The Ministry of Business’ Fair Pay Agreement discussion paper released last month took a long time coming.

The ministry sat on it for 10 months following the release of the Bolger-led Fair Pay Agreement Working Group’s report last December.

At 53 pages, the discussion paper is nearly as long as the working group’s report. Yet anyone wanting to make submissions on the discussion paper was given just six weeks – with final submissions due this week.

The discussion paper asks 98 questions about a possible system of fair pay agreements (FPAs). Indeed, it asks every question except the most important one: do we even need FPAs?

Along the way, the discussion paper makes several misleading claims and obfuscations. These relate both to the case for FPAs and the potential impact of FPAs on the wider economy.

To recap, the system of FPAs proposed by the working group would allow minimum terms and conditions of employment to be set across whole industries or occupations. Union representation in FPA negotiations would be compulsory for workers. Employers would have to be represented by industry or employer groups. The recommendations would take us back to the system of industrial awards that dominated industrial relations in New Zealand for most of the 20th century.

Some alleged economic concerns fallacious

In July this year, a report by The New Zealand Initiative, Work in Progress: Why Fair Pay Agreements would be bad for labour,evaluated the working group’s recommendations. We found the case for FPAs did not stack up. The alleged economic concerns underlying the working group’s recommendations were either fallacious or would not be helped by a system of FPAs. Contrary to the claims of the working group:

• the share of GDP going to workers has not fallen since New Zealand’s labour markets were freed in 1991. In fact, it has risen. As a result, market income inequality has fallen in New Zealand since the early 1990s;
• wage growth has not lagged behind productivity growth;
• wages have not fallen as a result of a race-to-the-bottom in any industry. Indeed, wages in every wage decile have risen; and
• New Zealand’s productivity growth has been insipid for more than half-a-century, and it has been higher since the labour market reforms than in the preceding two decades.

Disappointingly, despite the economic evidence presented in Work in Progress, the MBIE discussion paper repeats every one of the working group’s discredited claims.

The “Message from the Minister” accompanying the discussion paper refers to New Zealand’s worrisome levels of poverty. Yet no evidence-based links are made between the labour market problems and the poverty problem. Among the many causes of poverty, the housing market crisis looms large. But the government will not solve the housing affordability problem by bringing back compulsory, centralised collective bargaining.

The discussion paper also plays fast and loose with OECD labour market studies. As we reported in Work in Progress, the OECD warns compulsory collective bargaining is a potential impediment to productivity growth rather than a prescription for improving it. The discussion paper ignores this warning and instead claims the OECD studies suggest FPAs could lead to “better productivity outcomes.” Yet the passages relied on in the OECD report refer to which system of collective bargaining presents the least risk to productivity growth. Nowhere does the OECD suggest any system of collective bargaining is better for productivity growth than New Zealand’s current flexible labour market arrangements.

As well as finding that the case for FPAs did not stack up, our research found New Zealand’s labour markets are working very well. Unemployment is low compared with other OECD countries (4.2% compared with an OECD average of 5.2%). New Zealand has enjoyed the third-highest rate of jobs growth in the OECD in the period since the 1990s reforms. And, at 80.9%, its labour market participation rate is among the highest in the world.

We also found a system of FPAs was likely to harm productivity growth, increase unemployment, adversely affect consumers and harm New Zealand’s overall prosperity and wellbeing.

Who benefits?

So, who benefits from FPAs? The answer is obvious: the unions. The working group proposes that workers should be compelled to have unions represent them in negotiations for an FPA. Coupled with the proposed low thresholds for triggering bargaining for an FPA, unions will occupy a pivotal role in industrial relations across the economy.

It is little wonder the Council of Trade Unions (CTU) has so vocally advocated introducing FPAs since the working group’s report was released last year.

The government’s stated aim in considering FPAs is to create a highly skilled and innovative workforce and an economy that delivers well-paid, decent jobs and broad-based gains from productivity and economic growth. This is a laudable objective.

But the answers to the 98 questions in MBIE’s discussion paper will not help achieve this goal. Consequently, The Initiative’s submission in response to the discussion paper answers the unasked 99th question: should we introduce a system of FPAs? The answer is a resounding no, and our submission again explains the reasons.

Despite the overwhelming evidence against FPAs, if the government nevertheless introduces a framework permitting FPAs, if the FPAs are to have any legitimacy, then they must:

• be introduced incrementally, targeting only industries where there is evidence of labour markets failing workers and employers. No such evidence has been presented either by the working group or MBIE to date;
• have a high level of worker and employer support;
• permit both workers and employers to opt out of the process; and
• be subject to rigorous before and after the event market impact assessments.

FPAs constructed along these lines would be a rather different solution from the one MBIE has been incubating for the past 10 months. But, if the government discards the flexible labour market settings that have served New Zealand so well and presses ahead with its plans, the unions will have won and the nation will have lost.