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

Workers as Commodities.

In 1944 the International Labour Organisation, at its meeting in Philadelphia, declared that "labour is not a commodity" a declaration intended to reassert the ILO membership's commitment to the achievement of social justice .

In Sunday's New Zealand Herald Damien Grant asserted that "Economically, the unskilled are irrelevant. They are a commodity." Roger Kerr's comment to the Dublin Economic Workshop in 1999 made a similar point although in a considerably more moderate form: "while people are not commodities or articles of commerce, the labour services they provide using their mental and physical capacities most certainly are." Kerr's comment, especially in its wider context, makes it clear that his comment extended to all workers who are sellers of labour services, unlike the position taken by Grant that "Only talent matters" with the implication, unlike Kerr, that "talented" workers, whatever these may be, are in some way not commodities but rise above the common herd!

I do not intend to comment in any detail on the obnoxiousness of Grant's comments but they should not go unremarked.

The view that labour is a commodity, and the related claim that there is no inequality of bargaining power, may make sense in the abstruse mathematical models of neoliberal economists, and it can be argued that it is economically illiterate to make such comments. This is true, however, only if the discussion is confined to economic models, models whose relationship to the real world is tenuous at best. There is much to be said for the comment that economics was invented to make weather forecasting look credible. In other words such statements are essentially assertions, made within the realm of economic theory, and should be confined to that sphere. Outside a strict economic context Grant's statement translates as "unskilled workers ought to be commodities".

The statement that "labour is not a commodity" is not an economic statement-it is a normative statement designed to express a particular set of political and social values that I need not elaborate on. They are well known in any democratic society. In essence it encapsulates the values that all workers are entitled to expect to work in decent conditions and to receive a reward for that work that provides a reasonable standard of living relative to the economic condition of the society within which they live. It is also a rejection of extreme market ideology of neoliberal economists. Genuine science observes and attempts to explain the world. Economics develops models and wants to make the world conform to them, a characteristic it shares with religion.

The fundamental problem with comments such as that made by Grant is that they take statements that may have some validity in a closed and limited model, and attempt to present them as a universal truth rather than as the ideological position they are. Grant is attempting to win an ideological-political argument that seeks a particular distribution of wealth and influence in society-a normative position that he seeks to disguise as an inevitable truth.

The rest of us may have trouble with defining exactly what our normative position is but at least we are not pretending to do otherwise.