The power balance between workers and employers, illustrated by the current industrial unrest, has always been contentious, says Peter Lyons, especially as union bargaining powers have been eroded.
Worker-employer negotiations over pay and conditions are not a contractual discussion between equals, particularly as unemployment mounts. This has been a hard fact of capitalism throughout history. The appalling pay and conditions of mill and factory workers in 19th century England were improved through bitter political and social struggles, rather than a natural organic process of uninhibited free markets.
Economic textbooks teach that workers are ultimately paid according to the added value of their output. This is based on the assumption that workers and employers operate in competitive labour markets.
Employers compete to attract and retain productive workers and workers compete for jobs. This ensures efficiency. This ideal only comes close during periods of near full employment. This has seldom occurred in New Zealand since the early 1970s. The power equation between employee and employers has become increasingly distorted over the past few decades due to a variety of factors.
A key factor has been the erosion of union bargaining power. Unions have become weaker, partly due to legislative changes such as the 1991 Employment Contract Act, and partly due to societal attitudes. Many younger workers regard unions as an anachronism. They have been raised in an era of user pays where it is everyone for themselves. Many believe in the capitalist ideal of meritocracy. If they are stand-out employees they will be paid accordingly. Yet, this is very dependent on the availability of other employment options, otherwise their negotiating power is limited.
There has always been a tension over the distribution of national income between profits and wages.
This distribution is largely the outcome of political and societal influences, rather than any natural economic order. This is not to deny that some unions have abused their bargaining power, but in recent decades the pendulum has swung.
This has contributed to the large income inequalities here and abroad.
A further factor affecting wage rates in New Zealand has been our monetarist approach to managing our economy. The Reserve Bank Act of 1989 enshrined the doctrine that inflation was public enemy number one. What this has meant is that when inflationary pressures rise the Reserve Bank increases interest rates to reduce demand in the economy. As demand for goods and services falls, unemployment rises.
The sacrificial lamb in this process will always be the unemployed. This reduces the bargaining power of workers and therefore reduces wage inflation. The irony is that inflationary pressures over the past decade have largely been the result of the credit binge of our lightly regulated financial sector.
From 1984, New Zealand embraced free trade. Many industries, such as clothing and textiles, were virtually wiped out. The jobs that were lost were largely low-skilled, creating a pool of unemployed workers desperate to find alternative employment. This served to depress wage rates for less skilled workers. In 1980, our unemployed numbered around 5000. By 1991 this had risen to 180,000. Somehow, we managed to find 175,000 shirkers during this decade of radical economic reform.
We still continue a sad tradition of blaming the unemployed for the lack of job opportunities.
Worker negotiating power has been further reduced by the massive household debt build up over the past few decades. Our financial sector went on a lending spree which allowed us to bid up our own house prices. As a result, few employees have the luxury of losing income for a lengthy period in order to negotiate better pay and conditions.
Employers cry out for greater flexibility in the work place. Workers seek to maintain their pay and conditions and eke out an improvement if possible. Flexibility is often a euphemism for casualisation and a loss of job security and the benefits that go with it.
Large income inequalities are a key aspect of lassez faire capitalism.
Workers who do best under this system are those with specific skills in limited supply in growth industries.
The losers are low-skilled workers left to compete in global labour and product markets. Supporters of this system regard this as beneficial in enhancing the efficiency of our economy. What they fail to appreciate is that workers are also consumers. As income inequalities mushroom, the demand patterns in an economy become distorted, creating further unemployment. The wealthier can consume only so much. They seek to put their excess incomes into luxuries, often imported, and income-earning assets. This contributes to asset bubbles in share and property markets. The key employment sector in all advanced economies is services and services are generally consumed by locals. Reduced income inequalities should lead to greater demand for local services, creating employment.
Meanwhile, those at the bottom of the income ladder are left to cobble together a living of sorts. This leads to social problems that become very evident in a society of four million living on a few isolated islands.
The power balance between employers and workers has always been contentious, particularly during hard times. It is up to us as a society to decide the extent of this imbalance. If it is left entirely to market forces the outcomes will continue to be ugly and damaging to our national wellbeing.
• Lyons teaches economics at Saint Peters College in Epsom and has authored several economics texts.
