5.1.5  New Zealand labour market institutions

Many of New Zealand’s labour market institutions are set out in the Employment Relations Act 2000 (ERA). The ERA was enacted to unwind some of the changes to labour markets brought in by the Employment Contracts Act 1991 (ECA), although it does not return fully to the previous institutional settings. In general, it promotes collective bargaining and provides for unions to play a greater role in the employment relationship.

A study of the short term impacts of the ERA was published by the Department of Labour in November 2003 (New Zealand Department of Labour 2003). The study finds that the Act has had little impact on most employees, particularly those in small workplaces. There has been little change in the extent and coverage of collective bargaining and increases tend to be in areas where there is existing and historical union coverage, such as the public sector. There has been little increase in levels of union coverage as a proportion of the workforce. Further assessment of the ERA would be useful after it has been in place for longer, especially as amendments to the Act are currently being considered by Parliament.

Analysis carried out by Maloney (1998) on the impact of the introduction of the ECA provides some interesting insights into how institutional change can affect resource allocation by New Zealand firms. Maloney found that the ECA reduced union density and through this increased output and utilisation of labour but reduced productivity. The greater availability of labour led employers to utilise labour more intensively rather than to invest in physical or human capital. The reduction in unionisation after the introduction of the ECA made labour relatively more available and cost effective as a factor of production than physical capital. This led to labour contributing more to economic growth through labour utilisation than through labour productivity.

A number of changes are being made to other regulations such as holiday and parental leave entitlements. These changes may reduce the flexibility of the labour market and negatively impact on growth if they restrict the flexibility of firms in their resourcing decisions. However, in terms of their impact on costs, the literature suggests that non-wage terms and conditions tend to be accommodated through adjustments to wages and may therefore be neutral for labour costs and productivity growth.[14]

Overall, New Zealand’s labour market institutions are relatively flexible compared to those of many other countries. McMillan (2004) suggests that, compared to other countries, the levels of job creation and destruction exhibited in New Zealand imply its labour markets and economy has a considerable degree of adaptability. The World Bank (2004) benchmarks the business regulations of 133 countries and ranks New Zealand 10^th in terms of the flexibility of hiring, firing and the conditions of employment and 5^th of the OECD countries, as shown below.

Figure 4 – Flexibility of labour regulations

Source: World Bank