Generous to a fault

The Labour government has been very generousto its public servants.   Since Labour’s election in 1999, average ordinary timewages in the public sector have increased by 34% compared with 25% increases inprivate sector wages.   In 1999 private sector wages were on average 79% ofthose prevailing in the public sector, today they are around 74% of publicsector wages.

Typically wage rates are influenced bythe ability of workers (eg their skills, experience, diligence, andintelligence), the performance of their employer (ie their ability to rewardworkers), and the relative bargaining power between workers and employers.   Onecould argue that wage increases in the public sector simply reflect the employmentof more high-ability workers.   But even if this is the case, the increase inpublic sector wages must also reflect the willingness and ability of governmentagencies to pay higher wages.  

The government’s financial position hasdefinitely been sound in recent years.   Reductions in debt servicing costs anda higher tax take have allowed the government to increase its non-finance-costcore spending by 45% in the last five years – a period when nominal GDPincreased by just 32%.

Public sector wages have also beenboosted by the promotion of collective bargaining via the Employment RelationsAct 2000.   A key justification for the promotion of collective bargaining is aperspective that there is an "inherent inequality of power in employmentrelationships".  

There is no provision within the Act foraddressing circumstances where the inherent inequality favours employees.   Yetpublic sector employment relations are such a case.   To begin with,governments’ statutory powers to raise taxes mean that they do not face thesame type of immediate financial pressures that inhibit wage rises in mostprivate firms.   In addition, it is difficult for citizens, the ultimateemployers of public sector workers, to ensure that they are well represented inthe wage negotiation process.

Government activities are funded bytaxpayers for the benefit of the nation’s citizens.   The interests of citizensare entrusted to politicians to make strategic decisions on their behalf, topublic sector managers to organise the delivery of public sector services, andto public sector employees to implement the delivery of these services.  

There are natural conflicts of interestbetween each of these parties and their ultimate employers, the citizens.  Using public sector wages to illustrate: high wages improve the wellbeing ofemployees at the expense of taxpayers, yet the threat of unemployment to publicsector workers from excessive wage demands and industrial action are negligiblecompared with the private sector.   In addition, the political fall-out ofindustrial actions are potentially more serious to politicians than the cost ofhigher wages, which can be spread thinly across all taxpayers.

Unionisation in New Zealand is a largely public sector phenomenon.  According to Department of Labour data, 211,123 of the total 373,117 unionmembers in March 2006 were members of unions associated with government-dominatedindustries (ie the Government Administration and Defence, Health and CommunityServices, and Education industries).   Relating this information to employmentdata implies that unionisation in these three government-dominated industriesis around 58% of employment.   Unionisation in the rest of the economy is around12% of employment.    

Promoting collective bargaining in thepublic sector seems a recipe for excessive public sector wage growth.   Althougha key purpose of government activities is to redistribute incomes from thewealthy to the less fortunate, it is not obvious that public servants, teachers,and medical practitioners are the "unfortunates" most of us have in mind.  

What can be done to improve the socialreturns from tax-funded government spending?   One approach is to imposestronger spending constraints in order to encourage government agencies to resistpay increases with more resolve and for them to seek smarter ways of doingthings to fund the wage rises that are agreed to.   It is interesting to notethat during the 1990-1996 period, when public sector spending restraint wasimposed with rigour, that it was also a period of comparative balance between privateand public sector wages (see graph).

Public sector managers should be assistedhere by reducing public sector union power.   This does not necessarily mean de-unionisationin the public sector.   There is already an alternative model for rationalisingpublic sector pay negotiations: ban public sector industrial action and replaceit with arbitration as the ultimate dispute resolution process.   This processhas been used by police for many years in New Zealand.   It is a process that has not diminished union membership in thepolice or the employment conditions of police officers.   But arbitration enablesbargaining power to be shifted away from the ability of unions to disrupt theprovision of public services and onto the cogency of the arguments and evidenceproduced by the negotiating parties.

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