Bargaining agreements hurt small firms

In an affidavit backing the Free Market Foundation's constitutional challenge to bargaining council extensions, Rankin says they don't make economic sense.

The foundation is taking the ministers of labour and justice and 48 bargaining councils to court over Section 32 of the Labour Relations Act, which allows for the extension to non-parties of agreements on wages and working conditions reached in bargaining councils.

Rankin says employers and unions represented in the council collude, intentionally or not, to raise the price of labour.

According to Rankin, smaller firms' ability to pay lower wages is one of the main reasons they can compete with larger firms, which can afford more capital-intensive technology.

But when smaller firms are forced to pay higher wages they may have to lay-off staff or even close down. This benefits companies in the bargaining council as competition is reduced, while union members benefit from less downward pressure on wages. This also discourages new entrants to the sector, he says in his affidavit.

Consumers, in turn, lose out as reduced competition leads to the charging of higher prices. This results in a stagnant economy that is less competitive without the entry of new and dynamic smaller firms.

Rankin says it's not possible to predict how the scrapping of extensions would affect employment.

"Back-of an-envelope calculations suggest it would create hundreds of thousands of jobs. But this is probably an under-estimate, as it is a static calculation based on current conditions," he says.

"It would also send a positive signal to smaller businesses, which currently perceive that everything is stacked against them and are reluctant to hire as they are concerned about regulations and getting caught in successive wage hikes in which they have no say.

"In a welfare sense, extensions are all bad news. They make everybody worse off. Though certain participants, larger firms and their workers, are better off, the costs outweigh the benefits when you consider the consequences of the loss of opportunities for jobs, entrepreneurship and the existence of small firms," Rankin says.

Source: Financial Mail via I-Net Bridge