Why new Fair Pay Agreements claims don't compute

Roger Partridge
NZ Herald
1 June, 2021

Persistence looks set to pay off with one of Labour’s 2017 election manifesto promises: to reintroduce compulsory sector-wide collective bargaining across the country. Dubbed “Fair Pay Agreements,” the Government’s plan is to take New Zealand back to the system of awards that dominated industrial relations for most of the 20th century.

Yet, try as they might, successive Workplace Relations and Safety Ministers have been unable to make a credible case for Labour’s radical FPA proposals.

Back in 2018, the terms of reference to the FPA Working Group from then Minister, Ian Lees-Galloway, argued there were multiple “problems” with New Zealand’s labour market settings. There was just one issue with the former Minister’s claims. None of them stacked up.

Contrary to the Minister’s claims, since the old industrial awards system was abolished in 1991:

  • Employees’ share of GDP has trended upwards;
  • Unlike other countries, market income inequality in New Zealand has fallen;
  • Wage growth has closely tracked productivity growth, not lagged behind it; and
  • 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.

Indeed, as the Initiative showed in its 2019 report Work in Progress: Why Fair Pay Agreements would be bad for labour, the country’s labour markets have been working rather well for workers. Unemployment has been lower here than in most OECD countries. Labour market participation rates have been among the highest in the developed world. And, over the last three decades New Zealand has enjoyed the third highest rate of jobs growth in the OECD.

While productivity growth across the economy has been poor, the Initiative’s report showed that our productivity problem dates back more than two decades before the 1991 reforms. And the fastest period of productivity growth in the last half century was in the decade immediately after the old system of industrial awards was abolished. The evidence of New Zealand’s productivity performance provides no grounds for linking low productivity growth with the 1991 labour market reforms.

Indeed, the country’s track record since the early 1990s suggests it would be foolhardy to throw out a system that has been working so well for workers. 

Cabinet paper’s specious claims 

Fast forward from 2018 to 2021 and new Workplace Relations and Safety Minister Michael Wood put forward a mix of discredited and new claims to justify his FPA plans announced last month. 

Wood’s identifies seven “entrenched weaknesses” in his 7 May 2021 Cabinet paper seeking approval to draft new FPA employment legislation. But the new Minister’s claims are as spurious as his predecessor’s.

The holes in the Minister’s claims are so obvious that even his own officials have felt compelled to point them out. The Cabinet paper records that the (yet to be released) Regulatory Impact Statement from the Ministry for Business, Innovation and Employment concludes there is “minimal empirical evidence for the [labour market] problem or [the FPA] policy response.”

Wood’s first claim is that New Zealand’s labour market suffers from “a significant prevalence of low-quality jobs.”  He describes these jobs as “those that offer working conditions, pay levels and opportunities for advancement below what many consider acceptable standard.” But the Minister does not identify the nature of the jobs he regards as worthy of disdain. Nor does he explain how workers who are unable to obtain more productive, higher-paid work will suddenly command higher wages if a system of FPAs is introduced.  What is more likely is that FPAs will lead to job losses. Firms will only hire workers if their value (productivity) exceeds their cost (wages).

The Minister’s second “entrenched weakness” is “low real wages.” Yet the economic evidence shows that wage growth in New Zealand has steadily tracked productivity growth over the last three decades. Indeed, in 2018 the OECD singled New Zealand out – along with Denmark – as countries in which labour markets have been working well, with real median wage growth closely tracking productivity growth. Low wages in New Zealand are not a function of labour market settings. They are a function of poor productivity growth.

Inevitably, perhaps, low labour productivity is the Minister’s third problem. Though the Cabinet paper repeatedly asserts FPAs might improve productivity growth, the only evidence the Minister cites is an OECD study which finds the opposite. The OECD concludes that compulsory centralised collective bargaining (like FPAs) risk negatively impacting productivity growth.

The reasons why FPAs can be expected to harm productivity growth are obvious. Setting terms and conditions of employment across entire industries or occupations will reduce flexibility, risks locking in practices that are unsuitable or inefficient for specific workplaces and will add cost and complexity. These problems will then be amplified by the disruption from automation and innovation to the future of work. History also suggests FPAs will harm industrial relations, which will in turn hamper productivity. So much for the Minister’s third claim.

The Minister’s fourth claim is even more fact free. It is that wage increases have not kept “up with productivity increases in many industries or occupations.” The claim is not supported by any evidence. There is no reason to believe it is true.

Next the Minister claims the labour market has produced poor outcomes for particular populations: Maori, Pacific peoples, the young, the disabled and recent migrants. While the Minister is right to be concerned about labour market outcomes for the disadvantaged, the Cabinet paper offers no reason to conclude that FPAs will improve their lot. More troublingly, there are good reasons to conclude that FPAs will harm the marginal worker by increasing unemployment (euphemistically described in the Cabinet paper as “disemployment effects”).

Equally fact free is the Cabinet paper’s claim that ongoing skills shortages are a result of current labour market settings. The more likely culprits are the constraints the housing crisis imposes on labour mobility and the declining educational outcomes from an education system which is failing to produce the skilled workers the economy needs. Neither of those will be fixed by a return to a compulsory system of industrial awards.

Finally – and tellingly – the Minister identifies the low level of union membership in New Zealand and low levels of coverage by a collective agreement (at only 17%) as a systemic weakness of the labour market. But a weakness for whom?

The evidence of the last thirty years is that, given the choice, workers prefer not to be represented in their wage negotiations by unions. Unsurprisingly, they choose to have a direct relationship with their employer. This may be bad news for unions, but it is not a systemic weakness in the labour market.

And that is the real reason why the claims in Minister Wood’s Cabinet paper don’t stack up. New Zealand’s labour markets are working well for both firms and workers. But they have not been working well for unions. That is the only “entrenched weakness” of the current framework. And it is only a weakness if you are a union official. For anyone else, the case for FPAs does not compute.   

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