The Employment Contracts Act and its economic impact

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Executive summary

• The Employment Contracts Act (ECA) represents a significant change from previous legislation governing labour relations.
• It has reduced the legislative backing for unions, and has served to strengthen the direct relationship between employees and their employers. It has removed the obstacles to different types of employment contract and working arrangements.
• However, the ECA is only one of many factors that has affected the economy over the past five years. Care is required when interpreting data.
• The ECA has substantially changed the way that employees and employers negotiate and contract with one another. Union membership has almost halved since the Act, and now only a small minority of the workforce is covered by multi-employer collective employment contracts.
• The content of employment contracts has also changed. There are more flexible work practices, greater multi-skilling and increased use of performance pay. Rates for overtime and penal rates have dropped.
• Employers who have made these changes are more likely to report actual improvements of labour productivity and operational flexibility. Aggregate economic data also tends to support the hypothesis that the ECA has improved productivity, although different measures tell different stories.
• Employers report increased employment as a result of the Act. This is especially so for part-time and casual employment, but also for full-time employment. Econometric analysis shows the ECA seems to account for at least one-sixth of the total growth of employment between 1991 and 1995.
• No estimates have been made of the ECA’s effect on economic growth, but this is likely to have been positive given improved productivity and positive employment growth.
• Econometric work shows the ECA as having had no significant effect on the aggregate level of wages. There may have been some deterioration in working conditions, however evidence is not clear-cut.
• If anything, the hourly rate of wages received by women has improved relative to that of men (although not necessarily as a result of the Act). Similarly for part-time workers and those with no qualifications. But the rates for Māori workers have deteriorated compared with those for Pakeha.
• However, inequality may be worse than the statistics show if the conditions of people working for smaller employers, who are not adequately covered by the data, have deteriorated.