NZ's labour markets have worked well, why overthrow them?

Dr Oliver Hartwich
NZ Herald
12 May, 2021

The Prime Minister is delivering on her main promise. Before the 2017 election, Jacinda Ardern promised to lead a "transformational" government. But only now are we seeing what she meant.

Ironically, the man whose support made Ardern Prime Minister in the first place later undermined all her reform ambitions.

Winston Peters prevented a capital gains tax, stopped hate speech legislation, and killed off the Auckland light rail project. These are just three examples of New Zealand First's handbrake on Ardern's former coalition government. You may even miss Winston for that.

New Zealand First is gone (whether for now or for good), and Labour commands a rare absolute majority. And so, the true meaning of the word "transformational" is finally becoming visible. The latest example is the labour market reform announced on Friday.

Dubbed "Fair Pay Agreements", the policy shifts employment negotiations from individual companies and employees to industry-wide bargaining. It is the biggest shift in workplace relations since 1991. New Zealand First's staunch opposition held it up in the last term.

And yes, this policy is truly transformational.

"Transformational", in the meaning of the Latin-origin word, stands for "changing in shape". However, it does not mean "better". It only means "different". And different it is.

Before the election of the Ardern Government, New Zealand was quite a unique country. It combined the British heritage of Westminster democracy and the common law with a "New World" can-do attitude. It was more egalitarian and optimistic than Europe. It was also less corporatist than Europe, even though it never carried the libertarian genes of the American Revolution.

Over the past three decades, New Zealand has outranked most developed countries for its ease of doing business and economic freedom in international surveys.

While European nations marched towards bloated government sectors and regulated markets, New Zealand's approach was relatively nimble. It served the country well.

Not least in employment relations did New Zealand's more liberal approach work, as the Initiative showed in its 2019 research report Work in Progress.

The 1991 Employment Contracts Act reduced the role of unions and allowed companies and employees to negotiate directly. No longer did we have industry-wide wage accords or collective agreements. These flexible reforms continued under the 2000 Employment Relations Act of Helen Clarke's Fifth Labour Government.

And over the ensuing 30 years – and contrary to what you may have heard - wages in New Zealand went up in line with productivity increases.

In most other countries, workers earned a smaller share of the economy over the past decades. Not so in New Zealand. Since the 1991 law, New Zealand employees received increasing shares of GDP as wages and salaries. Workers in other countries would have envied their Kiwi colleagues for that outcome.

Also, for the past 30 years, our labour productivity and wages have increased in tandem. As employees produced more, they also received higher salaries – in New Zealand, but not in other developed economies.

These positive outcomes for workers went hand-in-hand with low unemployment and high labour market participation rates. The New Zealand economy created plenty of jobs and opportunities – unlike most of Europe.

And if that was not enough, income inequality in New Zealand has trended down since the 1991 law bedded in. Whatever you hear about inequality in New Zealand these days has a lot to do with our obscene house prices. On the other hand, incomes have become more equal over time – unlike in countries like the US.

New Zealand's labour market regulations have succeeded. They have been beneficial compared to Europe where employment has traditionally been more heavily regulated and unionised.

Europe has often practised the opposite of New Zealand's liberal work-relations approach.

Instead of wage bargaining at the firm level, Europe had industry-wide agreements. Instead of limited union interference in wage determination, they had strong union power. And instead of non-politicised wage negotiations, European employment ministers often played a role in them.

European employees fared worse than New Zealand ones: for inequality, wage increases, and unemployment outcomes.

New Zealand's labour markets have worked well, thank you very much. Unfortunately, that does not stop the Government from trying to overthrow them.

To be "transformational", the Ardern Government wants to make our labour markets more like Europe. Well, actually, the so-called "Fair Pay Agreements" try to out-do Europe on regulation.

Take Germany as a comparison. It is a corporatist country in which trade unions enjoy a privileged role. Germany's unions may install "works councils" in companies. In larger firms, there are individual works council members who are fully exempted from work for the company. In companies above 500, a supervisory board with at least one-third employee representatives must be formed.

As far as trade-unions are concerned, it does not get much better than Germany. It is a paradise for organised labour.

Even by German standards, New Zealand's planned "Fair Pay Agreements" are outlandish.

Yes, Germany has collective wage bargaining. However, to be subject to collective wage bargaining, German companies need to belong to an employers' association. If they choose not to join, they will not be covered by the collective wage agreements.

In contrast, the Government's new Fair Pay Agreements can be initiated by just 10 per cent of the employees in an industry or occupation. Once that quorum is reached, there will be an outcome binding the other 90 per cent of employees and their employers. There is no escape for companies or employees not willing to be covered.

Incidentally, this move to compulsory collective bargaining will also put New Zealand at odds with our international treaty obligations. The right of workers to choose whether to appoint a representative to negotiate their terms and conditions of employment is enshrined in the International Labour Organisation's Right to Organise and Collective Bargaining Convention, 1949.

If an agreement cannot be reached under the Government's Fair Pay Agreements scheme, the Employment Relations Authority will determine one.

Again, this goes well beyond even the German approach. For companies not bound by a collective agreement, Germany's Federal Employment Minister can declare these agreements binding for all companies in an industry. But this is extremely rare and only happens in less than 2 per cent of such agreements. In New Zealand, however, this will be the default position.

Even by union-friendly German standards, the Ardern Government's labour market policies are super-generous for trade unions.

So, this is what the Government means by "transformational". It is not a change for the better: Our existing system delivered labour market, employment and wage outcomes superior to those overseas. But they will be scrapped regardless.

"Fair Pay Agreements" will make us more European than Europe, but not in a good way.

They are part of the transformation of New Zealand into a different country: not a market-based, small-government, light-touch regulation country but a big-government, union-dominated and heavily regulated economy. Apart from the unions, it will make everyone worse off.

There is no longer a handbrake inside Government to spare us this unnecessary and harmful transformation.

New Zealand businesses will thus have to do without Winston Peters to explain to the public why there is nothing fair, workable or agreeable about Fair Pay Agreements.





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