Canada Should Consider                                                           New Zealand-Style Labour Market Reform

Fazil Mihlar

Despite years of political rhetoric about job creation and numerous job creation programs, unemployment remains a serious problem in Canada. With an average unemployment rate of 10 percent over the last 10 years, federal and provincial governments should be concerned about the impediments in the Canadian labour market which are hindering job creation.

Several explanations have been offered for the sustained high unemployment that Canada has faced over the last decade. On the supply side, these explanations include Canada's generous employment insurance program, high welfare benefit rates, minimum wage laws, relatively high payroll taxes, restrictive labour market regulations, and a high level of unionization compared to the US. These kinds of interventions distort and impede the smooth functioning of labour markets. For example, generous employment insurance programs induce some workers to remain unemployed. Research evidence gathered over many years seems to indicate that such heavy-handed government interference has contributed to labour market inflexibility and lack of adaptability. This, in turn, has led to high unemployment rates.

To add to the problem, union activities in Canada are structured and regulated by provincial labour relations codes. Under these codes, there is an exclusive representation provision in all provinces. In practice, this means that individual workers are not free to decide whether or not to be represented by a union. Moreover, unions cannot compete either. Union contracts negotiated under provincial labour codes are such that individuals who are subsequently employed in a particular firm cannot opt out of union membership and/or payment of union dues. Exclusive representation is operative under the federal labour code as well. Canada, with its inflexible labour regulations and generous welfare state provisions, has virtually eliminated the possibility of change which now characterizes New Zealand's labour market.

In 1991, New Zealand legislated labour law reforms in order to introduce more flexibility into its labour market. Under this new labour law, workers were protected from being forced to join a union or pay union dues. Since the liberalization, unemployment rates have plummeted -from a high of 11 percent in 1991, to less than 6 percent in 1997. The evidence, as presented by Professor Wolfgang Kasper at the recent Fraser Institute conference, Right to Work Laws: The Global Evidence in Reducing Unemployment, suggests that the federal and provincial governments would be well-advised to pay heed to New Zealand's labour market reforms.

This issue's feature article, which follows, is Professor Kasper's assessment of New Zealand's success at labour market reform.

Right to Work:                                                                                    Job Creation New Zealand-Style

Wolfgang Kasper

[This article is a synopsis of a paper which the author presented at The Fraser Institute conference, Right-to-Work Laws: The Global Evidence in Reducing Unemployment, held in Calgary, Alberta on May 16, 1997. The author wishes to thank G. Hogbin (Sydney) and R. Kerr (Wellington) for their help and comments.]

"Choice and freedom in industrial relations have become integrated in the everyday expectations of employers and employees. The idea that people most closely concerned with a particular workplace should be able to agree to the kinds of working arrangements that best suit them is no longer a radical idea." -The Hon. Max Bradford, New Zealand Minister of Labour, March 3, 1997.

Between 1984 and 1994, successive New Zealand governments-first of the left, then of the right-managed the most dramatic and comprehensive deregulation exercise of any OECD country in decades. The Employment Contracts Act (ECA) of 1991 was an integral, though belated part of this strategy.

The ECA placed New Zealand labour markets on completely new institutional foundations. Ever since a Fabian minister had pushed the Industrial Conciliation and Arbitration Act through parliament in 1894, successive New Zealand governments had heavily intervened in the freedom to contract labour services on the assumption that there was unequal power between the suppliers and the hirers of labour. For nearly 100 years, unions were given special privileges in exchange for the promise to give up their right to strike. Wages were fixed centrally. In short, industrial relations were taken out of the purview of the common law and the marketplace. The promise not to strike was, however, frequently ignored by those unions that had "hold-up leverage" (Williamson 1985), because they handled large chunks of capital and/or because the products of the industry were protected from international competitors. The centralized award system was underpinned by fairly strong popular support for "outcome-egalitarianism" and a belief that state intervention in economic life can, indeed, achieve its intended effects, and has no negative long-term side effects.

The props supporting labour regulation are kicked away

Once economy-wide reforms began to take place in 1984, the supports that propped up the traditional award system fell away. The key elements of New Zealand's economic reforms (see table 1), which were in essence put in place in two waves of consistent deregulation (Labour, 1984-87; National, 1991-93) were:

•A resolute liberalization of international trade and payments which brought indirect international competitive pressures to bear on New Zealand's job markets. Concurrently, subsidies to industry and agriculture were eliminated, and many domestic markets were deregulated, reinforcing competitive disciplines on labour from product (or goods) markets. However, the Labour government felt it could not deregulate the heavily unionized, centrally controlled labour "market." Indeed, labour was re-regulated as a result of concerns that workers needed to be protected from what were assumed to be the adverse consequences of general deregulation. Predictably, profits were squeezed, and unemployment rose. Eventually, these unintended consequences made job deregulation under the Employment Contracts Act of 1991 "politically realistic."

•the constitutional commitment to price stability by the newly independent Reserve Bank of New Zealand (enshrined in the Reserve Bank Act of 1989) put greater pressure on the government to consolidate its budget and get its fiscal house in order. The Fiscal Responsibility Act of 1994-the third leg in the central triad of NZ constitutional reforms-made governments more accountable, applied the same accounting rules to government that parliament demands of business (i.e., to submit not only an account of receipt and expenditure flows, but also a fully audited balance sheet), and entrenched rules that make for small, transparent government while hampering parliamentary opportunism and rent-seeking (Richardson 1995: 162-171 and 234-243; Scott 1995). As a result, the government lost much of the capacity to use the fiscal and monetary policy levers as it had in the past.

The sequence of the reforms led to job distinction, but a more rational sequence was not politically feasible. The New Zealand policy approach was to grasp political opportunities wherever they appeared in order to push deregulation forward and, at the same time, prevent backsliding (Douglas 1990). This was based on the hope that complementary institutional arrangements would sooner or later have to be made to bring the areas into line despite political resistance. Military scholars would term this procedure an "indirect strategy," i.e., to conquer terrain where it is feasible to do so with an economy of effort, trusting that the points of resistance will eventually fall, too. Sir Roger Douglas, the pioneering reformer in the first Labour government, conveyed the pragmatic, can-do spirit of the reforms in his comments on sequencing, the hobby-horse of neoclassical economists:

A great deal of technical debate has been aired worldwide about the optimum sequencing of structural reform. At a purely analytical level the debate is entertaining, but no clear-cut messages emerge. Moreover, from my point of view as a practitioner, the question is irrelevant. Before you can plan your perfect move in the perfect way at the perfect time, the situation has already changed. Instead of a perfect result, you will have a missed opportunity. Some decisions take full effect the date they are made. Others take two to five years' hard work before they can be fully imple-mented. Perfect sequencing is just not achievable. If a window of opportunity opens up for a decision or action that makes sense in the medium term, use it before the window closes! (Douglas 1990: 4)

Another long-standing, though less visible prop that had supported the dirigiste approach to labour markets was a statist-collectivist intellectual climate. This was challenged in the wake of the Thatcher and Reagan changes and the advent of economic analysis in the evolutionary, Austrian mode (e.g. Kasper et al. 1981; Kasper 1985; Brook 1990; Epstein 1991). A small elite of Treasury and business economists undermined the ideological underpinnings of top-down guidance and focused attention on the need to create simple, stable, non-discriminatory rules that give private, self-responsible operators both the confidence and the capacity to make the best of a complex, evolving economic system. The conclusions from chaos theory-that one should not interfere with complex, open systems for fear of unforeseen, unintended side effects, which the intelligentsia readily adopted for eco systems and human medicine-also began to be accepted for the complex, evolving economic system. Academic economists and industrial relations experts opposed this intellectual sea change, but their influence has greatly decreased in New Zealand.

Codifying the freedom to work

The Labour government's treatment of public welfare, budget cutting, and labour markets as holy cows produced massive job destruction towards the end of the 1980s in New Zealand. Unemployment stood at near 11 percent in 1990 when the conservative opposition (the National Party)-amongst others-campaigned with an Employment Contracts Bill that promised the freedom to compete for labour and for jobs, as well as the freedom of association (or non-association). They won the election resoundingly, and promptly proceeded to implement moderate welfare reform and resolute budget consolidation, and by May 1991, the Employment Contracts Act had become law.

The ECA made the following institutional innovations:

•It allowed the contracting parties to choose virtually all aspects of employment contracts and gave the parties almost entire freedom to determine what areas their employment contracts should cover.

•Membership in unions or other associations was to be voluntary; restrictive practices such as closed shops were now prohibited.

•The negotiating parties were given the freedom to choose agents, with agency having to be fully contestable.

•It facilitated bargaining at the individual workplace level, rather than bargaining for big, anonymous groups at industrial or occupational levels covering multiple work sites, as had been the case before.

•However, it restricted the freedom to work by giving employers and employees asymmetric sets of rights under a comprehensive provision for arbitration in cases of personal grievances through Employment Tribunals and an Employment Court, raising the transaction costs of dismissal.

The ECA liberated employers as well as workers to a greater extent than what is, for example, currently customary in the United States. New Zealand workers are now free to contract their labour, subject to very few constraints, [Adults have to be paid a minimum of 40 percent of the average wage, youths between 15 and 19 years 60 percent of the adult minimum. In March 1997, the new conservatively-led coalition government mandated a higher adult minimum wage of NZ$7.00 per hour (Bradford 1997), not much below the US minimum wage, where average real incomes are 50 percent higher. The youth wage has been raised to NZ$4.20 per hour. It has been argued that the minimum wage for youth hampers job creation and the entry of inexperienced young people into the best training scheme available, namely, being part of a work team (Hartley 1992; ACIL Economics 1994; Sloan 1994). Other specific constraints of the freedom of contract are the stipulation of a minimum of three weeks' leave and eleven paid public holidays per annum, paid sick leave, equal pay for women and men, a right to unpaid maternity leave, and job protection for defence-force volunteers.] one of which is a minimum wage. New Zealanders are now able to negotiate singly or in groups through appointed agents, such as elected worker representatives, hired specialist agencies, or trade unions. The agents require explicit, written authority for each negotiation round. Contracts are generally subject to the common law on contracting. For example, work has to be delivered during the contract period. Only after the end of the contract period are strikes and lock-outs permitted-exit options that exist in other contracts as well. No longer do unions have a monopoly in representing workers, as had been the norm before the ECA.

Government no longer interferes in what consenting adults wish to do with regard to wage rates, periods of notice, severance pay, work periods, conditions for shift work, holiday arrangements, or job-specific health and safety conditions (other than those fixed by legislation). However, employment contracts have to spell out how employees will proceed in conflicts with employers (there is a non-obligatory standard clause which can be altered by mutual agreement).

Where contract conditions are violated, employees may appeal to either the lower-level Employment Tribunals or the Employment Court. [The Employment Court, staffed with judges of the old industrial-relations era, have often tried to go against the spirit of the ECA, for example in making dismissals harder. This has led to the most severe criticisms of the new-era labour-market constitution (Howard 1995; Robertson 1996; Baird 1996a, 1996b; Kasper 1997).] Appeals against the verdicts of these specialist courts can be lodged in the general courts of the land (where they have been frequently overturned). The general personal grievance provision for employees considerably raised the obstacles to firing. Privileges extended only to employees, not employers, now covered 1.7 million people, up from the previous total of 400,000 (Bradford 1997: 8). In the hands of the long-serving judges of the Employment Court, who were imbued with the principles of the traditional, power-based industrial-relations system, this became a considerable new limitation of the freedom to hire and fire.

Despite some failings, the ECA was an integral part of a comprehensive liberalization strategy in which, so far, there have been very few reversals (table 1). As the reforms progressed, the sub-orders governing product, capital, and labour markets eventually became mutually consistent again, so that the new rule system-what one might call the new economic constitution of New Zealand-is now stable and effective. [Since The Fraser Institute is about to publish my more detailed analysis of the ECA and its consequences in the book Right-to-Work Laws: The Global Evidence of their Impact on Reducing Unemployment, I have confined myself here to a fairly short summary of its provisions. Before proceeding, however, I want to assert that none of the recent developments and none of the other recently published analyses have changed my original major assessments (Kasper 1996b).]

The opponents' predictions were wrong

The Employment Contracts Bill had been controversial during the election campaign of 1990, but this did not prevent a landslide win for the National Party, which had campaigned with it when most support for regulated labour markets had either already been done away with or were about to fall (table 1).

The Employment Contracts Bill was even more controversial after the election. Unions, churchmen, academics, industrial relations experts, and welfare lobbyists agitated publicly against the Bill, combining this with vocal opposition to the concurrent social welfare reforms. Leading figures, including a few business representatives, put their names to a number of dire predictions: real wages would fall; new jobs would be of low quality and part-time to suit employers; anarchy, strikes and confrontation would break out; "gangster unionism" would spread; unemployment would rise, especially among women and young people; work place democracy would be suppressed; employers would be unable to calculate their costs beforehand, and discontinuities would disrupt business. The Council of Trade Unions feared widespread abuses by employers and set up an emergency telephone "Sweatline" for aggrieved workers.

Without exception, these predictions turned out to be wrong (Kasper 1997). The "Sweatline" soon lapsed from lack of demand. Most definitely, New Zealand did not return to what some had depicted as the 19th century workplace; on the contrary:

•Average real wages, though hard to measure, have risen slowly. Admittedly, 10 percent of individual wages were initially reduced, but most pay packets were increased, to reflect higher productivity levels. After many years of "judicial levelling of wages," the wage structure has become more diversified and now reflects rewards for higher skill levels. This has committed many workers to skill acquisition (Kasper 1997).

•Strikes have dropped to near zero. Most new wage contracts are now settled with a minimum of fuss and transaction cost. Wage structures have been simplified. After the highly politicized posturing by union and employer apparatchiks during centralized wage-fixing rounds before 1991, work disputes and industrial relations have faded from the headlines and the political agenda (Kerr 1997).

•Employment has risen by about 250,000 (i.e., by 20 percent or 4.5 percent per year) since 1991. Medium-term forecasts are for continued solid rises.

•During the strong cyclical upturn from mid-1991 to early 1996, unemployment in New Zealand fell overall from nearly 11 percent to below 6 percent-much faster and by more than during the comparable upturn in Australia (Kasper 1997), and much more than in previous New Zealand upturns (Hall 1996; Yeabsley, Savage 1997). In the 1996-97 cyclical "growth pause," New Zealand unemployment did not rise again, in contrast to Australia, with its more regulated labour markets.

•Three quarters of the new jobs are full-time.

•Far from being to the detriment of certain classes of people who are sometimes designated as "socially disadvantaged," the new labour law led to dispropor-tionately big falls in the high specific unemployment rates among Maori and immigrants from the Pacific Islands, among the long-term unemployed, and among young people. Many young people are now able to join functioning work teams, which are the best type of job-training scheme. The long-term unemployed, who made up half the total in 1992, now account for only a quarter of those without a job. These effects happened early, i.e., before the first labour shortages came about in high-activity centres such as Auckland. They owe as much to the ECA as to less generous public welfare. [New Zealand Treasury have estimated that the increase in the differentials between household incomes from employment and incomes from social welfare since 1991 has raised labour-force participation by 2%; increased total employment numbers by 2.5%; reduced unemployment by 0.7 of a percentage point; and induced more young adults to participate in education and training (Kerr 1997: 4).] Analyses by NZ Treasury confirm that the most effective escape from poverty is a job, even if the initial wage is low. About one quarter of the most poorly paid 20 percent of workers moved to a higher income bracket within a year, and there is evidence that workers on low wages have achieved wage increases by larger percentages than better-paid workers (Kerr 1997: 5).

•The predicted disruption of business and the unpredictability of wage contracts failed to materialize. On the contrary, business managers now speak more directly to their workers, so both managers and workers are better informed about the ongoing evolution of their businesses. People felt a sense of empowerment when uniform dictates handed down in distant places gave way to direct negotiations. The climate in most work places improved, and many productivity reserves were mobilized in exchange for corresponding wage premiums. This is not only documented by case studies (Kasper 1997), but also by opinion surveys. In some opinion surveys conducted during 1991 and 1992, the ECA had initially been opposed by a 2:1 margin. Now, the majority of New Zealanders approves of the new workplace freedom. A representative opinion survey five years after the ECA came into force showed that 41 percent of 1000 New Zea-landers surveyed approved, or strongly approved, of the ECA, while only 24 percent disapproved. Similar percentages believed that there had been positive effects on the general economy (National Business Review 1996: 23). A great majority of employees found that the ECA had affected them personally in positive ways: over three-quarters of respondents were satisfied or very satisfied with their own terms and conditions, their own job security, and their own bosses. Eighty-five percent said that they now felt high or very high job satisfaction (NBR 1996: 23).

•More than three-quarters of New Zealanders surveyed now want direct employment and wage negotiations with their employer so that they are in control, rather than some union leader or panel of judges. Only 21 percent favour negotiations between unions or through other intermediaries whom workers cannot control directly (NBR 1996: 23). In practice, groups of workers elect representatives to negotiate on their behalf, or engage agents-at times former unionists who had lost their jobs. This reduces information and other transaction costs. The essential difference between this and the old collective system is that the workers now determine the negotiation strategy. Control has moved from union officials to the workers who can hire and fire their agents. The empowerment workers feel under ECA becomes quickly apparent when one visits workplaces.

•In the 1996 general election, some political parties (Alliance, Labour) campaigned, amongst other things, with the promise to repeal the ECA. They lost the election; 60 percent of the electorate voted for parties that promised to retain the current system. Under the new electoral system it is unlikely that a coalition will ever be formed that can repeal the ECA (Kerr 1997: 1).

Have there been any losers? The most noted losses from the new freedoms to work and associate have occurred in union membership, which has gone from fairly high rates (due to closed-shop legislation and compulsory union membership in many occupations), to US levels (about 30 percent of the workforce). Many union officials have lost their jobs and influence. Nonetheless, some unions rose to the competitive challenge and have become service organizations that do their members' bidding, help their members to compete, and even sell services (such as training) to employers. Likewise, the Employers' Federation had to reinvent itself to become an information and service provider to its members, having before been a monopoly negotiator in central wage cases. Other casualties of the liberation of labour have been the industrial relations departments at various universities and the contributions from the union wing of the labour movement to its political wing.

The system-wide benefits of the reforms

The more general effects of the sea change in New Zealand's economic constitution have been that the working climate has improved, raising productivity and the quality of output have become an ongoing pursuit, and New Zealand work places have become internationally highly competitive:

•The 1996 Global Competitiveness Report (WEF 1996) rates New Zealand as the third most competitive economy out of 44 countries overall (Canada ranks in eighth place). As to the "quality of labour," the Report rates New Zealand second, with top rankings on such criteria as "willingness to accept change," labour costs, labour force restructuring, and ability to avoid social costs of employment (WEF 1996: 106-107). (Canada ranks very poorly on labour-market criteria). However, the Global Competitiveness Report also documents residual labour weaknesses in New Zealand, such as limitations on the supply of skilled labour, alcohol abuse, and minimum wage regulations.

•The Fraser Institute's International Economic Freedom Index, which does not cover the freedom to work, rates New Zealand as the country with the second highest level of economic freedoms in 1993-95 [The 1998 International Economic Freedom Index is expected to have measurements of labour markets.] (Gwartney et al. 1996: xx) and among the ten countries with the biggest improvement in economic freedom ratings (Gwartney et al. 1996: xxviii). "New Zealand comes out clearly the leading reformer of the 23 [OECD] countries in both absolute and relative terms," David Henderson, former Head of the OECD's Economics Department, wrote recently (1996: 12).

•Having been proven wrong on wage reductions and job destruction, defenders of labour-market dirigisme have begun criticizing overall productivity increases (measured at the level of national accounts). Overall labour productivity has risen by 2 percent per annum during the 1991-96 upswing, and the combined output of capital and labour rose by 2.3 percent, versus 1.3 percent in previous upturns in the demand cycle (Hall 1996). Such relatively slow aggregate productivity increases after reforms, however, are not surprising in an economy that has emerged from massive unemployment. New Zealanders have, on the whole, translated the upswing in demand into more employment and modest wage increases, as individually less productive workers were "sucked" into jobs. Of course, this (probably welcome) effect dilutes average productivity increases. As the economy approaches high employment and as growth moves from a job-extensive to a productivity-intensive mode, average productivity can be expected to increase more rapidly.

•At the micro level, great productivity advances are being reported, and the business people directly involved attribute much to the ECA (although the other reforms are also crucial). Thus, at a conference of the Australia-New Zealand Business Council in Auckland on September 22-23, 1996, which I attended, one CEO after another reported great strides in productivity. For example, the privatized railroad now operates with one quarter of the staff it had prior to privatization, and has more than doubled its output volume. (Productivity is up 9 times from an admittedly appalling base). The state-owned but corporatized electricity industry has improved its management of production and distribution capacities to such an extent that the planned construction of one large power plant has become unnecessary. Since 1990, when the old telephone monopoly was privatized and exposed to completely open competition, each employee of NZ Telecom looks after three times as many phone lines as before. As many new entrants in the "lightly regulated" telecom market of New Zealand are learning how to compete properly, telephone costs have fallen by 50 percent in real terms.

•The stock prices of NZ Telecom nevertheless keep rising. New Zealand's privatized and competing ports now deal with a standardized basket of loading activities at only 30 percent of the costs of the same operations in Australian ports (which, not long ago, government-owned, unionized New Zealand ports surpassed in inefficiency). Freighters are turned around on average in 18.5 hours, compared to 3.5 days in 1988. No wonder that New Zealand is attracting so much foreign investment as well as "management pilgrims" from around the world interested in efficiency.

•An important consequence of the new right-to-work conditions is a palpable improvement in worker satisfaction. A new commitment to quality and productivity has replaced notorious attitudes to performance that prevailed when distant authorities fixed wages and one was rewarded for simply being at work. Now, wages are a reward for effort, skill, and attention to quality. Complicated wage premiums for weekend or shift work have disappeared, but wage premiums for human capital have become widespread. This, in combination with cuts in indiscriminate public-welfare provision, has given rise to great increases in demand for training and education; people invest in their human capital to succeed in the labour market.

One should not underestimate the importance of job satisfaction, which is, after all, central to many people's well being. A new pride, confidence, and can-do optimism is widely visible in the country.

Conclusion

New Zealanders now enjoy an unrestricted right to work in the context of the most free and trust-inspiring economic constitution of any OECD country. Working conditions have improved dramatically. However, New Zealand's workers and producers are not competing with their past, but as inhabitants of one of the "front-line states," with the newly industrialized countries in East Asia. Workers and job creators in East Asia enjoy even greater freedom to work than New Zealanders, and are less distracted by public-welfare activism. Many East Asian workers now enjoy not only rapid productivity and wage increases as their economies reach high employment, but also surprisingly even income-distribution outcomes (Riedel 1988: 18-21). Thus, the benchmark for New Zealand is no longer what is done in sclerotic labour markets in Europe, but the reality of the industrialized countries of Asia.

The realization has spread in New Zealand that Kiwi jobs are competing with jobs in Kuala Lumpur, Shanghai, and Seoul-and that jobs in places like Auckland are increasingly successful thanks to the simple, non-discriminatory, and enterprise-and-trust-inspiring institutions which are now governing working life in New Zealand.

References

ACIL Economics & Policy. (1994). What Future for New Zealand's Minimum Wage Law? Canberra: ACIL. Mimeo.

Baird, C.W. (1996a). The Employment Contracts Act and Unjustifiable Dismissal. Wellington: New Zealand Business Roundtable.

_____. (1996b). The ECA: Almost a Model for the World. Wellington: New Zealand Business Roundtable. (March 19). Mimeo.

Bradford, D.M. (1997). What Happens Now? Keynote Address to the Annual Industrial Relations Conference. Wellington, March 3. Mimeo.

Boettke, P.J. (1994). The Elgar Comparison to Austrian Economics. Aldershot: E. Elgar.

Brook, P. (1990). Freedom at Work: The Case for Reforming Labour Law in New Zealand. Auckland: Oxford University Press.

Douglas, R. (1990). Ten Principles of Structural Reform. Policy 6, 1: 2-6.

Epstein, R. (1991). Liberating Labour-The Case for Freedom of Contract in Labour Relations. Sydney: Centre for Independent Studies.

_____. (1996). Employment Law, Courts and Contracts. Wellington: New Zealand Business Roundtable.

Evans, L., et al. (1996). Economic Reform in New Zealand 1984-95: The Pursuit of Efficiency. Journal of Economic Literature xxxiv, 4: 1,856-1,902.

Gwartney, J., R. Lawson, and W. Block. (1996). Economic Freedom of the World: 1975-1995. Vancouver: The Fraser Institute.

Henderson, D. 1996. New Zealand in an International Perspective. Wellington: New Zealand Business Roundtable.

Hall, V. (1996). Economic Growth. In Silverstone, Bollard, Lattimore, eds. A Study of Economic Reform: The Case of New Zealand. Amsterdam: North Holland.

Howard, C. (1995). Interpretation of the Employment Contracts Act 1991. Wellington: New Zealand Business Roundtable.

Kapser, W., et al. (1980). Australia at the Crossroads. Sydney, New York: Harcourt Brace Jovanovich.

Kasper, W. (1985). The Destruction and Creation of Jobs. Perth: Australian Institute of Public Policy.

_____. (1996a). Free to Work-The Liberalisation of New Zealand Labour Markets. Sydney, Wellington: Centre of Independent Studies.

_____. (1996b). Responsibility and Reform-A Conversation with Ruth Richardson. Policy 12, 3: 25-31.

_____. (1997). Free to Work: The Liberalization of New Zealand's Labour Market. In Right-to-Work Laws: The Global Evidence of their Impact on Reducing Unemployment. Vancouver: The Fraser Institute.

Kerr, R. (1997). Obstacles to Employment and Productivity Growth in New Zealand's Labour Market. Auckland: Institute for International Research, 11th Annual Industrial Relations Conference. Mimeo.

National Business Review. (1996). New Zealanders Back Labour Reforms. National Business Review. Feb. 16, 1996: 1 and 22-23. (Press report about an MRL Research Group opinion survey).

Richardson, R. (1995). Making a Difference. Christchurch: Shoal Bay Press.

Riedel, J. (1988). Economic Development in East Asia: Doing What Comes Naturally. In H. Hughes (ed.) Achieving Industrialisation in East Asia. (Cambridge: Cambridge University Press), 1-38.

Robertson, B. (1996). The Status and Jurisdiction of the New Zealand Employment Court. Wellington: New Zealand Business Roundtable.

Savage, J. (1996). What Do We Know about the Government Impacts of the ECA? NZ Institute of Economic Research Working Paper, no. 96-9 (May).

Scott, G. (1995). New Zealand's Fiscal Responsibility Act. Agenda 2, 1: 3-16.

Silverstone, B., A. Bollard, R. Lattimore, eds. (1996). A Study of Economic Reform: The Case of New Zealand. Amsterdam: North Holland.

Sloan, J. (1994). Towards Full Employment in New Zealand. Wellington: New Zealand Business Roundtable.

Williamson, O. (1985). The Economic Institutions of Capitalism. New York: Free Press.

World Economic Forum. (1996). Global Competitiveness Report 1996. Geneva: WEF.

Yeabsley, J. and J. Savage. (1996). What Do We Know about the Economic Impacts of the Employment Contracts Act? Address to Moving Forward conference. Auckland: 15 May. Mimeo.

Reality Check:                                                                         Minimum Wage Laws Do Kill Jobs

Fazil Mihlar

Until quite recently, there was widespread consensus that minimum wage laws did indeed kill jobs, and therefore did not help unskilled or young workers. In 1994, however, two Princeton University economists, David Card and Alan Krueger, published a study purporting to show that in 1992, after the state of New Jersey increased its minimum wage by 19 percent, employment in a number of fast-food outlets actually rose. Since the study appeared, many anti-poverty advocates and liberal political and economic commentators have been urging politicians to increase minimum wages. This policy prescription, however, would be disastrous for the poor. Any careful analysis of the data shows that minimum wages do in fact kill jobs.

Card and Krueger examined the effects of the 1992 increase in New Jersey's minimum wage by measuring the change in employment in a sample of the state's fast food restaurants between February and December of that year. They used a group of restaurants in Eastern Pennsylvania as their "control" group, where there was no increase in the minimum wage. In New Jersey, however, where there had been an increase in minimum wages, employment increased by 2.5 employees per restaurant compared to the controlled group in Pennsylvania.

However, a detailed analysis carried out by the Employment Policies Institute found that the official payroll data does not match the Card-Krueger survey data. Using this payroll data, Michigan State University economist David Neumark and William Wascher of the Federal Reserve Board calculated that the actual impact of the 18 percent increase in the minimum wage was to reduce employment by 4.8 percent. To the dismay of many social engineers, most detailed reviews of the Card-Krueger study, along with the majority of labour market studies, conclude that an increase in minimum wage leads to a decline in employment.

For example, more compelling evidence of the disemployment effects of increases in minimum wages was uncovered by Neumark and Wascher in a 1992 study. Analyzing state panel data for the period 1973-1989, they conclude that a 10 percent increase in the minimum wage causes a decline in employment of 1 to 2 percent for teenagers, and 1.5 to 2 percent for young adults.

In 1993, Bruce Fallick from UCLA and Janet Currie of MIT concluded that teenagers were more likely to lose their jobs if the minimum wage was raised. Indeed, their study confirmed the conventional view that workers were 3 to 4 percent less likely to be employed one year after an increase in minimum wages.

According to a 1995 study by Neumark and Wascher, increases in the minimum wage raise the probability that teenagers will leave school in search of employment. However, by pricing teenage labour, which tends to be less productive, out of the market, higher minimum wages effectively guarantee that these teenagers will not find work. Hence, increasing the minimum wage hurts teenagers in two ways: by encouraging them to leave school while, at the same time, virtually ensuring that they will not find work.

In Canada, a study by Pierre Fortin found that the disemployment effects of minimum wages had, in fact, reduced the earnings of those that the minimum wage law intended to help. The minimum wage increase also led to shorter working weeks and increased use of part-time workers.

Additionally, a recent study by Ernst and Young found that a 10 percent increase in real minimum wages decreases employment in sensitive industries or demographic groups by 1 to 3 percent. The study points out that when adult minimum wages in B.C. were increased from $5.50 to $6.00 per hour in 1993, employment in the B.C. restaurant industry fell by 3 percent.

While anti-poverty groups may cling to their beliefs that higher minimum wages do not affect unemployment rates, the evidence shows otherwise. Minimum wage laws hurt intended beneficiaries such as unskilled workers and youth. This is the real research record and the evidence that should guide policy making in Canada.

References

Card, David and Alan B. Krueger. "Minimum Wages and Employment: A Case Study of the Fast-Food Industry in New Jersey and Pennsylvania." American Economic Review 84, September 1994, pp. 772-793.

Currie, Janet and Bruce Fallick. "A Note on the New Minimum Wage Research." NBER Working Paper No. 4348, April 1993.

Ernst & Young. "British Columbia Minimum Wage Study." Canadian Restaurant and Food Services Association: Final Report, August 1995.

Neumark, David and William Wascher. "Employment Effects of Minimum and Subminimum Wages: Panel Data on State Minimum Wage Laws." Industrial and Labour Relations Review 46, October 1992, pp. 55-81.

Neumark, David and William Wascher. "The Effects of New Jersey's Minimum Wage Increase on Fast Food Employment." Unpublished Manuscript, March 1995.

Minimum Wage, Maximum Folly

Walter Williams

You don't have to be an economist to understand economics. It's easy. Say you commissioned me to study how to eliminate poverty in Haiti. When the study is completed, I tell you what's needed is for the Haitian legislature to enact a $7-an-hour minimum wage law. That way, Haitians would no longer be poor. Our government would probably compliment me on my findings, but you'd probably tell me I was a fool. You'd be right. If higher minimum wages were an effective anti-poverty device, world poverty would have been eliminated ages ago.

Minimum-wage proponents say higher minimum wages don't cause unemployment. However, the first fundamental law of demand, to which there are no exceptions, says when prices rise, people tend to buy less, and when they fall, people tend to buy more. When beef prices rise, we buy less beef. When interest rates rise, we take out fewer mortgages. After all, if people didn't respond that way, sellers could charge any price they wanted and we'd still buy their products. Labour services are no different. When labour's price exceeds its value-what it can produce-employers will buy less of it and seek substitutes. Among those substitutes are automation, moving to a lower-wage country, and customer self-service.

What can be done to raise people's wages? Low wages are more a result of people being under-productive than underpaid. They simply do not have the skills to produce and do things that other people value highly. Seldom do we find highly productive individuals or nations who are poor. Those who earn low wages tend to have low skills and education. How can we make these people more productive? Raising minimum wages will not raise worker productivity; however, it can sabotage worker potential to acquire higher productivity.

Put yourself in the place of an employer and ask: If I must pay the government's minimum wage of $7 per hour, does it pay me to hire a worker so unfortunate as to have skills enabling him to produce only $3-an-hour worth of value? Most employers would see that as a losing economic proposition and wouldn't hire such a worker. Therefore, a major impact of the minimum-wage law is to discriminate against the employment of low-skilled workers. The denial of a job makes the disadvantages of low-skilled workers more permanent. After all, one of the most important means to higher skills is to be employed in the first place and receive on-the-job training and learn about other opportunities.

Among academic economists, there is little or no debate over the unemployment effects of minimum wages. Our only debate is the magnitude of unemployment. Close to 90 percent of academic economists agree that minimum wages cause unemployment, especially for teenagers, particularly black teenagers. Check it out yourself: introductory university-level textbooks in most sciences represent a distillation of what constitutes a broad consensus in the field. Virtually all economic textbooks that say something about minimum wages conclude that it causes unemployment.

People working at or near the minimum wage are exercising their best known alternative. Even though their income is meagre, we shouldn't destroy that alternative just so we can feel good. The minimum wage and other regulations help explain why today's underclass has taken on a permanency not typical of yesteryear. The minimum wage law is poorly conceived legislation, and deserves to be repealed altogether.

info@fraserinstitute.ca You can contact us at the above email address for any comments or information requests. Please report any dead links or technical problems.

If you know someone who would be interested in this web page, please enter their email address below, and we will forward this URL to them: Email Address:

Last Modified: Wednesday, October 20, 1999.