Voodoo economics guide NZ workplace relations

Dr Oliver Hartwich
The Australian
31 August, 2022

If a workplace relations system requires armies of HR people and lawyers to work, it is too complicated.

At least that was the conclusion, jointly reached by the ACTU and the Council of Small Business Organisations Australia, with the support of the Albanese government.

As The Australian reported on Monday, the two organisations agreed to allow wage bargaining at the company level rather than an entire sector.

For Australia, this is major step forward which is likely to lift productivity and secure jobs.

But it is also ironic that such a flexibility-enhancing reform is happening in Australia while the New Zealand government is pursuing the opposite approach.

For the past three decades, New Zealand’s workplace relations were flexible and decentralised.

Unlike Australia, there was no awards system and no industry-wide bargaining. Individual employers and their employees could design tailored solutions to their circumstances.

The result of this liberal approach was the opposite of what unions might have feared. Instead of favouring the employer side, it was employees getting a good bargain out of the system.

The introduction of liberal workplace relations in 1991 saw employees’ share of GDP trending upwards. This coincided with a reduction in income inequality before tax and transfers. And finally, across all income groups, the average wage rates grew faster than inflation.

In short, it was a system which allowed flexibility in the labour market and delivered its fruits to workers. Their wages went up in line with productivity increases, just as they should.

For the current Labour Government, however, that is not good enough. Since it took office in 2017, it has been busy trying to change the settings towards industry-wide bargaining.

These workplace relations reforms run under the name ‘Fair Pay Agreements’. It is a misleading label since there is little that is fair about them. And with the threat of compulsion, they are not much of an agreement, either.

The new system was developed by the Fair Pay Agreement Working Group, chaired by former Prime Minister Jim Bolger. It recommended reintroducing compulsory, centralised, collective bargaining.

In the first term of the Ardern Government, the coalition partner New Zealand First stalled progress on these reforms. But in Ardern’s second term, with an outright majority in Parliament, nothing can stop their implementation.

Still, the Fair Pay Agreements approach is based on little more than voodoo economics.

In conventional economics, wages reflect economic conditions. If a company does well, if it increases its productivity and then its profits, that growing pie will be distributed between owners and workers. So, in this way, the wage increase reflects how well the company is doing.

In the Alice-in-Wonderland world of New Zealand Labour, things work differently. Their starting point is not a how the economy is doing but how it should be doing.

The idea is that wage increases should precede productivity increases. So a company should first pay its people higher wages, and it should then see how it could afford them, ideally through increased productivity.

This approach is courageous, in a ‘Yes, Minister’ way. No wonder even the New Zealand Ministry of Business, Innovation and Employment warned its ministers about proceeding with their Fair Pay Agreements plan.

There is an obvious problem with banking on future productivity increases: They might not happen.

It comes down to companies deciding on paying above-productivity wages in the vague hope they will be able to afford them later.

But business does not work like that. And economies that see wages rise faster than productivity will sooner or later face rising unemployment, since companies will not pay their workers more than what they produce.

The New Zealand government has brushed such economic concerns aside as outdated thinking. In their view, reducing labour market flexibility is a tool for lifting productivity, not hampering it. Never mind that all empirical evidence and research from the OECD points to the opposite.

So convinced does the government appear of its case, New Zealand may now expect a broad rollout of this new policy.

Initially, the government signalled that it would not expect more than a couple or maybe a handful of Fair Pay Agreements. But with the New Zealand First handbrake gone, there is no such inhibition anymore.

Only one minor problem remains. For negotiations to take place, it takes two sides. Though the unions are keen on going down the Fair Pay Agreements path, BusinessNZ has declared it is no longer prepared to represent the employer side. So either the government finds another organisation to represent business, or it must artificially create one.

Either way, while Australia has now started the process of reforming its broken employment relations system, New Zealand has started to break its working one.

That is good news for Australia. And terrible news for New Zealand.

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