David Peetz. Productivity in the Construction Industry: Did it surge under the Coalition’s Reforms?Apr 8, 2016
On 7.30 recently the Prime Minister dismissed the Productivity Commission’s findings on productivity growth in the construction industry in favour of those from a small consultancy firm. He used it to support a claim that the previous Coalition government’s legislative reforms in that industry had led to a 20% increase in construction productivity, which had ‘flatlined’ under Labor.
Actually, though, things were a bit different. To see how we know it didn’t, and why he said it did, we look at (i) what’s it all about—what reforms are we measuring; (ii) what the official data show about productivity in that industry; (iii) why the Productivity Commission and a consultancy firm differed on the issue; and (iv) why the Prime Minister wanted to prefer the consultant’s version of events.
What’s is all about—what reforms are we measuring?
The debate is all about special laws on industrial relations in the construction sector. The Howard government passed laws in 2005 that created the Australian Building and Construction Commission (ABCC). The legislation provided for six months jail for anyone refusing to cooperate with ABCC inquiries, or speaking about them to anyone, and increased penalties for other breaches of industrial law. It didn’t just apply to construction workers—an passerby (an academic, in fact) on a street near a building site was interrogated for hours and threatened with jail if he spoke about it.
But even more important than the legislation itself was how it was administered.
In September 2010 the term of the Howard government’s appointee to the top job, John Lloyd, expired and he was replaced by a Gillard appointee, Leigh Johns. Gillard in 2009 had already imposed some restrictions on Lloyd’s activities. During most of Lloyd’s term, the coercive powers mentioned above were extensively used. Johns adopted a very different approach. He was much less antagonistic to unions. The use of compulsory interrogations dropped by nine tenths in 2010. Johns was criticised by Lloyd for pursuing sham contracting by companies—he labelled it a ‘trendy’ issue—at the expense of prosecuting unprotected strikers.
In June 2012 the legislation establishing the ABCC was repealed and new legislation, retaining some coercive powers but with more safeguards, took its place. The ABCC was replaced by the Fair Work Building Industry Inspectorate (which goes by the acronym FWBC). Johns moved across to head that body. As the ABCC under Johns had not been using its full powers, not so much changed with the new legislation in place.
In October 2013, after the election of the Abbott government, Minister Abetz put Nigel Hadgkiss into the top position, replacing Leigh Johns, who had resigned. Hadgkiss was Lloyd’s deputy in the Howard years. Hadgkiss accused Johns of having struck ‘deals’ with the construction union. Hadgkiss was described as ‘tough’ and the ‘right man to restore rule of law in construction’ by mining employers and as a ‘well known union basher’ by former union official Brian Boyd. The mining employer body considered that ‘appointing the right person…is just as important as implementing the appropriate institutional and legal arrangements’.
So there are really three distinctive periods in Commonwealth oversight of the construction industry since 2005, corresponding to the ABCC under Lloyd (2005-2010), the years of the Labor appointee, Johns (2010-2013), and the Hadgkiss years in charge of FWBC (2013-2015). The first and the third of these corresponded to ‘tough’ regulation, the second less so (though there were still coercive powers available).
What do the official data show about productivity in that industry?
The chart below shows labour productivity from 2005 onwards, in the construction industry and nationally, according to the ABS National Accounts.
What immediately strikes you on looking at this is how labour productivity in construction moved in tandem with national level productivity until 2011. There is no discernible effect from the ABCC legislation and the Lloyd years.
Then, in 2012 and 2013, there were large improvements in construction productivity that were not matched by the rest of the economy. Yet these were years when Labor’s appointee, Leigh Johns, was in charge of the ABCC and the FWBC, and coercive powers were rarely used.
Through 2014 and 2015 productivity growth in construction wound back (it ‘flat-lined’) while other industries started to catch up. This was the period when the ‘right person’ (or the ‘union basher’) Nigel Hadgkiss was back in charge of FWBC. Hadgkiss’ years corresponded to the poorest two years of construction productivity growth since 2005.
The second chart makes this pattern slightly clearer. It shows the average annual growth rates over the three periods.
Across the economy as a whole, the average annual growth rate did not vary much between these periods. But productivity in construction did: in the Lloyd/ABCC period, at 1.6% per annum, it was fairly similar to growth in the economy as a whole; in the Johns period, at 5.1 per cent per annum, it was well above national growth; and in the Hadgkiss period, at -0.5% per year, it was well below it. (If you want to split the Johns period into the ABCC and FWBC sub-periods, the numbers were 5.7% and 3.9% respectively, both well above the rates achieved under the more aggressive regimes.)
In short, the evidence suggested that productivity in construction was best when coercive approaches were not followed.
Why did the Productivity Commission and a consultancy firm differ on the issue?
The consultancy firm the Prime Minister referred to—originally called Econtech, then KPMG Econtech, then Independent Economics—had been commissioned by the ABCC, and later by a construction employer body, to try to prove a point (that the ABCC had done a great job). It published and republished largely similar reports, mostly updates using the same assumptions as the previous version.
At the core of the original Econtech analysis was a spreadsheet error, which some colleagues and I identified. Econtech eventually admitted this, but never changed the estimated productivity gains it claimed arose from the ABCC. Instead it made selective (and contradictory) use of start and end dates and questionable techniques to try to maintain the original finding.
The Productivity Commission obtained the original data we and Econtech had used, and found no error in our analysis. It concluded that ‘it cannot be maintained that the data show — even in an indicative sense — that aggregate productivity improved because of the BIT/ABCC’ (p786).
Why did the Prime Minister want to prefer the consultant’s version of events?
The government seeks to re-enact legislation re-introducing the ABCC. It has claimed that this is to deal with corruption in the industry, as identified by the Royal Commission on Trade Union Governance and Corruption, but there are three big problems with this.
First, the content of the ABCC legislation does not deal with corruption. That is why it cannot be extended into a ‘federal ICAC’ as sought by some: ICAC deals with corruption, ABCC deals with strikers.
Third, re-establishing the ABCC was not a specific recommendation of the Royal Commission.
So, another rationale is necessary. Productivity has long been used, spuriously, as the rationale for the ABCC. The Productivity Commission, never seen as a friend of unions, has dismissed the rationale, but the consultant’s report, paid for by the ABCC and employer bodies, naturally supported it. So the Prime Minister has chosen to make use of the only report that endorsed the preferred course of action, regardless of its origin.
What does it all mean?
All this is not to say that productivity would be enhanced by a more liberal regulatory regime or regulator.
Rather, the whole idea that the regulatory regime or the regulator determine productivity growth in construction is a furphy.
Productivity growth in the industry (and indeed, nationally) is influenced by a range of matters. It goes up and down from one year to the next.
In construction one of the biggest influences is simply how much work is going on. So the biggest fall in construction productivity in the past three decades occurred after the construction boom leading to the 2000 Sydney Olympics came to an end. It’s the downturn in the industry, not Nigel Hadgkiss himself, that has led to the current downturn in productivity.
But politicians and advocates will try to use productivity figures to prove a spurious point, carefully choosing the start and end dates to do so. If it gives the right answer, they’ll broadcast it; if it gives the wrong answer, they’ll ignore it.
The claims about productivity in the construction industry follow that pattern.
David Peetz is Professor of Employment Relations, Griffith Business School, Griffith University, Brisbane.