A long overdue public debate has started in Australia about free riding in industrial relations – when non-union members benefit from collective agreements negotiated by union members without contributing (through membership dues or other payments) to their negotiation and administration.

Several union leaders want rules to stop free riding. Without this, they argue, union membership will keep falling, imperilling collective bargaining.

The issue has been given impetus by the latest data on union membership rates. The proportion of employees belonging to a union is now a record low 12.5 per cent. In the private sector it’s just 8 per cent.

In the 1980s more than half of the Australian workforce was unionised. Since then Australia has experienced the most dramatic deunionisation of any major industrial country.

That, at least in part, is by design. The Howard Government passed laws in the late 1990s and 2000s prohibiting union preferences in hiring, bargaining fees or other structured supports for union membership.

But the idea workers can get something for nothing – enjoying the benefits of collective bargaining, without contributing to its costs – ignores both economic theory and reality.

The economics of free riding

Economists have long grappled with the problem of free riders in many areas of economic life.

The textbook case involves public goods – things to which access cannot be limited to paying customers. Examples are clean air and water, infrastructure, policing and national defence.

With public goods, conventional market mechanisms (based on rational individual choice) do not work. If something is free to all, there will be some people prepared to voluntarily contribute to its cost, and others that won’t.

To address this market failure, economists endorse policy interventions that deliberately interfere with individual choice. For government-provided public goods, this usually relies on compulsory contributions (taxes).

Why pay when you get it for free?

Other industries and ventures also encounter free rider problems, and laws have evolved to address them.

For example, unit owners in a residential strata don’t have free choice to refuse monthly strata fees. They are required to contribute to the collective costs of running their shared building. The power of the strata to set and collect monthly fees is provided for in Australian law. If strata fees were voluntary, the whole system of strata ownership would collapse.

Nor can individual shareholders in a corporation choose to withhold their share of payments approved by the corporation’s duly elected directors. These provisions are recognised and protected in law.

When it comes to collective bargaining, however, Australian law not only tolerates but effectively encourages free riding.

Under the Fair Work Act, any benefit or entitlement (from higher wages, to working conditions, to rostering systems) negotiated through enterprise bargaining must be equally available to all workers covered by an agreement.

A narrowly rational individual might understandably ask why they should join the union when they can get all the benefits of a union-negotiated contract anyway.

Left to individual choice in this context, it’s not surprising union membership has fallen.

How other nations deal with the problem

I have catalogued six distinct approaches used by other nations to address this market failure and establish a viable foundation for collective bargaining. All are founded on the presumption that collective bargaining is socially beneficial and should be encouraged.

One approach, informed by traditional conceptions of property rights, is to close off access to union-negotiated wages and benefits to dues-paying members only. Varieties of this strategy have been tried in the United States and in New Zealand.

This has generally not worked, however, because employers can still undermine unions by voluntarily offering equal improvements to non-members. It also damages worker solidarity, critical to any collective organisation.

Britain, Canada, India and Japan (among others) allow closed shop or agency shop arrangements. In any workplace that has been unionised (through some kind of majority decision, like a ballot or petition), all covered workers pay dues to reflect the benefits they receive from the collective agreement. In a closed shop they must join the union. In an agency shop they don’t have to join the union but do have to pay the same fees.

The Philippines, South Africa and the US are among those with a modified agency shop system called bargaining fees. Everyone covered by an enterprise agreement (which must be ratified by affected workers) contributes something (usually less than full union dues) to the direct costs of negotiating and administering that agreement.

France and Brazil are among several countries that directly support collective negotiations with public subsidies. Like paying taxes for public goods, this approach directly allocates resources to fund a service (collective bargaining) deemed to be essential for a healthy labour market. New Zealand is taking a similar approach with its new Fair Pay Agreements (in effect since December 2022).

In Germany, Italy and many other European countries, collective bargaining is mandated by law, with employers above a certain size required to establish a workers council and cover the costs. Workers don’t have to join the union but, with such a well-funded infrastructure, collective bargaining remains strong.

In the Nordic countries and Belgium, extra support for collective bargaining is provided through union sponsorship of income support and social programs (like unemployment insurance and pensions). Workers are attracted to join their union to get better access to these services. This provides unions with resources and leverage for collective bargaining.

Developing an Australian-made fix

So there is a wide choice of specific ways to fix the free rider problem in industrial relations.

In Australia, however, the right to free ride is fully protected, even celebrated. The result (as intended) has been the steady erosion of union membership. Australia is now quickly converging with the US as one of the least unionised nations in the Organisation for Economic Co-operation and Development.

In December, the Albanese Government passed its Secure Jobs, Better Pay bill, aimed at strengthening collective bargaining. If these reforms succeed in broadening collective bargaining coverage, the evidence suggests Australia’s abysmal wage growth will
pick up.

That alone should enhance workers’ appreciation of the value of collective action, and indirectly strengthen the incentive for union membership.

Eventually, however, it will need to be recognised that collective bargaining is not free and is being undermined by a legal framework that pretends it is. We need to develop a made-in-Australia solution to fix it.

Dr Jim Stanford is an economist and director at the Centre for Future Work, Australia Institute and an Honorary Professor of Political Economy at the University of Sydney. Dr Stanford is a member of the Australian Services Union. The opinions expressed in this article are those of the author and do not necessarily reflect any official policies or positions of the AEU or the SSTUWA. This article was first published on the Conversation website and has been reproduced here with permission.