Michaelia Cash and Productivity in Wonderland

As you might expect, the Canberra Times is by far the best newspaper on things happening in Australia's Commonwealth Public Service.

On 16 October, the Canberra Times headlined a story Public servants are not living 'in the real world': public service minister Michaelia Cash.On 19 October, the paper reported that Rejected pay deal likely to result in more job losses at Australian Border Force. These two stories are examples of stories that have been running and running for several years now on pay and other disputes within the Commonwealth Public Service . In this post I want to briefly reflect on those stories, for to my mind they are examples of the mess created by the blind application of particular approaches.

The old Commonwealth Public Service was marked by four key features:

• It was non-party political and existed to serve the Government of the day. Objectives were set by the Government. The Public Service provided advice, but was then responsible for for implementing Government decisions, including the management of on-going programs. Particular agencies were responsible for particular activities, but did not have formal objectives outside the framework set by administrative and policy responsibilities.     
• Reflecting this approach, the overall focus was the ministerial portfolio.As portfolio responsibilities changed within Governments and between Governments, agencies were subject to relatively constant change as new functions were added, existing functions moved within portfolios or between portfolios. 
• It was a career service in which officers moved between agencies. To assist movement and also avoid the risk of nepotism, there was a common position hierarchy that applied to all agencies with jobs advertised within the Public Service. Variation was accommodated by some variations in position level between agencies, but always within the common structure.
• Terms and conditions of employment including pay were set centrally and were uniform across the Public Service. Again, variation was accommodated by variations in position structure between agencies.  

Perceived problems with the old system led to a number of changes. Of particular relevance to current disputes:

• Agencies acquired lives of their own through the adoption of corporatist approaches with their own plans, mission statements, goals and performance indicators. Technically, if not always in practice, these were meant to be subordinate to, to fall within, parameters set by Government policies.
• Government became more centralised and to a degree rigid. More control was concentrated at the centre, reducing the power of ministers. Within agencies, new decision structures were created that had the effect of centralising decision making, focusing advice and decisions within the frame set by corporate mission, objectives and performance indicators. One side effect was a reduction in the range of advice available to the Minister. 
• Certain HR and payroll functions were delegated to agencies in the name of flexibility and better management, leading to the creation of agency specific enterprise agreements whose terms and conditions could vary between agencies.
• Agencies placed greater weight on uniformity and consistency within the agency. Common and sometimes expensive communication and branding strategies emerged to reinforce the framework set by mission, values. plans and KPIs. Risk assessment and management became more important partly because of increased size, more because centralisation of authority focused the risk on a smaller number of individuals.
•  The new processes were computer dependent and were associated with investment in various IT systems used for management within agencies and in communication processes between agencies and the central coordination and decision processes. IT systems linked to agency structures, management and purpose became more divergent. .       

On coming to power, the Abbott Government made major changes to administrative arrangements, in so doing highlighting problems with the current  system as well as in some elements of Government thinking. .

To begin with, agency mergers brought together staff under varying enterprise agreements with different features, requiring complex negotiations to create new enterprise agreements. As the same time, a number of existing agreements were expiring, requiring the negotiation of new agreements. To manage the process, the Government attempted to establish common principles that would govern all negotiations. Central to these was a requirement that any pay increase be offset by savings elsewhere. To further complicate matters, agency budgets were being cut at the same time.

Under the old approach, the Government would simply have stated that pay increases could not be justified at this time and provided reasons. There would have been industrial trouble, but the process would have been relatively clear cut. Now its far more complicated.

The process is further complicated by the Government's mindset. This combines cost reduction with a desire to improved productivity. To this end, the offsetting savings required are encapsulated under a productivity improvement rhetoric. The confusions inherent in this approach are captured rather well in the views expressed by public service minister Michaelia Cash.

Ms Cash is a former industrial relations lawyer from the big end of town (Freehills) and it shows. I quote:

Federal public servants are not living in the "real world" of Australian workplace relations, according to public service minister Michaelia Cash. 

Senator Cash says the idea of a worker getting a pay rise without offering a productivity offset is "frankly unacceptable" in the "real world" where "Australians live".

The comments, in Senate question time on Thursday, indicate the government is digging in, with most of its 150,000 public servants well into the second year of a wages stalemate. 

Tens of thousands of public servants at key departments have rejected pay offers containing "productivity offsets", but Senator Cash told the Senate that was not how things were done "out there in voter-land". 

Answering a question from ACT Labor Senator Katy Gallagher, the newly minted minister said wage negotiations "in the real world" were conducted differently to the Australian Public Service. 

A combative Senator Cash said the government had been upfront about what it wanted in the wage negotiations. 

"It has required some wage moderation in this bargaining round," she said. 

"The government's offer has been on the table: it is a 1.5 per cent pay increase over three years.
"But what we have asked in return for the 1.5 per cent pay rise is productivity gains. 

"In the real world, where Australians live, where people open businesses and risk their own money, in the real world, you don't actually get a pay rise if you don't give a productivity gain. 

"I think out in voter-land, out when you're having a coffee in a cafe, when you're having a beer at a pub, when you're having a sandwich at a local sandwich shop, the idea that you would get a pay rise and not have to offset that pay rise with a productivity gain, quite frankly, is unacceptable."

There are a number of problems with Ms Cash's analysis. 

First, I doubt that most Australians would accept the idea that all individual rises must be offset by individual productivity gains, although they might accept that across the economy as a whole, the capacity to pay more  might be linked to productivity improvement broadly defined. I very much doubt that Ms Cash herself would have argued when she was a Senior Associate at Freehills that her pay increases should be limited to improved personal productivity on her part. I suspect that she would have been more inclined to point to changing market rates, although her charge performance would certainly have come into play.

It is correct, I think, that in large organisations pay rises are often linked to productivity improvements, especially during times of increased financial stress. However, and as we saw during the mining boom, when times are good competition for resources bids up wage costs. Wages increased at a time when measurable productivity seems to have been in decline because profits were there to support the wage increases. 

Looking specifically at the Commonwealth Public Service, the Service has already been subject to (and remains subject to) progressive efficiency dividends extending over considerable periods. It may well be that these have had limited effects on productivity, I have suggested that they may in fact have had negative effects. However if (as Governments have argued) the cuts have improved productivity, then that provides a base for a pay rise on Ms Cash's own arguments.

 More importantly, perhaps, productivity is quite hard to measure. For that reason, all the proposals placed on the table involve some increase in working hours combined with some reduction in costs through changed entitlements, things that can be valued. Now this is where a degree of unreality enters the debate. A 1.5% pre-tax pay increase over three years is so small in post tax terms that most public servants are likely to be worse off as a consequence of the required trade-offs. Why bother?

In the way of the world, disputes will drag on. In the end, market forces are likely to sort things out. As has happened a number of times in the past, a period of pay suppression will be followed by pay expansion as the Service finds difficulty in recruiting the staff it needs. .

Postscript

It seems from the Canberra Times that some form of break-through has been achieved on the pay dispute. The problem with the previous doctrinaire approach was summarised in this way:

Senior executives negotiating on behalf of agencies had complained privately about a lack of flexibility in the rules, which required that any proposed pay rises be funded through administrative savings or "cashing out" benefits, such as asking staff to work longer hours. 

Senator Cash said the revised framework would give agency heads more flexibility to strike deals, though the costs of any wage rises would still need to be met within existing budgets.

By increasing the maximum annual pay increase from 1.5% to 2% per annum while relaxing the obligatory offset conditions, the Government has created a better base for negotiation. Real public service salaries will still drop based on expected inflation rates and are likely to be below rates of increase in the private sector, while agency budget caps mean that pay increases automatically flow to lower head count in the absence of other savings. I don't have a problem with this, although there are some longer term issues.

On a related matter, the brief discussion in comments on productivity in professional services including law highlighted in my mind the way I am still struggling to come to grips with the concept of productivity improvement as applied to services.The confusion in my mind lies not so much in the concept of productivity improvement at firm level, but in the relationship between that and productivity improvement as measured by economists and expressed in statistical indicators. Quite simply, I am still confused!    .