At the time of writing the Howard Government’s industrial relations bills are going through Parliament and are likely to be amended in minor areas before they become law.

They will come into force early in 2006. However the fall-out is going to be with us for a long time yet. Too much is at stake.

What is making the process more complicated is that economic and political motives are being mixed. Many economists believe that the changes are mainly politically motivated even though both the Government and the employer groups say they are economic.

This article deals mostly with the economic arguments although we should note the political aspects. These are not getting a lot of coverage because both sides see disadvantages in pushing the politics of the situation.

The Government wants to see its reforms as economically based and not as an attack on the Labor Party and its supporters – the union movement. However it seems likely the new laws will weaken the trade union movement by cutting them out of the workplace.

This will see a decline in union membership (so the argument goes) that in turn will weaken the ability of unions to fund the Labor Party.

In addition the legislation will create a whole new breed of small business contractors through the Australian Workplace Agreements (AWAs). Small businesses are traditionally big supporters of the Government.

For its part, Labor does not believe that defending itself and the unions will get much public support and in any case it would only distract attention from what it sees as the negatives for many workers.

But what of the economic arguments?

The Government has said the reforms are necessary to increase flexibility in the workforce. This will lead to higher productivity growth, better conditions for workers, and a reduction in unemployment.

Now increasing workplace flexibility is an admirable aim but it’s difficult to pin down. Presumably it means that workers and employers will be better able to reach agreement on working conditions without too many outside restrictions.

This of course is what all the fuss is about. Will workers be bludgeoned into accepting conditions that lead to lower pay, worse conditions and the elimination of penalty rates?

The answer is highly variable. If you are in a highly skilled job where the demand for your talents is strong, you will not notice any difference. And in times of prosperity when unemployment is low then the effects will be minimal for most workers.

The crunch will come when there is an economic downturn caused by a rise in interest rates or a recession spreading from overseas. The bargaining power of workers will be greatly reduced and it seems likely that many will be offered AWAs on a take-it or leave-it basis. If a reduction in wages or conditions starts in an industry that is struggling, then it will probably spread amongst most employers as they try to compete.

But will these changes increase productivity or reduce unemployment? Both are desirable. Productivity growth, or output per hour worked, is the source of greater wealth. Unemployment is one of the major causes of poverty and social disadvantage.

In relation to productivity, the evidence is scant. There have been a number of studies looking at the link between labour market deregulation and productivity growth and none have shown a strong correlation.

New Zealand introduced labour market deregulation in 1991 with the Employment Contracts Act. In the previous 16 years it had similar productivity growth to Australia of around 2.5 per cent a year. After NZ introduced the new laws, productivity growth between 1993 and 1998 averaged just 0.5 per cent.

In the same period Australia, operating under its collective bargaining rules averaged 3.2 per cent. Rather than boosting productivity in NZ, there was a slowdown.

Indeed there are arguments that suggest that if wages decline as in a deregulated environment there is less incentive for employers to improve efficiencies and introduce labour saving machinery.

So what of unemployment? The argument is that wages should be allowed to fall to the clearing level where everyone who wants work can get it. Like the price of tomatoes, the price of labour should be allowed to fall until demand is strong enough to absorb it all.

This could happen if the Fair Pay Commission decides to limit the increase in the minimum wage so that the real wage falls. Again the evidence is scant but it may happen in some unskilled areas - although at a cost. As the economist Joan Robinson once remarked, the invisible hand of market forces always works, but sometimes by strangulation. But in a recession when the downward pressure on wages will be greatest, it is unlikely too many employers will be looking to take on labour, no matter what the cost.

There is also another problem with falling wages. In Australia in the 1980s the Labor Government had the Accord with the union movement and real wages fell.

It was during this period that we had the lowest rate of productivity increases for decades. With labour getting cheaper, why become more efficient?

And while more people may get jobs if wages are lower we could end up with a class of working poor. These people will have to receive top-ups from taxpayers - an undisclosed subsidy to employers.

So why is business so supportive of the changes if the economic advantages are dubious? Business is in business to make a profit. The new laws will increase profitability although it will not be because of increased levels of productivity but a transfer of wealth from employees to employers.