Fair pay agreements will undermine the Government's goals

Roger Partridge
NZ Herald
9 July, 2019

Former Prime Minister Jim Bolger came charging back into public sight when the Government released his Fair Pay Agreement Working Group's report in January. The Bolger-led working group recommended the Government introduce a new system for setting wages and other terms and conditions of employment. Bolger calls the new system "fair pay agreements" or "FPAs" for short.

FPAs would see an end to businesses and their employees negotiating their own employment terms and conditions. Instead, basic terms and conditions of employment would be set across entire industries (such as "retail" or "forestry") or occupations (such as "builders" or "accountants").

The recommendations would re-write New Zealand's labour market rule-book. The resulting changes would be as profound as those after the then Employment Contracts Act was enacted in 1991. The ECA abolished compulsory unionism and scrapped the system of "industrial awards" which had dominated industrial relations for most of the last century. FPAs would not reintroduce compulsory union membership. But they would bring back compulsory industry- or occupation-wide collective bargaining.

Under a system of FPAs, the lower of 1000 workers or 10 per cent of the workers in an industry or occupation can trigger a compulsory collective bargaining process for the entire industry or occupation. Union representation would be compulsory for all workers. Employers would have to be represented by industry or employer organisations. If agreement could not be reached, a statutory body would determine the outcome for the entire industry or occupation.

In launching the Bolger working group, Workplace Relations and Safety Minister Iain Lees-Galloway expressed an ambitious goal of creating a highly-skilled workforce and an economy that delivers decent, well-paid jobs, along with broad-based gains from economic growth and productivity. This is a laudable goal. It is what governments should strive for. But will Bolger's recommendations help the Government realise its vision?

In a research report published this week by The New Zealand Initiative, Work in Progress: Why Fair Pay Agreements would be bad for labour, we find that the type of "fair pay agreements" recommended by the Bolger working group are more likely to undermine than to promote the government's goal.

Our research finds that New Zealand's current labour market regulation has been good for labour. Unemployment is comparatively low when measured against the OECD average.

Employment growth since 1991 has been the third highest in the OECD. Our labour market participation rates are among the highest in the world. And real wages for all wage deciles have been rising since the 1991 reforms. Overseas narratives of stagnating wages simply do not play out in New Zealand.

It is little wonder, therefore, that other countries – notably France under President Macron – have looked to emulate aspects of New Zealand's flexible labour market regulation.

Against this background, the Bolger report seems to be a solution looking for a problem.

The working group's report – and the terms of reference from the Minister – do nevertheless raise several concerns about the operation of New Zealand's labour market.

However, our research reveals that the concerns are either unsupported by the empirical evidence or that there is no evidence suggesting FPAs will help solve the concerns. In particular, we find that:

  • Contrary to the experience of many other countries, income inequality before taxes and transfers has actually declined in New Zealand since the early 1990s
  • The share of GDP going to employed workers has been trending upwards since the 1991 reforms (after two decades of decline)
  •  Average wages for New Zealand workers have risen faster than inflation across all income deciles
  • There is no evidence linking New Zealand's admittedly poor productivity performance with the labour market reforms in the early 1990s.

More importantly, Bolger working group's system of FPAs is a threat to the Government's goal of a higher-productivity, higher-wage economy.

The threat arises from the risk of slower productivity growth from FPAs locking in inefficient practice, reducing the flexibility of labour markets and increasing the cost and complexity of their operation. These problems will be amplified by the disruption from automation and innovation to the future of work. It may never have been more important that firms are agile enough to respond to the challenging demands of the marketplace. Yet industry or occupation wide FPAs will restrict this agility. Slower productivity growth means lower wages in the long run for workers.

Nevertheless, if the FPA process is successful in forcing up wages in the short-term, this will cause job losses in firms unable to recoup the costs of wages from customers. The risk will be the greatest for firms facing international competition. The burden of job losses will likely fall on the least skilled workers. And higher wage rates will raise the hurdle for the unemployed to enter the workforce, particularly inexperienced and unskilled workers.

Consumers also face a serious risk of harm from firms able to increase their prices to recoup higher wage costs from FPAs. The effect of increased prices will be felt most acutely by the least well-off.

The minister identified many of these perils of FPAs – including slower productivity growth – in the terms of reference to the Bolger working group. Unfortunately, the working group failed to make any substantive recommendations to manage or mitigate them.

To achieve the Government's goal of a higher-wage economy, we do need to tackle New Zealand's poor productivity performance. Many factors have been blamed for our dismal record. They include our small size and geographic isolation. There is little we can do about either of them. But there are many constraints on productivity growth we can address. Improving the educational outcomes of our workforce (especially our school leavers) and solving the housing crisis to enable workers to access high-growth regions like Auckland are two obvious examples. Our report offers a list of policy recommendations in these and other areas for the Government to consider.

In the meantime, the Government is taking time to consider the Bolger working group's report. Our research suggests it should consider rejecting the recommendations in their entirety. A system of FPAs is not the way to create a more productive, higher-wage economy.

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