How deregulation put NZ at top of jobs table

By JIM EAGLES

Deregulation of the New Zealand economy between 1978 and 1998 increased the employment rate by 2.6 per cent - equivalent to around 50,000 jobs - says an OECD report.

It concludes that New Zealand boosted its employment more than any other OECD member as a result of market liberalisation during the 20 years under study.

The finding comes at a time the Labour-Alliance Government has rolled back some of the measures credited with creating jobs, so a study done today might not be quite so favourable.

The OECD study says its analysis confirms that employment in most countries benefited from the market liberalisation reforms.

"Over the past two decades, regulatory reforms have played a significant role in increasing employment in the OECD area, particularly where pro-competition policy developments have been extensive," it says.

The best performers were New Zealand, which is estimated to have added close to 2.6 per cent to its business employment rate (excluding agriculture), followed by Britain (2.5 per cent), Finland (2.1), Australia (2) and Germany (1.9).

"On the other hand, countries where regulatory reform has made more modest progress have experienced correspondingly smaller employment gains," the report says.

The worst performer was Greece, which is estimated to have added only 0.4 per cent to its employment rate, followed by Italy, Spain, Ireland and Portugal (all around 1 per cent).

The 1978-98 period covered in the study saw huge changes to product market regulation in New Zealand, with the abolition of import licensing and most tariffs, the ending of several state monopolies and the freeing of competition in areas such as transport, telecommunications, electricity and post.

But the OECD says New Zealand - and almost all other OECD countries - could make even bigger employment gains.

To illustrate this, the study compared product market regulation against the situation in the United States.

It found that New Zealand could add a further 1.1 per cent to employment if it matched the US regulatory stance.

"In the long run, some southern European countries and Ireland might gain as much as 2 to 2.5 percentage points in their employment rate compared with 1998," the report says.

It also briefly looks at the impact of employment protection and tax policies on total employment.

In both areas New Zealand's performance rates better than the OECD average but significantly behind frontrunners such as Australia, Canada, Britain and the United States in encouraging job creation.

In fact, the report indicates that if New Zealand adopted the same employment protection policies as the US, employment would have grown 4.4 per cent faster.

The OECD notes that differences between labour market policies and product market regulations account for only 40 per cent of the variation in employment rates across member countries.

The remaining 60 per cent of the variation is due to labour market institutions such as bargaining systems and unions, output gaps and unexplained country-specific factors.

New Zealand appears to have problems under those headings because they have had a markedly negative effect on employment over the 20 years being looked at, it says.

It indicates that job growth in New Zealand could have been 8.8 per cent faster if it had matched US performance in those areas.

The report acknowledges that market liberalisation may increase the risk of workers being laid off. But it distinguishes between job security (in respect of a worker's existing job), which may be reduced, and overall employment security (the difficulty of finding employment), which would be improved.

"Pro-competition regulatory reform, by increasing the employment rate in the long run, is likely to reduce the time it takes to find a new job."

Since the study period concluded in 1998, however, some of the reforms credited by the OECD with encouraging job growth in New Zealand have been wound back.

For example, the restoration of the ACC monopoly in accident insurance represents a re-regulation in a product market; the rise in the top marginal tax rate to 39 per cent would make New Zealand's tax policies less favourable to employment creation; the replacement of the Employment Contracts Act with the Employment Relations Act has raised the level of labour-market regulation.

Darren Gibbs, senior economist with Deutsche Bank, said such changes had certainly affected New Zealand's relative position.

"I doubt these changes alone would alter the basic conclusion of the study from the New Zealand perspective," he said. "But we may not look quite so favourable as the study depicts if the latest policy configuration was factored."