On TVNZ’s Q&A programme yesterday, the Minister for Workplace Relations, Iain Lees-Galloway was interviewed.
The Minister and his government are keen to increase union membership and are putting in place further significant increases in the minimum wage.
From his interview yesterday, here is part of the Minister’s story
….all the evidence from around the world shows us that when you have more people covered by collective agreements, that helps to drive wages up. It also helps to drive productivity, and yes, we’re a government that’s focused on transforming our economy into one that’s productive, more sustainable.
It almost invites one of those Tui ads. We’ll come back to wages in a moment, but just consider for moment that claim that there is causal relationship between steps to increase union membership (and collective bargaining) and higher (economywide) productivity. It is a shame the interviewer didn’t push the Minister on the point, but his comments suggest that he really has little idea what productivity is. It is about businesses, old and new, finding new products, new markets, new ways of doing things, new ways of combining capital and labour in ways that successfully take on the world. I’m not suggesting that unions can never play a constructive role – although they can also play a destructive one. But the Minister offers no credible story for how a greater role for unions in New Zealand will make any material positive difference to the ability of firms operating in New Zealand to take on the world from here.
That is especially so because he is quite open that his goal to shift the balance in the labour market, so that a larger share of GDP flows to labour.
CORIN So the purpose of these changes is to boost union power.
IAIN Well, it’s to get a better share of the economy. We’ve talked about having an economy that’s more inclusive, where working people can actually bargain for a fair share of a prosperous economy. That’s what we’re trying to achieve.
I’m not going to debate what is “fair” here, but as a matter of arithmetic, more for one side means less for the other, unless somehow the size of the cake itself increases faster. And since firms are the ones making the investment and location decisions, it isn’t self-evidently obvious that increased union power would lead to faster rate of real GDP growth.
In support of his claims, the Minister attempted to use the example of Australia.
If you look at the wage gap between us and Australia, that has broadened over the last 30 years. Australia didn’t dismantle their collective bargaining framework in the same way that New Zealand did. That’s part of the story, but absolutely, we’re strongly of the view that people not being in a strong bargaining position has meant they haven’t been able to make the demands on the employers.
Reading that, I had hazy memories of some posts last year (eg here) drawing attention to an increase in the labour share of GDP in the last 15 years. But what about the comparison with Australia?
Here is the change in the labour share of GDP (less net production taxes and subsidies) since 1990. Why 1990? Well, the Minister talked about the last 30 years, but also explicitly highlighted the labour market reforms most of which date to 1991. I’ve shown the numbers not just for New Zealand and Australia, but also for the other three Anglo countries.
New Zealand is the median country. The labour share of income fell a bit less here than in Australia. If one takes the comparison just over the terms of the last two governments, so starting from 1999, the labour share of income here has increased – and in each of these other Anglo countries, it either fell or increased less than the increase in New Zealand.
I don’t want to make very much of pretty small differences. But the numbers just don’t seem to support the Minister’s case. And to revert to productivity, Australia has had one of the faster rate of productivity growth (real GDP per hour worked) among the older OECD countries since 1990. I’m not aware of any evidence suggesting that collective bargaining and the role of unions has been a material (positive) part of that story. A rather more common story is to emphasise the role of the rapid increase in Australia’s mineral exports.
The interviewer moved onto minimum wages
CORIN You talk about balance. How fair is it for a business, let’s say a business making a product that’s sold globally, with 25 staff, to now face the higher minimum wage; they lose their fire-at-will rights; they’re going to face much stronger unions, more compliance costs; they are operating in a global marketplace; they’ve lost their flexibility; how fair is it for that business?
IAIN I don’t think they’ve lost any flexibility at all. And operating in a global market means that businesses need to be resilient. They need to be able to work with the different market forces. Now, if a small change to the minimum wage is going to be that detrimental to them, they don’t sound resilient, and so what we actually need is to signal to businesses, as we have done, what our plans are for the minimum wage and for our other industrial law changes, give them an opportunity, if they don’t feel like their business model can operate in those in that environment–
CORIN So tough luck if they can’t make that work?
IAIN To give the opportunity to transition. Because we need businesses to transition into an environment where in a high-skill, high-wage economy, they are able to operate.
CORIN I think there’ll be plenty of people watching this morning who run small businesses, very frustrated and will be yelling at the TV, saying their margins are small; they’re battling away; they’re trying to employ Kiwis. They will see these changes, and certainly Business NZ is arguing that this week, as being unfair and unreasonable.
IAIN Look a lot of businesses come and go, regardless of any changes the government makes. So, yeah, most start-ups, for instance, don’t actually last beyond a couple of years. That’s the nature of doing business. What we as a government have to do is make sure there is an environment in which new businesses can develop; new jobs can be created; and as thing change for people, new opportunities become available for them. That, I think is the most important thing – that we have a strong economy where if businesses do come and go over time, which they do, that there are new opportunities for people to take up.
Now, no one is going to dispute that firms come and go, that is the nature – the desirable nature – of a market economy. But the indifference of the Minister here is all but breathtaking. His attitude appears to be that somehow we don’t want firms that can’t manage to turn a profit paying what has already been one of the highest minimum wages (relative to median wages, or to the overall productivity of the economy) anywhere.
He mightn’t, but the people who hold those jobs at present might have a rather different attitude. Sure, they’d prefer a higher wage, all else equal. Who wouldn’t? But that isn’t the scenario the Minister paints. It isn’t even the usual line the advocates of higher minimum wages run, that somehow hardly any jobs will be lost. The Minister seems to recognise that some firms will be forced out of business, and he just doesn’t care. Because amid all the blather about “new opportunities” and the earlier rhetoric about “transforming our economy into one that’s productive”, there is nothing in what the Minister is saying – or what his leaders and colleagues have been saying – to give anyone any confidence that government policy is about to transform our underwhelming productivity performance.
It is true, of course, that there might be some small measurement effects from big increases in the minimum wage. If some people are priced out of work altogether they will tend, on average, to be the least productive workers. Average productivity of those who remain may be a little higher as a result. But that is no comfort to anyone, and doesn’t earn New Zealand as a whole better opportunities in the wider world. In some cases, firms may even respond to higher minimum wages by mechanising more, but again that isn’t a gain for New Zealanders as a whole – but rather a second-best response (not the production process they’d have preferred, and which market opportunities would have warranted) to a direct government intervention. Pricing some people out of the labour market is no way to improve opportunities (and incomes) for all.
It is also not as if the increases in minimum wages are small. The minimum wage was set at $15.75 last April, and under coalition agreement it is to reach $20 per hour in April 2021. That is a 27 per cent increase in four years. There will be some inflation over that period. But on the Reserve Bank’s forecasts the other day, that will total only 6.7 per cent over four years. In real terms, minimum wages are rising by 19 per cent in only four years.
All of which might be fine if there was productivity growth to match. Over the last five years there has been only about 1.5 per cent productivity growth in total.
Perhaps the next few years will be different? But there is nothing in the Minister’s remarks offering any sort of credible explanation as to how, or why we should expect something better? Most likely, some firms – not very resilient, in the Minister’s terms – will be forced to close, to downsize, or to adopt production patterns that are less efficient than market opportunities and market prices would lead them to prefer.
Those losses are more likely to be concentrated in the outward-facing tradables sectors of the economy. Domestically-oriented firms don’t have unlimited pricing power, but they often have some – especially when across the board regulatory changes like this are put in place. Most outward-oriented firms – whether in tourism, export education, farming or wherever – have very little, if any.
And it is not as if the economy has been successfully becoming more outward-oriented over recent years either, even before this latest scheduled lift in the real (unit labour cost) exchange rate.
One mark of a successful economy tends to be an increasing share of the economy accounted for by exports and imports – local products and services successfully taking on the world, enabling locals to consume the best the world has to offer.
Perhaps the Minister wishes for a world of abundant home-grown high-performing, high margin businesses. It might even be a worthy aspiration, but wishing doesn’t make it so, and there is no sign that government has any credible story as to what might make it so.
Changing tack, as I noted in my post on Saturday, I did an interview with Wallace Chapman for yesterday’s Sunday Morning programme on Radio New Zealand. Later in the same programme, Chapman had an interview on population issues with Massey university sociologist Paul Spoonley (he runs the government-funded immigration advocacy research programme CADDANZ) and with environmental economist Suzi Kerr, of Motu and Victoria University.
It was a slightly unnerving discussion, at least to anyone who counts children as a blessing. Kerr seemed set on encouraging people to have fewer children for the “sake of planet” (observing that she and all the people she worked with had chosen to have two or fewer), observing that adjustment to climate change would be easier with fewer people. In the course of the discussion, she was careful to disavow any particular expertise in immigration – and didn’t come across as a particular immigration booster (countering Spoonley’s arguments in a couple of placs) – but never once did she suggest that if we were concerned about reducing the number of people here that immigration policy – affecting non-New Zealanders – would be an obvious place to start. Non-citizen immigration is, after all, an increasingly large share of New Zealand’s population increase, and the total fertility rate here is already below replacement, reaching a record low last year. I suspect she isn’t much interested in New Zealand specifically and is more interested in “saving the planet”, including talking of redistributing people round the world. It was a little disconcerting given that she has just been appointed as a member of the government’s new Climate Change Commission (a fact Radio New Zealand failed to point out in introducing her). One hopes that in her new official role she will think rather harder about the easier options – if not ones necessary welcome to the political masters to whom the owes her appointment – open to New Zealand to ease the cost of adjustment to the government’s carbon targets.
As for Spoonley, he asserted – of my comments on immigration (lack of NZ specific evidence of benefits) in the earlier interview – that I was partly right and partly wrong. If he remains convinced of the economic benefits of immigration to New Zealanders as a whole, perhaps he could engage with some of the indicators I’ve referred to in various recent posts (eg here and here) – the underperforming Auckland labour market, the outflow from Auckland of New Zealanders, the way in which the margin by which real GDP per capita in Auckland exceeds that in the rest of the country is small and shrinking, all in an economy with an underwhelming overall productivity performance, and a shrinking share of the outward-oriented sectors. Spoonley’s apparent preference – to encourage/incentivise immigrants to move to places other than Auckland – is no (economic) solution either, just transferring the problems to even less productive places.