Fair Pay Agreement reform remains a lemon

Roger Partridge
NZ Herald
31 May, 2022

New Zealand has been living with the prospect of a return to compulsory, sector-wide collective bargaining for nearly half a decade. Labour campaigned on its so-called ‘Fair Pay Agreement’ policy in 2017. But a combination of coalition politics and the lack of a convincing case for the reform saw it stagnate through Labour’s first term.

A Bill proposing to implement the reforms made its way to Parliament earlier this year. And on budget day last month, submissions closed on Workplace Relations and Safety Minister Michael Wood’s Fair Pay Agreement Bill.

The best that can be said for the Bill is that when it becomes obvious how bad the FPA idea really is, it will be easy for a government to repeal it. It requires just a single sentence to put a standalone Bill to death. ‘This Act is hereby repealed’.

It will be a good thing too.

The policy objective of the Bill purports to be to improve labour market outcomes in New Zealand. However, the Bill will harm just about every interest group in the community other than the unions.

New Zealand’s labour markets are performing very well, with high levels of employment, high levels of labour market participation, and one of the highest rates of job growth creation in the OECD. Therefore, the Government should be very cautious before altering labour market settings that are working well for workers and overall wellbeing.

The inevitable working group report and ministry discussion paper that preceded the Bill asserted a mix of perceived economic problems that needed “fixing.” But research from The New Zealand Initiative has demonstrated these were either make-weights or misleading.

Wages in New Zealand are not plagued by a race to the bottom. Employees’ share of GDP is not declining. Wage growth is not lagging behind productivity growth. The list of disproven claims by FPA policy proponents goes on and on.

It is true that productivity growth in New Zealand lags our OECD peers. But as the Initiative showed in its 2019 report, Work in progress: Why Fair Pay Agreements would be bad for labour, the country’s productivity growth was even worse when the country’s labour markets were regulated under the system of industrial awards the Government now wants to return to.

Worse still, international studies suggest that the inflexible industry- and occupation-wide system of awards in the FPA Bill risk harming New Zealand’s already tepid productivity growth.

It is not hard to work out why. Setting terms and conditions of employment across entire industries or occupations will reduce flexibility. It will lock in practices that are unsuitable or inefficient for specific workplaces. And it will add cost and complexity. None of this is rocket science.

Nor are the concerns with the Government’s FPA’s proposals unique to the Initiative - or other private sector groups.

A 2018 OECD study cautions that centralised bargaining systems like FPAs are associated with lower productivity growth if coverage is high.

Advice to Cabinet from Treasury, the Government’s own economic adviser, also questioned the rationale for introducing FPAs. Treasury questioned whether there was evidence suggesting imbalances in bargaining power caused wage and productivity concerns which FPA’s were claimed to address. And even if bargaining power were the problem, Treasury said it could not see a “strong case” that FPAs were the most appropriate policy response.

The Regulatory Impact Statement on the Bill from the Minister’s own department, the Ministry of Business, Innovation and Employment, was equally sceptical. MBIE stated that the proposed FPA system was not its "preferred" approach. Rather than throwing out the existing, flexible system of employment agreements, MBIE said it favoured tweaking it. This could be done by strengthening the existing system and setting targeted sector-based standards where a case could be made out.

Of course, New Zealand’s labour market regulations already have provisions to protect vulnerable workers. These include our minimum wage laws and Part 6A of the Employment Relations Act 2000. The Holidays Act and the KiwiSaver Act also contain a suite of statutory minimum protections that apply to all employees. It is not surprising neither Treasury nor MBIE could identify a need for FPAs.

Solutions lie elsewhere

If the Government is intent on solving New Zealand’s productivity problem, then it should be looking at other issues than our labour market settings. Fixing the country’s housing affordability crisis. Arresting the declining educational outcomes for school leavers. Upgrading the country’s ailing infrastructure. And sorting out the other critical aspects of social and regulatory policy that constrain growth. These are the policy areas where the solutions will be found.

Parliament will not achieve the Government’s goal of promoting a highly skilled and innovative workforce; an economy that delivers well-paid, decent jobs and broad-based gains from economic growth and productivity by “fixing” what is not broken.

Instead, as the Initiative concluded in its Work in progress report, a system of FPA’s will end up harming the very people it purports to help. Workers, especially the low skilled. The unemployed, who will face a higher hurdle to getting (back) into the labour market. And consumers.

The only group that will benefit from FPA’s are the unions. The FPA Bill places them back at the centre of wage bargaining. After three decades in the wilderness, it is no wonder unions are applauding the Bill.

But with the Bill threatening the prosperity of everyone else, the prospect of Parliament passing it leaves a bitter taste in the mouth.

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