<>Address to the 1994 National Biennial Conference of the New Zealand Engineering Union, 13-15 May, Christchurch.
Keywords: Growth & Innovation; Labour Studies;
Today I want to discuss economic growth strategies, by looking at the vision which underpins the Employment Contracts Act (ECA), and the alternative. One of the central tenants of a good strategy is “know your enemy”. So let me make a case for the Employment Contracts Act. What sort of vision of the economy does it represent?
It would be easy to say it represents an unfair vision, with its claim that the employer and employee are free to bargain on equal terms. We know that is a nonsense. I am reminded of a car back window sticker I saw in Australia recently.
TOGETHER WE BARGAIN:
DIVIDED WE BEG
Nor is the message that the ECA depresses wages an especially original one. Indeed later I shall caution against assuming that it will always drive wage rates down. To do this, the ECA has to be in the context of high unemployment. As unemployment falls, and labour becomes scarce, then there is upward pressure on wages which the industrial relations configuration under the ECA will be quite unable to restrain.
The vision of the Employments Contract Act is not solely about reducing the power of workers relative to their employers, nor is it really about low wages. Rather it is a vision about a particular sort of workplace and labour market, and a particular sort of growth strategy.
It will be hard for most engineering workers to understand that vision, because it is so far away from their working experiences; as far – you might say – as the life experiences of those who conceived of the ECA. For what they were imposing on the New Zealand economy was a particular vision, one which in many ways was very class based, and which ultimately could divide the nation, as have many of the other policies the advocates of the ECA have promoted. I shall talk about that a little later, especially those in the social welfare area. But first what was their labour force vision?
The technical term for its central player is the detached worker, that is a worker who is not firmly attached to the firm for which he or she is currently working, for there is little loyalty between worker and employer, especially in the work process, in this strategy. The employer is not concerned for the worker’s welfare, because outside the factory gate there are other workers without jobs, and those unemployed will happily take over one when the time comes for the current worker to move on, or for the boss to sack her or him.
In such circumstances you do not need a very sophisticated relationship between the employer and the employed. The simplest arrangement the ECA allows will do. For the firm it works better if there is a pool of unemployed to maintain discipline over a recalcitrant worker. The firm need then only pay a minimum wage.
The advantage to the firm of such an arrangement is that the firm can take on as many workers at it needs, paying them a rate which it can afford, and so it enables the firm to expand into the market, undercutting its competitors. Domestically this is not especially effective if all firms are doing it. But if the firm exports abroad then it can undercut other producers. Exports boom, and the economy experiences a rapid growth. Thus the ECA has behind it a vision which amounts to a growth strategy. It is a strategy which we associate with the successful East Asian tigers.
To work, the strategy requires two key elements. The first is unlimited supplies of labour. This is typically seen as a pool of unemployment, but as the economy expands the jobless are taken on, and the pool shrinks, unless there is more jobless labour streaming into it. In the third world this labour comes from refugees from the farm sector and from the informal sector.
In the first world, there are no such hidden labour reserves. Unless immigration from the third world is allowed, the pool of unemployed disappears, and the discipline on the detached worker relaxes. They begin to demand higher wages and better working conditions. At which point the growth strategy comes to a halt.
You can already see this happening in New Zealand, for even under our high levels of unemployment, all be they low by third world standards, wages are beginning to move up, and the Reserve Bank is beginning to restrain the growth of demand and hence of employment by higher interest rates. We may well be locked into a high unemployment economy – rather like that projected by the major forecasters when they advised the Prime Minister’s Task Force on Employment. They thought that by the end of the century unemployment might be back to the levels they were in 1990 when the Employment Contracts Act was announced, but closer analysis suggests the forecasters probably had in mind unemployment rates near 10 percent.
They projected ‘unemployment falling to between 7 and 8 percent of the workforce by the end of the five year period …’ Prime Ministerial Task Force On Employment, p.64.
However these forecasts assume labour productivity will rise only 1 percent a year. On page 60 the task force remarks that the average labour productivity growth has been 1½ percent a year. If this rate is continued, the unemployment rate will be nearer 10 percent at the end of the century.
As gloomy as that outlook is, there is an even more fundamental flaw to the strategy of the detached workers. As a rule detached workers are unskilled workers, and the jobs they do are low productivity ones. High productivity comes from specificity of labour skills, just as it comes from specificity of capital equipment.
It is a characteristics feature of a the most productive capital is that it has very limited uses. Contrast for instance, the great specificity of a Boeing 747 which has very few uses, and indeed can only land regularly on two airfields in New Zealand, with the generality of the $400 million in cash which a 747 costs. The money can be converted into an infinite range of products which can do an unimaginable range of things. It is what is called “fungible”. But the productivity of an economy comes from the non-fungible assets such as capital equipment, which the money can be converted into.
The same applies to workers – to human capital. High productivity comes from the acquisition of specific skills which cannot be easily converted into other labour for other purposes. Consider this economist. I have some very great skills, very valuable in the market thanks to the outrageous fees the government pays to ideologically approved consultants, but those skill would be almost useless in a 747, or in front of a lathe.
A skilled worker has a different relationship with the employer from that of the unattached worker. Many of the skills are firm specific, so that the employer and the employed have a mutual interest in preserving and promoting those skills, and of ensuring they are effectively utilised. It has to be an ongoing relationship: the worker needs an incentive to acquire the skills, while the cost to the firm of replacing a skilled worker is greater. Both need a mechanism by which they can upskill and benefit from that upskilling.
The Employment Contracts Act does not reflect the job reality of the attached worker, with specific skills. The very flexibility the ECA gives to the employer of the detached, unskilled worker makes it difficult for the employer and an attached worker. Now, of course, with goodwill many of the difficulties can be overcome, and the Engineering Union has a number of agreements with employers which reflect that goodwill. But unlike as promised by the proponents of the ECA, the better quality contracts in the new environment took more, not less, effort and time to negotiate as a result of the change in law.
Moreover, in this new environment where industrial relations is dominated by the ECA, despite four years of policy analysis to paralysis, the government has still not resolved the problem as how to provide sufficient upskilling in the economy. The skill shortages which are appearing, and which are both automatically via bottlenecks, and by monetary intervention causing higher interest rates, choking off growth, are a tribute to the failure of the ECA to be able to address the upskilling issue.
The high skill, high wage, high productivity, economy offers a different growth strategy to that of the third world one. It is of course that which has been pursued by the richest industrialised countries in the world. In time the Asian tigers will have to switch to it as their labour reserves run out: you can already observe this in Japan.
Workers may be able to chisel temporarily a slightly higher wage by depressing profits. Some workers may be able to increase their wages by depressing the real wages of other workers. But the only way in which an economy can sustain high and increasing wages for everyone, is if productivity is high and increasing. If we do not have a growth strategy aimed at high performance then we cannot have a strategy which delivers high wages.
The central notion of this high performance strategy is the production of technologically sophisticated and innovative products by a skilled labour force. There may even be a conscious strategy by a country to get out of the simple and crude products, by shifting them offshore, where they can be produced more cheaply by low technology means by a low paid labour force. That has been the source of a lot of the Asian tiger growth.
There is no merit for a country like us to pursue a Asian tiger growth strategy unless we are willing to accept their wage rates, and ultimately their standards of living. And if we do, many of our best people will go elsewhere, for a better way of life, at a decent material standard of living.
What I am arguing then, is that we still have a choice for our growth strategy, and that the industrial relations arrangements reflect that choice between a low technology, low skill, imitative strategy and a high technology, high skill, innovative strategy.
The difference between the two strategies is not only one of industrial relations, and vision. The fragmentation of the labour force, summarized in the term of the “detached worker”, also applies to the way the advocates see firms operate. In their vision each firm is an entity whose productivity and performance is independent of other firms, except by way of market contracts. That, like their view of industrial relations, is a gross simplification. Especially in the manufacturing sector, firms affect one another’s productivity indirectly. An effective manufacturing sector requires an industrial policy to ensure that these direct linkages are at their maximum effectiveness.
An obvious component of a successful industrial policy is an industry wide training and upskilling program. Because workers are mobile, the typical firm cannot afford to train its workers, and have some less responsible firm steal the trained worker. But industrial policy is not only about labour skills. A Comprehensive Industry Policy (CIP) needs to address the following:
– the establishment of a Ministry of Industry;
– a policy for the development and expansion of the physical infrastructure;
– a policy for the development and expansion of the technological infrastructure;
– small and infant industry assistance;
– regulatory and border policy;
– business taxation, especially one which encourages investment;
– a policy for worker training and upskilling;
– a process of involvement and consultation of all the active participants (including workers and their unions) in manufacturing.
The nation is some distance from such a policy. What is particularly unfortunate has been the calls for reductions in tariff levels, without any recognition that border protection is a crude industrial policy. In my view any reductions in the tariff must be accompanied by the development of a comprehensive industrial policy.
But even a CIP is insufficient by itself for sustainable economic growth. There is a euphoria about the current cyclical upswing. It is true that it is the strongest since rogernomics was introduced almost a decade ago, but the expansion is not exceptionally strong by post-war standards. In any case the strength is partly a rebound effect from the worst economic contraction in the post-war era, engendered by the silly economic analysis of 1990 which, among other things, resulted in the Employment Contract Act.
Unfortunately the euphoria obscures the pressures on the economy, which means the upswing is unsustainable, and as I explained earlier is expected to leave us with high unemployment rates for the rest of the decade and even beyond. There is probably little we can do to enhance the current upswing, which appears to be weakening. What we can do is develop policies to minimize the downswing and provide a basis for a sustained expansion – one which will lead to a reduction in unemployment to levels comparable with that before rogernomics was introduced.
As well as tackling the supply-side through a comprehensive industry policy, there will need to be a macroeconomic policy less dependent upon monetary manipulation, which uses a wider range of policy instruments. One of those instruments is going to have to be management of the wage path. If we want to reduce unemployment to levels which are tolerable for those unemployed, we cannot rely upon high unemployment to discipline the worker, be they detached or otherwise from the labour market. But without discipline in the wage path the economy will become uncompetitive and growth will be stifled. A managed wage path in a low unemployment economy requires a different industrial relations system to that of the Employment Contract Act. Especially it requires restraint from workers.
This may seem some distance from current preoccupations, but it is well to warn that the current upswing will not be permanent, and that workers need to be cautious when setting their wage path even today. Unfortunately current policies encourage greed in the short term, to be offset by distress in the long term. Recall how buoyant were financial markets in 1987 just before the crash, how rapacious investors exposed themselves for short term gain, to be found naked when the markets collapsed. We are still recovering from their avarice.
Now workers can do exactly the same thing, when they hike their wages during a boom, above long run sustainable levels. It would not be so bad if they were willing to reduce wages when the boom came off, but the usual outcome is layoffs. It is very easy at the moment to demand, and even get, higher renumeration, but ask yourself whether the wage is sustainable in demand conditions similar to those of 1991. The cost of an overly high wage path is likely to be overly high unemployment at a later stage.
I am afraid that much of the current economic policies are about short term gain, for long term pain. Many of the employers who have taken advantage of workers using the Employment Contracts Act will rue that decision at a later stage, if they are still around.
But the workers will be around, and their union will be around. Unlike market speculators they need long term strategies, which is what I have focused on I this paper. So let me finish by summarizing the growth options:
The economy can grow with an emphasis on low skilled cheap labour (supplementing the export of simply transformed commodities);
– firms will be technologically unsophisticated and imitative;
– their workers will be low skilled, poorly paid;
– there will not be a strong attachment of workers to firms;
– there will have to be substantial unemployment to restrain wages;
– there is no need for a comprehensive industry policy;
– the Employment Contract Act is a part of that growth strategy.
The economy can grow with an emphasis on high paid high productivity labour (transforming the primary commodities into sophisticated quality products);
– firms will be technologically sophisticated and innovative;
– the workers will be highly skilled, well paid, and there will be ongoing upgrading of skills;
– workers with their unions and the management will be working together to enhance productivity and the resulting improvements of pay and working conditions;
– unemployment will be low. Instead wage restraint will come from a managed wage path between unions and employers;
– there will need to be a comprehensive industry policy;
– the industrial relations legislation will recognize the realities of such a growth strategy.
While New Zealand is currently following the first strategy, I hope for all our sakes, and the sakes of our children and grand-children we will soon turn to the second.