What Julia Gillard knew or did not know about the illegal fund set up by her ex-boyfriend, Bruce Wilson, then a senior Victorian Australian Workers’ Union official, and fellow official Ralph Blewitt, has been the centre of attention during the last week of federal parliament’s sitting.

However, the story tells us less about Gillard’s behaviour, appropriate or otherwise, than it does about the internal workings of the Australian Labor Party and the unions affiliated with it.

To recap: in 1992, Gillard was a lawyer with Slater & Gordon, a firm that boasted the AWU as one of its main clients. Gillard did the legal work for her then boyfriend Wilson and his sidekick Blewitt, officials of the AWU in Victoria, to set up the AWU Workplace Reform Association, supposedly to promote workplace safety. It was supported by donations from major construction firms Thiess Contractors and John Holland.

However, in 1995, Gillard discovered the fund was not officially sanctioned by the AWU. Rather, it was a ‘slush fund’ to assist candidates in an internal AWU stoush that Wilson was leading. Gillard was not involved in any of the activities subsequent to the fund’s formation and her relationship with Wilson had ended.

When the AWU discovered this unofficial ‘slush’ fund, national president Bill Ludwig sought an order in the NSW Industrial Relations Court in 1996 for the money to be returned to the AWU. The fund was seen then and now as inappropriate. Ian Cambridge, once national secretary of the AWU, wanted a royal commission into the fund issue.

When Slater & Gordon also became aware that Gillard, as one of its lawyers, had been involved in setting up a fund not authorised by its client, the AWU, it conducted an internal interview with her. Gillard left the firm shortly afterwards and in 1996 became chief of staff to the then ALP leader of the opposition in Victoria. She subsequently gained preselection and in 1998 was elected to parliament. Gillard’s links to the right-wing AWU had done no harm to her political career, given her Socialist Left faction affiliation.

While considerable attention has been paid to Gillard’s involvement in the fund, the affair also highlights two other important issues.

First, there is the continuing trade union influence on the Labor party, and Labor governments, and the nature of the interactions between trade unions and a modern political party that seeks to represent all Australians. Gillard’s involvement with the fund, and her subsequent move into politics, highlights how entwined the trade union movement remains with Labor. Getting on in the Labor party means getting on with the unions.

The union movement was once representative of the workforce. By the early 1950s its membership represented 60 per cent of the total workforce, so a link to a major party was politically legitimate. But does it make sense now?

Union membership in Australia has been in decline since the 1950s. It is now down to 13 per cent in the private sector and 18 per cent among the whole workforce.

Nevertheless, unions still call the Labor party home and are embedded deep within its structures. They control 50 per cent of votes at Labor conferences, dominate branch meetings, are major players on state and federal executive committees and preselection committees and are key financial contributors, though considerably less than previously. Unions can legitimately devote union funds to de facto political campaigns that assist Labor, as occurred with the Howard Coalition’s WorkChoices legislation during the 2007 election.

The problem is not only the decline in trade union membership, but also the change in the nature of Labor itself. Its members, both branch and parliamentarian, are no longer ‘working class’. In fact, there is no one in Labor’s federal parliamentary wing whose job immediately prior to election would make them ‘blue collar’ or even a ‘tradie’, if you consult the latest Commonwealth Handbook. While there are 36 ex-trade union officials in current federal Labor parliamentary ranks, many of them had no actual working experience in the areas their unions represent.

The other issue is that unions affiliated with the Labor party, like the AWU, Australian Manufacturing Workers’ Union, Shop, Distributive and Allied Employees’ Association, Liquor, Hospitality and Miscellaneous Workers’ Union or even the Construction, Forestry, Mining and Energy Union are hardly at the cutting edge of where the economy is heading and job growth occurring.

So, for a party wanting to embody policy modernity and vision then this strong institutional and emotional link to a declining institution like the unions is out of step with the times. Also, union links do little or nothing to help Labor connect with small businesses, which employ 70 per cent of the workforce and find many of Labor’s policies anathema. Nevertheless, recent suggestions to reduce the trade union link have been discounted. The reason may be less to do with nostalgic trade union links and more that unions provide personal powerbases.

The AWU funding scandal highlights poor governance and even corruption within trade unions then and now. Corruption in Australia has not just been confined to business seeking to influence state or local governments. It has often involved trade unions, as royal commissions into the Maritime Unions (1974), Federated Ship Painters’ and Dockers’ Union (1980), Building Construction Employees’ and Builders Labourers’ Federation (1981), the building industry in New South Wales (1990) and the building and construction industry (2001) show. The recent problems concerning the Health Services Union are further proof of this.

It is this bigger picture that the federal opposition has failed to grasp, despite its obsession with Gillard and the AWU scandal. While Abbott is calling for a ‘judicial inquiry’ into the AWU affair, what is needed according to Michael Costa, former NSW Labor government Treasurer, is a royal commission into the whole management of trade unions.

That a review of union governance is overdue is not in doubt, but the establishment of such an inquiry by an incoming Liberal-National party without it looking like a political exercise would require special attention to its membership and terms of reference. And Labor well knows how royal commissions can be used for political purposes. Abbott as federal industrial relations minister established the Royal Commission of Inquiry into the Building and Construction Industry which was seen by many in the union movement as an overt attack.

If the Labor party is to overcome its present poor primary vote around Australia, escaping the jaws of a narrow and declining trade union movement must be the first step to establishing the more relevant, modern social democratic party that Australia needs to provide real policy choice.

That’s if the unions let them.

Scott Prasser is Professor of Public Policy at the Australian Catholic University, Canberra.