The economic rationale for the ERA

How do you get a high-wage economy? Not by going along with employers paying low wages, says the government. We should take this seriously because that is the economic rationale for the Employment Relations Act (ERA).

The ERA is actually a piece of social policy. While parties of the right see workplace relations primarily as a business cost, that is, as economic policy, parties of the left see workplace relations as primarily a social equity issue of individual and household sustenance.

Much of the motivation for the nineteenth- and twentieth-century industrial conciliation and arbitration legislation was a Fabian socialist ideal that workers were entitled to a living wage. Workers were not cattle, to be bought and sold according to supply and demand, was the unions’ and left parties’ refrain.

Economists, by contrast, argue that wages are in fact a matter to be determined by supply and demand. In the broad sense and long term the economists are probably right, though in the short term, even the medium term, state regulation and union intervention can defy the economists’ logic.

Removing those impediments was the main motivation for the Employment Contracts Act (ECA) in 1991. Unions were denied state backing and enforcement. Primacy was given to individual contracts and multi-employer arrangements were made hard to get.

This gave employers greatly increased flexibility in how they deployed and paid employees. Real wage costs dropped.

It is the loss of that flexibility which employers fear in the ERA. For some it may mean the difference between profit and loss, for others the difference between sustainable and unsustainable profitability.

The old arrangements had depended on businesses being insulated from world forces. Rogernomics and globalisation swept away that insulation.

But, say the left parties, the ECA went too far. It not only focused managers’ attention on wage costs but allowed them stay focused on wage costs when the national interest would have been better served by a more aggressive focus on lifting revenue.

Further, it – coupled with other government action during the 1990s – enabled managers to take the easy route to higher profit: lowering or holding wage rates instead of investing in productivity-increasing machinery and technology. Hence, left parties say, our poor productivity record during the 1990s.

If the left is to accept the open economy and unforgiving international competition, it must find a way to deliver to wage workers a living wage. It cannot do this by government regulation. The alternative is to try to drive managers to find solutions on the revenue side.

This is what social democratic folklore tells the left parties was Sweden’s secret – that, by holding wages high (with supporting policies), Sweden drove business towards high-wage activities.

Some have also noted Singapore’s deliberate choice a decade or so ago to force wages up (by government fiat), making low-wage activities such as textiles and clothing unprofitable and forcing businesses into higher-wage activities. Though other factors also played a part, the result is that Singapore’s GDP per head is now above ours.

The logic seems powerful. Why don’t right parties and business leaders welcome the ERA? Wouldn’t even they be better off? Doesn’t a low-wage economy cost us all in many ways, not least in the difficulty of retaining skilled and able people right across the economy and in the social services because we can’t pay competitive wages and salaries?

First, note that Sweden, while still a high-wage economy, has been liberalising its economy, including wage-fixing. And Singapore has depended heavily on the forced savings of its citizens for its success: return on investment there is well below deregulated Hong Kong.

Second, if the left parties are right in their accusations that management has been of low quality and the governments of the 1990s made it easy for them, maybe today’s managers are not capable of taking the economy up-market — maybe those who can have gone off to do it in other economies.

Third, maybe the structure and disadvantages of the economy won’t allow it. Tourism, our highest foreign-exchange-earner, is not a high-wage industry (hence its squeals about the ERA). The terms of trade are turning relentlessly against our mainstay pastoral industries, faster than we can reduce our dependence on them. Our distance and lack of critical mass work against developing a big high-tech sector, despite the government’s best intentions.

The risk in the ERA therefore is that it does not force managers up-market but instead forces unemployment up. Which is not only risky economics but risky politics, too.