Multi-employer bargaining and firm heterogeneity: a case study

by Dan Andrews and Jack Buckley

New research by the e61 Institute examines how the introduction of multi-employer bargaining could affect market competition given the widespread heterogeneity in firm performance within industries.

In a case-study of firms in the air conditioning manufacturing industry – where unions are already pursuing multi-employer agreements – the research finds that:

  • Highly profitable firms co-exist with a large number of loss-making firms. The top 10 per cent of firms have profit margins exceeding 12%, while nearly a quarter report a loss.
  • Differences in profitability reflect large differences in productivity. Market leading firms are 30% more productive than mid-tier firms and 67% more productive than laggard firms.
  • High-performing firms pay higher wages with market leading firms paying average wages that are 13% higher than mid-tier firms.

The research also highlights that, given this heterogeneity, the introduction of multi-employer bargaining could have significant implications for industry dynamics and competition:

  • If mid-tier firms were drawn into a market leader’s enterprise agreement, their competitive threat may fall as they lack the capacity to offer the same wages while remaining profitable.
  • If laggard firms were drawn into the agreement, higher wage costs could force some less productive firms to exit, increasing aggregate productivity. However, this would require workers to be smoothly reallocated to more productive firms.

It remains an open question how these effects will play out. But these findings highlight that the Fair Work Commission must take into account the widespread heterogeneity in firm performance when considering whether businesses should be subject to the same enterprise agreement.