A Light Goes Out in New Zealand

The Employment Relations Act Turns Back the Clock

I have often referred to New Zealand’s 1991 Employment Contracts Act (ECA) as a model of voluntary unionism that we in the United States would be wise to emulate. Notwithstanding its shortcomings—including its mandatory personal grievance provisions, its creation of the specialist Employment Court, and its failure to do anything about the minimum-wage law—the ECA made the employment relationship in New Zealand a matter of voluntary exchange for most workers and most employers on most issues.

It stripped unions of most of the special privileges and immunities they enjoyed before 1991, which placed them above the rule of law. Unions, like everyone else, were made subject to the common law of property, contract, and tort. Unions could represent only their voluntary members, and workers could choose union or nonunion third parties to represent them or could choose to represent themselves. Like unions, nonunion third parties could represent only those workers who contracted with them to do so. Bargaining was wholly voluntary. No unions, nonunion representatives, employers, or individual workers could be forced to bargain with any other party against their will. There was true freedom of association, which includes the right not to associate, for all parties in New Zealand labor markets. Freed from compulsory unionism, most New Zealand workers chose to be union-free. Between 1991 and 1999 the percentage of workers represented by unions fell from 50 to 20 percent. Employment growth accelerated, unemployment plunged, average real wages increased, and strikes almost disappeared. Public opinion polls indicated substantial and growing support for the ECA throughout the period.

The Unions Strike Back

Union leaders, of course, abhorred ECA. Their declining market share meant fewer and fewer dollars came into their treasuries and more and more workers, journalists, and politicians were losing interest in what union leaders had to say about anything. Threatened with penury and irrelevance, union bosses pulled out all stops to return the Labour Party to power in the 1999 elections. They were assisted by the incumbent National Party government that seemed to have run out of all its reformist energy and had nothing new to offer. Labour and its coalition partner, the Alliance, won the election, giving the impression they would make only minor changes to ECA. However, it didn’t take long for the union bosses to present their IOUs. At the unions’ behest the coalition government cobbled together the Employment Relations Act (ERA), which became law August 1.

ERA turns the clock back to the days of special privileges and immunities for unions. Its authors adopted many of the bad features of our National Labor Relations Act (NLRA) and came up with some equally bad features of their own.

Worker Choice. Unlike NLRA, ERA still permits individual workers to opt out of union representation, but it stacks the decks against that option. ERA says that a union may consist of as few as two employees; and all employers, whether unionized or union-free, are forced to allow union organizers on their property to recruit workers. Unions, and only unions, have this privilege.

Once two workers join up, the employer becomes unionized and is forced to bargain with the union in good faith. Only unions may engage in collective bargaining and enter collective agreements with employers. Where a collective agreement is in effect, all newly hired workers are made subject to its provisions for 30 days, after which a worker may opt out of the collective agreement, remain union-free, and work out an individual contract with the employer. However, notwithstanding any terms in an individual contract, an employer must allow every union-free worker to join the union and become subject to the collective agreement at will. So most employers are likely to be forced to bargain with unions, and union-free workers will find it difficult to avoid the blandishments of union organizers. Moreover, employers must provide only “neutral” advice to workers on joining collective agreements. ERA tolerates only pro-union propaganda. Employers may not “undermine the integrity of a collective agreement” by offering inducements to workers, but unions may undermine the integrity of individual contracts by offering inducements to workers. ERA states that it “protects the integrity of individual choice.” Some integrity, some choice!

Speaking of propaganda, ERA forces employers to give union workers from five to 35 days (depending on firm size) of paid leave each year for “employment relations education leave.” Of course the education is provided by the unions. I am reminded of the mandatory “sensitivity training” imposed on many American college campuses for students with politically incorrect views.

Replacement Workers. Under the principles of voluntary exchange, if person A refuses an offer from person B, person B is free to make the same offer to person C. This is now the rule in all markets in New Zealand except the labor market. ERA provides that during any strike an employer is forbidden to hire replacement workers, and nonstriking workers may not be assigned to do the jobs of strikers. American unions have tried and failed to get this privilege ever since 1935. ERA implies that unions, not employers, own the jobs performed by union workers.

Labor as a Fixed Cost. ERA forces any employer “covered by a collective bargaining agreement to continue to employ every employee bound by it during the whole of the period the agreement is in force” notwithstanding any changes in business conditions. Union labor becomes a fixed cost of doing business, and union labor cannot be kept out of any firm. This will do wonders for New Zealand firms trying to compete in the global economy.

Inequality of Bargaining Power. The ERA asserts that it “acknowledges and addresses the inherent inequality of bargaining power in employment relationships.” This is strange because most New Zealand workers opted for individual employment contracts under ECA. I guess they were not aware of their inherent bargaining-power inferiority relative to employers. They didn’t realize how much they needed the unions, which they were always free to join, in order to reach bargaining-power parity. They must be overjoyed now that Labour Party politicians and unions have enlightened them.

As I and others have repeatedly explained, the hoary myth of a worker’s inherent bargaining power disadvantage has support neither in logic nor in history. Bargaining power comes from having alternative employment opportunities. A prosperous economy, within which entrepreneurs and investors are creating increasing employment opportunities, gives workers more bargaining power than any union is likely to give. By decreasing the flexibility and resilience of labor and product markets, ERA will make New Zealand much less hospitable to entrepreneurs and investors, decrease real economic growth, and increase unemployment. New Zealand workers will lose, not gain, bargaining power.

Cartelization of Markets. It is widely understood that unions are labor cartels. A cartel is a group of sellers of something who agree with each other to suppress competition among themselves in order to extract monopoly prices from customers. Workers are sellers of labor, and if wages can be taken out of competition, buyers of labor (employers) will have to pay monopoly wages. ERA doesn’t stop at promoting labor cartels; it also makes it easier for unions to help employers to cartelize product markets. It permits strikes in pursuit and enforcement of multi-employer collective agreements. A group of employers who are covered by a multi-employer collective agreement will all face the same labor costs and can easily translate this into uniform product prices. Associate Labour Minister Laila Harre likes this feature because it “will put an end to price competition by putting all workers on the same wage.”

Mandatory Good-Faith Bargaining. The worst feature of NLRA copied by the authors of ERA is mandatory good-faith bargaining. New Zealand employers are forced to bargain with unions that represent two or more workers. At least in the United States, a union must have the support of a majority of an employer’s workers before it can force him to bargain. Mandatory bargaining is bad enough, but the good-faith requirement makes things worse. ERA doesn’t define “good faith.” It says that “codes of good faith” must be developed in tripartite negotiations among unions, employers, and the government. NLRA doesn’t define good faith either. However, even though it specifically states that it does not require the “making of a concession,” case history implies that employers must compromise with unions. No take-it-or-leave-it bargaining is permitted. Employers must watch their language and show proper deference to the union negotiators. It is bad faith for employers to poll workers to find out what they want.

Good faith means only unions can speak for workers whether the workers like it or not. The only effective defense against a charge of bad faith bargaining is a record of concessions to the union. Inasmuch as Harre speaks favorably of the “North American model” of good-faith bargaining, there is little doubt that her good-faith codes will be written to give unions as much of an advantage in collective bargaining as possible.

Freedom of Association. The authors of ERA boast that it brings New Zealand into compliance with the International Labour Organization (ILO) Conventions 87 (Freedom of Association) and 98 (Collective Bargaining). Here, at least, they speak the truth. Those two conventions are used by the ILO to promote compulsory unionism all over the world. The unions complained about ECA to the ILO on these grounds in 1993. It chastised New Zealand for focusing too much on individual rights at the expense of collective or group rights. To the ILO freedom of association means that individual workers should be herded together into collectives. Any conflict between the interests of individuals and the rights of the collective are to be resolved in favor of the latter. The ILO explicitly refused to include the right not to associate with unions as part of the freedom of association. This should not be surprising since the ILO was formed by democratic socialists who saw all labor issues through the prism of Marx’s labor theory of value and class struggle.

The forces of reaction have extinguished the light of freedom in New Zealand labor relations. However, I think their victory is only temporary. ECA continues to enjoy widespread public support. It is the union bosses and their Labour Party mandataries, not the workers, who are repealing ECA. If the opposition parties, particularly the National Party and ACT, can muster the energy and focus necessary to run an effective campaign that promotes continuing the free market reforms of the late 1980s and early 1990s, chances are the voters will put things right. The future still belongs to the forces of freedom.