Roger Partridge: Why Labour's Industrial Relations Plan Will Hurt Workers

Judging by the length of Labour’s manifesto proposals for workplace relations reform, you might think New Zealand’s labour markets were not working well for workers.

If re-elected, Labour will persist with plans of former Workplace Relations and Safety Minister Ian Lees-Galloway to introduce compulsory industry-wide collective bargaining (dubbed ‘Fair Pay Agreements’). This reform will fundamentally change relations between firms and their employees.

This month, New Workplace Relations and Safety Minister Andrew Little also promised Labour would press ahead with its plans to lift the minimum wage to $20 an hour next year. In the same announcement, Little said Labour would double statutory sick leave entitlements from five days to ten.

Despite Labour’s best intentions, all these reforms will hurt workers. When the Covid-19 pandemic and economic downturn is already causing job losses – particularly among Māori, young people and women – Labour’s plans are the last thing Kiwi workers need.

Labour market settings are not the problem

The hardship caused by job losses as the Covid-recession bites will be extreme. It will hit workers and families who have never faced the stresses of unemployment and welfare dependency.

But New Zealand’s labour market settings cannot be blamed for the receding high tide of employment. Until the Covid-19 pandemic arrived, this country had:
One of the highest labour market participation rates in the world;
The third highest job creation rate in the OECD over the past three decades;
Low unemployment compared with the OECD average;
Steady growth in real wages in all wage deciles; and
Wage growth closely tracking productivity growth.

Because of rising house prices and therefore housing costs, many workers may not feel like their lot has improved over the last decade. However, this is the fault of bad housing policy. It is not the fault of labour market settings.

Despite Labour’s best intentions, each of its industrial relations reform proposals risks jeopardising this enviable employment record.

Fair Pay Agreements

FPAs will take New Zealand back to the system of pay awards that monopolised industrial relations during the second half of the 20th century. They will stop firms negotiating employment arrangements with their workers. Instead, basic terms would be set across entire industries or occupations.

The OECD has warned against arrangements like Labour’s proposed FPAs. It said they reduce labour market flexibility, increase complexity and risk locking in inefficient practices. Worst of all, they lower productivity growth, which is the only way wages can sustainably rise. This will only harm workers.

If compulsory collective bargaining forces wages up, this risks job losses in firms unable to recoup the costs of higher wages from customers. Shrinking employment levels from increased wage costs are likely disproportionately to hurt young and unskilled workers. Higher wage rates set across an industry will also make it harder for the unemployed – particularly young people – to enter the workforce. No firm will hire a worker whose skill level and experience cannot justify industry-wide rates of pay set under an FPA.

Higher minimum wage

Lifting the minimum wage is a seductive idea. Who would not want workers to be paid well?

But high minimum wages relative to the median wage can lock low-skilled and young workers out of the labour market. Firms will not keep workers whose productivity cannot justify the higher minimum wage.

New Zealand’s minimum wage rate is already very high by OECD standards. At 66% of the median wage, it is more than twice the US level and almost a third more than in France. Yet Labour wants to take it even higher.

The risks of workers being locked out of the labour market by high a minimum wage can be masked by jobs growth. Yet even in the boom times of last December, the Ministry for Business, Innovation and Employment forecast 2020’s minimum wage increase to $18.90 would slice about 7500 jobs.

MBIE predicted a loss of a whopping 19,000 jobs if the minimum wage were increased by an additional dollar to $19.90 – more-or-less the level Labour wants it at next year.

MBIE’s predictions were on the express assumption of “limited but steady” overall employment growth. Times have changed since MBIE’s forecasts were made late last year. Employment growth is now a pipe dream. A recession will only amplify the adverse effects on employment of a higher minimum wage.

Labour’s idea to lift the minimum wage rise to $20 will benefit those in work and who keep their jobs. But as the economy struggles to regain its post-Covid feet, those gains will come at the cost of workers who are laid off as a result of the minimum wage rise – and of the unemployed who are locked out of work by the increased wage rate.

Extra sick leave

Labour’s sick leave plans are equally seductive. In this new Covid-afflicted world, no-one wants workers to feel under pressure to go to work with a sniffly nose.

The Government’s sensible answer was to give extra, subsidised Covid leave for those waiting on test results. But permanently doubling statutory sick leave will hurt both firm and workers.

The extra cost will fall either on firms, on consumers (if firms can pass on the increased cost) or on workers themselves (in lower rates of pay).

Since company profits are already under strain and consumers are hugging their wallets, the cost of extra sick leave will most likely be shouldered by workers.

As firms may not reduce wages of existing workers, the cost will be borne initially by businesses. For some firms, the extra cost may be the straw that breaks the camel’s back – with obvious adverse consequences for workers. But over time, firms will look to transfer the extra costs - first to new workers in the form of lower wages, and then to existing workers in the form of lower pay increases.

Either way, workers will bear the cost of Labour’s largesse.

(Incidentally, in the same way, the Prime Minister’s idea for extra statutory holiday will also trim workers’ salaries by the cost of the lost day’s work.)

None of this should come as a surprise to Labour – though it might help snap workers out of the seductive illusion of costless workplace policy tweaks.

New Zealand’s labour markets are working well. Tampering with them risks unintended consequences. Workers beware.

Roger Partridge is chairman and a co-founder of The New Zealand Initiative - see HERE - and is a senior member of its research team.