Lessons From New Zealand’s New Sectoral Bargaining Law

In December 2022, New Zealand will initiate an innovative sectoral bargaining policy, called the Fair Pay Agreements Bill, that may serve as a model for pro-labor advocates in the United States.¹ The policy details of the new agreements are valuable—but most importantly, New Zealand’s experiences and actions highlight the need to incorporate sectoral bargaining in any policy to improve working conditions.

New Zealand adopted its new sectoral bargaining policy as a proven solution to rebalance power between workers and employers and address stagnant wages, rising economic inequality, and low productivity. Policymakers recognized the need for sectoral bargaining—rather than just improvements to worksite-level bargaining—because of New Zealand’s history with bargaining agreements as well as international research.

In the late 1980s and particularly the early 1990s, New Zealand made a series of changes to undermine sectoral bargaining and unions, leading to a labor system more akin to that in the United States, which has weaker unions and primarily worksite-based bargaining.⁴ Under its worksite-only bargaining system, New Zealand has suffered several decades of rising inequality, slow wage growth, and low productivity, contrary to the promises of business leaders and politicians that supported the neoliberal economic reforms.⁵ In 2000, New Zealand attempted to strengthen unions and improve collective bargaining, but that effort proved unsuccessful without a strong push for sectoral bargaining.

These experiences—combined with international research that highlighted the benefits of sectoral bargaining, particularly from the Organization for Economic Cooperation and Development (OECD)—were key drivers of the push for fair pay agreements.

The fair pay agreement system has received widespread support. As New Zealand Minister for Workplace Relations and Safety Michael Wood explained, “Fair pay agreements are about creating a new, modern, sector-based bargaining system that supports fair, safe, and productive workplaces.”⁶ They are “a modern solution to a modern problem of low wages and low productivity,” noted Member of Parliament Camilla Belich.⁷ Richard Wagstaff, president of New Zealand’s Council of Trade Unions, has argued that “Fair Pay Agreements will help our economy and they’ll put more money in the pockets of working people.”⁸

The first fair pay agreement has yet to be settled, but the policy is already making a significant impact around the world. Pro-worker leaders in Australia and Britain are looking to the New Zealand model as they seek to rebuild their economies, which suffered predictable negative consequences after the countries weakened their sectoral bargaining systems decades ago.⁹

In the United States, worker allies have much to gain by understanding what is happening in New Zealand and, especially, why.

Under the fair pay system, unions and employers will bargain for minimum terms and conditions for all employees in that industry or occupation.¹⁰ The agreements must include certain topics, such as wages and overtime, while topics such as safety and flexible working must be discussed but not necessarily included. Other employment terms can be included if the bargaining sides agree.

The agreements set a floor; unions and workers can still bargain at the worksite for higher standards, as is common in most sectoral bargaining systems; that is, sectoral bargaining and worksite bargaining will work in conjunction to improve working conditions. Wagstaff, New Zealand’s union council president, explains:

[Fair pay agreements] stop the race to the bottom by setting the minimum rates, terms and conditions which must be paid within an industry. However, they still allow flexibility, people still have to negotiate their pay rates and conditions of work, but FPA’s mean there are minimum standards employers have to meet.¹¹

In other words, the agreements will bridge the gap between economywide minimum standards, such as the minimum wage, and worksite-level collective bargaining.

Unions—and only unions—can initiate the process by demonstrating support from 1,000 workers, or 10 percent of workers, under potential coverage of an agreement—whichever number is lowest. Alternatively, workers can access fair pay agreements by showing that their industry meets a public interest test; for example, an industry could have low pay, systematic discrimination, or health and safety issues. Ratification of an agreement requires support from 50 percent of workers and employers, as determined by a vote of those covered. Unions are given worker contact information and worksite access to facilitate this and other parts of the bargaining process. Once a fair pay agreement has received 50 percent support, an independent government agency, the Employment Relations Authority, extends contract terms to all covered workers. Agreements then become law, and noncompliance is a criminal act.¹²

The Employment Relations Authority can help facilitate bargaining by providing funding and support personnel for the bargaining parties, as well as mediation services. If bargaining breaks down or votes fail twice, the Employment Relations Authority can mandate the terms of an agreement.¹³ While the aim is to encourage true collective bargaining between unions and employers, New Zealand’s policies may allow for more direct governmental involvement than is common in other types of sectoral systems. This is likely due to New Zealand’s historical bargaining systems as well as the need to revive bargaining from its current nadir.

Implementation is expected to begin soon, although the opposition party has promised to repeal fair pay agreements if it wins the national election in 2023.¹⁴ Implementation may begin among occupations with low union density, such as security guards and janitors, but the fair pay process will eventually be open to all workers.

Currently, collective bargaining in New Zealand occurs on behalf of a group of workers at a particular worksite, as is typical in the United States. However, New Zealand has a strong history of sectoral bargaining, far more so than in the United States. In New Zealand, collective agreements covered between 60 percent and 70 percent of all workers in the 1980s, with sectoral bargaining agreements covering more than half of all workers until 1991, when legal changes essentially wiped them out.¹⁵

In contrast, in the United States, broad-based bargaining was once common in industries such as automotive, steel, and telecommunications, but it covered only approximately 10 percent of workers by 1980, at a time when one-quarter of U.S. workers were covered by any type of collective bargaining agreement.¹⁶ Today, such bargaining only occurs in a few industries, such as television writing and hotels in some cities.¹⁷

For many decades, New Zealand had an industrywide arbitration system¹⁸—a unique style of sectoral bargaining shared only with Australia—that led to wage growth, low levels of economic inequality, and strong unions. In the late 1980s and early 1990s, however, New Zealand undertook a series of reforms that dramatically weakened unions and eliminated sectoral bargaining. One review reported:

Most important were the Labour Relations Act of 1987 (introduced by a Labour government, which shifted collective bargaining to the enterprise level), and the subsequent Employment Contracts Act in 1991 (introduced by a National Party government, which imposed harsh limits on collective bargaining in any form).¹⁹

The Labour government of the mid-1980s enacted social and economic changes, including its effort to promote enterprise bargaining over sectoral bargaining, “based largely on neoliberal ideology,” according to one academic review.²⁰ The review noted that the failure of these neoliberal policies “contributed to the defeat of the Labour government and were followed by more radical labor market reform by the newly elected National Government.”²¹ The conservative National Party government, another review found, “removed all legislative support for unions” and collective bargaining.²² These changes had a type of “superficial neutrality,” but they “had the clear effect of privileging employer interests because employers could use their greater bargaining power to set the terms of negotiations in most instances.”²³

The impact of these labor laws was dramatic. Union membership and collective bargaining coverage declined quickly. In the early 1980s, union density was around 65 percent and collective bargaining coverage almost 70 percent; both fell to 22 percent and 30 percent, respectively, by the late 1990s.²⁴ Since then, declines have continued, albeit at a much slower rate, with the latest figures from the Organization for Economic Cooperation and Development showing collective bargaining and union density at 19 percent and 18 percent, respectively.²⁵

Studies considered whether the decline of collective bargaining coverage was attributable to the failures of unions to adequately respond to changing economic and political conditions, but they ultimately showed that these policy changes were responsible, finding “state intervention as the determining agent of the fortunes of unionization and collective bargaining.”²⁶

Not surprisingly, as union density and collective bargaining coverage fell dramatically, workers and the economy fared poorly.²⁷ Wage growth slowed and by some measures was stagnant for more than a decade.²⁸ As one study explained, “From about 1992 onwards, the real wage path steadily fell behind labour productivity increases.”²⁹ The share of income held by the top 1 percent has doubled since the mid-1980s.³⁰ International Monetary Fund research indicates that the decline of unions and collective bargaining in New Zealand explains more of the rise in inequality than in any other advanced country studied.³¹

Compounding these problems, productivity growth slowed after sectoral bargaining was eliminated, with one analysis of the reforms noting that “labour productivity growth declined after 1992.”³² Increases in productivity—how much output is produced from a given quantity of inputs—provides the economic potential for increases in living standards. New Zealanders work longer hours than other OECD countries, on average, yet they produce just $68 per hour in output compared with the $85-per-hour output that is typical in the OECD.³³ As New Zealand’s Productivity Commission explains, “For the last 25 years or more New Zealand’s income per person has stayed at about 70% of that in countries in the top half of the OECD.”³⁴

The prevalent view that eliminating sectoral bargaining harmed workers and the economy proved critical for the passage of the Fair Pay Agreements Bill: “Our 30-year experiment with a low-labour-cost model has not worked,” Labor Minister Wood explained.³⁵ “Many workers have suffered, but, equally, our rates of labour productivity have been amongst the worst in the world under that regime,” he continued. Similarly, one paper in favor of fair pay agreements argued that “the disappearance of collective bargaining has certainly contributed to the prevalence of low-wage work, stagnant wages and productivity growth, and inequality.”³⁶

While New Zealand’s own experiences were critical in shaping views about the importance of sectoral bargaining, so too were comparisons with other countries and international research highlighting the value of broad-based bargaining.³⁷

As many New Zealanders recognized, neighboring Australia had also weakened its system of sectoral bargaining and consequently suffered similar economic problems.³⁸ From the early 1900s through the 1980s, Australia had a labor system based largely on a model of industrywide arbitration—similar to what New Zealand once had—which produced significant economic success, including one of the strongest middle classes in the world. Yet in the 1980s and especially in the 1990s, Australia began dismantling its labor system and weakening unions. Under the country’s workplace bargaining system, bargaining coverage has fallen, labor union density has been in steep decline, inequality has risen sharply, wage growth has begun to stagnate, the middle class has weakened, and economic growth has worsened.³⁹

International academic research beyond Australia has increasingly highlighted the benefits of sectoral bargaining to workers and the economy, and this also influenced New Zealand policymakers.⁴⁰ Studies show that sectoral bargaining significantly increases the number of workers covered by collective agreements that lead to higher wages, better benefits, and safer working conditions. As the researchers at the OECD explain, “[C]ollective bargaining coverage is high and stable only in countries where multi-employer agreements (i.e. at sector or national level) are negotiated.”⁴¹

In addition, researchers find that sectoral bargaining also helps close pay gaps⁴² for women⁴³ and people of color⁴⁴ and significantly reduces economic inequality.⁴⁵

Importantly, studies indicate that sectoral bargaining can help boost productivity. Sectoral bargaining incentivizes companies to compete based on greater productivity rather than lower pay because it sets higher compensation floors and encourages employers to provide similar pay to workers who do similar jobs.⁴⁶ Sectoral bargaining prevents low-road companies—those that do not offer good wages and benefits—from undermining high-road companies that do right by their workers. Broad-based bargaining can also reduce employee turnover, promote workplace collaboration, and incentivize worker training.⁴⁷

This international evidence was important in the debate about fair pay agreements. As New Zealand’s minister for workplace relations and safety explained, the agreements are “built on international evidence described by the OECD Directorate for Employment, Labour and Social Affairs as the positive benefits that a level of sector-based bargaining can have in labour markets.”⁴⁸ Similarly, Jan Logie, a supportive member of the Parliament, argued, “[T]he international evidence is really clear: strong unions and collective bargaining frameworks are the best tools for delivering decent pay, stable jobs, and safe workplaces.”⁴⁹

New Zealand’s failed experiences with previous pro-labor reforms also helped spur fair pay agreement legislation. These measures attempted to improve workplace-based bargaining, yet they proved insufficient without a strong sectoral bargaining component, prompting labor advocates to contemplate bigger and bolder reforms.

In 2000, New Zealand passed legislation that would supposedly address “the inherent inequality of power in employment relationships” by increasing legal protections for unions and collective bargaining and encouraging “good faith bargaining.”⁵⁰ These policy changes made New Zealand’s labor policy more akin to U.S. policy and curbed some of the most extreme aspects of the earlier law. Unfortunately, the changes did not have much substantive impact. As a study explained, these American-style labor policies “made little difference to the scope or extent of collective agreement making.”⁵¹ Indeed, in 2000, union density was 22 percent according to the OECD and 18 percent by the most recent figures; bargaining coverage has fallen to similar levels.⁵²

In other words, attempts to improve worker power without a strong push for sectoral bargaining did not work.

Further supporting the view that a push for sectoral bargaining was necessary in New Zealand, Australia enacted similar “good faith bargaining” legislation as an attempted corrective in 2009, but the policy did not succeed there either.⁵³

Fair pay agreements are part of a series of exciting pro-worker policies that the New Zealand government has enacted, including strengthening union rights, increasing the minimum wage, and promoting pay equity.⁵⁴ New Zealand policymakers recognized that they needed to rebalance power between workers and employers and viewed sectoral bargaining as a critical piece of this rebalancing.

As the United States seeks to rebalance power in the economy, New Zealand’s efforts to strengthen sectoral bargaining deserve attention. Elements of fair pay agreements may be worth attempting to replicate in the United States, although there are many other policy models in the United States and around the world that could increase sectoral bargaining.⁵⁵ Most importantly for worker allies in the United States, the debate about the new agreements highlights the growing understanding among union leaders, scholars, and policymakers around the world that sectoral bargaining—in conjunction with worksite-level bargaining—is essential to making today’s economy work better for working people.