New Zealand's productivity growth is being hampered by employment protection laws that make it hard for boards and business owners to fire poorly performing senior managers, a new report from The New Zealand Initiative warns.
The research note, by NZ Initiative chairman and senior fellow Roger Partridge, found strong arguments for New Zealand adopting an Australian-style carve-out of high-income earners from the unjustified dismissal provisions of the Employment Contracts Act 2000.
It recommends a salary threshold of $250,000, above which employees would be exempted from unjustified dismissal laws.
"No one wants vulnerable workers being unjustifiably dismissed. But by constraining firms from getting rid of underperforming bosses, laws introduced to protect the jobs of ordinary workers may be placing those jobs at risk," says Partridge.
"The difference between C-grade and A-grade managers may very well be the difference between business success or failure."
More broadly, the report found that by restricting firms from dismissing underperforming senior managers, unjustified dismissal laws constrained performance and productivity, and therefore workers' wages and overall wellbeing.
The finding was supported by a 2014 Productivity Commissions report singling out low managerial capabilities as a cause of the country's poor productivity record, Partridge said.
"Australia deals with this problem by exempting most high-income earners from that country's equivalent of our unjustified dismissal laws. New Zealand should do likewise," says Partridge.
"Australian employers have much greater freedom than their Kiwi counterparts to fire underperforming senior managers".
"This flexibility may go some way to explain the productivity gap between the Australian and New Zealand economies".
In 2017 a private member's Bill proposed introducing Australian-style flexibility but was voted down after concerns were expressed about the Bill's complexity and the low, $150,000 threshold at which the high-income exemption was triggered.
To address these concerns, NZ Initiative is recommending an initial threshold of $250,000 - the starting salary for Ministers of the Crown, who serve at the Prime Minister's pleasure and can be dismissed without cause.
"This threshold would capture less than the top 1 per cent of income earners, while capturing the CEOs and senior managers whose roles have the most significant impact on productivity," Partridge says.
"Consequently – and paradoxically – laws introduced to protect the jobs of ordinary workers may be placing those jobs at risk".
Regulations would permit the threshold to be adjusted annually to track increases in New Zealand's median income.
The report points to an opportunity for a win-win reform for firms and workers - and for society, Partridge says.
"Parliament can and should consider the issue a new".