Low wages: is Competition a factor?

Low wages: is Competition a factor? Bill Rosenberg, CTU Policy Director/Economist Peter Cranney, Employment lawyer, Oakley Moran Law and Economics Association of New Zealand 2 May 2019

Overview • Low Wages – some evidence • Reasons • A look at the research • Competition (Peter Cranney) • Solutions • Raise productivity • Supporting people through change • Collective bargaining (Peter Cranney)

Low Wages: OECD Comparison Source: OECD Average Annual Wages dataset, https://stats.oecd.org/Index.aspx?DatasetCode=AV_AN_WAGE#

And wages falling behind the weak productivity growth: Real Compensation of Employees per hour compared to productivity gains Former Measured sector productivity to 1995, then Measured sector. 2018 estimated by movement in average wage and GDP(E) Deflator $5.20 or 16%

And wages falling behind the weak productivity growth: Real Compensation of Employees per hour compared to productivity gains Former Measured sector, 1978-2018, March 2018 dollars 2018 estimated by movement in average wage and GDP(E) Deflator

Reflected in low and falling share of income: Labour income share of Net Domestic Income compared to OECD Sources: AMECO database, SNZ, author's calculations Average $11,800/year per employee

Low wages: the working poor In New Zealand – 40% to 50% of children in poverty are in households where at least one adult is working (Perry, 2018, p. 158). The majority of the poor are couples with jobs, with some – but not a lot of – children living in their own home albeit with a mortgage. (Easton, 2013, p. 23)

Low wages: lower increases Real increase in average hourly income in each decile, 1998-2015 Source: Data: NZ Income Survey (Stats NZ); see Rosenberg (2017) To a reasonable approximation, employees paid below the overall average wage experienced either low wages or low wage growth or both.

Low wages: Poor rewards for training • Degrees can be well rewarded, though many graduates end up in jobs unrelated to their degrees(high mismatch rate, mainly overqualified) • But many vocational qualifications are poorly rewarded. • There has been a series of research studies (Crichton, 2009; Crichton & Dixon, 2011; Tumen, Crichton, & Dixon, 2015; Tumen, Dixon, & Crichton, 2018; Zuccollo et al., 2013). • Crichton (2009) for example found that • gaining a workplace-based qualification at level 4 or higher improved earnings only by 7 percent more than comparable workers. • gaining a qualification at level 3 improved the average earnings of males by 2 percent but females saw no rise

Low wages: embedded • Low wages are embedded in the structure of our economy • Two of our largest export industries, agriculture and tourism, have among the lowest wages • Widespread noncompliance with basic labour standards; frequent exploitation of vulnerable migrant workers. • Insufficient labour inspectors to enforce these basic laws • Lawyer Catriona MacLennan (2017) made Official Information requests to MBIE’s labour inspectorate: 2012 to 2016, 3,314 investigations, of which 2,145 found breaches. E.g. • three Auckland liquor and convenience stores required to pay $96,574.33 in wages and holiday pay to 11 migrant workers, plus other penalties; • 31 out of 44 dairy farms visited in breach of minimum employment rights including underpayment of the minimum wage; • auto valet in South Auckland ordered to pay $241,451 in penalties and arrears for serious breaches of employment law over six years during which it deprived some 221 employees by failing to pay the minimum wage or pay holiday pay to employees leaving the company • Such cases continue despite more pro-active enforcement

Low wages: why? • Many causes often discussed – won’t go into them in depth, nor cover all of them • Not lazy! • Not lacking skills • Not simply productivity – see above • Globalisation/offshoring • Weak employment protection • Focus on • Competition (Peter) • Collective Bargaining

Low wages: not laziness • Not about being lazy • Referring here mainly to pay rates • New Zealanders work longer hours than most other OECD countries

Low wages: not qualifications, skills • Well educated, qualifications profile similar to OECD average • Good skill levels to the extent they can be compared (Statistics New Zealand, 2017). NZ Productivity Commission, 2016, p.97 • Large qualification mismatch – mainly overqualified/overskilled(NZ Productivity Commission, 2016, p. 97; Statistics NZ, 2017, p.16) – symptom rather than cause of low productivity/low wage economy? • Skill scarcities in some occupations but considerable concern that many employers are using immigration to avoid training New Zealanders or paying higher wages.

Low wages: Not simply productivity • Productivity clearly a factor • But not simply productivity: wages have not kept up with even weak productivity growth • Raising productivity requires employers to invest more in their businesses, using technology, machines, and better ways of organising and managing their businesses, engaging with their employees • Low wages provide little incentive for investment, employee engagement: could encourage low productivity • If rising productivity is through increased automation replacing labour, that could also reduce the labour share of income • Seems unlikely to be large factor here given low capital intensity

Low wages: Globalisation • Offshoring of jobs to very low wages countries, or the threat of it • Many examples in New Zealand • Weakens bargaining power of employees • Trade can on average increase incomes, but - • there are winners and losers • transition costs high and long lasting • E.g. “China Shock” in US; • Several studies of job loss in New Zealand – e.g. Hyslopand Townsend (2017, Motu) estimate displaced workers’ earnings and total income were 25-30% lower in the first year and 13-22% lower five years after being displaced.

Low wages: Weak employment protection • Lowest protection against dismissal in OECD; among lowest coverage of collective employment agreements; among greatest turnover/shortest job tenure • Weakens bargaining power • E.g. Cimenelli, Duval and Furceri (2018) found deregulation of employment protection significantly reduced the share of income going to wages Source: Fig 2.1, p.53, OECD(2017)

Low wages: Bargaining power • A number of these factors either reduce the bargaining power of wage/salary earners … • Offshoring • Weakened employment protection and collective bargaining • or are exacerbated by reduced bargaining power • Wages lagging productivity • Employment protection • Poor rewards for skills

International research on falling labour income share • Reduced bargaining power of labour • Deregulated labour relationships • Globalisation: e.g. threat of offshoring, imports • Financialisation • e.g. International Labour Organisation (2013), Furceri, D., Loungani, P., & Ostry, J. D. (2017), Guschanski & Onaran (2018) • Lack of competition/increased market power – unshared rents (‘pure’ profits) • e.g. Barkai(2016), Eggertsson, Robbins & Wold (2018). • Rise of ‘super-star firms’ with increasing share of the economy • High capital intensity, contracted out labour, globalised • E.g. Autor, Dorn, Katz, Patterson & Reenen (2017). • Increased capital intensity, substituting for labour Bargaining power “Future of Work”?

Low wages: Competition • Finding reduced competition in US and OECD • Raises interest in much older question (see Manning, 2003): do employers have monopsony power over their workers? • monopsony = single buyer (here, buyer of labour) • If so, they have bargaining power over those selling labour to them: workers • Can then reduce wages, even if it is at expense of lower employment and output • Suresh Naidu, Eric Posner, and Glen Weyl (2018a, 2018b) model this – suggests very substantial economic losses – in their rough model, between 8.5 percent and 26 percent of output

Low wages: Competition • Standard labour market model assumes (near) perfect competition and perfect information: • employer faces a single market wage for his/her employees and pays it, hiring until additional worker is unprofitable (when wage = marginal revenue product) • Implies that • if any worker could obtain 1 cent more from another employer he/she would leave for the other job – so all workers would leave: “infinite elasticity of labour supply” • Thus the employer has no power to set different wage • Not reality

Low wages: Competition • Empirically, the elasticity is found to be around 0.5 for the whole labour force, and within a range for different firms which can be higher (e.g. above 10) but often around 1 (e.g. Naidu, Posner & Weyl, 2018b); estimated 0.75 in Australia (Booth & Katic, 2010). • E.g. elasticity of 1 means that if the employer reduces the wage by 5%, then 5% of workers will leave – rather than all • This gives considerable bargaining power to employer • Can be direct (employee) or indirect (employee of supplier with few buyers – e.g. supplier to major supermarket chain) • Wilmers (2018) shows that in the US, “dependence on large buyers lowers suppliers’ wages and accounts for 10 percent of wage stagnation in nonfinancial firms since the 1970s”

Low wages: Competition • Simple definition of monopsony is one employer available to an employee • E.g. miner in a mining town with one mining company • Relatively rare, though more likely in a small country or remote locations or for specialised occupations • Broader definition acknowledges that concentration is not only source of employer market power: e.g.

Low wages: Competition • Naidu, Posner & Weyl (2018b), and Marinescu & Posner (2019) extensively analyse US competition (anti-trust) law, which allows for cases of labour monopsony/employer market power • Find it is rarely used and even more rarely succeeds • Naidu & Posner (2018) conclude that “antitrust is likely to play only a secondary role in remedying it, and other legal and policy instruments to intervene in the labor market will be required” • “Jobs are not like chairs” (N&P) or Manning: “people go to the pub to celebrate when they get a job rather than greeting the news with the shrug of the shoulders that we might expect if labor markets were frictionless” • More like a relationship than a market

Low wages: Competition • Naidu & Posner suggestions include • Wage regulation such as minimum wage • Wage boards (as in Australia and proposed Fair Pay Agreements) (see also Dube, 2019) • Mandatory employment benefits/minimum standards • Job protection • Occupational licensing • Government subsidies including training and employment • Legal protections for and subsidies to unions • Countercyclical macroeconomic policy that minimizes job loss during downturns

Unions, workers and markets • Why many unions don’t talk much about “markets”. • Are unions “monopolies”? • “Buying” and “selling” labour – an individual act or a collective one?

The concept of “bargaining unit”: • individual (IEA); • group of individuals within employer (SECA); • group of individual with multiple employers (MECA); • industries (industry agreements); • every worker in the country (Minimum Wage Act 1983).

Competition Law and Employment • employment agreements not caught by Commerce Act 1986 (see definitions of “services” in s2: “but does not include rights or benefits in the form of the supply of goods or the performance of work under a contract of service”. • strikes and lockouts are lawful

Courts recognise legitimacy of collective bargaining: • See AFFCO NEW ZEALAND LIMITED v NEW ZEALAND MEAT WORKERS AND RELATED TRADES UNION INC [2016] NZCA 482 (at [66]) [66] It is obvious that AFFCO’s objective was to undermine or compromise the parallel process of negotiating a collective agreement which was then underway with the union. The company’s purpose was to fragment the future bargaining strength of the workforce by isolating individual workers. By this means it took advantage of the inherent inequality of its relationship with the seasonal workers who were members of its captive workforce and to whom it owed existing duties to offer re-employment… • See also Jacks Hardware and Timber Ltd v First Union Incorporated [2019] NZEmpC 20

Employment Relations Act 2000 – an attempt to make the labour market function: • Although not stated explicitly, the monopsonistic or “buyer friendly” nature of many labour markets is reflected in the provisions of Employment Relations Act 2000 see in particular s3(a)(ii), (iii) and 3(b) • The Act has assisted but needs to go further: • stronger collective bargaining rights to weaken excessive power of buyers of labour

History • New Zealand’s entire industrial history is marked with a recognition – or at least acceptance – that an unregulated labour market is not a free one, that employers have too much power in such a market and that intervention and control is needed to make the market work effectively. • See currently Equal Pay Act 1972 and Bartlett v Terranova (Court of Appeal) • Arguably a long term government- supervised monopsony across the entire residential age care sector.

Some solutions Productivity • Industry policy • Deliberate policy to move to higher value production • Widespread in E Asia • Coming back internationally • Improving worker engagement (High Performance High Engagement method) Better support for people through change • Changes in industry can lead to further job change or loss • Our support for workers going through change is very weak (OECD, 2017) • Strengthen “Active labour market policies” • Life-long learning, work based training

Some solutions Sharing the gains • Collective bargaining • Proposed Fair Pay Agreements (FPAs, as per Working Party proposal) • Workers and unions in industry or occupation ask for a FPA • Coverage subject to negotiation; then the FPA covers whole sector • Terms of the agreement cover pay rates, how increases are determined, working hours, overtime and penal rates, leave, redundancy, skills and training, and anything else agreed to consistent with legal minima • FPA would form a floor of conditions for the sector, but unions, individuals and employers could negotiate better conditions. • An agreement would have to be ratified by meetings of the workers covered by it and by employers covered by it. • Workers could not strike over negotiations but if agreement could not be reached, an authority would determine its terms

Some solutions • Forms a floor under pay and conditions in a sector, • Removes low pay as element for competing: encourages competition on productivity, service, quality • Helps resolve monopsony problem of suppliers with dominant buyers • E.g contracts for city bus services • Including training and skills creates an industry approach to developing skills • Pay could recognise skills and qualifications • Encourages increased productivity and workers benefiting from it • Does not go as far as many successful countries in Europe, especially northern Europe, with much more equal distribution of income and higher productivity • But would help move us towards a fairer sharing of our income and more productive workplaces.

ThanksDiscussion, questions?

Low wages: is Competition a factor?