A fair pay agreement sounds like something everyone should want.

After all, no one wants to work for unfair pay. And it is hardly likely to be sustainable for an employer to offer unfair pay – especially at times like the present in New Zealand with low levels of unemployment and skills shortages almost everywhere you look.

Yet The New Zealand Initiative’s latest report, Work in Progress: Why Fair Pay Agreements would be bad for labour, finds the type of “fair pay agreements” recommended by the Fair Pay Agreement working group would be bad for just about everyone and especially for workers and the unemployed.

Rather than advancing the government’s goal of creating a high-wage, high-productivity economy, with broad-based gains from economic growth, implementing the working group’s recommendations would be a major setback.

The working group was established a little over a year ago by Workplace Relations and Safety Minister Iain Lees-Galloway. Former prime minister Jim Bolger made a cameo return to public life to lead the working group, and he presented his report to the minister in December last year. Lees-Galloway then released the report in January this year. Apart from the occasional impatient hurry-up from one union or another, little has been heard of it since.

Our research suggests this is exactly the treatment the report deserves. The working group recommends dismantling the flexible labour market arrangements introduced in New Zealand by the 1991 Employment Contracts Act (and its successor, the Employment Relations Act). In their place, the working group would have us return to centralised compulsory collective bargaining across whole industries and occupations (described in the report as Fair Pay Agreements or FPAs).

However, the FPAs recommended by the working group would be closer to the system of “industrial awards” that dominated New Zealand’s industrial relations landscape for most of the last century than they are to “agreements.”

Indeed, FPAs need not be agreements at all. And they would be highly undemocratic. The working group recommends that the lower of 1000 workers or 10% of the workers in an industry or occupation should be able to force all workers in that industry or occupation into an FPA process. Union representation would be compulsory for workers. Employers would have to be represented by employer organisations. And if negotiations did not lead to an agreement, the outcome for the entire industry or occupation would be decided by a statutory body.

Misrepresents evidence

To justify these radical reforms, the working group describes a range of alleged shortcomings with New Zealand’s industrial relations framework. However, closer examination reveals the claims of shortcomings are misconceived. Far from harming workers, our flexible labour market regulations are treating workers well.

At 80.9%, New Zealand’s labour market participation rate is higher than in most other developed countries. Our unemployment rate at 4.2% is also well below the OECD average of 6.6%. Income inequality before taxes and transfers has declined in New Zealand since the 1990s. And over the same period, employees’ share of GDP has been trending upward – reversing the declining trend that dominated the 1970s and 1980s (at a time when industrial relations were characterised by the sort of compulsory collective bargaining the working group recommends we return to). 

More than that, while wages for the low-paid have stagnated in other countries, in New Zealand they have continued to rise. Even on the working group’s figures, real average hourly wages have risen across every wage decile by a minimum of 18% between 1998 and 2015.

The working group is nevertheless correct to point out that New Zealand has a productivity growth problem. But this is a problem that dates back at least two decades before the early-1990s labour market reforms. And there is nothing in the economic evidence to suggest our productivity problems stem from our flexible labour market arrangements. Indeed, New Zealand’s fastest period of productivity growth in the past 50 years was in the 1990s, in the immediate aftermath of the 1991 reforms. And the OECD has recently singled out New Zealand – along with Denmark – as two countries whose labour markets have been operating effectively by increasing wages in line with increases in productivity.

Why so bad?

It is not just the undemocratic aspects of FPAs that would be bad for labour. It is no fluke that our labour market record has been strong since those early-1990s reforms. And that is why other countries – most notably France under President Emmanuel Macron – have looked to emulate aspects of New Zealand’s flexible labour market regulation.

Indeed, the OECD has warned that by reducing flexibility and locking in inefficient practices, centralised collective bargaining of the type proposed by the Bolger working group risks slowing productivity growth. These problems will be amplified by the disruption from automation and innovation to the future of work. History also suggests FPAs will harm industrial relations, which will also have an adverse effect on productivity.

If the FPA process is successful in forcing up wages, there is also a risk it will cause job losses – especially in firms unable to recoup the costs of higher wages from customers. The burden of job losses is likely to fall disproportionately on the unskilled. And higher wage rates will raise the hurdle for the unemployed, particularly inexperienced and unskilled workers.

Lees-Galloway’s terms of reference to the working group in June last year identified many of these risks and asked the working group to manage or mitigate them where possible. Unfortunately for the minister, the working group has conspicuously failed to do this.

A better way

The government’s goal in establishing the working group was to help create a high-wage, high-productivity and inclusive economy. This is a laudable aim. But the solutions to New Zealand’s challenges with productivity growth and inclusiveness will not be found by reforming our labour market. The challenges lie elsewhere: education and skills training, housing and planning, infrastructure policy and health. If we solve our policy problems in these areas, the country can confidently look forward to a more productive, high-wage economy. Bolger and his working group should be asked to start all over again.