Liberating labour: The New Zealand employment contracts act

Between 1984 and 1991, New Zealand converted its economic system from the most heavily regulated to the least regulated in OECD. The public sector was restructured to separate core administrative functions from government-owned production activities. The latter were corporatised, and many privatised. Product markets were deregulated and opened to international competition. Virtually all producer subsidies were abolished. Foreign trade was liberalised. Financial and capital markets were liberalised and foreign investment and immigration were made welcome. Labour markets were freed up, and workers were given the right to associate freely. In the process, a formerly inwardlooking, slow-moving economy with rising unemployment was turned into a flexible, globally competitive, high-growth economy with price stability, above-average job creation and small, effective government. New Zealand had long been known internationally for its system of centralised wage fixing and arbitration. Since 1991, however, it has become equally known for the new Employment Contracts Act (ECA), which was the capstone of the comprehensive economic and social reform programme. The ECA converted a centralist, corporatist industrial relations system into a decentralised 'market order. Freely negotiated labour contracts are now the basis for responsive, diverse labour markets. The effects of the Act can only be understood as an integral part of all-round liberalisation and New Zealand's reinvention of government. Previously antagonistic industrial relations have given way to cooperation between employers and workers, flexible adjustment to competitive conditions and an enhanced competitiveness of New Zealand workplaces and firms in a rapidly changing, internationally open economy. The new workplace relationship has led to profound attitude changes which have been inspired by the discipline of open, competitive product markets and the withdrawal of several labour-supply disincentives in the form of public-welfare supports. The main effect of the labour reforms has been to assist in making the supply-side of the New Zealand economy fairly price elastic. This has been underpinned by a price-level target for independent monetary policy and by fiscal downsizing, privatisation and public debt reduction. Employers and most employees have welcomed the freedoms under the new contracts system. In many sectors, productivity has risen steeply, reflecting more rational work practices. Managers are now able to effectively manage the human resources that firms hire. Real wages have risen, but slowly, reflecting productivity gains. Union membership and the number of union officials have fallen, as many workers now use bargaining agents to negotiate employment contracts. The frequency of strikes and lockouts has fallen considerably. The ECA and the other reforms have created a Kiwi job-creation machine, which has increased aggregate employment by over 10 percent during the long upswing of 1991- 95. It has nearly halved the overall unemployment rate within less than two years - in contrast to earlier upturns in the New Zealand cycle and the pattern in Australia. As labour shortages are emerging in the present cyclical upswing, many long-term unemployed, the young and Maori are being drawn back into gainful employment. Labour market deregulation has also increased the market premia for skills and reduced transaction costs in operating about markets. Most observers predict a period of sustained, inflation-free growth and further drops in unemployment (March 1995: 6.6%) as New Zealand - despite a strengthening currency - is now seen as an internationally highly competitive exporter and an attractive location to internationally mobile capital and enterprise.