Free to Work: The Liberalisation of New Zealand’s Labour Market
Centre for Independent Studies, $15.95
ISBN 186432 0125
The most interesting observation in Free to Work — Professor Wolfgang Kasper’s distinctly unambitious treatise on the Employment Contracts Act (ECA) — is hidden away in a footnote. “It is probably no coincidence that New Zealand, a frontline state in the competition with Asia, has become one of the first mature western societies to re-examine the fundamental belief, underpinning the concept of the western ‘mixed economy’ or ‘social market economy’, that governments should intervene on equity grounds to correct market outcomes.”
By this the professor means that New Zealand through the ECA has abandoned the essentially western precept that the labour market should be treated differently from other markets because the wage has great social impact. “Labour is now treated as a marketable service and the wage as a market price, agreed freely between employers and individuals or groups in decentralised contract negotiations.”
The assertion made me smile. I had just read Professor John Kenneth Galbraith’s memoirs, A Life in Our Times, in which he observes: “That the individual worker, needing regularly to eat, often committed to a mortgage and in doubt as to alternatives, can deal on equal terms with the large corporate buyer of labour can be believed only after much careful training.”
It was a nice counterpoise. So insistent has been the neo-conservative mantra and so traduced the debate that any demurral, however reasonable, is immediately castigated as advocacy of a return to full-blown Muldoonism, that it is comforting to be reminded that the new orthodoxy is not a destination but a point on the pendulum.
But, because economic liberalisation liberates the economically powerful at the expense of the economically weak, it has influential allies. Which is where Professor Kasper comes in. He is on the council of academic advisors for the Centre for Independent Studies — a rightwing Australian think tank which, in a classic example of “newspeak”, claims to “encourage competition in ideas” while meeting the need for informed discussion “on issues of importance to a free and democratic society in which individuals and business flourish, unhindered by government intervention”. Which means the council picks its researchers carefully. Galbraith, were he still alive, although one of the greatest economists of the post-second world war era, would wait a long time between assignments.
Having discarded all other tests as irrelevant, Professor Kasper had only to prove that the ECA is economically efficient. It would appear a simple task but it was not. He runs into brick wall after brick wall, ending up in a delicious tangle of self-contradiction. An illustration: “As a result of the ECA workplace arrangements are more performance-oriented and respond flexibly to changed circumstances but overall patterns of work, pay and other contract conditions have not changed dramatically.”
His dilemma is that on the most important criterion — productivity — the case for the ECA is weak, a fact which is so counter-intuitive that it has many economists scratching their heads and which, given the nature of his brief, was disastrous for Kasper. Here is Brian Easton in the Listener of 27 July: “The non-ideological economist would have made three confident predictions about the effects of the ECA. First, it would weaken the unions. True. Second, it would depress the wages of low-paid workers. True. Third, it would generate productivity increases [at least in the short term]. False… How can it be false?”
How indeed. But the figures show that in the five years since the ECA was passed, labour productivity measured by output per worker has risen just 0.5% a year compared with an annualised average over the preceding five years of 0.8%.
Professor Kasper does his best. He notes that 15% of all contracts negotiated under the ECA contain productivity clauses and that 38% provide for more flexible work hours. And he quotes a Heylen poll from September 1993 showing that 46% of private enterprises and 40% in the public sector attribute productivity improvements to the ECA. But he is reduced to two case studies and to the lame observation that “positive outcomes have been reported in many other companies too”.
The best macro evidence he can come up with is the oft-quoted World Competitiveness Report showing New Zealand’s ranking on the “People Factor” has risen from twenty-second of 33 countries in 1989 to twelfth of 41 in 1995. “It would be hard not to attribute most of this enhancement to the improved institutional framework surrounding labour markets,” he says.
However much of the “enhancement” to which he refers derives not from improved work practices but from lower wage costs, especially for less-skilled workers. And, by Kasper’s own admission, this is less to do with the ECA than with the exigencies of an international economy which has pitched low-skilled New Zealanders into more direct competition with “bountiful Asian supplies”.
So he is reduced to proving the benefits of the act by a measure he concedes is “less rigorous” — namely, a comparison with Australia which, under the Hawke and Keating Governments, maintained a centralised wage fixing system. Tracking both economies as they struggled under and then rebounded from the 1991 recession, he finds:
- Wages held up more strongly in Australia, rising by an average of 0.8% a year between 1990 and 1995 while in New Zealand they rose by only 0.4%.
- Job growth in the recovery was strong in New Zealand at 10% and non-existent in Australia.
- Unemployment in Australia fell later and by less than in New Zealand, dropping 3% against New Zealand’s 4.8%.
These statistics suggest a democratic trade-off — lower wages for more jobs. It is an argument the government has often resorted to and can be expected to thrash on the campaign trail in the coming election. And it does have substance as regulated labour markets tend to create insiders and outsiders by maintaining wages at a level beyond the market value of the marginally qualified.
But, according to research conducted by economist Tim Maloney and quoted by Kasper, only 1% of the 4.4% employment growth recorded in New Zealand since the ECA can be directly attributed to the act. The reality is that the New Zealand economy went into a deeper trough than did the Australian one and was therefore rebounding from a lower base. And there is a further, important qualification which is reflected in the different experiences of the United States and western Europe through the 1980s. Europe — with its stronger wage regulations, welfare supports and worker protections — suffered persistently higher unemployment than the United States which experienced a surge of low-paid jobs.
But the United States also paid a price as productivity growth in the service industries where most of these cheap jobs were located lagged far behind the rates achieved in Europe. The Hudson Institute has calculated that productivity across the whole United States service sector fell by an average rate of 0.2% a year between 1970 and 1985. In other words, the ECA’s effect in containing wages may be working at cross-purposes with its avowed intent to improve productivity.
Kasper does not admit this contradiction but — true to the ideologue’s instinct — argues for further deregulation through the removal of what he calls “residual market imperfections”. He identifies these as:
- Too generous welfare provision which is “weakening the material incentive to search for work”.
- The continued existence of a statutory minimum wage.
- The ability and, he laments, the willingness of the Employment Court to overturn dismissals on procedural grounds. Kasper spends some time discussing this because he regards it as the most egregious departure from “free-market conditions” and because he is aware it was not included in the first draft of the legislation.
This is significant as in all other respects the prescription became more radical as the policy making progressed, a trend Kasper attributes to the influence of the Business Roundtable whose position the National Party eventually endorsed in preference to the “gradualist reform” initially advocated by the more conservative Employers Federation.
However it did not endorse it entirely. Hence the rigidities Kasper complains of. Had it done so, New Zealand would have fully embraced the Asian model celebrated in his footnotes — a model under which “governments have by and large abstained from ‘social justice interventions’ in labour market, taxation and social arrangements”.
But, as noted at the outset, the ECA did move New Zealand further toward liberalisation than most western countries, including the United States. And Kasper marvels at the scope of the philosophical change it wrought, given that New Zealand had not simply participated in but had often led the western proclivity for government intervention to secure greater “equality of outcomes”.
The father of New Zealand’s labour law was Fabian socialist William Pember Reeves, architect of the 1894 Industrial Conciliation and Arbitration Act. He introduced compulsory arbitration [a world first] with the dual aim of preventing strikes and fostering the formation of unions. But the two aims were contradictory and became more so with the election of the 1935 Labour Government which not only made union membership compulsory but extended to unions monopolistic coverage both of workers and of work.
It was inevitable that these rights taken together would lead to abuse, especially in a largely protected economy. It was also inevitable that exporters competing internationally and facing some of the most militant unions on the waterfront and in the freezing works would eventually rebel.
The surprising thing is that it should all have survived as long as it did, particularly as National, with its strong rural constituency, was in power most of the time. But, by the early-1980s a sufficient head of steam had built up to enable the then Labour Minister, Jim Bolger, to overcome the inertia of his Prime Minister, Sir Robert Muldoon, and introduce voluntary unionism. Bolger basically reverted to the Reeves formula, retaining compulsory arbitration together with theoretically strong but largely ignored restrictions on strike action.
However, the 1984 Labour government restored compulsory unionism and removed compulsory arbitration in exchange for a virtually unfettered right to strike. This was not a serious attempt to achieve labour market equilibrium but a political payback to the unions for their electoral support and was justifiably resented by business.
It was in 1984 as a member of the parliamentary press gallery that I began to cover industrial relations and I remember it as a series of late night stake-outs either in the Beehive (as a minister sought to mediate a politically sensitive dispute) or outside the trend-setting metal trades award negotiations. The settlement when achieved (and, although the key negotiators on each side knew in advance exactly where they were going to end up, they were always careful to put on a good show with lots of drama and muscle-flexing) was always a guaranteed front-page lead because it told the entire workforce what they could expect. Certainly it told me because newspaper journalists had a relativity linkage with core fitters. What they got, we got.
It was, of course, economically absurd. But it was also socially cohesive. My interest, for example, in the wage fortunes of the core fitter diminished substantially when the link between us was severed.
But changes were afoot. From 1985, the government refused to umpire disputes, which earned the Minister of Labour, Stan Rodger, the soubriquet “Sideline Stan”. And Sir Roger Douglas’s deregulatory agenda had made an anachronism of a protected labour market. Labour tried to respond to these pressures in the 1987 Labour Relations Act and did succeed in exposing the unions to some market discipline, principally by giving workers a choice not as to whether they would join a union but over which union they would join. But this had little practical impact and beyond it, Labour’s hands were tied by its strong bonds to the union movement. It would take a National Government not only unbeholden to the unions but, by this stage, actively antagonistic to their power, to crush them.
That is the principal purpose of the ECA. It goes further than even United States law. It does not require the employer to negotiate in good faith, does not prevent him or her from trying to pick off individually workers who have elected to bargain collectively, does not even contain the word “union.”
Since its passage in 1991, union numbers have almost halved — from 675,000 in 1990 to just 345,000 by mid-1995. At a generous estimate, that represents roughly 30% of the potential union catchment. But, while this has occurred under the ECA and was the intention behind the ECA, it is not entirely the ECA’s achievement. That there were other factors at work, not peculiar to New Zealand, is evident in the fact that 30% union penetration is, as Kasper observes, consistent with “OECD-wide trends.”
Principal among these other forces is the transition to a service sector-dominated economy as the services, with the exception of health, education and government administration, are notoriously difficult to organise. This has led American thinker, Peter Drucker, to suggest that unionism as an instrument for the political mobilisation of workers may be an historic phenomenon which was a creature of labour intensive mass production and will decline as technology displaces manufacturing jobs.
Taken in this wider context, the ECA was no more than a catalyst. But the clock, having been wound forward, cannot now be wound back. New Zealand’s exposure to global markets is part of the explanation for that. The other part is that workers, having tasted the freedoms of the ECA’s permissive regime, will not lightly give them up.
In recognition of these realities, all the Council of Trade Unions (CTU) is really asking for are changes which would put unions here on the same footing as those in the United States. And, beneath its rhetoric about repealing the ECA, that is all the CTU’s political ally — Labour — is really offering. It is a sign of how far we have come that, as recently as six years ago, the United States was held up as the ultimate in labour market deregulation.
When I was asked to write this I was also asked for a thoughtful analysis of where to from here. I have failed to provide that because I believe it will take more than a change of government before there is any meaningful shift in direction. It will take something cataclysmic and external to produce a swing in the pendulum away from free trade and toward protectionism. And that will take a major war or a crisis in the world economy. But, at least in the cultural sense, the ECA does represent a turning point. It represents a deliberate decision by the government on behalf of the community to subordinate the value of social cohesion to the value of economic efficiency. And even Kasper cannot convincingly demonstrate that it has delivered the efficiencies National hoped of it.
Patricia Herbert is economics editor of the New Zealand Herald. She studied American labour market policy on a Harkness Fellowship in 1994/95.