Labour market regulation – a case of devil take the hindmost

Dr Bryce Wilkinson
The National Business Review
16 June, 2019

The government has largely put the KiwiBuild and capital gains tax fiascos behind it.

Next headed for the cold storage might be the recommendations of its Fair Pay Agreement working group.

Led by former prime minister Jim Bolger, the working group handed the government a hot potato late last year. The central recommendation of its report, publicly released on  January 31, would return New Zealand to a mandatory sector-wide, trade union-dominated system of wage fixing.

This would be a vastly complex, fractious and problematic undertaking. Monolithic trade unions and employer groups would emerge to determine pay agreements for all. The biggest firms and unions could be expected to seize the most power.

The centralised bargaining of pre-1990s New Zealand required a barrage of advocates, litigants, tribunals, courts, regulators and dispute resolution procedures to make the system “work.” Similarly, specialist lawyers, tribunals, mediators and courts will now arise to litigate never-ending demarcation and other disputes. They will form an “industrial relations club” to take advantage of the system.

New Zealand’s previous attempt at centralised bargaining (aka industrial awards) was so strike-prone that ministerial intervention became common practice. That in itself was a sign of dysfunction.

The working group’s proposed reincarnation of the earlier industrial awards system is likely to hit small employers and the least employable the hardest.

Why? At its heart, the proposal is extraordinarily undemocratic. A mere 10% of workers in a sector or occupation could force the other 90% into the proposed procrustean system. Many of the 90%, particularly the self-employed and small enterprise employers, would have no meaningful representation.

No voice

Much worse, those with the most to lose – would-be workers – would have no voice at all. This includes school leavers. Would-be workers do not pay union fees. Unions’ duties are to their members. 

Prolonged involuntary unemployment is a scourge. It is an affront to human freedom and dignity. It lowers self-esteem and deprives its victims of much of their sense of purpose. (The New Zealand General Social Survey is quantifying the orders of magnitude for the lower life satisfaction and sense of purpose experienced by the unemployed.)

Policies that make it harder for the least-skilled to get paid work are not ethnically neutral. The non-mixed Maori unemployment rate is 10.3%, three times higher than the 3.2% rate for non-mixed Europeans.

Yet, politicians are under endless pressure to make it harder for the least employable to get paid work. Pressures to fix wage rates above the productivity of the least employable are most unkind to those least able to fend for themselves.

The minimum wage is one tool for pricing the least employable out of work. On the latest OECD statistics, New Zealand’s minimum wage in 2017 was one of the highest among member countries in the OECD, relative to average and median wage rates. Those pushing to raise it further are not demonstrating kindness to those at the bottom.

It is not the only tool. Pressures on local authorities to pay a living wage are pressures to benefit those whose wellbeing is likely already high relative to that of the chronically unemployed.

Health and safety regulations imposing drug testing on workplaces are also likely to penalise those disproportionally who have the least sense of purpose in life. Prolonged unemployment is associated with drug-taking.

Raising the unemployment benefit is a palliative that does not address the affront to self-esteem and lack of purpose and contribution.

The trade unions would be the obvious winners from what the working group proposes. Their membership, income and clout would increase. Union officials might once again have the power to “bring the country to its knees” through strike action. (This was a battle cry of the likes of union leader Fintan Patrick Walsh in the 1960s.)

The prospect of gains is more nuanced for the larger firms. They do not lose competitiveness domestically if all firms face higher labour costs relative to productivity, and smaller firms go to the wall. But they would lose competitiveness if they face international competition.

We saw this dynamic at work in the 1960s. A nil general wage order in 1968 was overturned by what then Finance Minister Robert Muldoon described as an “unholy alliance” of unions and employer organisations. Devaluations and double-digit inflation followed along with, and from the mid-1970s, deficits and rising debt and unemployment.

The losers

In short, the losers are likely to be the least employable workers, small firms, self-employed contractors, larger firms exposed to international competition, customers, and the general public affected by increased strike action.

What is fair about Fair Pay Agreements that seem likely to drive the most vulnerable firms out of existence and the least productive workers out of work?

Regrettably, the working group’s report did not even attempt to define fair pay or attempt to characterise it.

From a human liberty and dignity perspective, pay by mutual uncoerced agreement would be a reasonable definition. That is how we operate as consumers. School teachers and hospital staff would rightly observe that options are few when government is a monopoly employer but these cases are the exception, not the rule.

From an economic perspective, the market tendency will be for workers’ pay to track their value to the employer – in other words, their productivity. That is fair in the sense that neither side is commercially disadvantaged.

The absence of any articulated concept of fairness makes the notion of Fair Pay Agreements look Orwellian.

The NZ Initiative is preparing a report evaluating the working group’s report. Our report will examine the group’s recommendations and supporting arguments. We will also propose a better approach to tackle the unsatisfactory features inherent in our current arrangements.

The government is getting used to handling hot potatoes of its own making. We hope that on this occasion, it will focus on labour market regulations likely to raise rather than lower the wellbeing of those who are already the least employable.

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