It's good to be flexible

Dr Eric Crampton
Insights Newsletter
15 September, 2017

Elections are not quite the advance auctions of stolen goods that H.L. Mencken warned about. When the electorate is very lucky, elected governments break the worst promises they had to make to win election – or at least bend them.

Labour’s industrial relations policy is a great example of a policy promise best left unfulfilled. Campaigning on the policy might attract a few votes. But delivering on it could be rather damaging, both for the overall economy and for the workers Labour might intend to help.

Labour proposes industry-level Fair Pay Agreements within their first year in office.

Quite what that means is not clear. But it looks like national-level bargaining between employers, unions, and the Employment Relations Authority would set wages, hours, and conditions for broad industry-level groups. And the agreements would apply for all firms in each industry, whether or not their workers had decided to join a union. 

So manufacturing companies across the country might have to negotiate with E tū to set standardised pay, hours, and employment conditions across the whole sector. Restaurants across the country, from fine dining to McDonald’s, would have to do the same.

Where think tanks might sit for collective industrial bargaining is anybody’s guess.

But flexible labour markets where employers and workers come to the arrangements that best suit local circumstances simply work better. Right now, jobs are being created as fast as new workers join the work force. Both the employment rate and the labour force participation rate for the past year are higher than they have been in any year going back to 1987.

When labour markets are more free and flexible, unemployment is lower, and recessions are less severe – at least in empirical work on the Fraser Institute’s Economic Freedom Index.

Last year, New Zealand’s labour markets ranked as seventh most free in the world, despite a poor showing around our rules on hiring and firing. Australia’s labour markets, where wages and working conditions are set by the kind of complicated system that Labour suggests, rank eighteenth.

Politicians are often criticised for not keeping election promises. We hope that Labour reconsiders this one. Mencken also warned that democracy is the theory that voters know what they want, and deserve to get it good and hard. But a bit more mercy than that might be in order. Voters know not always what they do

Stay in the loop: Subscribe to updates