Date created: 28 November 1996
Last modified: 18 November 1997
Maintained by: John Quiggin
John Quiggin

NZ shows labour reform may not be so ideal

Australian Financial Review

Sep 22 , 1994

Over the last five years, the New Zealand and Australian economies have followed almost exactly parallel courses. Both entered recession in 1989, well ahead of most other OECD economies. Unemployment rates rose rapidly, peaking in both countries at around 11 per cent. In both countries, a hesitant recovery in output commencing in late 1991 was insufficient to yield significant employment gains. Finally, in the last year, strong output growth (at least relative to rest of the OECD) has yielded a recovery in total employment and some modest reductions in unemployment.

Both countries have achieved GDP growth rates of around 4.5 per cent, and employment growth rates of 3-4 per cent. New Zealand reduced unemployment rates to 9.5 per cent in the March quarter, with Australia attaining the same level in July. Even New Zealand apparent very small lead in recovery is offset by the presence of significant numbers of unemployed New Zealanders in Australia. The ebb and flow of migration across the Tasman is closely related to economic conditions. Furthermore with the recent revisions to the Social Security Agreement between Australia and New Zealand, the New Zealand government actually bears a significant share of the cost of providing pensions and benefits to former New Zealanders now living in Australia. So, many of these unemployed workers are effectively part of the New Zealand labour market and also, at least in a budgetary sense, part of the New Zealand social security system.

The one big difference in the reported economic outcomes, the much-vaunted New Zealand investment boom, turns out to be, in large measure, a statistical illusion. For reasons which are not entirely understood, purchases of business equipment have grown very strongly in the last year, while the investment levels reported by firms have grown more slowly. New Zealand uses the first measure of investment and Australia the second. So New Zealand has reported strong investment growth and Australia, until recently, very little.

For those who like to explain economic outcomes in terms of macroeconomics all of this is exactly what would be expected. Australia and New Zealand have experienced very similar macro shocks. Financial deregulation led to an asset price boom, which was exacerbated by monetary easing response to the 1987 stock market crash. Subsequent tightening of policy led to a severe asset price deflation. This sequence was observed in every country that undertook radical financial deregulation in the eighties. In the UK and Scandinavia, houses, rather than shares in jerry-rigged corporate structures, were the most important speculative investments, but the basic pattern was the same. In addition to the policy-induced shock of asset price deflation, both Australia and New Zealand experienced adverse terms of trade shocks.

So, in macroeconomic terms there is nothing surprising here. For those who stress the role of microeconomic policy, however, there is a mystery worthy of Sherlock Holmes. The dog that did not bark in the night is, of course, New Zealand's Employment Contracts Act of 1991. By that Act, the Bolger government abolished a centralised wage fixing system with entrenched union power and replaced it, almost overnight, with one based on individual wage bargains between employers and workers, in which unions enjoyed only a marginal role. At the same time, unemployment benefits were reduced and the conditions associated with them were tightened. The Act replaced existing contracts over a two-year period, so that the residual constraints imposed by the old system have been almost completely worked out by now.

Based on either the dire predictions made by the Kirner government's scare campaign before the last Victorian election or on the more frequent claims that labour market reform is essential to Australia's economic future, one would have expected dramatic effects, positive or negative, from such changes. In particular, if the widespread view that government- or union-imposed labour market rigidities are the primary cause of unemployment had any validity, unemployment should have fallen rapidly.

At the level of individual enterprises, there have undoubtedly been some dramatic effects. Some firms have been able to strike mutually beneficial bargains with their employees that would have been impossible under the old system. On the other hand, unscrupulous employers have been able to impose sweatshop conditions. More generally, although the impact on real wages has been relatively small, anecdotal evidence suggests that the shift of power from workers to employers under the Act has led to a widespread loss of working conditions (also referred to as removal of restrictive work practices).

But at the aggregate level, nothing has happened. New Zealand's labour market performance is almost indistinguishable from that of Australia, where labour market reform has proceeded at a slow and halting pace. Of course, it is always possible that, over the next few years, New Zealand will, in Mr. Keating's words, 'bring home the bacon.' But we have heard this kind of prediction all too often in the last ten years. In the light of New Zealand experience, advocates of labour market reform should admit the possibility that their proposals will have only a marginal impact on unemployment.

John Quiggin is Professor of Economics at James Cook University and author of Great Expectations: Microeconomic reform and Australia, published by Allen & Unwin.

Read more articles from John Quiggin's home page

Go to John Quiggin's Weblog

Read more news articles from 1994 and earlier