BHP cutting wages does not improve productivity


BHP has been at it a few times recently, claiming that cutting wages via using its in-house subsidiaries is somehow a productivity improvement.

New subsidiary Operations Services is now employing workers at the Caval Ridge and Daunia mines in Queensland and, according to the Muswellbrook Chronicle, at the Mt Arthur mine in the Hunter Valley.

The company is quoted as saying: “Operations Services offers permanent jobs for workers – many of whom are currently labour hire employees and will provide security and flexibility to them, labour stability and productivity benefits for BHP.”

But the lie has been exposed repeatedly as a wage-cutting exercise that seeks to get around the union victory in the Federal Court Skene case where long term casuals were determined to be permanent workers entitled to annual and other leave.

BHP is seeking to bring the labour hire workers in-house – but at big wage discount. Matthew Stevens in the Australian Financial Review – no friend of workers – has pointed out that BHP is seeking to cut wages by $40,000 or more per year.

Cutting wages does NOT improve productivity. The commonly accepted definition of productivity is the ratio of the volume of outputs to the volume of inputs. (That’s from the OECD – the intergovernmental agency of the developed nations.) Note that it is NOT about the PRICE of either the outputs or the inputs. So labour productivity in coal mining is measured as the number of tonnes produced per hour worked or person employed.

Cutting wages does not move this figure at all. But it does lower the company’s wages bill per tonne of coal sold. That improves their profits, but not productivity.

Real productivity in coal mining (and other mining) has an on-again, off-again track record. Obviously the increasing size and efficiency of the equipment used has improved output per hour worked enormously over the decades since the arrival of mechanisation after WWII. And automation and remote operations is likely to do so too (though there’s little evidence of it yet).

But in recent years its actually gone up and down according to the mineral price cycle. In the big downturn in the late 1990s productivity soared as workers were retrenched. And again in the 2012-16 period as workforces were slashed after the end of the Resources Boom. But in the run-up to 2012 productivity fell as job numbers boomed while management sought to maximise production while prices were good. And it is falling again since 2016 when prices starting improving and job numbers went up.

This makes sense. In a downturn companies seek to shrink the workforce while maintaining production. Even if those cuts are not sustainable in the long term it produces an immediate bounce in productivity. When the upturn comes, more people are employed as companies seek to remove bottlenecks to increased production. Job numbers tend to increase faster than production, leading to a fall in productivity.

We don’t have good national data on coal output per person employed, let alone per hour worked. National data on that ended in 2005 with the last publication of Australian Black Coal Statistics by Coal Services Pty Ltd. We now only have data for productivity per person for NSW.

In 2005 that publication showed annual output per person as 10,345 tonnes of saleable coal. In NSW it was 10,355 tonnes per person. (It was actually lower in Queensland despite that state having a higher proportion of open cut mines.) Fast forward to September 2012 and NSW production per person per year had dropped to 7,680 tonnes. Forward again for the year ending June 2016 – the end of the price downturn, and after lots of retrenchments, the annual output per person was 10,541 tonnes. A big increase on 2012 but just a tiny bit more than in 2005!

Jump to December 2018, and Coal Services data show 9,364 annual tonnes per person employed on NSW. Productivity has been falling as coal prices improved and job numbers went up.

There are other reasons for the trends in productivity apart from the waves of retrenchments or job increases in response to the mineral price cycle described above. Increasing over burden ratios as open cut mines go deeper is one. Less experienced workers because of the greater use of labour hire is another. Turnover of management leading to poorer mine planning and equipment utilisation is another. Annual output per person may also be distorted by more or less hours being worked per person.

But one thing is for sure – that productivity per person is not altered one jot by simply cutting their wages. In fact, to the extent it results in higher labour turnover and experienced people leaving the industry, it is more likely to actually reduce real productivity.

If BHP keeps saying it is improving productivity by using the in-house subsidiaries with lower wages, it is showing it either does not understand productivity or, more likely, is seeking to obscure a simple wage-cutting strategy with the mantra of “productivity”. Because productivity growth is meant to be a way that companies can increase profits at the same time that workers can increase their wages. But BHP is, quite deliberately, giving up on the second bit.

And then it wonders why the mining industry has an image problem! Go figure!

Peter Colley