EDITORIAL: Imposing terms of employment carries big economic risks

The Labour policy that has most worried business and economic commentators, before and since the change of government, are so-called "fair pay agreements". Their worries will not be assuaged by the terms of reference now published for a Fair Pay Working Group that is to recommend how the policy should be put into force.

Its expressed purpose is to "design a system of bargaining to set minimum terms and conditions across industries or occupations". Law already sets a national minimum wage, this policy envisages regulating many more of the arrangements between employers and staff.

The Government believes these arrangements can be safely set for entire industries or occupations by national negotiations between representative bodies. But most of the energy that drives an economy comes from small businesses that are too busy to belong to national industry organisations. Few will be at the table where new terms and conditions of employment are to be set for their business, many might not even be aware it is happening.

The first many might know of it is when a trade union writes to inform them their business comes within the definition of a recently settled industry agreement and the union wants to check that their staff are working under the newly required terms and conditions.

One of the stated aims of the Fair Pay policy is to entice all firms and their staff to join collective bargaining organisations. It aims to reverse 27 years of low union membership and individual contracting since the passage of the Employment Contracts Act and the Working Group will be headed by the former Prime Minister who presided over that legislation but now believes it is to blame for wages being too low.

Income levels in New Zealand are generally agreed to be too low because productivity is too low. The new Government agrees, stating in the Working Group's terms of reference it wants, "a highly skilled an innovative economy that provides well-paid, decent jobs, and delivers broad-based gains from economic growth and productivity."

Productivity is not the volume of production, it is the value produced for every unit of investment of capital and labour. When wages rise without an increase in the value of work done, productivity declines, the economy suffers and employers facing higher costs than they can sustain will probably try to get by with fewer staff. That would raise productivity but only by increasing unemployment.

All these risks are recognised in the terms of reference. The Working Group has been asked to "mitigate" risks of "slower productivity growth if a Fair Pay agreement locks in inefficient or anti-competitive businesses, models or market structures, unreasonable price increases for some goods and services if increased labour costs are not offset by productivity gains and profit margins are held at existing levels (and) possible job losses, particularly in industries exposed to international competition".

If the Working Group can suggest a way to avoid those pitfalls it will have worked a wonder.