Matthew Hooton: What’s really driving Government’s pay agenda?


The trendiest and most overpriced cafes in Wellington’s Bowen Triangle are abuzz with chatter about what four-dimensional chess lay behind the Ardern Government’s ill-fated announcement last Wednesday of a public-service pay freeze.

The more conspiratorial suggest a cunning plan to placate median voters while also boosting union membership. Apparently, the former National voters who switched sides last year needed to see some fiscal and labour-market stick before the shock of Friday’s Fair Pay Agreements (FPAs) and next week’s expected big benefits increase.

For their part, the unions could prove their worth by forcing a quick Government backdown.

The theory makes heroic assumptions about the Government’s strategic creativity, political daring, basic competence and willingness to accept short-term public humiliation for longer-term policy gains. It also requires believing everything unfolded exactly as planned.

More likely, the pay-freeze declaration was the usual attempt to manage expectations before public-sector pay negotiations get underway.

On the advice of the Public Service Commission, governments have been doing this for decades and it only works if it provokes a bit of outrage. The Wellington union establishment also wins by being able to explain to their members that anything above the baseline will be evidence of their brilliant negotiating skills.

In fact, the pay-freeze announcement is best understood in the context of Grant Robertson’s innate fiscal conservatism, Jacinda Ardern’s so-far empty promises to reduce inequality and Labour’s beliefs about the relationship between wages and productivity.

One thing about which ministers and Beehive strategists are not completely naive is the culture and workings of public-sector unions. It takes some years for a teacher, nurse, police officer, border worker or policy analyst to gain influence and become an elected official in their union, during which time they move automatically up the pay scale. If only unconsciously, it means Wellington’s public-sector union establishment can’t help but look at the world through the lens of their higher-paid members.

Moreover, the suburbs surrounding the Wellington CBD where bureaucrats and union bosses live and work are the highest-earning parts of New Zealand. Inevitably, when choices must be made, the bias is to give those higher up the scales a little more at the expense of those further down.

The Beehive sees that as averse to its objective to narrow wage gaps, while also worrying that pay rises further up the scale cost much more in the medium term than those directed at entry-level teachers, nurses and police officers.

Robertson’s attitude is that if New Zealand is to borrow billions of dollars over the next decade for public-sector pay rises, he wants the money spent on people earning under $100,000 rather than over it, and for the lion’s share to go to those earning less than $60,000.

To prove its point, the Government made a big song and dance about this week’s $170 million pay settlement with early childhood teachers, which it says will mainly benefit those in the $50,000 to $65,000 range, some of whose pay will increase by 17 per cent.

At the other end of the education spectrum, the intention is that secondary school principals, who are all in the $100,000 to $200,000 range, won’t get anything.

You can’t really attack a Labour Government for trying to narrow income gaps, any more than you could an Act government for promoting free speech, choice and tax cuts. The pay-freeze initiative is from the same policy cocktail as increasing the minimum wage, next week’s expected benefit boost, plans to reduce immigration by low-skilled migrants, and FPAs.

Those agreements will allow the Employment Relations Authority (ERA) to impose base wage rates, ordinary hours, overtime and penalty rates — and potentially redundancy, leave, health and safety, and regional pay provisions — on industries or occupations where employers and unions representing 1000 workers or 10 per cent of the total can’t reach agreement.

It is intended, although not guaranteed, that FPAs will be used more by unions like Unite, which genuinely represent the poor and downtrodden, than by those which act for upper-middle-class doctors or policy analysts.

But reducing inequality is not the only motivation of the Government’s programme to push up wages at the bottom end. In part based on the Future of Work Commission which Robertson ran in Opposition, and also ongoing work by the Productivity Commission, the Government rejects the argument that wage rises should only follow productivity gains.

Instead, it believes that wage rises at the low end themselves drive improvements in productivity.

No one in the Beehive would dare put it so brazenly, but the unspoken agenda is to price out low-skilled workers from the labour market to force businesses to improve productivity by investing in new technology and skills training.

This is a relatively mainstream economic view, with some theoretical and empirical support. The cliche argument is that, in the US, car washing is carried out by low-skilled and often illegal migrants.

In contrast, Swedish car washing businesses have been forced to invest in technology.

Similarly, the argument goes, if New Zealand asparagus growers are deprived of low-paid domestic and foreign workers, they’ll have to invent some new technology to harvest their crop, which might in turn become a bigger export earner than their asparagus will ever be.

No one can really dispute that raising the minimum wage or allowing the ERA to impose higher wages on industries will cause some unemployment in the short run. Some businesses who can’t survive without low-skilled foreign or domestic labour will also go broke.

Based on New Zealand’s current educational and socio-economic profile, the worst affected in the short run will be Māori and Pacific people.

But economists backing the Government’s approach would say these are small prices to pay for the medium-term productivity gains expected to result. Moreover, if the economic theory is true, what better time, politically, to act?

The main opposition party has abandoned serious economic and social debate for one about race. Unemployment is modest and much lower than feared a year ago. Very few migrant workers are being allowed in anyway.

The Government is expected to strengthen the social-welfare safety net in the Budget, with measures to better protect family income levels during short periods of unemployment. And, if it all turns to custard, Covid can get the blame.

– Matthew Hooton is an Auckland-based public relations consultant.

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