Key's MP pay legislation magics problem from view

John Key has cleverly defused a MP pay remuneration bomb, writes Peter Lyons.

John Key is a superb politician.

A superb politician knows how to retain power.

Mr Key has announced that politicians' salaries will no longer be determined by the Remuneration Authority.

The Authority has recently awarded politicians a 5.5% pay rise.

This was very embarrassing for a government determined to cut public spending.

Mr Key' s legislation is retrospective which means the pay rise, which is backdated, no longer applies.

What is most interesting about the whole affair is that the Remuneration Commission's decisions about the pay of politicians, judges and top civil servants reflect what is going on in the wider economy.

The pay rates of those at the top are still pulling away from the rest of us on an annual basis.

Mr Key has acted to ensure that the publication of this fact for members of Parliament is no longer rubbed in our faces.

It will be interesting to see if his hasty legislation also applies to top civil servants and judges and other high-income earners in the public sector.

The rationale behind the Remuneration Commission's pay rise for politicians is to ensure the pay for politicians matches the pay increases in the corporate sector.

This is meant to ensure that politics attracts the appropriate talented individuals.

The problem is that the system for determining pay rates in the corporate sector, both here and overseas, is flawed.

According to economic theory, pay rates in any occupation are ultimately determined by supply and demand.

Workers at the bottom end of the market are assumed to have the same market power in negotiating their pay and conditions as CEOs.

It is all about the impersonal forces of supply and demand.

A bank teller or storeperson or shop assistant can negotiate with his or her employer for a pay rise if he or she feels his pay does not reflect his productivity.

There is no power imbalance.

Workers who feel that their talents and efforts are not appreciated by their current employer can demand a pay rise or leave.

They are not disposable units of labour.

They are valued contributors to the bottom line and are treated accordingly because this is how competitive labour markets work.

An employer who fails to treat their employees appropriately will suffer the consequences of competitive market forces.

For those of us who have experienced New Zealand's increasingly casualised labour market, the power imbalances are very evident and pay rates reflect this.

Many employees are treated as disposable units of labour.

The message is that you are lucky to have a job.

This message has helped erode worker negotiating power, pay and conditions in recent decades.

It is very deliberate because it helps reduce inflationary pressures.

Yet in recent years inflationary pressures have largely been the result of increases in housing costs and electricity prices rather than excessive pay demands from ordinary workers.

Meanwhile, at the top end of the labour market the power dynamics differ.

This is the embarrassing reality that Mr Key prefers to conceal.

The pay of top executives is often determined by a cosy club of directors and executives whose pay rates are mutually reinforced.

Shareholders of publicly listed companies are meant to act as a handbrake on pay rates for top executives and directors.

The reality is that this power is often too diffused to be effective. Company directors appoint top executives.

Top executives often play a key role in the selection of directors who determine their pay.

Excessive pay rates for top executives in some firms invite a similar trend in others in a very thin market.

A ratchet effect applies among a very select group of top income earners.

The belief behind this trend is there is a very small select group of omnipotent supermen who can perform these top executive jobs.

What is amazing is this small group of superhuman executives is predominantly male and white.

Obliviously, they are the product of the impersonal forces of supply and demand.

Top executives need to be very well paid to ensure the best talent is attracted and retained.

Workers on the minimum wage cannot be paid too much otherwise they will no longer have a job.

The logic of the market can be arbitrary.

Mr Key has done a superb job in defusing this issue.

His law change will ensure that the growing income inequality in New Zealand is no longer such a visible problem.

• Peter Lyons teaches economics at Saint Peters College in Epsom and has written several economics textbooks.

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