The magic of markets (and why fair pay awards aren't needed)

Roger Partridge
The National Business Review
25 May, 2018

Is it possible to have too both too much and too little of something at the same time? This may sound like a problem posed by quantum physics but the question arises with something much more prosaic: bus drivers.

Driver shortages have been a trending topic in the national media in recent weeks. There have even been stories about the bosses getting behind the wheel to help out. And in April, Auckland bus company Ritchies applied to Immigration New Zealand to fill 110 bus driver jobs with migrant workers.

Meanwhile, First Union, representing bus drivers, has claimed there is no shortage, and “if anything, there is an oversupply of drivers in New Zealand.” Can they both be right?

Of course, there has been controversy surrounding Auckland’s bus drivers since early 2016, when Auckland Transport (AT) awarded bus contracts to several new operators. They promised “more for less,” with new fleets of state-of-the-art, low-emission buses and new standards of service.

One problem that quickly emerged was that the new bus services would not just involve lower costs for the city. They also involved lower pay for the buses’ drivers. And, because the negotiations took place between AT and the bus operators, it appeared the drivers had been given no say over their own wages.

Unsurprisingly, this raised the ire of the unions. And as a consequence, Auckland’s bus services have been disrupted ever since, with frequent industrial action, the most recent just last week.

Unfair treatment
Perceptions of unfair treatment of bus drivers in tender rounds in both Auckland and Wellington also prompted the Labour Party to campaign during last year’s election for the introduction of “fair pay awards” (or old-fashioned industry awards for those of us who can remember the 1970s and 1980s).

In the aftermath, new Transport Minister Phil Twyford suggested bus drivers could be the first workers to gain the benefit of such an industry award.

To some, Labour’s plans to reintroduce industry-wide awards is simply a nostalgic nod to an earlier, union-dominated, era. But there is something, at least superficially, unsatisfactory about workers being locked out of negotiating their own wages. That really doesn’t sound right.

And of course, it isn’t right. The labour market works like other markets. Or it does if it is allowed to. Workers are not passive price-takers. At least not in large cities like Auckland with acute labour shortages. If workers do not like the wages on offer they can look for employment elsewhere.

It seems that is exactly what has happened with bus drivers – and not just in New Zealand’s largest city but elsewhere around the country. Unhappy with the wages on offer by the new operators, bus drivers have taken their labour to other employers. There may be lots of bus drivers but they are no longer driving buses. And that is how we can have both too few drivers and, at the same time, more than enough trained bus drivers.

In response to shortages in supply, markets have a clever way of signalling scarcity: the price mechanism. And in recent weeks we have seen it in action, with NZ Bus, the Council of Trade Unions and First Union reaching a two-year contract, described by CTU national president Richard Wagstaff as setting “a new benchmark in Auckland on wages and work practices for the industry.”

Increased wages
Unless Immigration New Zealand grants Ritchies its wish for 110 migrant bus drivers, doubtless it will agree to increased wages, too. And the higher wages will entice more trained drivers to get behind the wheels of Auckland’s buses.

It is this ability to balance supply and demand that make markets one of humanity’s greatest inventions.

Of course, the labour market is not perfect. And no doubt the adjustment process must have been disruptive – for drivers and bus operators alike.

So it might be tempting for politicians to try to smooth over some of the market’s rough edges with national awards. But there are good reasons for policymakers to exercise caution.

By their nature, industry-wide awards lack flexibility. They do not differentiate between large and small employers or urban and rural workplaces. More importantly, they cannot hope to provide the flexibility that individual workplace agreements can offer to employees – or which individual workplaces may need from employees.  As a result, they pose a risk to both well-being and productivity.

And neither, in any event, do they offer a better solution to shortages of supply. We need only observe the acute shortage of teachers – especially in STEM subjects (science, mathematics, engineering and technology) – to see the pitfalls of national collective agreements.

Markets may not be perfect but they have an uncanny knack of ensuring we get what we pay for. There is a lesson in this – for bus companies and politicians alike.

Stay in the loop: Subscribe to updates