff will become gradually less competitive in the labour market and productivity will suffer as recruitment and retention becomes more difficult.

Second, he could say that, when he said remuneration should be 100 per cent linked to productivity improvement, he didn't really mean it and that some cash savings, including through arbitrary staff reductions, could count given the precedent he has now allowed in his department. The problem is that cash savings from minor reductions in conditions and staff reductions are not bottomless pits, especially in public sector organisations, so such an approach can't last as a workable basis for policy (or, in the minister's terms, it's not "sustainable").

Third, he could say: "Bugger it. I might have saved some money but essentially I've stuffed it. I'll tear up the bargaining regulations and move to a series of public service-wide agreements that attempt to put major occupational groups in a reasonably competitive position in the outside labour market for comparable work, and I'll do likewise for the ADF and other Commonwealth agencies. I now realise that this will save hundreds of millions of dollars over the longer haul in transaction costs, will postpone pay increases for another six months or so, will provide a solid basis for negotiations with staff and unions, and will make an important contribution to greater efficiency and productivity in Commonwealth employment." That would be a big shit sandwich but Abetz could temper its taste by blaming his advisers, whether or not they are responsible for what's on his plate – he'd not be the first minister to do so, nor the last. And it's not as if the government hasn't been flexible about many of the things it has said it would or would not do.

There is no sign Abetz will take this sensible approach.

Community and Public Sector Union national secretary Nadine Flood says the government is attacking employment conditions and rights for pay increases of between 0 and 1 per cent, and that usually mild-mannered staff are angry. Pointing to a 95 per cent vote in favour of protected industrial action in the Department of Human Services, Flood says the government is provoking large-scale industrial action and Abetz is apparently refusing to meet the union to see if that somehow might be avoided.

So it only remains to wish the minister good luck in coping with the mess he's created. Here's hoping his Christmas is at least happy as it will be for Commonwealth civilian and military staff whose remuneration he is reducing in real terms. And spare a thought for other citizens who are having the productivity of Commonwealth organisations put at serious risk by the government's ludicrous policies.

Paddy Gourley is a former senior public servant.