What is your labour really worth?

Dr Eric Crampton
The National Business Review
28 April, 2017

It is too easy to take prices for granted – in part because nobody invented them. If somebody had invented prices as a way of making sure that goods, services, capital and workers wind up, for the most part, getting to the places where they are most needed, that hero would have commemorative statues everywhere.

Economists could have carried placards with the inventor’s picture in last weekend’s March for Science.

But prices are an emergent outcome of human interaction rather than a product of human design. And meddling with them then is always dangerously tempting.

Enter the Employment Relations Authority and the government’s Draft Employment (Pay Equity and Equal Pay) Bill.

The bill would ultimately have the authority decide on allowed wages – the price of labour – if employees brought a claim that they were underpaid.

It requires that remuneration in female-dominated occupations be no less than remuneration in male-dominated occupations with substantially similar skills responsibilities and services, where work is undertaken under substantially similar conditions, and where substantially similar degrees of effort are involved.

Reversal of markets

But that gets the workings of prices in competitive markets completely backward.

Value and price do not derive simply from the skill involved in some type of labour, or from the working conditions, or from inherent responsibilities. What matters instead is how much consumers value another bit of the final product or service, and how many people are willing to provide the labour to supply it.

If two jobs have, as far as an employment tribunal can tell, equivalent skills, equivalent working conditions and equivalent responsibilities, and one pays far more than the other, that price difference is important.

It says there is a surplus of workers in lower-paid jobs, relative to demand for their services – and a relative shortage in the higher-paid jobs.

For example, translation between Maori and English, or between French and English, may require equivalent skill, training and working conditions but no tribunal could improve on existing market prices to tell you which job should pay more in New Zealand.

Signalling shortages

When markets work well, the signal sent by wage differences tells people entering the labour market where the relative shortages are – and provides them with an incentive to help change things. And if the wage difference persists, maybe, just maybe, there are aspects of the jobs that the bureaucrats have forgotten to consider.

But enough about theory. What happens when an employment tribunal decides that it is the best judge of what wages should be? We can look to Ontario’s pay equity experience in the 1980s.

Ontario’s 1988 Pay Equity Act went further than has so far been proposed for New Zealand. Rather than wait for employees to raise pay equity claims, as is here proposed, Ontario required employers proactively to implement pay equity plans.

While that made Ontario’s regime far more costly than New Zealand’s is likely to be, because far more employers were covered, it also meant Ontario was better placed than a lot of jurisdictions to try to figure out which kinds of employment should be considered comparable. And Ontario did not have an easy time of things. A 1999 evaluation by Morley Gunderson and Paul Lanoie described the resulting mess. They describe the process in one hospital, where four pay equity committees spent weeks and countless meetings deciding on job evaluations and consequent wage adjustments.

‘Litigation nightmare’

While that hospital’s process did not even wind up involving the tribunal, cases that did hit the tribunal made for a “litigation nightmare.”

The complexity of selecting an appropriate “comparison group” seems to have been unanticipated but should have been foreseeable where, outside of trivial cases, the absence of obvious appropriate comparisons means both sides will choose and argue for favourable ones.

As Gunderson and Lanoie put it, “Regulations begat further regulations to close the loopholes, with the process often bordering on the impenetrable to all but a few. Of course, there is money to be made by such complexities, but that money does not go to those for whom the system was designed to assist.”

For smaller employers, the administrative costs of the system were greater than the eventual wage settlements.

Later evaluation by Judith McDonald and Robert Thornton found the system did not even wind up reducing Ontario’s gender wage gap.

Lower costs

Since New Zealand’s proposed legislation requires firms to respond to pay equity claims rather than proactively set pay equity programmes, the administrative costs should be lower.

But the main problems faced in Ontario – like defining appropriate comparison groups – will be similar here.

Already we have heard comparisons between teachers and prison guards.

And, worryingly, an Official Information Act request tells me the Treasury has not provided any information through to the minister and the cabinet about Ontario’s difficulties in implementing pay equity. There may be cautionary lessons there to learn.

The biggest real problems in salaries, as the Regulatory Impact Statement points out, is where there is a dominant funder for an employment sector – generally the state.

But the case for improving salaries in teaching should not depend on authority decisions over whether teachers are more like prison guards, university lecturers or children’s entertainers.

It really should depend instead on the value that excellent teachers provide to the kids they teach – and on what it costs to get that calibre of candidate to consider teaching as a profession.

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