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Emplyment Changes in NZ Explored By New Book

8 February, 2005

Is There Unequal Bargaining Power in the Labour Market?

The latest Business Roundtable publication examines bargaining between employers and employees, and explores New Zealand's experience with changes in employment law.

"The idea that employers have a bargaining advantage, allowing them to push down wages unless employees are 'protected' by regulation, is often heard in public policy debate and motivates the Employment Relations Act", New Zealand Business Roundtable executive director Roger Kerr said today.

"The paper Is There Unequal Bargaining Power in the Labour Market? - based on a speech by University of Chicago law professor Richard Epstein during a visit to Wellington in August 2004 - debunks this hoary claim."

Professor Epstein points out that the exploitation model cannot explain features that we see in real-life labour markets, especially "the spirited competition that takes place at every level for honest, able and ambitious workers who are the heart and soul of any business, large or small". Monopoly in labour markets is not a serious problem; both workers and firms are mobile. Real wages and other conditions of work have gone up, not down, over time.

A competitive labour market reflects supply and demand factors, which sometimes work in favour of firms and at other times in favour of workers, not systematically unequal bargaining power. In this, the labour market is no different from any other market. As Epstein says, "By allowing the free movement of price and quantity, powerful forces will result in a convergence at the optimum level", including full employment with real wage growth reflecting growth in labour productivity. This is what has happened in New Zealand with the freer labour market: real wage growth is occurring as the labour market has tightened after a lengthy period of high unemployment, and as productivity growth has picked up.

Professor Epstein, who was involved in the New Zealand debate on labour market reform in the 1980s, examines recent employment law in New Zealand. He states:

It is often claimed that the [Employment Contracts Act 1991] was advantageous to employers. I am an academic - and an employee - with no such covert motive. My goal is to maximise the sum of consumer and producer surplus, employer and employee surplus. The goal should be to create a system of ex ante opportunities from which both sides will be able to profit through voluntary exchange.

Epstein argues that the 1991 legislation increased such opportunities, and revealed the artificial nature of the previous situation which had been characterised by a highly unionised workforce with strong monopoly powers. Of the shift to the Employment Relations Act 2000, Epstein writes:

I do not believe the changes help workers ... For domestic firms to succeed, a cartel mentality bent on achieving monopoly wages and obtaining a larger slice of a given pie must be abandoned in favour of a production mentality focused on the efficient operation of firms.

He argues that firms and employees should be free to decide on the type of employment contracts that suit them best, including contracts at-will as well as contracts with more elaborate provisions governing hiring and firing.

"The Marxist idea that there is systematic unequal bargaining power in the labour market should have died a natural death many years ago", Mr Kerr said. "The Business Roundtable was disappointed that former labour minister and law professor Margaret Wilson declined to debate the issue with Professor Epstein during his visit. Political parties going into this year's election have policies based on different ideas of how the labour market works. A sound analysis of them is needed and the publication of this report is therefore very timely."ENDS

Is There Unequal Bargaining Power in the Labour Market? is one of thirteen lectures Professor Epstein delivered during his 2004 visit to New Zealand. Each is being published by the New Zealand Business Roundtable.

Purchase ning+Power+in+the+Labour+Market?&price=$12.50 Is There Unequal Bargaining Power in the Labour Market? ($12.50 plus postage and handling)

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