Business, Unions Should Join Forces, Push Growth

Please find attached a Business Forum column that appeared in the Dominion Post today, 25 March 2007.

Business and Unions Should Join Forces to Push for Growth

Business and unions share some common aims: a “highly skilled, high wage economy”, in the words of Ross Wilson of the Council of Trade Unions in his article Time to Catch up with the Wage Lag in these pages last December. I would add full employment as a priority aim.

Mr Wilson also agreed with Phil O’Reilly of Business New Zealand that “we should not be legislating minimum wages.” Around a third of OECD countries don’t have legislated minimum wages, nor do some others like Hong Kong.

Raising minimum wages doesn’t raise production. If it benefits the wages of some workers, that will be at the expense of other working conditions or other vulnerable groups such as the unemployed. At least beyond the short term, it won’t be at the expense of (mobile) capital.

But Mr Wilson is wrong to say we need legislated minimum wages “because of the entrenched low-wage legacy” of the Employment Contracts Act.

In the early 1990s the unemployment rate reached 11 percent because of the rigid labour market. Wages and labour productivity were far out of line.

With rapidly falling unemployment after the ECA, the labour market was closer to being in balance by the mid-1990s. Real wage growth (PPI-outputs deflated) roughly matched productivity growth from 1995 through to 1999. We should not expect a perfect match because there are too many measurement problems and diverse cyclical variations.

There would, however, be broad agreement with Mr Wilson’s view that “the benefits [of productivity growth] need to be shared”.

They have been, as Treasury research has confirmed. Another indicator is that between 2001 and 2006 the share of compensation of employees in national disposable income increased from 52.2% to 54.8% while net operating surplus fell from 40.0% to 37.8%. Business increased the stock of productive capital, raising capital per worker and real wage rates.

Freer economies spread wealth better than less free ones, as we can see from the emergence of a middle class in China today, the rise in house values which has benefited most New Zealanders, and the decline in unemployment. Unionisation and collective bargaining have little to do with wealth creation and distribution, as their minimal role in the private sector in countries like the United States and Hong Kong shows. Indeed they often work in the opposite direction, as they did in pre-reform New Zealand.

A key point of agreement is that major changes are needed to achieve “a sustainable base for continuous improvements in labour productivity”.

The recent Statistics New Zealand figures on business sector productivity show labour productivity plummeting – to 0.4% in the year to March 2006, and down from an annual average of 2.7% in the period 1992-2000 to 1.2% since the Labour-led government came to office.

The business community has been critical of what might be called ‘the failed policies of the present’. There is no prospect of achieving Mr Wilson’s goal of closing the 30% gap in average pay with Australia unless the productivity slide is reversed.

Currently, other signs of failing policies include the squeeze on the export sector due to mushrooming government spending and regulation (the non-traded goods CPI has risen by 22.1% in the last 5 years compared with 3.2% inflation in traded goods); a major loss in competitiveness (relative unit labour costs rose by 46.5% in 2000-06, the biggest rise in the OECD; the widespread confusion about the Reserve Bank’s role and actions; and the huge current account deficit resulting from unbalanced policy.

With the rate of productivity growth low and perhaps still falling, it is absurd to see unions making 5% wage claims. Also their members should expect little growth in real wages with unions also pushing for non-wage benefits such as more leave and employer contributions to KiwiSaver.

Workers will not miss out on the gains from rising productivity. Low unemployment is forcing firms to compete to hire valuable workers. No one can stop wages matching productivity growth in the long run – that is what competitive markets do. Any lag is small relative to the productivity and wage gap with Australia and other leading countries.

But New Zealand incomes will stagnate with productivity-destroying policies and a focus on wealth redistribution rather than wealth creation. Income redistribution cannot do much to raise incomes at the bottom, and it damages incentives to produce, as a forthcoming Business Roundtable study documents. Programmes like Working for Families push redistribution beyond sensible limits. To raise wages and incomes in general, the emphasis must be on productivity and wealth creation.

Unions should join with business organisations in calling on the government to reassess its entire growth strategy.

Roger Kerr is the executive director of the New Zealand Business Roundtable.

ENDS

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