“Productivity isn’t everything but in the long run it is almost everything,” observed economist Paul Krugman. “A country’s ability to improve its standard of living over time depends almost entirely on its ability to raise output per worker.”
This is bad news for New Zealand. Our labour productivity wallows at about 20% below OECD averages. Indeed, other small advanced economies like Denmark, Belgium and the Netherlands enjoy GDP-per-hour worked that is more than 50% higher than New Zealand. Workers in those countries consequently enjoy higher standards of healthcare, education, and social security than their Kiwi counterparts.
Many factors have been blamed for New Zealand’s poor productivity performance. The Productivity Commission points to the small size of our domestic markets and geographical isolation, about which nothing much can be done. But that makes it all the more important to get our policy settings right in areas like education, employment and housing policy. All are critical to productivity, and all are within our control.
The failings of our education system have been a regular theme in this column. So too have problems in the policy settings related to housing.
However, we have said little about New Zealand’s employment laws. The reason is obvious. In recent years, New Zealand has enjoyed labour market flexibility that ranks among the world’s best. According to the OECD, this has facilitated “a high level of employment, job mobility and different types of employment arrangements while ensuring that workers have the protection of a set of minimum standards.” Unfortunately, this is all set to change.
Minimum wage hike
The first assault on our labour markets is the government’s unprecedented plan to lift the minimum wage to $20 an hour – or by more than 20% – by 2021. The Ministry of Business, Innovation and Employment (MBIE) advised the government that this year’s increase to $16.50 is likely to cost 3000 jobs.
MBIE’s estimates suggest that by 2021 the increases will price more than 10,000 workers out of the labour market. History tells us the victims will disproportionately be the young. This is hardly a sensible – or compassionate – means of improving productivity.
The Employment Relations Bill
Last week the Employee Relations Amendment Bill emerged from the select committee. It comprises a compendium of workplace relations reforms. And despite more than 2500 submissions from businesses opposing the reforms, the bill is largely unchanged from its introduction to Parliament in January.
The bill requires employers to give paid time off to union delegates (and give union delegates access to workplaces). It repeals employers’ rights to deduct pay for low-level industrial action. It requires employers to conclude collective agreements (except in exceptional circumstances). It prevents employers from opting out of multi-employer collective agreements. And it removes the 90-day trial period for employers who employ more than 20 employees.
MBIE’s two regulatory impact statements on the bill comment on the risks and benefits of the proposed reforms. The risks comprise reduced employment due to changed incentives for employers (and a specific risk that employers unable to use trial periods will be more risk adverse to hiring employees “at the margin of the labour market”), an increase in industrial action, an increase in partial strikes and lower firm productivity.
Weighed against this, MBIE predicts a range of benefits. Unions are likely to benefit from an increasing role within workplaces (though why MBIE thinks this is a relevant benefit is anyone’s guess). Employees will benefit via increased wages and conditions. New employees in larger firms will benefit from greater certainty and security from the repeal of trial periods. And employers “could” benefit from an increase in labour productivity.
Not surprisingly, apart from a trite reference to a Gallup report about the benefits of employee “engagement,” no evidence is given for the claim that the reforms would lift labour productivity. And against the litany of risks identified in the regulatory impact statements, the bill is more likely to reduce labour productivity than increase it.
Fair Pay Agreements
We will have to wait to evaluate the third limb of the government’s workplace reforms. The Jim Bolger-led Fair Pay Agreement working group is not due to report back to the Minister of Workplace Relations and Safety, Iain Lees-Galloway, until the end of the year.
But there is no reason to expect that reintroducing industry awards will meet the minister’s stated aim of a more productive, higher wage economy.
Indeed, how could it? We do not need Professor Krugman to tell us the drivers of gains in productivity are competition, innovation, investment – in physical and human capital – and a sound regulatory framework.
If the government wants a more productive, higher wage workforce, it would do better to focus on the knowledge and skills base of the New Zealand workforce, fixing the housing market, and making New Zealand a more welcoming destination for foreign investment.
The current trifecta of employment law reforms will do nothing to lift labour productivity. But there is every chance it will harm the living standards of the very workers the reforms are designed to protect.