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Insights 25: 12 July 2019
Roger Partridge discusses with John Campbell on TVNZ Breakfast why fair pay agreements are not suitable for New Zealand
Roger Partridge explains in the NZ Herald why fair pay agreements will undermine the Government's goals
New Report: Work in Progress: Why Fair Pay Agreements would be bad for labour

Fair Pay Working Group fit to be forgotten
Roger Partridge | Chairman |
Former Prime Minister Jim Bolger burst back into public life in mid-2018 to lead the government’s Fair Pay Agreement Working Group. The working group’s report was made public on 31 January. Since then, the government has said almost nothing about the report’s recommendations. It is almost as if both Bolger and the report have been shelved.

If so, that would be a good thing. The report recommends reintroducing compulsory collective bargaining across entire industries and occupations. Yet, as we explain in our latest research report, Work in Progress: Why Fair Pay Agreements would be bad for labour, the working group’s recommendations are based on a misrepresentation of New Zealand’s labour market record. 

The recommendations also fly in the face of both empirical evidence and international trends towards greater labour market flexibility. They will hinder, rather than help, the government’s commendable goal of a high-wage economy that shares the benefits of economic growth and productivity.

Our research finds that New Zealand has fared well since the reform of labour market regulation in 1991. The reforms swept aside the system of “industrial awards” that had dominated most of the last century. Under the Employment Contracts Act (and its successor, the Employment Relations Act), the decline in employed workers’ share of GDP that had dominated the 1970s and 1980s was arrested; since the 1990s, employees’ share of GDP has trended upwards. At the same time, income inequality before taxes and transfers has declined. And our unemployment and labour market participation rates are the envy of most OECD countries.

While productivity growth is still the Achilles heel of the New Zealand economy, it was a problem in the two decades that preceded the 1991 reforms. It is also a problem in many advanced economies. But there is nothing in the economic evidence to suggest our productivity problems stem from our flexible labour market arrangements. Indeed, the OECD recently singled out New Zealand – and Denmark – as countries whose labour markets have been operating effectively by increasing wages in line with increases in productivity.

It should therefore be no surprise that other countries – most notably France under President Emmanuel Macron – have looked to emulate aspects of New Zealand’s flexible labour market regulation.

The government’s goal of a high-wage, high productivity economy, with broad-based gains from economic growth, is laudable. But the path to achieving it cannot be found in the Bolger report. The government should send the working group back to the drawing board.

Work in Progress: Why Fair Pay Agreements would be bad for labour is available here.

Allowing growth to pay for itself
Dr Patrick Carvalho | Research Fellow |
Can local community growth pay for itself? In other words, can economic growth itself pay for the community’s required infrastructure expansion (e.g. from revamped wastewater and drinking water networks to the proper provision of local amenities and safer roads)?

If the answer is no, then homeowners and renters alike – i.e. everyone, including yourself – are the ones who either directly or indirectly bear the growth costs mainly via property rates.

No wonder local communities can become vocal – and quite often successful – opponents of new housing developments and large tourist influx.

This self-funded growth conundrum is at the heart of the Productivity Commission’s recently released draft report on local government funding and financing.

Too often ratepayers in fast-growing communities throughout New Zealand struggle to bear the costs of new demand for infrastructure, while a fiscal windfall in terms of GST and income taxes flow directly to central government.

Even if – and it is a big if – additional property rates and residual user charges eventually end up covering the council’s initial growth expenses, it might take many years to happen. Meanwhile, current residents keep footing the bill.

To address the issue, the Commission recommends an array of incremental changes, from a stronger focus on targeted rates and user charges to greater flexibility on council debt limits.

On housing, the report supports the expansion of Special Purpose Vehicles to independently finance new infrastructure and the creation of central government grants rewarding new local building consents – both ideas long sponsored by The New Zealand Initiative.

On tourism, the report endorses introducing accommodation levies to help communities providing for incoming visitors – whose numbers can often be multiples of local residents during peak seasons.

These are all good first steps, but ultimately, for growth to pay for itself, local authority’s revenues must suffice to fund economic development.

As an example, communities facing fast-growing infrastructure pressures could be granted access to a share of GST and income taxes generated through local activity.

Alas, such a proposal was not endorsed by the draft report – although the Commission promised to investigate the issue further before releasing its final report.

For the sake of allowing growth to pay for itself, let us hope the Commission’s final recommendations recognise that councils must have skin in the game to join the growth game.

You can read our submission on the Local Government Funding and Financing Inquiry here.

The curse of getting what you wish for
Dr Eric Crampton | Chief Economist |
Parables, biblical or otherwise, are excellent instruction. They warn of the dangers of getting what you wish for. Local Government New Zealand might wish to take heed.

Midas had regrets.

The 1001 Arabian Nights tells of the blind beggar of Baghdad. In that story, a dervish had a magic cream that, if anointed on one eye, would reveal hidden treasures – but would give only blindness if applied to both eyes. The blind beggar earned his name when, not trusting the dervish’s wise counsel and thinking further riches were at stake, pleaded to be anointed in both eyes.

Even Homer Simpson regretted his wish, granted by an evil magic monkey’s paw, for a turkey sandwich: the sandwich was a little dry. Homer cursed the monkey’s paw before passing it over to Ned Flanders, hoping similar ills might befall his neighbour.

So we come to LGNZ’s similarly cursed wish. At the LGNZ conference this past week, member councils begged that central government change the Resource Management Act. The RMA does need to be changed. It is far too hard for councils to change their district plans, and standing for objections is far too broad. When it is too easy to object, it is too hard for anything to get done.

Changing those aspects of the RMA could help improve things. And there are other changes that could speed up consenting processes.

But that isn’t what councils asked for.

Councils instead pleaded that central government force them to consider the effects of consenting decisions on greenhouse gas emissions.

If you thought consenting decisions were glacially slow already, just wait to see what happens when new subdivision applications need come with expert reports on the effects of commuters on greenhouse gas emissions. Those reports will inevitably be contested by activists, sometimes quietly bankrolled by competitor developments. Councils which, in every other case, rightly balk at unfunded mandates imposed on them by central government will have to hire experts on greenhouse gas emissions.

All this is entirely and utterly pointless where consented activities already fall under the Emissions Trading Scheme. Under a binding ETS cap, every blocked development will just provide room for someone else’s emissions.

“May you get what you wish for” is a curse. I hope we can rather forgive councils for not knowing what they’re asking for – and refrain from indulging them.

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