When government messes up, we all bear the costs

Dr Eric Crampton
Insights Newsletter
28 April, 2017

Businesses that fail as badly as government does would go bankrupt. But when government screws up, it gets more power instead. And that makes for some depressing dynamics.

New Zealand is getting a new pay equity regime.

As the Regulatory Impact Statement for the new Pay Equity and Equal Pay Bill explains, pay equity concerns are most substantial where an occupation has a dominant funder - typically, government. Elsewhere, competitive forces help ensure fair pay. Recruiters, for example, target workers undervalued by their current employers. That does not work so well when government is the primary funder.

But the draft legislation is hardly restricted to cases where there is a dominant funder. And it also provides the Employment Relations Authority with a rather difficult task: deciding which occupations are most comparable for pay equity settlements. And experience abroad suggests it will not be easy.

Things did not go well when Canada’s largest province, Ontario, implemented a far-reaching pay equity scheme in the 1980s. All firms were required to provide pay equity plans, rather than only those firms where pay equity claims had been advanced. It was not surprising then that administrative costs outstripped wage settlements for small firms.

Perhaps more surprisingly, there was no discernible effect on pay differences in Ontario.

The Ontario Tribunal that had to decide on pay equity claims had to choose which professions provided the most appropriate comparison for the group that claimed to be underpaid. The result, as one evaluation later put it, was a “litigation nightmare.”

New Zealand will face similar and substantial problems in assessing which occupations have similar skills and responsibilities, similar working conditions, and require similar levels of effort. While Treasury made the job somewhat easier by providing a hierarchy for selecting appropriate comparators, it would be surprising if New Zealand did not face litigation nightmares of its own.

In short, New Zealand learned little from Ontario’s experience. Neither Tribunals nor Authorities are well placed to set pay relativities between different occupations.

The main pay equity complaints are in government-dominated fields like health and education. Because the government did not sort out its own pay issues, the whole country is being given a regime that risks bogging down employment relations more broadly for years to come – and sets the Employment Relations Authority as adjudicator on what pay should be.

Stay in the loop: Subscribe to updates