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Professor Richard Epstein

Declining Productivity as a Way of Life

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It is now eighteen years since I first visited New Zealand as a guest of the New Zealand Business Roundtable. Yet that period of time is long enough to document the early rise in growth during the period between 1992-2000, followed by the much more anemic growth in the period between 2000 and 2006. The trend rate of labour productivity growth in the measured sector was about 2.7% in the first period and 1.3% in the second. The point of the divide is no accident, for the year 2000 marks the rise of the current Labour government to power, and the gutting of the Employment Contracts Act of 1990, which I am happy to say I helped promote on my first visit to New Zealand.

The obvious question is what counts for this difference. Clearly it cannot be greed or self-interest, which operate with about the same intensity in all political regimes. Rather, the difference must be traced to differences in policy. In this instance, one clear determinant was the conscious effort to liberalise (in the nineteenth century sense of that term) labour markets in the former period, in sharp contrast with the nonstop efforts to regulate labour markets in the second.

I think that it is apparent that this revival effort has faltered. Indeed the disparities in growth rates that I refer to above understand the difference between a world of open and regulated labour markets. The impact of the 1990 reforms were quickly apparent. In December 1991 trade union membership stood at 33.9 percent of the work force. By December 1992 that figure had fallen to 27.8 per cent, and by December 1999 that figure fell to a low of 16.7 percent. Yet even with this sharp decline, market forces had to contend with established institutions that have long placed a burden on productivity. In addition, the labour market reforms in 1990 did not establish a fully open market in labour, for much regulation remained from other sources, including the refusal of New Zealand employment courts to give freedom of contract for employers and employees alike full sway.

By the same token, the post-2000 years could not completely undo the work that took place in the previous period. So the contrast between the two systems is in practice less stark than it is in theory. Accordingly, the gap in growth between the two periods understates the economic differences in the long run between a system of open markets and a system with strong labour market regulation. The passage of the Employment Relations Act resulted in a modest increase of union membership to 17.2 percent by December 2000, and in the next seven years has barely moved from that figure, totaling 18 percent in 2007. With membership basically static, the more interesting figure perhaps the sharp increase in the number of unions, which moved from 66 in 1991 to 169 in 2007. Obviously the membership of these newer unions is only a fraction of the older larger ones, which doubtless reflects a far greater emphasis on plant or regional unionisation at the expense of large nation unions. The overall lesson seems to be that once individuals choose to leave unions, they are reluctant to return to them, even when the legal position has changed.

So what then accounts for the decline in productivity growth in the post 2000 period when it cannot be laid at the step of high levels of unionisation? The explanation cannot depend on some exotic refinement of modern economic theory in light of the large observed differences. Rather, the explanation is too simple to bear much elaboration. Productivity can suffer the death of a thousand cuts. The policies that lead to prosperity in periods of downturn are the only policies that will keep productivity going forward once the downturn is ended. There are no once-and-for-all fixes in dealing with economic systems. The good work of the Employment Contract Act cannot survive indefinitely after its demise. Legal reforms do not depreciate instantly if they are not maintained, but depreciate they do. There is never a period of time when any nation can coast on its laurels and assume that the problem of production has taken care of itself so that the larger task of income distribution can begin.

Yet in response to the stagnant condition in today’s labour market, it is instructive to see the approach taken by the New Zealand Council of Trade Unions. (Click here) Instead of asking what could be done to free up productivity, its web site features a headline that says “Fairness Approach Welcomed,” which then exhorts the government to do what it can to narrow the wage gap with Australia. It won’t work. It is sad to see that New Zealand Trade Unions are determined to do their level best to use failed industrial policies to entrench the failed status quo. In the long run the only protection for workers, in or out of trade unions, lies in increased productivity of labour, which in turn depends on the ability of firms to deploy labour in whatever form it sees fit.

The fear of employer domination and tyranny which leads to an active government role to redress the imbalances of markets only makes matters worst. It leads capital at home to go abroad and capital abroad to stay there. We have seen evidence of these regrettable trends in the United States where there is widespread devastation throughout much of the Northeast in such bellwether industries as steel and auto—which is directed attributable to strong unions overplaying their hand, thereby bringing to their knees the firms in which own members work. The Labour Party and the Trade Unions need to junk their appeal to fairness, and realize that their own policies are the source of their own undoing, and that of New Zealand.