[stop-imf] IMF responds to Aussie union blast

[Robert Weissman]

*To see the materials from the Australian Council of Trade Unions to
which the IMF is responding, see our earlier post:

http://lists.essential.org/pipermail/stop-imf/2005q4/001134.html

[the original ACTU letter is at: *

http://www.actu.asn.au/work_rights/news/imf2004articleivconsultation.pdf ]

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*http://www.imf.org/external/np/vc/2005/102705.htm

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
<http://www.imf.org/external/np/vc/2005/102705.htm#P33_1586> 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
<http://www.imf.org/external/np/vc/2005/102705.htm#P38_3458> 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.

With best personal regards,

Sincerely yours,

David Burton
Director
Asia and Pacific Department



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^1 <http://www.imf.org/external/np/vc/2005/102705.htm#P33_1587>
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 <http://www.imf.org/external/np/vc/2005/102705.htm#P38_3459> Card and
Kruger, 1995, /Myth and Measurement: The New Economics of the Minimum
Wage/, Princeton University Press.