Fair Pay Agreements deserve a fair hearing.

The shrill shroud-waving we have heard since last week's release of the report from the Jim Bolger-chaired working group — it will take us back to the 1970s! — can only have come from people who have not read the document.

Having a system of collective bargaining to set industry-wide minimum pay and conditions, which can be improved on by enterprise or individual agreements, is commonplace among countries whose workers are more productive and better paid than we are.


Our highly decentralised wage-setting process allows a race to the bottom in too many sectors.

Firms which offer decent pay and conditions are at risk of being undercut by competitors which don't, and the latter can get away with that because they are, in effect, subsidised.

The subsidy argument is not one the working group makes, but it goes like this: just as the Accommodation Supplement is, in effect, a subsidy to landlords, allowing at least a subset of them to demand higher rents than their tenants could otherwise possibly pay, the broader system of income support allows some employers to pay less than a living wage.

The 2018 household incomes report from the Ministry of Social Development tells us that when households are ranked by income, the lowest four deciles receive more in transfers from the state than they pay in income tax.

The income support includes welfare benefits, NZ Superannuation, Working for Families tax credits and the Accommodation Supplement.

Even so, the lion's share of the income of that thick 40 per cent slice of the population, including the lowest-income quintile, comes from the market (ie wages) rather than the Government.

They include the working poor, who are employed but can't earn a living.

Ex-PM Jim Bolger led the pay study. Photo / File
Ex-PM Jim Bolger led the pay study. Photo / File

In effect, their employers are piggy-backing on the taxpayer, relying on the welfare system to top up their workers' wages.


And if from that position they are undercutting competitors offering decent wages, that is an outcome that is neither fair nor efficient.

The working group's report tells us that one in four wage-earners earns less than $20 an hour — when the average wage is $31.63. They are disproportionately young, women, Māori or Pasifika, or part-timers.

Occupations where more than 70 per cent of workers earn less than $20 an hour include food preparation assistants, checkout operators, hospitality workers, packers and product assemblers, cleaners and laundry workers, hairdressers, sales assistants and child carers.

That is 207,000 people — one in every 10 wage-earners.

As of 2016, just 15.9 per cent of New Zealand employees were covered by collective agreements, half the OECD average.

"The OECD recommends a model of combined sector and enterprise level collective bargaining, because it is associated with higher employment, lower unemployment, a better integration of vulnerable groups and less wage inequality than fully decentralised systems like ours," the working group says.


"Some countries also link wage increases to skills and training pathways, with the aim of increasing productivity and sharing its benefits."

Two-thirds of OECD countries have a system with agreements both at enterprise level and at sectoral or national level. And almost all of those countries have higher levels of labour productivity than New Zealand does.

Which brings us to another major problem fair pay agreements are intended to address: the growing mismatch between the skills of the workforce and those that businesses need.

New Zealand needs to prepare for a faster rate of job loss and skill obsolescence, the working group says, as forces such as technological change, globalisation, demographic changes and climate change affect the demand for labour and skills.

That argues for increased sector-level dialogue between employers and workers.

"Training and skills provisions should be a key feature of collective agreements."


To put it more bluntly than the working group does, too many firms rely on poaching or importing workers trained at someone else's expense.

The free-rider problem more generally challenges the position of employer representatives on the working group who, while supportive of much that it recommends, reject the compulsory nature of the system as currently drafted.

The report acknowledges the need for flexibility in fair pay agreements to allow for regional differences. It envisages some provisions for exemptions.

And the Government has said there would be no recourse to industrial action during bargaining. That means that the provisions for mediation and dispute resolution during the bargaining process would have to be carefully designed and work effectively.

Another sensitive point to be addressed when the Government comes up with its response to the recommendations is the trigger level: what proportion of the workers in an industry would need to seek an agreement in order to initiate the process?

But perhaps the most challenging issue for the Government in considering its response is how to integrate labour market reform with another major item on its agenda, tax reform.


If it is going to push up the cost of labour through fair pay agreements, it does not make sense to simultaneously discourage capital deepening by adopting an exceptionally harsh capital gains tax on the capital income generated by investment in productive enterprises (as distinct from rental property, for example).

Making both labour and capital more costly at the same time is no way to raise the capital-to-labour ratio in the business sector.

And that is a necessary (though not, of course, a sufficient) condition of improving New Zealand's frankly lousy labour productivity and sustainably lifting wages.

Improving the lot of the working poor through labour market reform looks like a more promising approach than what the Cullen Tax Working Group looks likely to recommend — taxing capital income at the same rate as other income (which no other country does) and using the proceeds to fund an untargeted and fiscally costly cut at the bottom of the income tax scale.