A bouquet for MBIE on Fair Pay Agreements

Roger Partridge
NZ Herald
13 July, 2021

In 1870, British Prime Minister William Gladstone up-ended Britain’s civil service. Instead of officials being appointed by politicians following changes of government, Gladstone’s reforms introduced a permanent, politically independent public service.

The reforms were modelled on the governance of the British East India Company. Incorporated in the 17th century, the East India Company’s administration had proved capable of managing more than half the world’s trade. Gladstone hoped that advice from independent officials would bring similar capabilities to public policy development and its implementation.

Gladstone’s reforms found their way to New Zealand with the passage of the Public Service Act in 1912. The concept of independence was carried over into the State Service Act 1988. And it remains at the heart of Labour’s new Public Services Act 2020.

Just how independent the civil service is, is another matter.

Treasury’s “judgment”

Last week’s revelation that Treasury’s forecast that house prices will only increase by a little over 2%, each year until 2025 were based on guesswork, has seen the Green’s Chloe Swarbrick and National’s Nicola Willis, questioning Treasury’s independence.

Labour’s Duncan Webb chairs the Finance and Expenditure select committee. Webb has denied opposition MPs the chance to cross examine Treasury officials about their forecasts. Webb’s reticence only reinforces suspicions about Treasury objectivity.

If Treasury is guilty of telling the Government what it wants to hear, that would be the antithesis of independence.

MBIE slays FPAs

No such charge can be levelled at the Ministry of Business Innovation and Employment.

While Treasury’s independence was under attack, last week MBIE proactively released its Regulatory Impact Statement evaluating Labour’s Fair Pay Agreement policy proposals.

Cabinet gave Workplace Relations and Safety Minister Michael Wood the green light for his FPA proposals in May. The proposals will re-introduce compulsory sector- and occupation-wide collective bargaining across the economy. FPAs will replicate the system of awards that dominated the industrial landscape for most of last century. Unions will resume the box seat in wage negotiations.

The flaws in Labour’s longstanding FPA plans have been well documented. So too has the evidence that New Zealand’s existing labour market settings have been working well for both firms and workers.

If the Minister thought his Ministry’s assessment of the impact of his proposed reforms would gloss over the flaws, he was mistaken.

MBIE explains up front that the Government’s proposed system is not its “preferred” approach. Rather than throwing out the existing, flexible system of employment agreements, MBIE favours tweaking it. Strengthening the existing system and setting targeted sector-based standards where a case can be made out.

While stating the case for FPAs is “weakly positive”, MBIE says “the approach has significant downside risks” and that “it is unclear the system would always have net benefits.” 

The regulatory impact assessment catalogues a litany of risks in the Government’s proposals. FPAs are “not well targeted.” They “may create significant labour market inflexibility.” When used in sectors without a demonstrable labour market issues “costs for employers and displaced workers…could outweigh benefits.”

Officials also warn that “The compulsory nature of FPA bargaining and the bar on industrial action may not comply with New Zealand’s international labour obligations.”

Though noting the FPAs could lead to increased wages, MBIE warns that the higher costs may simply be passed on to consumers.

Higher costs may also hurt employees “if employers reduce hours of work, reduce the size of their workforce or do not hire as many workers in order to remain competitive.”

Productivity and prosperity harmed

Critically, MBIE’s assessment contains warnings that FPAs would likely reduce productivity growth, with “potential impacts on innovation, productivity, and competition.” And the Ministry warns that binding a sector or occupation under an FPA could lessen employers’ abilities to “adapt to changing market conditions.”

MBIE draws attention to a similar warning in the OECD’s 2019 Economic Survey for New Zealand. The OECD said FPAs “would likely reduce wage inequality, but also reduce productivity growth in sectors covered if significant freedom to determine terms and conditions of employment at the enterprise level is not retained.”

In case this warning was not clear enough, MBIE’s assessment records that “The OECD Economics Department structural reform quantification simulator suggests that the reforms would reduce GDP per capita in the long run, the more so the greater the extent of the agreements.”

It is hard to conceive of a more damning conclusion from public servants.

MBIE goes on to state, “Under the Government’s proposed model we think there is a significant risk of setting up a regime which has net costs if the benefits to workers are less than the cost to employers and of providing the system.”

And if that was not clear enough, MBIE states, “We consider that the FPA system is not adequately targeted at relevant labour market problems and as such, is concerned that the benefits achieved may not outweigh the potential risks.”

MBIE’s regulatory impact assessment does not get everything right. The case it makes for more limited interventions in the labour market than the Government’s FPA proposals is unconvincing. The evidence of a so-called wage ‘race to the bottom’ is at best ambiguous.

Indeed, MBIE acknowledges that “[l]ow wages may be a symptom of a number of problems, of which a ‘race to the bottom’ is only one.” And MBIE accepts that low returns for tenure in occupations like cleaning, rail and bus workers could equally be explained by the productivity gains levelling off with experience in the role.

But, in the context of MBIE’s regulatory impact assessment as a whole, this criticism is little more than a quibble. No impartial reader of the regulatory impact assessment could conclude that the case for FPAs stacks up. MBIE has taken its Minister’s proposals and subjected them to Gladstonian scrutiny.

Sadly, the same cannot be said about the Minister’s decision to proceed with his FPA proposals despite his Ministry’s advice to the contrary.

But then, the objective of Gladstone’s reforms was only to take the politics out of the public service. What the politicians decide – and why – is another matter entirely.

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