Friday, 21 September 2018

Good stuff from Treasury

Two kudos for great work at Treasury - I've given out enough brickbats lately. 

First up, this week Treasury released its advice on the government's proposed Fair Pay Agreements. I don't know who requested it by OIA, but it's on their OIA release website, and available here. They get this one dead right. My summary:
  1. The Cabinet paper provides no evidence that industry- or occupation-wide bargain could address the purported problems of employer monopsony power;
  2. Neither does it provide any evidence that any imbalances in bargaining power have anything to do with wage and productivity concerns noted in the Cabinet paper;
  3. There is no evidence base suggesting this could help improve wages and productivity in any occupation or industry;
  4. Having a working group set this kind of policy is dangerous when they have only a high-level sense of that there's a problem and no clue what they're really doing - and the effects could be substantial structural changes to the labour market;
  5. International experience shows it's easy to mess these things up, to screw over outsider firms, and to build in fragility in case of economic shocks;
  6. And, regional heterogeneity will be a big problem that the working group would need to sort through too. 
Treasury consequently recommends extending the policy process to allow for further analysis.  

Appendix 1 provides Treasury's comment in the Cabinet paper:
The Treasury considers more departmental policy work is required ahead of Cabinet’s consideration of, and agreement to, the recommendations in this paper. The policy proposal is significant: Fair Pay Agreements could make substantial structural changes to the labour market and – as referenced in this paper – misapplication of the policy could have large negative effects on productivity, worker terms and conditions, and employment. The policy is also in the early stages of development: Cabinet’s in-principle agreement is being sought to an outline of the policy direction; initial work by officials has not identified an occupation or industry in which the proposed system would address wage or productivity issues; and the working group is being tasked with answering foundational policy design questions.

Given the significance of the proposal, we recommend extending the departmental policy development process to enable further analysis of the causes of the wage and productivity concerns identified in the paper, options to address those concerns, and the conditions for the success of industry-level bargaining. This would enable Cabinet to make decisions with a clearer view of the purpose, scope, and impacts of the proposal, and ensure the working group’s terms of reference are tied to this purpose and Government priorities.  
This is exactly the kind of unwelcome but important advice that Treasury has to be willing to give. Excellent. We put out a press release on it this afternoon.

Next up, and belatedly, Treasury's advice around Labour's proposed minimum wage hikes. See in particular the 14 December part. The team make the same points I make:

  • Risk of higher youth unemployment - but starting-out rates could mitigate
  • Minimum wage is a poor way of supporting low-income families because it's poorly targeted - most are workers starting out who then move on to higher wages, and abatement of other income-linked benefits eats most of it anyway
  • It is likely to bite in tougher labour markets, and especially where our minimum wage is already very high relative to median wages - and this is most likely to hurt the most vulnerable.
Again, this is good sound advice on a Labour election policy plank. Kudos to Treasury for providing it. 

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