Ditch Iain Lees-Galloway's labour market reform agenda too

Roger Partridge
NZ Herald
28 July, 2020

Last week, Prime Minister Jacinda Ardern decided the conduct of her Workplace Relations and Safety Minister showed a “lack of judgment.”

Whether Iain Lees-Galloway’s indiscretions justified him being thrown out of cabinet is open to question. But the weaknesses of his labour market reform agenda are not so debatable. The proposals would harm both workers and the economy. They should be dispatched from Parliament along with the former minister.

Flawed Fair Pay Agreement proposals

Most flawed is Lees-Galloway’s claim that reintroducing a system of compulsory collective bargaining would be good for Kiwi workers. The former minister misleadingly called the system “Fair Pay Agreements” even though they were to be compulsory and prescriptive, the opposite of what is generally understood by the term “agreement.”

So-called FPAs would stop businesses negotiating employment arrangements with their workers. Instead, basic terms and conditions would be set across entire industries or occupations. The reforms would take New Zealand back to the system of pay awards that dominated industrial relations during the second half of the 20th century.

Lees-Galloway said FPAs were needed to repair the damage done to labour markets since New Zealand abandoned compulsory unionism and collective bargaining in 1991.

Yet, as the New Zealand Initiative showed in its 2019 report Work in progress: Why Fair Pay Agreements would be bad for labour, each of the former Ministers claims about the 1991 reforms is flawed.

Contrary to Lees-Galloway’s assertions:

  • Employees’ share of GDP has trended upwards since 1991;
  • Unlike other countries, market income inequality in New Zealand has fallen over the last three decades;
  • Wage growth has closely tracked productivity growth, not lagged behind it;
  • Wages have not been driven down by a so-called “race to the bottom” with “bad” employers undercutting the wages paid by “good” employers. Average real hourly wages in every wage decile have risen.

After taking office, Lees-Galloway also repeatedly claimed New Zealand’s poor productivity record was due to the 1991 reforms. Yet, while he was correct to identify poor productivity as the Achilles heel of the New Zealand economy, the evidence shows he was wrong to blame the 1991 reforms. The country has had poor productivity growth for more than half-a-century. The fastest periods of productivity growth were after New Zealand’s labour markets were made more flexible in 1991.

More importantly, judged by their results, New Zealand’s labour markets have been working very well. Until the onset of the coronavirus pandemic, unemployment was low compared with the OECD average. Over nearly thirty years, New Zealand’s employment growth has been the third fastest in the OECD. Our labour market participation rates have been among the highest in the OECD. On top of this, wages have been tracking productivity growth. And real wages for all deciles have been rising since the labour market reforms of the early 1990s – and not stagnating as they have been in some OECD countries.

It is no surprise that France and other countries are emulating aspects of New Zealand’s flexible labour market settings.

While the case for Lees-Galloway’s FPA system is weak, the case against FPAs is strong – and it is even stronger with the New Zealand economy on its knees due to the global pandemic. Industry or occupation-wide collective bargaining like Lees-Galloway’s proposed system of FPAs risks lowering the country’s already tepid productivity growth. FPAs will reduce flexibility of labour markets and increase the complexity of their operation. And they risk locking in inefficient practices. Kiwi workers and firms can ill-afford these risks with the economy struggling to get to its feet.

At the same time, if compulsory collective bargaining forces wages to rise (as unions no doubt hope it will), it risks even more job losses in firms unable to recoup the costs of higher wages from customers. This will likely disproportionately hurt the unskilled. Higher wages will also increase the hurdle for the unemployed – particularly young workers trying to enter the workforce.

No case for contractor reforms

Alongside his FPA proposals, Lees-Galloway also had plans to re-write the rulebook for contractors.

From truck drivers to tradesmen, and from cleaners to couriers, contracting is widely used across New Zealand as an alternative to paid employment. Lees-Galloway planned to turn some contractors into employees and create a new status of “dependent contractor,” with a fixed set of new entitlements.

Before intervening in private arrangements between firms and workers, one might expect some evidence of a problem that needed solving. Yet the Minister’s Better protections for contractors discussion paper released in late 2019 was remarkably free of evidence supporting his proposals to regulate the contractor model. 

The discussion document presents anecdotal evidence that some employers are guilty of misclassifying workers as contractors when, lawfully, they are employees. Yet this is a problem of enforcing the existing law. It does not support wholesalechanges to the law.

The discussion document repeats many of the economic discredited economic claims put forward by Lees-Galloway to support his FPA proposals. Removing these, all that is left are the anecdotes.

The OECD has recently warned that in this area “policy makers should be careful to base any decisions they make on evidence rather than anecdotes.” Unfortunately, this is a warning the former minister failed to heed.

Since there is no credible evidence of a systemic problem with contractor regulation, Lees-Galloway’s contractor reform proposals should follow him out of Parliament’s doors.

More troublesome intervention on the horizon

Just as firms and workers might hope the former minister’s misconceived plans will disappear with him, this month the Government revealed fresh ideas to meddle in labour markets.

On Monday, the Government convened the “Future of Work Tripartite Forum” to consider policy options to deal with workers displaced by the global pandemic.

Among the options is European-style unemployment insurance to substantially increase the unemployment benefits for workers who lose their jobs due to Covid-19.

While the Government’s plan may be well-intentioned, Germany’s recent experience in rolling back its wage-dependent unemployment insurance provides grounds for caution.

Following the GFC German unemployment rates plunged during a “labour market miracle.” after the country dismantled its wage-dependent unemployment insurance scheme created only a decade earlier. A 2018 Institute of Labor Economicsresearch project shows that the “miracle” was due to that country rolling back its generous, wage-related unemployment insurance scheme a few years before the onset of the GFC.

The study found that such schemes reduce unemployed workers’ incentives to look for new jobs. The study concluded that had Germany not rolled back its scheme, the unemployment rate would have been 50% higher by 2018 than it actually was.

The papers provided to participants at the Tripartite Forum note that “behavioural responses” such as those observed in Germany have not yet been factored into the New Zealand Government’s thinking on the costs and benefits of unemployment insurance. They need to be.

The lesson of all three reform proposals is clear: the Government must be extremely cautious before interfering with labour market settings that are working well. Both workers and the unemployed deserve better than well-intentioned but harmful labour market reforms.

Stay in the loop: Subscribe to updates