Sunday, September 18, 2011

How Inflexible is New Zealand's Labour Market?

Last week Andrew Scott-Howman in his Workface blog posted on New Zealand's ranking in the Global Competitiveness Report published by the World Economic Forum.  This body is a conservative think tank whose New Zealand partners are Business New Zealand and The New Zealand Institute.  The latter has an excellent commentary on the overall New Zealand report on its website. This post will focus purely on the Labour Market Efficiency "pillar" of the report on which New Zealand ranked 11th internationally, ahead of Australia at 13th.  This score is based on a measurement of nine factors which are (with rankings in relation to 142 countries-  the higher the place the greater the efficiency):
  1. Cooperation in labour-employer relations  (13th)
  2. Flexibility of wage determination  (26th)
  3. Rigidity of employment index (10th)
  4. Hiring and firing costs (86th)
  5. Redundancy costs measured by weeks of salary required to be paid (1st)
  6. Pay and productivity (34th)
  7. Reliance on professional management (2nd)
  8. Brain drain (82nd)
  9. Woman in labour force: ration to men (43rd)
Those items in bold are derived from the Forum's Executive Opinion Survey (in the case of New Zealand apparently 51 "business leaders" according to the New Zealand Institute commentary),  All other figures come from the World Bank's 2010 Doing Business report except for 9 which is from ILO figures.

The mixing of hard and soft data in this way to produce an overall figure seems somewhat dodgy at best (and the World Bank figures are themselves not without problems).  This is particularly apparent in relation to the outlier ranking of hiring and firing costs.  This figure seems to reflect employer prejudice and misunderstanding rather than anything resembling the reality of employment protection in New Zealand.  By way of comparison for example the OECD in 2008 ranked New Zealand as having the 4th least strict employment protection!

One particularly interesting result from the Executive survey was the ranking of "restrictive labour relations" in the overall survey results.  It was ranked 6th of 11 issues with a weighted score of 8.9 compared to 22.7 for the major concern, "inadequate suply of infrastructure."  In terms of the labour market the top concern was an "inadequately educated labour force" in 4th pace with a score of 11.5.  Interestingly Australian executives ranked "restrictive labour relations"as their top concern with a score of 16.6.  Given the heat of the debate on this topic in Australia at the moment one wonder if this reflects a response to the hot topic of the moment rather than reality - the OECD ranking for Australia was 5th.

Such reports are interesting but should be read with a considerable grain of salt. New Zealand's 11th overall ranking indicates a very efficient labour market even without the distortion introduced by the survey evidence

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