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Chapter 1 Introduction In the 1980s, the political tide in many countries turned against state intervention in the economy and in favour of the 'free' operation of markets, minimization of the tax burden, and openness to international trade and capital flows. This political shift was reinforced by developments in economic theory and political economy. The theory of the optimality of free trade was extended, the static theory of allocative efficiency being supplemented with analysis of the dynamic advantages of economic openness and export-orientated development. Entrepreneurship, innovation, and competition were brought to the forefront in this analysis. In New Zealand, the interventionist policies which had been pursued since the 1930s were finally abandoned in the mid-1980s. The turn in the tide of intellectual opinion meant few could be found to defend economic management as it had been practised in the post-war years. Yet it quickly became clear that the new policies had high costs in unemployment and inequality. Attention fell on Sweden as a country which had maintained free trade while implementing policies to achieve desired social outcomes. Yet Sweden was simultaneously experiencing a crisis of its own. While old policies were not being cast aside as emphatically as in New Zealand, it appeared that the Swedish model of welfare state expansion was also unsustainable. This book provides an historical account of the development of trade and employment policies in Sweden and New Zealand. The two countries make for an interesting comparison because of the similarity in the objectives they have pursued 1 until recently (full employment, income equalization, social security), and the great differences in the policies they have used to achieve these objectives. The central question this study addresses is why Sweden has adhered, with a few exceptions, to a policy of free trade, while New Zealand was highly protectionist. To answer this question, it proves to be necessary to examine the whole set of interdependent economic and social policies adopted in the two countries relating to employment and wage determination. The existence of a coherent set of social and economic policies in post-war Sweden - the 'Swedish model' - is widely recognized. That the policies adopted in New Zealand also had the coherence of a model is a much more contentious claim, given the unremittingly negative view of protectionism to be found in the economics literature. The second section of this Introduction outlines one of the main arguments of this book: that to understand the New Zealand model, it is necessary to place trade policy in the context of the policies adopted to achieve and maintain full employment. One consequence is that the analysis of the causes and consequences of protection advanced in this study is considerably more complex than that provided by neoclassical accounts of the political economy of protection. It may seem perverse, and hardly timely, to offer accounts of the Swedish and New Zealand models in 1994, now that both are apparently dead and buried. However, there are interesting lessons to be learned from a comprehensive analysis of why the models worked for a time and why they eventually failed. The first section of this introduction summarizes some of those lessons by providing an interpretation of recent events in the two countries. 2 I. Recent Policy Reversals in Sweden and New Zealand The key indicator of the demise of the Swedish and New Zealand models is the rise in open unemployment. New Zealand's unemployment rate took a step upwards after 1980, averaging about 4% in the period 1980-88, and then increased again strongly after 1989, to reach 10% in 1992. In Sweden, unemployment was also slightly higher in the 1980s than in the 1970s (2-3% compared with 1-2%), but the really significant change came after 1991. Unemployment reached 9% in mid-1993. The analysis advanced in this book suggests that the abandonment of full employment policies can be seen as a product of the disintegration of the compromises established in the post-war years over the government's exercise of its powers of economic management. The implementation of full employment policies in Sweden and New Zealand depended on finding ways of overcoming the resistance of capital and labour to extensions of the government's role in the economy. The government may extend its role and appropriate the necessary powers directly, by exercising its legislative and regulatory authority (the New Zealand case), or it may operate indirectly, by persuading the 'corporate partners' to control their members in the required fashion (the Swedish case). By either direct or indirect means, the government must achieve wage restraint and stabilization of investment if full employment is to be maintained. There are two sides to the problem of achieving sufficient wage restraint. On one side, the wage bargaining system generates money wage settlements which, if there are no inflation 'surprises', correspond to the real wage targets of the bargaining 3 parties. Chapter 7 discusses how this 'bargained real wage' is affected by the institutional structure of wage determination. On the other side, factors such as the level of investment and the rate of innovation, along with external factors such as terms of trade changes, determine the 'warranted real wage'. This is the real wage at which full employment can be maintained along with a sufficient rate of profit to motivate investment. The widening gap between the bargained real wage and the warranted real wage is the underlying factor leading to the demise of full employment policy. Chapter 6 discusses how the different trade and employment policies adopted in Sweden and New Zealand affected the growth of the warranted real wage. The simplest indicator of growth in the warranted real wage is the rate of growth in productivity. Productivity growth in New Zealand has been considerably lower than in Sweden throughout the post-war period, and in chapter 6 it is argued that differences in employment policy partly explain this difference in productivity performance. Table 1.1 also shows how productivity growth declined in both countries from 1973 onwards. Again, part of the decline in productivity growth that occurred can be seen as endogenous to the two countries' employment policies. In other words, the measures taken by governments to maintain full employment contributed to a poor productivity performance. The increase in industrial subsidization in Sweden and the large industrial projects embarked on by the government in New Zealand are examples of employment-creation (or maintenance) measures which contributed to low productivity growth. There were also exogenous factors which depressed the warranted real wage, such as the deterioration in the 4 terms of trade for both countries that occurred after the oil crisis. Table 1.1 Productivity Growth Output per employed person ('Labour productivity') Average annual rate of change Years Sweden 1960-73 4.1 1974-79 1.5 1980-91 1.3 New Zealand OECD Europe 1.6 -1.3 5.1 2.6 1.4 OECD 4.3 1.6 2.0 1.6 Data are for the business sector, i.e. excluding government. Source: OECD Economic Outlook No. 54, 1993, Table A.65. The decline in the warranted rate of wage increase meant that a higher degree of real wage restraint was required of the labour market parties if worse outcomes for inflation, competitiveness and/or unemployment were not to be experienced. The government can, for a time, achieve full employment without nominal wage restraint 5 by generating a higher-than-expected inflation rate. In small open economies, devaluation can be used to generate unanticipated inflation, while bringing particular benefits to internationally-competitive sectors (below). In Sweden a semblance of wage control was tantalisingly re-established along with the devaluations of 1981-82, but subsequently Sweden's inflation exceeded that of her trading partners, and relative unit labour costs climbed gradually back to their pre-devaluation levels (Calmfors, 1993, Fig. 10 and Fig. 14a). In New Zealand, the government also devalued, but its main strategy (until 1984) was to intervene more and more in wage-fixing, culminating in a wage and price freeze in the early 1980s. While this led to very low inflation in 1981 and 1982, New Zealand's overall inflation performance was worse than Sweden's (Table 1.2). Table 1.2 Inflation and Exchange Rates Inflation 1963-73 SDR Exchange Rates Krona/ Sweden New Zealand Sweden (Average annual % rate) (%Change over the period - not annualised) 5.0 5.6 -6 6 NZ $NZ/ -16 D.Mark $Australia -30 -28 1973-79 9.8 1979-92 7.8 13.8 9.7 -9 -77 -60 -103 -41 -9 -82 -21 Source: IMF International Financial Statistics Yearbook, 1993 The inability of the bargaining system to generate sufficient nominal wage restraint was related to the breakdown of centralized wage-fixing. In the 1950s and 1960s both countries operated centralized systems which served to internalize the externalities of high wage settlements. The reasons why these systems began to break down are discussed in chapter 7. In Sweden, the key factor was the withdrawal of support for centralization from competitive sector employers and unions. This withdrawal arose from a fundamental ambivalence about centralized wage fixing. On one hand, competitive sector employers favoured centralization as a means of protecting the competitive sector against excess wage pressure originating in the sheltered sector. In this, employers were at one with the competitive sector unions, who could observe the effects on the cost of living (and on taxes, when the public sector came to dominate the sheltered sector) of high wage increases in the sheltered sector. On the other hand, centralized wage bargaining reduced the scope for employers to make discretionary adjustments to the wage structure, for example to reward the acquisition of firm-specific skills and to promote long tenures. Union attitudes to these micro-level 'industrial relations' aspects of wage fixing were naturally at variance with those of employers, but scope existed for more highlyskilled workers to find a degree of common interest with their employers around the 7 desirability of improving their relative wage position. In Sweden, cleavage among workers was most pronounced between the unions with large public sector memberships and those in the internationlly-competitive sector. A variety of factors can affect the importance attached by the competitive sector to overall wage restraint versus the desired wage structure. The risk of departing from centralized bargaining is that the competitive sector is then exposed to uncontrolled domestic wage pressure and a loss of competitiveness. The weight attached to this risk depends in part on how exactly the centralized system operates in affecting the wage structure. The central agreement can leave scope for local flexibility or it can embody definite wage structure objectives, such as wage compression ('solidarity' in Sweden). To the extent that these objectives cannot be sustained on the shopfloor, wage drift will arise. In both Sweden and New Zealand, employers have argued that 'corrections' to central bargains through lower-level 'drift' and 'second-tier' bargaining meant that centralization was not only failing to control wages, but that the central bargain was actually adding to wage pressure. These arguments became increasingly important in Sweden in the course of the 1970s, when the policy of solidarity was pursued with considerable vigour and success. It could be argued that the unions were the villains in bringing centralized bargaining down by pushing too hard for egalitarian changes in the wage structure. However, the 1980s saw the unions retreat from solidarity in response to employers' unwillingness to continue to participate in centralized bargaining. The government also weighed in, playing an increasingly important role in bringing about centralized settlements. 8 Despite these attempts to sustain the centralized system, the leading competitive sector employers (the engineering sector) continued to advocate decentralization. Explanations of their position have highlighted the changes in the organization of work occurring in the sector, with increased demands for flexibility from the workforce and a blurring of the blue collar-white collar demarcation (Pontusson and Swenson, 1993; Iversen, 1994). In the last decade the reform of New Zealand's industrial relations system has gone through two phases. In the first phase, the Labour Government of 1984-1990 attempted to remedy the deficiencies of the system by continuing a 'corporatist' reform programme already begun in Labour's previous term in office (1972-75). In the second phase, the National Government which gained power in 1990 undertook sweeping 'market-oriented' reforms. In Labour's analysis of the system, one of the primary factors in the pressure for reform of the industrial relations system was its unsuitability for large workplaces. Whereas the centralized system in Sweden was built on big blocks, New Zealand's structure was based on complex linkages between small units. The reforms to the system undertaken by Labour governments can partly be understood as attempts to make the system more Swedish, by strengthening union organization to create a true 9 corporate partner for the Labour Party in power. The 1973 Industrial Relations Act and the 1987 Labour Relations Act aimed to promote the creation of larger unions and facilitate the formation of binding agreements through collective bargaining, reducing the role of the Arbitration Court (which was also variously reconstructed and renamed in these Acts). In the 1987 Act, constraints on the permitted activities of unions were removed, more accountability to memberships was provided for, and an element of contestability in union coverage was introduced to modify the previous system of exclusive rights of occupational representation (Williams, 1993). These changes can be understood as attempts by Labour to create a wage-fixing system in which unions played a strong, but disciplined, role. Some props to the old system were removed in 1987, notably the right of either party unilaterally to take a dispute to arbitration. Labour also sought to reduce the close entanglement of the government in the labour market (most strikingly marked by the involvement of the Minister of Labour in settling industrial disputes). This entanglement had tended to give a political advantage to the National Party, which could attack and suppress union activity in order to control wages. Labour in government was not prepared to take repressive action, but nor had it been able to benefit from corporatist arrangements in which the central organizations of unions and employers restrained industrial unrest. Labour's efforts at corporatist reform left competitive sector employers unimpressed. The most right-wing business organization, the Business Roundtable, pressed for deregulation and liberalization in labour market policy as in other areas. The basis for the Roundtable's argument was straightforward. Firms would be better 10 able to protect their competitive position in the world economy in a decentralized system, provided that the government did not adopt active policies to maintain full employment. The theory was that all sectors of the labour market could be made to perform competitively if comprehensive deregulation was embarked upon. In particular, if unemployment was allowed to emerge, competitive pressures arising from the labour supply side would come to bear on those sectors of the (internationally) sheltered labour market most exposed to competition from the unemployed. Competitive pressures could be further extended by reorganising the public sector, once the archetypical sheltered sector. A number of the economic policies of the Labour Government were in broad accordance with this model. In particular, Labour embarked on major reforms to the public sector. The fourth Labour Government lost office in 1990 to a National Party which had put its dirigiste past behind it and become committed to extending deregulation into the labour market. The 1991 Employment Contracts Act is striking evidence that a wage-fixing system created by legislation could equally be removed by legislation. The key feature of the 1991 Act was the establishment of individual employment contracts. Only a minimum code of employment conditions, other legislation on statutory holidays, and the Minimum Wage Act constrain the contracts that can be made. Collective contracts are also provided for under the law, but there is no recourse to arbitration or any other mechanism for ensuring that collective negotiations must achieve a settlement. Employers' gains from this system depend heavily on the absence of policies to maintain full employment, and also on the weakening of policies to ameliorate 11 unemployment, such as job creation schemes and benefit payments. While the National Government has cut unemployment benefits, not all employers are happy. Owners of smaller firms are themselves vulnerable to the entry of competitors who may have made more ruthless use of the law in order to reduce their labour costs. As chapters 2 and 3 explain, employers' interests in the regulation of such competition played an important role in shaping New Zealand's old wage bargaining system. The demise of the system signals that the structure of employment has changed markedly, with large firms now exerting a much greater influence on labour market policy. In both Sweden and New Zealand, governments have expressly terminated their commitment to use demand management policies to maintain full employment. This policy reversal could be said to have stemmed from the inability of both systems to achieve sufficient wage restraint, but equally the decline of centralized wage fixing has been precipitated by the abandonment of full employment. As noted above, employers' interests in centralized bargaining alter considerably if there is unemployment. Full employment policies and centralized wage restraint are mutually-reinforcing. The government's commitment to full employment also provides the payoff for the unions in supporting an anti-inflationary wage bargaining strategy. While a number of political and economic factors came together in bringing about the demise of Keynesian demand management policies, one aspect is of particular relevance to the analysis in this book. It has already been noted that in the 1970s and 1980s governments in both countries used devaluation to generate a higher- 12 than-expected inflation rate and reduce real wages. This had two important implications. First, it represented a failure of the wage bargaining system and was accompanied by a deteriorating industrial relations environment. Second, the policy was theoretically not sustainable: to continue to generate unanticipated inflation, the inflation rate would have to accelerate. However, the long-term unsustainability of a policy need not lead to its immediate abandonment. Both the Swedish and New Zealand governments were forced into the reversal of demand management policy by the critical experience of an exchange crisis. Loss of control over the exchange rate meant the removal of the policy instrument which both had come increasingly to rely on to maintain competitiveness. The exchange crises were also the most dramatic symptom of important structural changes in the two economies, changes which reduced the capacity of governments to implement full employment policies. To use a devaluation to restore competitiveness, the government must be able to choose the timing of exchange rate changes and to maintain a fixed exchange rate in the intervening periods. If the labour market parties expect that one devaluation will soon be followed by another, this will fuel inflation expectations and contribute to the rapid erosion of the competitive advantage gained by exchange rate changes. Recognition of this problem eventually (in 1991) led the Social Democratic Government in Sweden to announce the pegging of the krona to the ECU. This commitment was intended to dampen inflation expectations, but it proved problematic for demand management. High interest rates and an 'austerity package' were needed to defend the krona, and at the end of 1992 the currency finally had to be 13 floated. In New Zealand the change of government in 1984 was accompanied by a foreign exchange crisis and a large devaluation. Rather than become drawn into the costly defence of a new fixed rate, Labour then allowed the currency to float. However, the pursuit of anti-inflation credibility through a tight monetary policy, combined with a continuing fiscal deficit, pushed interest rates up, and the currency appreciated in 1985-86. The Government, apparently regarding its monetary targets as central to the credibility of its anti-inflation strategy, was unwilling to change domestic policy to prevent this damaging development on the foreign exchange markets. A commitment to operate domestic policy to achieve a stable exchange rate could have ended in embarrassment, as in the Swedish case. The increasing difficulty of managing the exchange rate stemmed from the liberalization of international capital flows. This in turn was linked to the general policy of deregulation of the financial markets, undertaken in both countries in the 1980s. The reasons for this deregulation are difficult to piece together. A large part of the deregulation literature is dominated by considerations of efficiency and competition in the market for financial services. Interest rate controls, ratio requirements, and sectoral direction of lending reduced the efficiency of financial institutions themselves, particularly by restraining competition between them. These seem to be second-order considerations compared to the great gains that can accrue from effective macroeconomic management, suggesting that 'bigger' explanations of financial market deregulation are needed. One can point to the inherent problems of system maturity, whereby the efficacy of controls was reduced 14 through a gradual learning process. The increased frequency of exchange rate adjustments also contributed to disintermediation, by providing the basis for a market for forward exchange rate cover. Generally, there was a tendency for the rewards from evading regulation to increase. In both countries, deregulation was preceded by a phase in which regulations became more binding. A key factor in this part of the process was the emergence of substantial fiscal deficits in both countries. Significant deficits emerged around 1975 (New Zealand) - 1978 (Sweden) and persisted into the late 1980s. These deficits were partly a consequence of the decision to 'ride out' the world recession following the oil crisis. The financing of the deficits put increasing strain on the structure of financial regulation. Requirements for trading banks to hold set ratios of government securities appeared to facilitate low-cost funding, but turned out to reduce margins and encourage disintermediation. A form of crowding out occurred in which the availability of bank loans for private sector investment became increasingly restricted, while interest rates remained controlled. This meant that the credit allocation process operated by regulators became increasingly important. Chapter 5 discusses how different configurations of capital market controls emerged from the introduction of Keynesian demand management policies. In Sweden, the Social Democrats stepped back from planning and nationalization and sought policies which would maintain incentives to private sector capital accumulation and promote entrepreneural behaviour, particularly in the export sector. As a result, restrictions on long-term direct investment abroad were avoided, although short-term capital flows were regulated. The capital flight which might be expected to arise from left-wing control of the government was countervailed by the profitable 15 opportunities created by the government's demand management policies and the favourable tax treatment accorded to corporate profits. In New Zealand, the government did not find it necessary to make concessions to internationally-mobile capital. Agriculture dominated the export sector and the government played a major role in developing agricultural export markets. Industrial development was oriented to import substitution, and the government engaged in some planning of this development, intervening in the direction of investment through credit control and import licensing. This account gives some pointers about the underlying rationale for the recent removal of capital controls in both countries. Taking the Swedish case first, the 1980s saw an acceleration in direct investment abroad by Swedish multinationals, indicating that the Swedish economy was no longer providing a sufficiently attractive environment for investment. Faced with this problem, the Swedish model could go in one of two opposite directions. One direction was symbolized by the Meidner plan for employee investment funds. In place of the cooperation of internationally-mobile capital, alternative sources of investment finance (worker savings) could be drawn upon. The other direction was to establish a policy regime which was more attractive to international capital. Insofar as capital controls raise the cost of borrowing on the international capital market, liberalization appeared to offer a route towards a lower cost of capital and increased market-driven investment. Furthermore, liberalization amounted to a promise to investors that a more anti-inflationary macroeconomic policy would be adopted. In the fashionable jargon, liberalization meant that the government made a credible commitment to abandon its previous full employment 16 policies by making them very difficult and costly to implement. For example, low-cost financing of a fiscal deficit through reserve requirements is precluded by financial sector liberalization. Potential inflation tax revenue is reduced by the removal of capital controls, because people can hold financial assets denominated in foreign exchange. In New Zealand a similar logic was to prevail, although the sources of New Zealand's investment problems were somewhat different. In the 1970s, the government undertook large-scale official international borrowing, accompanied by involvement in specific investment projects (ch 6). The low rates of return generated by these projects eventually led to the abandonment of the strategy. The government's failure to identify profitable investment opportunities, in conjunction with the emergence of politically assertive private capitalists, created the climate for a marketdriven capital allocation process. In theory, these measures to promote private investment should reverse the decline in warranted real wage growth. This could make it possible to achieve low and stable inflation (and to maintain competitiveness without successive devaluations) at lower rates of unemployment than currently prevail. However, it is equally possible that the breakdown of centralized wage-fixing will lead to increased bargaining pressure (a higher bargained real wage at each level of unemployment). If this happens, then both countries will experience persistently high unemployment, accompanied by higher real wages for those who are in employment. This scenario illustrates the risks and costs in reducing the government's capacity to manage the economy independently of international pressures, and in the 17 related process of dismantling collective institutions for managing the labour market. The general risk is that the political economy of the country will subside into sectionalism where once there was effective collective action. The progress of international trade policy in New Zealand illustrates how sectionalism may impede even a very determined programme of deregulation, with adverse welfare consequences. Chapter 6 traces the growing difficulties and disillusionment with the administration of trade protection back to the late 1960s, when the problems of export promotion and diversification created by the protectionist regime were highlighted. In the 1970s, it became apparent that protection could not achieve its central purpose of employment maintenance without grave costs in low productivity growth. It would seem, then, that the country was better prepared for trade liberalization in 1984 than for the liberalization of the labour and financial markets. At first sight it is surprising that this area of reform was an exception to the 'blitzkreig' of deregulation pushed through by Labour after 1984. While Labour did withdraw from interest group consultations and accelerate the removal of import controls and the tariff reduction programme, tariffs remained higher than the OECD average (OECD, 1990/91, p.76). The government's caution in trade policy compared with its haste in financial market deregulation seems to confirm the neoclassical hypothesis that small sectional interests will prevail over broader collective interests in the formulation of policy. However, it also suggests another hypothesis which is less palatable to neoclassical theory. The weakening of collective institutions and the reduction in the government's capacity to undertake policies in pursuit of broad collective interests may have 18 contributed to the entrenchment of sectionalist protectionism. One can point in particular to the failure of macroeconomic management to provide an appropriate environment for reductions in protection. A direct and specific connection between macroeconomic policy failure and continued protectionism can be found in the lack of an exchange rate policy. The best policy would have been for the government to have maintained sufficient control in the financial markets to be able to devalue the exchange rate as tariffs and controls were lifted. In 1984-85, it appeared that this path would be taken, as the dollar was devalued immediately after the change of government. However, the dollar subsequently appreciated as high interest rates attracted an inflow of capital, delaying recovery and growth in viable competitive sectors. Despite these problems, it could be argued that the prospects for developing a genuinely laissez-faire political economy in New Zealand are better than in Sweden, because New Zealand's structures of collective organization are less deeply entrenched. The sweeping reforms to the labour market undertaken by legislation in New Zealand could not be undertaken in Sweden. Late in 1992 the Swedish Government appointed a commission, headed by Assar Lindbeck, to analyse Sweden's economic problems. The Lindbeck Commission took the view that the whole structure of economic policy-making should be altered; in particular, that "interest groups should not be involved in decision-making in the public sector" (Lindbeck et al, 1993, p.262). The risk in the Lindbeck strategy is that the gains that have accrued from an 'encompassing' interest group structure will be lost to Sweden, while the presence of sectional interest groups is unavoidable. 19 It is also becoming apparent that welfare outcomes under a decentralized regime are inferior to those of a centralized system. In chapter 8 it is shown that the growth of Sweden's welfare state was fuelled by the relationship between the central union confederation (LO) and the Social Democratic Party. This is not the mighty alliance it once was. No longer is there a mechanism for the extension of social security benefits and free public services to be bargained against the moderation of wage demands. (In chapter 8 it is shown that these bargains were made implicitly: public sector expansion and collective provision strengthened the position of the central union confederation vis-a-vis member unions, thereby strengthening the system of wage restraint indirectly.) New Zealand's welfare state was always a more fragile creation than Sweden's, lacking as it did the strong foundation in collective institutions found in Sweden. This left its fortunes very vulnerable to fiscal conditions. As argued above, the deregulation of financial markets has tightened these fiscal constraints. The early 1990s brought the unedifying sight of the Minister of Finance touring financial capitals, promising welfare cuts to audiences of bankers in order to improve the country's credit rating abroad. II. The Political Economy of Trade Policy The neoclassical theory of the political economy of protectionism provides a starting point for the analysis in this book. However, it will be shown that the neoclassical account fails to explain either New Zealand's protectionism or Sweden's free trade. According to neoclassical political economy, democratic governments 20 might be pushed towards suboptimal policies by pressure from lobbyists. It is argued that protectionist lobbies are likely to form more easily than free trade lobbies, although society as a whole is assumed to be better off with free trade. The gainers from a tariff are a small group receiving a large benefit, while the losses are small and widely spread. Although the losers are in a numerical majority, the gainers have more incentive to lobby intensively. Logrolling (vote trading) may allow them to assemble a majority with other groups intensively pursuing other sectional interests. While there is a free-rider problem for the protectionists, as the benefits from a tariff will accrue to all participants in a protected industry whether they lobbied or not, this free-rider problem is assumed to be greater for the free traders, creating an inbuilt bias towards protection. However, this analysis of the payoff structure from protection is incomplete. It is straightforward to extend the analysis to show how the losses from protection may become concentrated on the export sector and those parts of the import-competing sector which do not get protection (in sum, the internationally-competitive sector). Protection of an industry lowers the real product wage in that industry and the real consumption wage throughout the economy. If there is real wage resistance, unions throughout the labour market will bid for an increase in money wages. This may be readily conceded by a naturally-sheltered or nontradables sector, which passes the wage increase on into prices. If this happens, another round of wage increases will result. The sector which loses from this process, in a small open economy, is the pricetaking internationally-competitive sector. If all workers restore their real consumption wages to the pre-protection level, there will be a rise in real product wages in the 21 competitive sector, and a fall in profits and employment. This means that, once wage responses are taken into account, the losses from protection are not widely spread, but are concentrated on the competitive sector. The competitive sector will then become a forceful lobbyist itself. While in principle it could advocate either free trade or industrial assistance, in practice it is likely to favour free trade, unless the sector is dominated by declining mature industries. Free trade saves the competitive sector from engaging in the process of political negotiation over assistance levels, and also sustains the possibility that some members may enjoy entrepreneural good fortune and make excess profits. If the sector becomes politicallymanaged, such profits are likely to be eliminated. The scenario outlined makes the strong assumption that sheltered firms exercise sufficient price-setting power to maintain a constant real product wage. This requires that sheltered firms neither compete with eachother, pushing down the rate of profit, nor exploit their market power to raise the rate of profit. It also requires that domestic demand conditions are accommodating, so that higher prices do not lead to lower sales. These conditions will not always be met, but it is shown in this study that they have been met sufficiently for the export sector to recognize the threat posed by domestically-generated inflation, and to organize to defend its interests against that threat. In both Sweden and New Zealand the organization of the export sector predated the fully-fledged establishment of full employment demand management policies, but became particularly important when such policies were adopted after WWII. In both countries, centralized wage fixing systems operated with the express 22 purpose of maintaining the relative position of the competitive sector. At first sight, this finding, of powerful export sector organization in both countries, is incompatible with the adoption of protection in New Zealand. However, it will be shown that protection was not as detrimental to exporters' interests as might be expected, as it was accompanied by a high degree of wage restraint. This reflected the weakness of worker organization under the Industrial Conciliation and Arbitration (IC&A) system. Mancur Olson has argued that Antipodean protectionism was the product of fragmentation and sectionalism in the labour market interest group structure in Australia and New Zealand (1982, pp.134-6). Olson's argument is not supported by the historical evidence reported in this study. It is found that the trade union structure contributed to the failure of the unions to oppose protection in New Zealand. Fragmentation and sectionalism weakened the unions' ability to adopt real wage maximising strategies in the interests of workers as a whole. However, the unions played no major part in bringing about the introduction of protection. The unions seem to have played a greater role in the establishment of protection in Australia, where they conceded protection in exchange for securing recognition of the family wage principle. It should be noted, incidentally, that some unionists may have believed that protection was in fact in the interests of the working class as a whole. Unionists could invoke the Stolper-Samuelson theorem in support of protectionism. According to the Stolper-Samuelson theorem, protection will raise the real return to the factor employed more intensively in the protected sector, with perfect mobility and a clearing labour market. In the Australian case, protection of labour-intensive 23 manufacturing would raise the real income of labour (Stolper and Samuelson, 1941). This brief survey of some of the major problems with received accounts of protectionism illustrates two important methodological points. First, it is not straightforward to identify where a group's best economic interests lie. The complexity of economic interrelationships means that an interest organization must use a theoretical analysis to determine the best course of action for it to pursue. Predictions have to be made about how other agents in the economy will react to a policy change. Short-run advantages have to be set against possible longer-term repercussions. Theory and ideology may play an important role in this complex calculation. Second, the institutional structure of the country - the constitutional framework, the electoral system, and the industrial relations structure - affects both the calculus of interests and the consequences of that calculus. Neoclassical theory confines interest groups to the role of lobbyists, whose activity brings forth legislative and regulatory measures from the government. However, labour market interest groups can also act in the wage bargaining arena to achieve their ends. Where labour market interest groups are also the main trade policy lobbyists, it is necessary to analyse the labour market context in order to explain the choice of trade policies. This book argues that trade protection was adopted in New Zealand as one of the policy instruments by which the government could maintain full employment. This presents two issues. The first concerns the efficacy of the policy. 24 Many economists would doubt whether protection could really contribute to the maintenance of full employment. The second issue is to identify the political preconditions for the use of trade restrictions to promote employment. Under what conditions will the state be able to appropriate the powers necessary to impose trade restrictions? Under certain conditions, it can be shown that trade protection in the form of a tariff may reduce either demand-deficient unemployment or 'classical' unemployment (where the real wage is too high). Considering first the case of classical unemployment, the purpose of the tariff is to reduce the real wage. Clearly the immediate effect of a tariff is to raise the prices of the affected goods, but this will only lead to a reduction in the real wage if money wages fail to respond to the rise in prices. As van Wijnbergen has pointed out, "[i]t is not clear why commercial policy would succeed in lowering the real wage where other attempts have failed" (1987, p.691). However, he goes on to provide one answer to his question. It may be possible to increase employment by imposing a tariff to raise revenue to subsidize labour. This policy has some affinity with the 'optimal intervention' prescription that a labour subsidy should be used where the market price of labour exceeds its social opportunity cost. Ideally, the subsidy should be financed by a nondistortionary tax, but if the government's other taxation possibilities are limited, a tariff may be used to raise revenue. In chapter 4 it is shown that the policies of the first Labour Government in New Zealand bore some resemblance to the labour subsidy prescription. Subsidies were paid on certain goods with a high weight in the consumption basket, driving a positive 25 'wedge' between the real product wage and the real consumption wage. A large transfer payment was also made to families with children, with a view to reducing the real wage in an institutional structure in which the position of men with children had a pivotal role in wage determination. A feature of New Zealand's protectionism was that quantitative controls on imports were preferred to tariffs, so trade protection did not directly finance the subsidy policy. This suggests that the programme of real wage restraint through subsidies could have been implemented without protectionism. However, import controls reduced the real command over goods and services enjoyed by wage earners, by causing shortages. Money wages did not respond to this 'back door' reduction in real wages, whereas it may not have been possible to prevent wages responding to a tariff or a devaluation. The use of protection against demand-deficient unemployment arises when the country experiences a current account deficit at full employment which cannot be financed or is unacceptable for some other reason. The expansion of aggregate demand is therefore constrained by a lack of 'international space'. If the protectionist policy is to work, the effect of protection must be to raise domestic savings at full employment. A temporary tariff or the temporary imposition of import controls might be expected to have this effect. In New Zealand controls were periodically relaxed and re-imposed in response to terms of trade fluctuations, producing variations in 'forced' saving in order to maintain current account balance. In theory, this policy was second-best to international borrowing and lending in a perfect world capital market, but the world capital market was not perfect. Indeed, 26 the comparison of Sweden and New Zealand reveals that capital market conditions were crucial to the different trade policies adopted. This was not only because of the effect of international capital flows on the viability of different macroeconomic policies for full employment. It is also shown that New Zealand's history of capital importing and Sweden's experience of capital exporting were integrally connected with the configuration of political interests affecting the government's choice of full employment policies. In the post-war years a case was advanced for the use of protection as part of a strategy of import-substituting industrialization (ISI). The case for ISI was based on the promotion of growth rather than the maintenance of full employment, and invoked dynamic advantages that were meant to accrue from a reduction in trade dependence. In the 1970s and 1980s the intellectual tide shifted strongly against ISI, largely because of the superior growth performance of developing countries that had adopted export-oriented strategies. However, some of the key concepts of ISI were relevant to New Zealand in the post-war years, especially 'elasticity pessimism'. The expectation that trade volumes would not respond substantially to a change in the exchange rate helped to sway the government away from devaluation and towards controls. Another factor was that New Zealand did not face free access (or even the potential for free access if it removed its own trade barriers) to export markets. The case against protection based on the problem of retaliation was therefore of limited importance to New Zealand. However, these factors did not play a crucial role in the adoption of import controls. It is shown in chapter 5 that elasticity pessimism was only one of several considerations favouring a strong currency. Furthermore, low 27 price elasticities of supply for exports and demand for imports could themselves be seen as a product of the historical weakness of private sector entrepreneurship and the dominance of the state, rather than as an immutable structural feature of the economy. In the final analysis, the efficacy of protectionism as an employment policy rested largely on the high level of wage restraint that accompanied the policy. This in turn reflected the government's deep involvement and strong influence in industrial relations. In examining the second issue raised above, concerning the political conditions necessary for the state to impose import controls, the importance of the government's dominance over the labour market parties emerges clearly from the comparison with Sweden. The large role of the state in the New Zealand economy was established before the advent of full employment policies, although the commitment to full employment gave a new impetus to the extension of state powers, in the area of trade policy among others. In 1893 the Industrial Conciliation and Arbitration Act was passed, setting the legal framework for the conduct of wage negotiations. The abiding importance of this measure was that it established the principle that neither employers nor unions could act freely in the labour market in disregard of the wider consequences of their actions. There was a 'national interest' in industrial peace which justified government intervention to suppress the class interests of capital or labour. Hamer gives an account of the particular version of classless politics promoted by the Liberal Government, elected with the establishment of full male suffrage and abolition of plural voting in 1890. Liberal philosophy was fundamentally anti-corporatist. Pursuit 28 of class interests was selfish and immoral (1988, p.41). The Liberals also adopted a practical but innately expansionist view of the state. The state was for the people to make use of as they pleased; it was an instrument for collective action, which should not be enlarged or constrained in accordance with any ideology (ibid., p.45). By contrast, the economic interventionism of successive Swedish governments was constrained by both capitalist and labour interests. Powers of economic management appropriated by New Zealand governments were denied to governments in Sweden. In Sweden a model of the mixed economy was developed in which the state undertook welfare functions which were neglected or inadequately performed by the private sector. The boundaries between welfare and enterprise were always negotiable, and the welfare functions of the state assumed vast proportions, but the private sector retained considerable autonomy. In the area of industrial relations, the state was kept at arms length by the unions as well as the employers, while private capital guarded its independence in investment decision-making. Third party interests were invoked in threats of legislative intervention in the labour market, but in the end corporatist self-regulation was to be the dominant feature of industrial relations. The contrast between the measures taken by the Liberals in the 1890s in New Zealand and the situation prevailing in the same period in Sweden is remarkable. The franchise was extended in 1909 and the electoral system reformed, but universal franchise was not introduced until 1919 (votes were extended to women in 1893 in New Zealand). Both labour and capital viewed initiatives of the state in the labour market with suspicion; neither class was confident of its ability to advance its interests 29 through legislation. The state in its turn sought to enhance the legitimacy of its activities by providing representation for the corporate partners in the administration of labour market institutions (Rothstein, 1991). It is tempting to emphasize the 'sequencing' of universal franchise and unionization in explaining the different political configurations of Sweden and New Zealand. In New Zealand, universal franchise preceded labour market organization, whereas Rothstein notes that in Sweden "the principle of corporative representation was established well before the principle of democratic representation" (1991, p.102). However, a more fundamental explanation may be found in considering the way in which the loci of political and economic power coincided or collided in the two countries. In New Zealand, farmers enjoyed both political and economic power, and farming interests advocated and promoted the role of the state in economic development. In Sweden, capitalists recognized the threat to their free exercise of economic power posed by democratization, and organized to defend their interests. The adoption of a corporatist mode of governance can be dated from the advent to power of the Social Democrats in the 1930s, at which point an accommodation between political and economic interests was negotiated. If the absence of restraint on the economic powers of the government can lead to protectionism, can it also be shown that corporatism leads to free trade? Mancur Olson has adapted the theory of interest group activity to fit with the outcomes found in corporatist Sweden. Olson suggests that Sweden is exceptional in that a high level of interest organization in the labour market has not led to the advance of sectional 30 interests through trade restrictions. This, he avers, is because Sweden's interest groups are highly "encompassing", and have therefore advocated policies which are in the best interests of society as a whole (ibid., p.90). In this book it is argued that the Swedish configuration can be seen as the result of self-interested lobbying by powerful employer and worker organizations. The main corporate partners lobbied against protection, not because it was socially suboptimal, but because it encroached on their freedom of action in the labour market or in making investment decisions. The union movement was sufficiently powerful to oppose the use of protection to reduce real wages and thereby increase employment. Capitalists for their part opposed the powers of state planning implicit in an active role for the government in managing trade. One implication of this argument is that the Swedish model is less in accordance with neoclassical prescriptions for optimal economic and social policies than Olson (and many others) have assumed. This is particularly apparent in the area of social policy. One key proposition of the neoclassical theory of trade is that free trade increases real income and consumer welfare. Any social disruption caused by exposure to international trade shocks can be countered with compensatory payments without anybody being made worse off. Superficially, Sweden might appear to have taken this efficient route. However, it is argued in chapter 8 that the expansion of the public sector in Sweden cannot really be explained by the concept of compensation. This is not surprising, as the idea of compensation is located in limbo between the analysis of a benevolent state (which could assess trade-related losses and make appropriate payments, but does not need to do so to achieve a social optimum) and an 31 interest group theory, in which 'compensation' payments would depend on political influence rather than the true extent of trade losses. Chapter 8 endeavours to provide some insight into the relationship between trade policies and other modes of income redistribution, particularly the social security system. It is argued that the role and structure of social security payments bears some relationship to the organization of interests in the labour market, but the relationship is not exactly what one would expect. A priori, one could argue that New Zealand's craft unions were not prepared to see protection substituted by compensatory social security payments, because restructuring of employment and changes in job definitions and demarcations posed the threat of membership loss. Large unions can be expected to be less concerned about employment restructuring, and a central union confederation should not be much concerned at all, and will be able to devote its attention to achieving the level of real wages and total employment which maximizes workers' (members') utility. This suggests that the confederation will favour free trade, but it does not necessitate the establishment of a system of compensation payments, unless such payments are required to suppress discontent among those members who lose from free trade. If suppression of discontent is the objective, then the design of social security payments need not be strictly compensatory. Instead, payments will be designed to enhance the cohesion of the organization. In the Swedish case, the demands of organizational cohesion have contributed to high levels of social security transfers which are not related to needs created by international trade shocks. 32 New Zealand's protectionism was costly to economic prosperity, resulting in low growth and inefficient industrial development. However Sweden shared some of the same problems, because of the difficulty of achieving sufficient private sector industrial investment without intervention. Public sector growth made up the shortfall in Sweden, as the government lacked other instruments for employment creation. It might be argued that public sector expansion is more efficient than protection. Certainly the costs are more transparent, and major distortions such as negative value-added should be avoided. However, it is really rather difficult to assess the two alternatives because the political pressures driving the choice of policies, and the social consequences of the policies, were so different. Public sector expansion was accompanied by a radical social transformation in Sweden, particularly in the organization of work done by women. The social effects of protectionism were conservative. The assessment of the two models therefore depends on social preferences. If a society attaches a high value to stability in employment and to the preservation of the social relationships created around that employment, then the protectionist outcome might be socially-preferred. III. Chapter Outline An introductory historical account of the industrial relations systems of Sweden and New Zealand is provided in chapter 2, which discusses the position of the competitive sector in the wage bargaining system, the degree of centralization in wage fixing, and the role and power of the state in industrial relations, vis-a-vis the unions and the employers. Chapter 3 looks for connections between craft unionism and 33 protectionism, and industrial unionism and free trade, by providing an account of the historical development of both union structure and trade policy in Sweden and New Zealand. In Sweden, restrictions on international trade were reduced at much the same time as the guilds were abolished. The key to the connection between freedom of international trade and deregulation of the labour market was that domestic industry could only be competitive if craft restrictions were removed. Free international trade combined with domestic regulation was a recipe for stagnation in the home industry. This was the formula adopted in New Zealand prior to the advent of protectionism, but the naturally-sheltered sector was large, because of the high barrier of transport costs. (A tariff of 20% was set in 1888, in order "to raise desperately needed revenue and not to promote protectionism" (Hamer, 1988, p.26). While the tariff must have enlarged the sheltered sector slightly, fully-fledged protectionism in New Zealand dates only from the introduction of exchange control in 1938.) Not only did craft organization become entrenched in the sheltered sector, but craft unions also dominated the union movement as a whole, because unions were unable to organize effectively in agriculture, which constituted virtually the entire competitive sector. The segmentation of agriculture from the rest of the labour market was a distinctive and vitally important feature of the configuration of interests generated by New Zealand's industrial relations structure. Chapters 4 and 5 provide an account of the development of trade policy immediately before and after WWII, when programmes to bring about and maintain full employment were implemented in both countries. Chapter 4 focusses on real 34 wages, aiming to answer the question of why trade policy would figure in a programme of real wage restraint. The conclusion, that protection probably did reduce real wages, carries with it the implication that protectionism would be opposed by a strong central union confederation armed with a strategy for maximising the real wage consistent with full employment. This implication is supported by the Swedish case, where LO strongly supported free trade. The effectiveness of LO's opposition to protection, in influencing policy, reflected the symbiotic relationship between LO and the Social Democratic Government. The Government recognized the importance to the achievement of wage restraint of promoting a strong central organization. It was therefore persuaded to avoid protection and to implement the active labour market policy, which helped to curtail sectionalism within the union movement. Chapter 5 examines the relationship between trade policy and demand management. In the Depression, Sweden enjoyed sufficient 'international space' to implement a demand expansion, partly because of the effective use of exchange rate policy. New Zealand's devaluation was not effective in easing monetary conditions, basically because of the colonial financial structure of the economy. The financial system was unable to generate a monetary expansion without the platform of a high level of reserves in London. Underlying this difference in monetary conditions was an historical difference in the structure of the capital account in the two countries. Sweden had become a capital exporter in the 1920s, while New Zealand was a capital importer, closely watched by its creditors in Britain. Conflict between the Labour Government and capitalist interests acquired strong overtones of nationalism, whereas the Swedish Social Democrats worked pragmatically to achieve cooperation from the 35 domestic capitalist class. Some of the ramifications of these differences in the relationship between the government and capital are drawn out in chapter 6. This chapter reviews the available evidence on how protection operated in New Zealand, both as a structural development policy and as a system of cyclical demand management. The chapter analyses the reasons why protectionism failed to reduce trade dependency (the import/GDP ratio) and describes the increasingly costly and ineffective search for devices to promote exports while retaining protection of domestic industry. While New Zealand governments could save existing jobs and, at some expense, create new jobs through trade policy, the success of Swedish employment policy rested on the promotion of private sector investment. Fundamental problems emerged in achieving sufficient investment in the competitive sector in the face of declining profitability. The composition of employment shifted towards the service sector, particularly the public sector, with adverse effects on productivity growth. Many commentators have alighted on excess wage pressure as the proximate cause of deteriorating economic performance in western economies in the 1970s. Chapter 7 discusses the operation of the wage bargaining systems of Sweden and New Zealand in the post-war years. It aims to identify the effects on wage determination of a corporatist, free trading configuration, on one hand, and a statist, protectionist configuration, on the other. It is argued that wage restraint may be more difficult in an open economy than in a sheltered economy, despite the constraint exerted on the competitive sector of an open economy by international market conditions. There would also seem to be more potential for conflict over wages in a 36 corporatist than a statist regime, insofar as the corporate partners have to maintain the consent, or at least the compliance, of their members. In Sweden, LO pursued an egalitarian or 'solidaristic' wage policy as a strategy to promote cohesion in the trade union movement. As the years went by and wage differentials shrank, the policy increasingly came into conflict with employer objectives, making centralized wage restraint less effective. The concept of solidarity also features in chapter 8, which discusses the connections between trade policy and welfare state development. Some correlation between economic openness and welfare state size might be expected, if the welfare state makes compensatory payments for losses caused by trade shocks. However in chapter 8 it is shown that this idea rests on a view of welfare state development which is too simplistic. It relies on the existence of some process whereby social security provision will arise to meet needs. It is obvious that this process is problematic, because some countries are more solidaristic than others, and some meet more needs than others. Furthermore, social security systems may make payments which are not strictly related to needs. While rejecting a simple view of a causal relationship between openness and welfare state size, chapter 8 shows that some connections between trade and social policies can be drawn. Indeed, since both sets of policies are the product of a single political configuration, it would be worrying if a consistent account of trade policy and welfare state development could not be advanced. This book advances an analysis of New Zealand's protectionism which is sympathetic in a limited way - at least, it does not suggest that the policy was entirely 37 misguided. Received accounts of trade policy have difficulty explaining why the transition to free trade should have such high and enduring social costs as can be observed in New Zealand (and in other countries engaged in economic liberalization programmes). This study attempts to find some explanations by drawing out the connections between international trade and labour market performance. The results illustrate just how extraordinary the Swedish model was, in its heyday, and how difficult it is to combine free international trade with full employment, social security and compression of the income distribution. Chapter 2 Labour Market Interest Groups in Sweden and New Zealand This chapter provides a description of the institutional structure of the labour market in Sweden and New Zealand. In the Introduction it was argued that the wagefixing system will influence the configuration of interests around protection, affecting the 'payoff' for workers in a protected industry and the perceived costs of protection for labour and capital in other industries. Both Sweden and New Zealand developed centralised wage-fixing systems, but the bases of those systems were very different. Centralisation in Sweden was the product of the accumulation of power by the peak organisations of employers and unions, with the possibility of government intervention in wage-fixing looming in the background and influencing the strategies of the parties in the labour market. Centralisation in New Zealand was not accompanied by the development of strong peak organisations. It was a product of 38 government intervention. The result was, paradoxically, a centralised system covering small unions and passive employers. In this chapter it is shown that, in both countries, the needs of the competitive sector of the economy exerted a dominant influence over the evolution of the industrial relations system. However, that dominance took very different forms in the two countries, because in New Zealand the competitive agricultural sector was usually a 'third party' in industrial disputes, whereas in Sweden the competitive sector employers and unions were able to wield considerable influence in their respective peak organisations, and thereby directly exercise power over the course of wage bargaining. In New Zealand the defence of agricultural interests led the government to intervene in industrial disputes to minimise work stoppages, particularly stoppages affecting the export trade. In Sweden, the government avoided intervention and, before WWII, the extent of industrial disruption was much greater. Government intervention in New Zealand entailed the imposition of arbitrated settlements, and the Arbitration Court assumed the mantle of central wage-fixing authority. Its determinations were not always to the satisfaction of agricultural interests, but it was highly sensitive to the farm lobby in minimising wage increases while avoiding industrial disruption. In Sweden the centralisation of power in the peak employer and union organisation (leading, after World War II, to the formal adoption of centralised bargaining) was intended to enable the competitive sector to defend its relative position in the labour market against the sheltered sector. The extent of inflationary 39 pressure from the sheltered sector depended on domestic demand conditions. The problem of sheltered sector pressure was basically a consequence of the implementation of full employment demand-management policies, but it is shown below that the case for centralisation was rehearsed in the 1920s when domestic demand conditions were much more buoyant than those faced by exporters. The Industrial Relations Framework in New Zealand In 1878 a Trade Union Act modelled on the British legislation of 1871, as amended in 1876, was passed by the New Zealand Parliament with little dissent. The Act of 1878 provided for the registration of unions and meant that combination was no longer illegal. However no positive right to negotiate over employment conditions was provided for. Some employers, especially those in agriculture and others engaged in exporting (such as the shipping industry), remained highly antagonistic to unionisation. Because of employer non-cooperation and the unions' lack of combative resources, many unionists came to favour statutory recognition of the right of workers to organise and to be heard by employers. This was provided by the Industrial Conciliation and Arbitration (IC&A) Act of 1894. This Act established procedures for registering unions and arranging negotiations between unions and employers to determine wages and working conditions in unionised trades. At the time it was passed, the Act was seen merely as providing machinery for the settlement of disputes between workers and employers. Conciliation was expected to resolve most conflicts; an Arbitration Court was established to rule in difficult disputes. 40 The IC&A Act achieved basic union objectives concerning the right to organise and to negotiate with employers. However it did so in a way which incorporated the politics of compromise rather than the rhetoric of class conflict. In the IC&A system unions were seen as juridical entities which would facilitate the settlement of orderly arrangements governing wages and employment practices. With the benefit of hindsight it is clear that the Act impeded the development of a strong trade union organisation and contributed to the proliferation of small craft unions. In the 1890s there was no question of unions rejecting the advantages offered by the IC&A Act. The main reason was that the more militant unions were in disarray following their defeat in the Maritime Strike of 1890. The Act was seen as strengthening the workers' cause by preventing employers making unilateral reductions in wages. Employers could not worsen terms of employment without obtaining the agreement of the union in conciliation. If conciliation failed, either party could request arbitration. This meant that the Arbitration Court could, in effect, secure minimum wages for unionised workers. However the IC&A Act also imposed strict boundaries on the activities of unions registered under its provisions. Either the employer or the union party to a dispute could request an arbitrated settlement (an 'award') from the Arbitration Court. It was unlawful for workers to strike or employers to lock out workers when an award or settlement was in force. This meant that employers could use the Act to prevent industrial disruption. It also meant that the government was automatically involved in many industrial disputes, because strikes when they occurred were usually unlawful. Unions could evade the Act's provisions by registering under the 41 1878 Trade Union Act rather than under the IC&A Act, but this loophole was closed after industrial unrest in 1911-13. The second major episode of industrial unrest in New Zealand's history, in 1951, found the government totally enmeshed in policing industrial relations. As early as the 1900s it was clear that the Arbitration Court was rapidly becoming the key wage-fixing institution in New Zealand. After a slow start (135 disputes were dealt with before 1902), more and more determinations were made by the Court - 375 between 1902 and 1907 (NZPD, 1908, Vol. 145, p.184). Occupations covered by 1911 ranged from bakers, boilermakers and bookbinders to tailors (and tailoresses, who had separate awards), timber-workers and watersiders. All the building trades were covered, as were most transport workers. The original Act had already been amended several times by 1911, but the mode of operation of the IC&A system was fairly much established. The Act was heavily used: the procedures of conciliation and arbitration could be invoked even if there was no 'actual or probable strife' in the industry - a 'dispute' turned out to be a formal state of affairs and easy to create. A workers' union with seven members had to be formed to initiate the process, but an employer could be brought under the jurisdiction of the Act even if he employed no union members at all. It was not necessary that the majority of workers in an industry be unionised for an award covering all workers to be made (Holt, 1986, pp.124-125). An amendment to the IC&A Act in 1900 provided that new employers starting up in operation were bound by any existing award for their industry and district, and 42 the Court had power to bind firms in other districts to an award where their products competed in the same market (ibid., pp.40-42). This subsequent parties provision or 'blanket clause' proved to be central to employer support of the IC&A system, as it regulated competition between employers. Amendments in 1906 and 1911 further extended blanket coverage. Provision was made for national awards where goods were 'interchangeable' (tradable) across district boundaries. Workers could only be represented in the IC&A system by a union, and in the view of the Arbitration Court, the role of the union was to represent workers within the system. One result of this reasoning was that the Court put limits on entry fees and subscription rates, and unions were thereby prevented from building up large reserves or fighting funds. They were also prevented from using their funds to assist other unions on strike, as such activity was ultra vires the IC&A Act (Stone, 1963, p.206; DOL AR, 1914, p.15). Unemployment benefits, travelling allowances, retirement grants and other payments to members were also ultra vires, and could not be provided for in the rules of a registered union, although some unions paid small benefits anyway (see, e.g., Printing Trades Union, 1962, p.19). While these features of IC&A registration constrained union organisation and activity, the ease with which a union could be registered and an award obtained allowed small craft organisations to thrive. The obtaining of an award not only made wages secure but also helped to maintain employment for the union's members, as the award specified the nature of the work it covered. Employers could thereby be prevented from reducing their wage costs by taking on cheaper types of labour. A new employer could not escape compliance with the award: the blanket coverage 43 provisions bound them if they were found to be undertaking the type of work envisaged by the award. The original IC&A Act gave no guidance to the Arbitration Court as to the principles on which wages were to be determined. The Liberal legislators appear to have believed that the problem of industrial unrest was the result of a deficient institutional framework for negotiation between workers and employers, rather than any more fundamental conflict. The Arbitration Court therefore invented wage norms as required in the disputes it was asked to adjudicate, seeking as much as possible to achieve a consensus with the employer and worker representatives. There was a natural tendency for the Court to seek to achieve consistency across its determinations by recognising and consolidating traditional relativities between occupational groups. This tendency was strengthened by the Court's resistance to setting different wages for different employers according to profitability. Because awards were structured along occupational rather than industrial lines, this also meant that the Court was not always sensitive to ability-to-pay in particular industries, although it was responsive to the development of the general level of income and the overall condition of the economy. As the coverage of the IC&A system increased, a degree of uniformity in wage-fixing across industries (but not agriculture) was achieved. After World War I this uniformity was supplemented by the granting of legal powers to make general wage orders, affecting all awards in force. This extension of power was a response to wartime inflation. During the war, the Arbitration Court responded to the cost of living increases by raising wages in the awards which came 44 before it, but it was impeded in making general cost of living adjustments by its inability to alter awards in force. Most awards ran for three years, and no adjustment could be made until expiry. This meant that by 1916 the structure of award wages was in disarray, many workers having received no increase since the start of the war. Unions began to seek remedies outside the IC&A Act. In 1918 the Government gave the Arbitration Court power to amend awards during their currency, and instructed the Court to take cost-of-living changes into account when making adjustments. However the disarray caused by different expiry dates during the war remained, and in 1919 the Court decided to cut through the whole problem of updating awards by setting basic wage rates for three categories of male workers (skilled, semi-skilled and unskilled). Cost-of-living adjustments were determined as money amounts from these basic wage rates. The effect of these measures was that by the 1920s a system of wage-fixing had evolved which achieved a high degree of cross-industry uniformity in wages. Despite the large number of unions registered under the IC&A Act and the correspondingly large number of awards, the system was effectively centralised via the pivotal role played by the Arbitration Court. 45 The Export Sector and the Arbitration Court The IC&A system was a legislative creation, and depended on the backing of successive governments of different political complexions for its continued existence. The IC&A Act was pushed through by a Liberal Government with Labour support, but in 1912 the Liberals lost power, and the system then functioned under a succession of governments strongly oriented to the country's rural heartland, until 1935 when Labour swept to power. In 1913 and in 1951 the government was (or felt) called on to defend the IC&A system against worker dissent, while in 1932 the government moved to reduce the security accorded to workers by curtailing the powers of the Arbitration Court. On all three occasions the government acted primarily in response to farming interests rather than employer interests. For reasons explained below, the Court was criticised by farmers at least as vehemently as employers for making awards which were generous to workers. At the same time, farmers were adversely affected by any industrial disruption, and their voice created great pressure for the government to intervene in industrial disputes. The conflict of interests between farmers and workers had its basis in two key structural characteristics of the New Zealand economy. Firstly, farming was dominated by small proprietors. The 1901 census recorded that just under half of the male agricultural workforce were employees, compared with 77.5% of males in the non-agricultural workforce. Small proprietorship was politically favoured as the 46 model for agricultural development, and was promoted by the government's land policies. Farm proprietors opposed IC&A coverage in agriculture, and were able to prevent it, with a few exceptions. The second structural feature of the New Zealand economy was that agriculture was the dominant export sector. Farmers were highly exposed to competitive world markets, as well as being adversely affected by any increase in costs or disruption to normal working in the 'export chain' of food processing and transport. In the early years of the IC&A system, farmers' critical scrutiny centred on their own labour force and the export chain. However by the 1920s a more general conflict between sheltered and unsheltered enterprise had emerged. The first major outbreak of worker discontent with the Arbitration Court occurred in 1911-1913. In the 1900s the Court adopted a very conservative stance. There is some suggestion that real wages actually fell (Holt, 1986, p.69). The decisions of the Arbitration Court created scope for some workers to improve their wages and conditions by free bargaining. In 1907 slaughtermen struck for an increase in the piece rate for killing sheep. They were fined for being in breach of the IC&A Act, but they were successful in getting an increased wage. The following year coalminers at Blackball struck for a longer lunch break: again they were successful, but they were also fined. A union registered under the Trade Union Act could strike without being in breach of the IC&A Act (strikes could also be legal under the latter Act, but only if an award was not in force over the matter in dispute). After 1909 an increasing number of unions cancelled their IC&A registrations, mobilised by the 'Red Feds' - a Federation 47 of Labour which originated with the miners' unions and subsequently organised other groups, particularly the unskilled (Olssen, 1988). Industrial disruption became more widespread. In January 1913 a series of strikes began at freezing works (abattoirs) throughout the country. The strikes were over by the middle of March, having caused some disruption to the killing season. Employers had taken on non-unionists in large numbers, many of them farmers. This was not the end of the trouble. In October 1913 waterside workers struck. Due to extensive picketing, initial attempts at strikebreaking failed. However employers then engineered the registration of a new union, aided by the Government, which also provided additional protection for strikebreakers by recruiting special police ('Specials'). The new union was formed almost entirely of farmers and farmers' sons. The special constables also included many farmers. As the Prime Minister and Minister of Labour, Massey, told Parliament: "We asked for special constables; we asked for special foot constables in the city; we asked for special mounted constables from the country - the response was magnificent." In his entire political career, Massey said, "there was nothing that touched me so deeply or appealed to me so forcibly as the response from farmers and their sons. When the history of this country comes to be written, special mention will be made of the year 1913 as the year in which the farmers and producers of the country came down and opened the ports; and were not satisfied even with that, but they loaded their own produce to be shipped away to the markets of 48 the world." (NZPD, 1913, Vol. 167, p.1134) To Massey, and to many others, there was no distinction to be made between the interests of the 'farmers and producers of the country' and the national interest. The use of the full force of the state against strikers was justified in defence of the national interest. In 1913 unionists found that this view was supported not only by farmers but also by the urban middle classes and many 'respectable' workers. The alignment of patriotism against unionism was further strengthened in the debate over conscription in WWI (Olssen, 1988). After the defeat of 1913, several of the key figures on the union side shifted strategy, taking the view that working class interests could only be advanced through political processes. Moderates and militants allied to form the Labour Party, and some leading unionists became members of the first Labour Government (1935-1949). However the alliance of the political and industrial left, based on the retention of the IC&A system, was always weak. The system gave parliamentary power clear priority over industrial organisation. As an Australian commentator has observed, trade unions under the IC&A system were early specimens of the quango, "serving public purposes from outside the boundaries of the state but entitled only to a 'quasi' autonomy in relation to the state and its instruments" (Rawson, 1983, p.162). While radical working class activists argued that unions should organise and bargain outside the system, the Labour Party generally favoured retention of the system with legislated amendments. While alliances between the two groups were sometimes achieved in the course of the twentieth century, the IC&A system frequently had the effect of polarising the political and industrial wings of the labour movement, as 49 political and industrial strategies were rendered contradictory rather than complementary. This was apparent in the buildup to the second major period of industrial unrest, in 1951. The Labour Government elected late in 1935 was fully committed to the principle of compulsory arbitration, and in the depressed conditions then prevailing, arbitration was also supported by most unions. Most members of the Labour Government had little sympathy for militant unionism, regarding it as opportunistic and lacking a strategy for long term growth and progress. Bassett comments that in the 1940s the Prime Minister, the Minister of Works and the Minister of Labour "were all veterans from the picket lines who believed that direct action was now an outmoded form of protest" (1972, p.22). Labour made some changes to the IC&A Act which were hostile to militancy. In 1939 an amendment to the IC&A Act provided that a union registered under the Act could be deregistered by the Minister of Labour if it initiated a strike in breach of the Act. A new union could then be registered - the technique used by the employers in the 1913 waterfront strike. In 1947 unions were required to hold a secret ballot before taking strike action. Provision was made in 1936 for the formation of a Federation of Labour (FOL). It was the Government's hope that such an organisation would exert a moderating influence over individual unions. The FOL was intended to support and supplement the Arbitration Court by ensuring compliance with awards and intervening when unrest occurred: a task which otherwise fell to the government. However the FOL had no power to curtail the activities of militant unions and the Labour Government was 50 not able to use the good offices of the FOL to remain at arms length from the industrial disputes which occurred with increasing frequency in 1948 and 1949. In 1949 the Government sought the FOL's intervention in a go-slow among carpenters, but the Carpenters' Union refused to hand the dispute over to the FOL. The union was deregistered by the Government. Subsequently militant unions formed their own central organisation, the TUC. For its part, Labour lost the 1949 election, and was replaced by the conservative National Government, which had much more of an appetite for confrontation with militant unions. In the late 1940s there was persistent industrial trouble on the watersides. Historically a haven for surplus labour, the Waterside Workers Union defended high manning levels and labour-intensive work practices. In the postwar environment of wage pressure and labour shortage, management attempted to impose new work practices, but was met with union and wildcat obstruction. The weakening of the Waterside Workers Union was seen by port authorities as a pre-requisite to the raising of productivity, the introduction of new technology, and the reinstatement of managerial power. For its part, the union was the dominant member of the TUC and a key opponent of compulsory arbitration and advocate of free collective bargaining. Both Labour and National Governments were opposed to the introduction of collective bargaining on the watersides. Compulsory arbitration was in force elsewhere in the labour market. In order to maintain arbitration on the watersides, special authorities were established in place of the Arbitration Court. Despite the Government's preference for arbitration, the union did succeed in 51 obtaining a settlement by bargaining with the employers in 1950. However in 1951 the employers drew back from bargaining, under pressure from the newly-elected National Government. The union began a campaign of industrial disruption; the employers responded with penalties, and, after several days in which it was unclear whether a strike or a lockout was in progress, a State of Emergency was declared by the Government. Troops were called in to man the wharves. As in 1913, the full force of the state came down on the strikers. Draconian regulations under the State of Emergency prevented assistance to the strikers. Leading figures in the unions involved were accused of communism. The Waterside Workers Union was deregistered and new unions registered at each port. With a heavy hand, the Government eliminated the core of opposition to compulsory arbitration, and the militant TUC faded into oblivion. The outcome was a high level of compliance with the IC&A Act for nearly two decades. Sheltered and Unsheltered Enterprise The 1913 and 1951 episodes suggest that the IC&A system was backed by the full power of the state because of the importance of third party interests, in the form of the farmers. In these conflicts, the farmers were allied with other respectable elements in society, including the more settled groups of craft unionists, organised in Trades Councils. The IC&A system structured a division between craft unionists and workers in the 'export chain', whose employment was often casualised and who did not enjoy craft protection of their skills. However, in the 1920s, farmers' representatives became increasingly critical of 52 the IC&A system. There were several reasons for this shift in position. The Arbitration Court showed more concern for the interests of lower-paid workers than before the War, perhaps out of a desire to avoid another episode of industrial unrest. The Court's new powers to determine basic wages tended to improve the incomes of casual workers. Furthermore, real wages fell sharply during WWI, and the Court worked towards gradually restoring real wages to their 1914 level, despite generally more adverse terms of trade. The farmers, for their part, suffered the effects of declines in export prices in 1919-21 and again in the latter half of the 1920s. The criticisms of the IC&A system advanced by farmers' organisations identified a general conflict between sheltered and unsheltered enterprise that was broader in scope than the conflict between farm proprietors and workers in the 'export chain'. It was argued that the system regulated competition between employers, enabling firms to pass wage increases on into prices. According to one observer: "Employers are compelled by the arbitration laws to form unions, and they employ these organisations to restrict competition among themselves."(Clark, 1907, pp. 235-23 Other commentators drew attention to the displacement of conciliation, which produced agreements binding only on the parties, by arbitration, which resulted in an award binding on all participants in the industry. By the 1920s, farmers were claiming that employers conceded wage increases too readily because of the protection provided by 'blanket coverage'. In effect, the IC&A system had created an alliance of interests between workers and employers to the detriment of farmers, whose real incomes were eroded by inflated domestic costs. In 1928 a National Industrial Conference was held to discuss the poor 53 performance of the economy, particularly the difficulties facing agriculture. Farming organisations and economists diagnosing the cause of agricultural recession argued that the IC&A system worked to the detriment of the competitive agricultural sector. Professor Murphy claimed: "It is quite possible for parties coming before the Court, or before the Conciliation Council, to make arrangements which will be equitable and compulsory as between the immediate disputants, but which will not be in the public interests. No employer would have any serious motive in resisting an alteration upwards in the wage level, if he were satisfied that he could pass it on." (National Industrial Conference, 1928, p.8) One difficulty with this analysis was that farm incomes were the main determinant of domestic aggregate demand, in the absence of active demand management by the government. Murphy's analysis implied that depressed aggregate demand was not preventing employers passing wage increases on into prices, while unemployment was failing to moderate wage demands. This proposition was too strongly framed, although real wages did rise in the 1920s after falling during the war. Table 2.1 suggests that the real problem for farmers was the steep fall in export prices. In the period 1925-1930, the cuts in wages and domestic prices that would have given a significant boost to real export incomes did not occur. Furthermore, given the fall in the terms of trade, real wages would have to have fallen if farmers' real incomes were to be protected by domestic adjustment. 54 Table 2.1 Wages, Prices and the Terms of Trade (1914= 100) Weekly Retail Import Export Terms of Real Export Prices/ Wages Prices Prices Prices Trade Wages Retail Prices 1920 146 178 238 164 69 82 92 1925 156 162 153 170 111 97 105 1930 163 156 124 113 91 105 72 1935 138 133 111 97 87 103 73 Source: NZOY. Weekly wages: Award wages for adult males; Retail prices: All groups, four main centres. In the face of a collapse in export prices in 1931, the Conservative Coalition Government moved to reduce money wages. Wages were cut by General Wage Order by 10% in 1931 and again in 1932. In 1932 the powers of the Arbitration Court were severely curtailed. The Industrial Conciliation and Arbitration Amendment Act of 1932 was intended to bring about reductions in wages and to induce more competitive relationships between local firms. The most important provision was labelled 'compulsory conciliation and voluntary arbitration': 55 "[The Act] stated that if a dispute was not settled [in conciliation] it could only be referred to the Court if a majority of representatives on both sides agreed. The practical result of this amendment was that the employers were for the first time in forty years able to dictate the wage payable without interference from the Court." (Williams, 1976, p.58) The amendment gave expression to the complaints of farmers against the IC&A system. The response of employers was muted. Established employers feared new entrants more willing to cut wages than themselves. By 1934 many industries were not covered by awards or industrial agreements. Allegations of 'sweating' were made, and some employers' associations became, according to Woods, "concerned about the behaviour of some of their less scrupulous members. By the end of 1934 many reputable employers were anxious to see a restoration of binding awards and industrial agreements covering the whole industrial field" (1963, p.129). Unionists' reservations about the IC&A system were also forgotten. When Labour came to power in 1935, it almost immediately restored compulsory arbitration, with the full support, at the time, of the union movement. The farmers' transition from staunch support of the IC&A system in 1913, to criticism in the Depression, to support in 1951, was clearly correlated with cyclical economic conditions. When export prices were high, the economy boomed, workers' bargaining position strengthened and farmers supported the efforts of the Arbitration Court to restrain wages. When export prices were low, workers' bargaining position weakened and union reliance on IC&A protection increased, while farmers railed 56 against the income security enjoyed by those fortunate enough to remain employed. Unionisation and Industrial Relations in Sweden The industrialisation of Sweden can be dated from about 1870, but it was not until after 1910 that the proportion of the labour force engaged in agriculture fell below 50% (Appendix, Table 10.1). The changing composition of the economicallyactive population was reflected in the advance of union organisation. By comparison with New Zealand, the government took little part in shaping the development of unions. No legislation was forthcoming to secure the right of unions to organise and to be heard by employers; these rights were won by the unions through an attenuated process of negotiation with employers. The culmination of this process was the Basic Agreement between the central organisations of unions (LO) and employers (SAF), reached in 1938. This agreement set out the principles and processes governing the conduct of disputes. Coming as it did after a decade of debate over legislation to regulate industrial relations, the Basic Agreement represented an important step in the formulation of a corporatist political economy in Sweden. Before the signing of the Basic Agreement, large employers took a strategic approach to the advance of unionisation, investing considerable funds in fighting industrial disputes with lockouts in order to achieve clearly-defined objectives. Employers sought the defeat of the small craft unions, and it is shown below that they thereby played a significant role in shaping the structure of unionisation in Sweden 57 along industrial lines. In the 1920s export sector wages declined relative to wages in industries supplying the domestic market. The largest union, Metall, whose workers were concentrated in the export sector, produced an analysis arguing that the workers in home market industries should not exploit their superior bargaining power to the detriment of those in the export sector. Metall advocated a greater role for LO in the conduct of industrial disputes. This pressure from (some of) the membership for increased centralisation in the trade union movement was supported by the Social Democratic Party, and by the strategies of employers. Employer Organisations, Unions and the State In the nineteenth century employers several times attacked incipient union organisation by locking out workers and threatening to evict those in company-owned housing. Eviction was a powerful weapon partly because of the law on vagrancy which rendered homeless workers subject to sanctions for 'defencelessness'. However after 1885 the vagrancy law was weakened so that a striking worker was not automatically defenceless. The easing of social controls (itself a product of economic change and development) contributed to doubts as to whether the state would always interpret its task of maintaining order in a manner favourable to the employers. There was an ever-increasing risk, signalled for instance by the establishment of a mediation service in 1906, that the state would intervene in a disorderly dispute and bring about a settlement that was not to the employer's advantage. After the turn of the century, industrial employers combined into organisations 58 which set about establishing a new relationship with the unions. The policy of the main employer organisation was to recognise the unions and to seek to negotiate the upholding of managerial rights and prerogatives by inserting appropriate provisions in collective agreements. The employers' decision to protect their position by entering binding collective agreements can be explained by the changing relationship between employers and the state; in particular, by the threat posed by the extension of the franchise. The importance of the franchise threat in bringing about the formation of employer organisations is clear from the response to the 1902 'political general strike'. The strike, in protest against the restricted parliamentary franchise, was organised by the trade union confederation LO, which had been formed just four years previously. According to the trade union press, about 120,000 workers out of an industrial and commercial workforce of some 550,000 struck for two days in response to LO's call (Casparsson, 1966, p.66). While employers in some industries in the larger towns had attempted to organise a united front to union demands before the turn of the century, the 1902 strike precipitated a more sustained organisational drive. The purpose was to protect the rights and powers of employers in the face of political change. The close connections between LO and the Social Democratic Party were of particular concern to employers, who wished to avoid the use of industrial disruption as a platform for political demands (Johnston, 1962, p.70). At a meeting in Stockholm in 1902, some forty employers formed Svenska Arbetsgivareföreningen (the Swedish Employers' Confederation, SAF). At much the 59 same time, the Gothenburg engineering employers' association, Verkstadsföreningen, was expanded into a national organisation, SVF. In 1903 building employers formed another group, CAF. (SVF affiliated to SAF in 1917, while CAF was dissolved and its membership included in SAF in 1919.) In the first years of its existence SAF grew rapidly through the formation and affiliation of employer groups organised along industry lines. The rules of SAF provided for the exercise of considerable centralised control over the conduct of disputes (Johnston, 1962, pp.75-78). In 1905 central scrutiny of collective agreements by the board of SAF was introduced, and Article 23 of SAF's rules provided that all collective agreements should include a managerial prerogatives clause, setting out the right of the employer to 'freely hire and fire' labour, to 'command and direct' labour, and to utilise either union of non-union labour. In 1906 SAF sought and concluded an agreement with LO which upheld Article 23. In particular, union attempts to achieve any sort of preference in employment or closed shop were rejected. In return the employers' prerogatives were qualified by the provision that the right of association should be left inviolate on both sides, and that workers could call for an investigation where they were of the opinion that the employer's power of dismissal had been used to victimise unionists (Schmidt, 1962, pp.26-27; Johnston, 1962, p.206). As it turned out, the December Compromise did not herald an era of cooperation and industrial peace. The exercise of employer prerogatives persistently came into conflict with union attempts to organise and negotiate. In various ways the employers sought to minimise the influence of the unions on the shopfloor and limit 60 the scope of negotiation over working practices and wages. The main effect of the establishment of employer associations was to increase the scale of industrial disputes and the extent of the disruption they caused. The employer organisations made extensive use of a strategy of escalation, via lockouts, in order to combat small strikes. LO did not have the financial and organisational power of its employer counterparts, and when it was pressured into calling a General Strike in 1909, the outcome was a victory for the employers. LO's only hope for a positive outcome from the 1909 General Strike was that the extent of the disruption would cause the Government to intervene as mediator and bring the employers to the negotiating table. However a Liberal motion to this effect was defeated in the Riksdag (Kristensson et al., 1980, pp.131-133). After nearly five weeks, workers began to return to work. No formal end to the dispute was ever concluded between LO and SAF. Instead the employers were able to impose termination of a union's LO affiliation as a precondition for a return to work. The outcome of the strike was a sharp reduction in the membership of LO and its member unions. The central organisations did not conclude any further agreements until 1938 (Schiller, 1975, pp.208-214). While the employers gained the upper hand in 1909, the end of World War I saw a marked shift in the political climate. With revolution in Russia and civil war in Finland, universal franchise was finally conceded and plural voting was abolished. In 1919 the Social Democrats formed a government in coalition with the Liberals, and one labour measure of considerable importance was introduced: the Law on the Limitation 61 of Working Hours. The impact of the law was substantial: working hours were reduced by almost 20% in most engineering shops, from 57 hours to 48 hours a week. After WWI unionisation advanced in great strides, density almost doubling between 1920 and 1940 (Fulcher, 1991, p. 144). In the 1920s, the scale of industrial disputes reached unprecedented levels, partly because of pressures stemming from the reduction in working hours. Workers demanded higher wage rates to compensate for lost time while employers implemented measures to raise productivity by reducing down-time and exercising tighter control over work practices. This struggle was conducted in a generally depressed economic environment, particularly for exporting firms. The high level of industrial unrest generated a number of attempts to introduce legislation to regulate labour relations. However no political party succeeded in obtaining the necessary majorities in the Riksdag to push legislation through. In 1926 the Social Democrats appointed a peace delegation to formulate measures to regulate industrial disputes, only for the Government to fall a few months later. In 1928 the Liberals did succeed in extending the government mediation service and establishing a Labour Court, but the functions of the latter body were confined to the enforcement of collective agreements (Schmidt, 1962, p.31). There was no limitation on the use of industrial action during the negotiation of new agreements. When the Social Democrats took power in coalition with the Agrarians in 1932, there was considerable parliamentary pressure to introduce labour legislation. The high level of labour unrest affected the economic interests of neutral third parties and sometimes interfered with the provision of essential public services. In the face of this 62 pressure for legislation, SAF and LO engaged in negotiation, and eventually concluded the Basic Agreement of 1938. The Basic Agreement contained provisions for the protection of third party interests and rules on the conduct of negotiations and disputes. This agreement met the demands of the parties in the Riksdag, and further proposals for legislative intervention in the conduct of disputes were not made. Industrial Unionism, Centralisation, and the Role of the Export Sector The formation of employer associations enabled the Swedish employers to pursue several clearly-defined objectives in their negotiations with the unions. The acknowledgement of employer prerogatives, as expressed in article 23 of the rules of SAF, was one objective. Another was to bargain on an industrial basis, in order to prevent individual firms being subjected to isolated industrial action ('whipsawing'), to minimise the number of separate negotiations that had to be gone through, and to ensure that groups of skilled workers could neither undertake costly industrial action nor impede changes in the organisation of production (Johnston, 1962, pp.68ff). In order to minimise the disruptive potential of the unions, the employers' organisations sought to ensure that all the unions in an industry were encompassed in the appropriate national collective agreement. For instance in 1908 the engineering industry employers made it a condition of renewal of the industry collective agreement that all unions in the industry become parties to it. When three unions declined to join, the employers responded with the by then familiar threat of an industry-wide lockout. LO refused to support the dissenting unions and the 63 employers achieved their objective (Norgren, 1941, pp.51-52). For the employers, escalation through lockouts ensured that the union could not disrupt production cheaply by bringing out on strike only small groups of skilled workers - those workers who occupied a central place in the production process and could not easily be replaced. Escalation had the effect of making the unions 'mass' organisations rather than clubs of elite craft workers. For instance when in 1905 Metall called a strike in support of its wage campaign, SVF responded with a lockout. The lockout considerably enlarged the dispute, a total of 101 workplaces employing 17,500 being affected. Of the workers locked out, 7,650 were members of Metall (Svensson, 1983, p.116). The employers' use of the lockout weapon therefore affected many more workers than Metall would have been able to bring out on strike - an example of how the employers' collective measures validated (or necessitated) collective action by workers. Successful use of the lockout weapon required substantial financial resources. Firms belonging to SAF were liable to give each other financial assistance in disputes through mutual insurance arrangements. The formulation of SAF's bargaining strategy was highly centralised under the General Council and Executive Board. Larger firms had greater influence on determining the membership of these organs, as voting power was proportional to size (Johnston, 1962, pp.72-75). Both the financial obligations of membership and the structure of representation tended to mean that SAF came to be dominated by larger firms (Norgren, 1941, p.37). At LO congresses from 1912 to 1941, unionists repeatedly discussed the 64 appropriate degree of centralisation in the organisation of the trade union movement. In 1912 the main issue was how the employers' strategy of escalation, which had led to the 1909 defeat, could best be combatted. A minority led by the Timber Workers' Union argued that individual unions should fight their own industrial battles and maintain their own defence funds. This would remove a pretext used by employers to escalate disputes. However the majority view was that the development of a strong central organisation was essential given the tactics of the employers' central organisations (Ullenhag, 1971, pp.20-25). A secondary theme supported the majority view that a financially strong central organisation should be developed. This was the concept that the trade union movement should act solidaristically to pursue socialist objectives. Primary among these objectives was to give support to the lowest-paid workers. The development of unions along industrial lines (which was also necessitated by employer strategies) was one step in this direction; centralisation was a further step. A further development of the theme of solidarity occurred at the 1922 Congress. The Stockholm division of Metall (the metal-workers' union) produced an analysis showing that workers in competitive industries had taken a much larger wage cut in the 1921 crisis than workers in sheltered industries. Even before the depression, sheltered sector workers had been better paid, and between 1920 and 1922 the premium enjoyed in the sheltered sector had widened substantially. 65 Table 2.2 Wages in Sheltered and Competitive Industries Adult Males, Annual Wages in kronor 1920 1921 Competitive Sheltered Av Wage Av Wage 3485 3060 Competitive as % of Sheltered 3752 93 3728 82 1922 2237 2951 76 1925 2395 2987 80 1930 2635 3255 81 1935 2613 2924 89 Source: Lönestatistik årsbok, 1929 and 1939. Metall observed that whereas in the 1900s it was the wage differential between skilled and unskilled workers that was most noticeable, the economic conditions after World War I had seen a new source of inequality emerge. International competitive conditions weighed more heavily on some workers than others, and certain groups 66 were able to raise their relative wages because of their insulation from international competition. As in New Zealand, the emergence of this issue, prior to the adoption of full employment policies by the government, occurred because of a sequence of events which affected the sheltered and competitive sectors differently. Between 1915 and 1920 the Riksbank allowed an extremely large monetary expansion (Jonung and Wadensjö, 1979, p.67). The exchange rate was allowed to depreciate, but in 1921 the Riksbank reversed its monetary policy, largely in order to engineer a return to the gold standard (pre-war parity with the US dollar was achieved in 1922, though the gold standard was not formally reintroduced until 1924). This squeeze on the export sector coincided with the reduction in working hours, and export sector unions therefore faced particular difficulties in obtaining compensation for reduced working time in the form of higher hourly wages and piece rates. The decline of 1920-22 in the relative wages of competitive workers did not herald an ongoing deterioration in their position. Instead their relative wages fluctuated, but they did not return to pre-1920 levels until after Sweden left the gold standard in 1932. Export sector wages were much more volatile than the wages of sheltered workers or, for that matter, the wages of workers in the import-competing sector. Between 1920 and 1929, a breakdown of the competitive sector into export industries and import-competing industries is available (Lönestatistik årsbok, 1930, p.95). Over the period, average wages in the two sectors were similar, but the export sector wages showed a wider variation. The special difficulties of the export sector were due to large fluctuations in key export prices. 67 At the 1926 LO Congress, the relationship between sheltered and unsheltered sector wages was again a central issue, and the debate was heated. The General and Factory Workers Union weighed in in support of Metall, and directed an attack specifically at the food industry and building workers. Their wage increases led to increased prices, lowering the living standards of other workers, the union claimed. Previous discussions of solidarity had concentrated on the allocation of defence funds in industrial disputes and the possibility that LO could become an 'attack' organisation, providing support in strikes as well as lockouts. In 1926 the Factory Workers Union raised the further possibility that LO could actively restrain the wage claims of some member unions. It was suggested that the LO secretariat should undertake an investigation into the wage relativity between food industry and building workers and other comparable workers, and that the former workers should refrain from increasing their wage differential over other workers (Ullenhag, 1971, pp.28-29). The response from the Food Industry Workers Union was, to say the least, unfavourable. The union gave notice that this 'grave attempt to introduce dictatorship' would lead to a split in the trade union movement (ibid.). The building unions also resisted increased central control. Not only was central control not in the interests of those groups of workers who were achieving relative gains, but also it should be noted that the culprit unions were themselves less controlled by their leaderships than Metall. In the building industry, pay agreements required membership referenda (Swenson, 1989, pp.44-45). Increased centralisation of the union movement as a whole would also require increased leadership control in individual unions. 68 The establishment of central control in the union movement was advanced by political developments in the late 1920s and 1930s. The labour legislation of 1928 had the effect of increasing leadership control in the union movement, because the collective agreements entered into by union leaders became legally binding on members. When the Social Democrats came to power in 1932 the political pressure on LO to achieve increased control over the conduct of industrial disputes increased. Some leading Social Democrats favoured legislation to regulate industrial disputes, partly because of the adverse effects on the party's recovery programme of the building workers' strike of 1933-34. However the party was unable to formulate proposals which would both attract sufficient bourgeois support in the Riksdag and avoid conflict with LO. Fulcher concludes that "[l]egislation was in the end blocked because the class cohesion of the labour movement proved stronger than the crossparty consensus on the need for some form of legal regulation" (1991, pp.152-3). The counterpart to inaction in the Riksdag was a high level of pressure from the Social Democrats on LO to engage in greater management of member unions' activities. However even this political situation need not have led to a corporatist outcome without the addition of a change in the strategy of the employers. The employer organisations, detecting a permanent change in the political climate, showed a new willingness to negotiate with LO in order that the rules and institutions of the labour market could be arranged without intervention from the state (Korpi, 1978, p.86). This willingness seems to have been less because it was feared that legislation might be directly adverse to employer interests than because of a general fear that any enlargement in the role of the state would lead to endemic socialism and intervention 69 in all spheres of economic activity. As SAF's director explained: "... one ought not believe that either of the sides could in the long run enjoy the protection of the state and support of its interests while at the same time preserving its freedom in other spheres." (Quoted in Swenson, 1989, p.47) LO was therefore pressed towards an agreement both by the Government and by SAF. The Basic Agreement, concluded in December 1938, laid down procedures for the dismissal, layoff and re-employment of workers. A negotiation procedure for the conduct of disputes was prescribed. In circumstances where negotiation failed and a strike or lockout occurred, provision was made for the maintenance of essential services and the protection of neutral third parties. The importance of the Basic Agreement depended on the authority exerted by the signatories in the labour market. Organisational strength was necessary for corporate compromise. This was more of an issue for LO than SAF, although Fulcher notes that LO pressed SAF to extend its coverage of industry (1991, p.144). For LO, the formal extension of the necessary powers over member unions occurred in 1941, when Congress approved rules governing the provision of strike support. For such support to be obtained from LO, the '3% rule' had to be met. No union could resort to a strike affecting more than 3% of its members without LO permission; if the strike involved fewer workers, but was likely to lead to a lockout affecting more than 3%, permission was also required, as it was also if a significant number of members of other unions were going to be affected. LO could refuse permission if the strike would cause 70 inconvenience to other affiliated unions, to the trade union movement as a whole, or to other social interests. If a strike was nonetheless allowed to go ahead, LO could participate in negotiations, present proposals for agreement, and withdraw its support if the proposals were rejected by the member union (Johnston, 1962, pp.42-3, p.263). The member unions themselves in turn increased their powers vis-a-vis the rank and file membership. LO's member unions adopted a standard set of rules which gave each union's executive power to push through settlements in the face of opposition from groups of workers (ibid., p.34). While the formal centralisation of LO postdated the Basic Agreement, Fulcher argues that the rules were "largely a systemization of existing practice" (1991, p.143). This practice dated from the early 1930s, when the government and the employers had propelled the LO leadership into a major role in controlling industrial unrest in the Depression. Conclusion This chapter has contrasted the legislated framework of industrial relations in New Zealand with the system which evolved through negotiation and conflict between employers and unions in Sweden. In both countries, exporters played a major role in shaping the industrial relations system, but in New Zealand this occurred through government intervention in industrial relations, while in Sweden the export sector was effectively represented in the central organisations of unions and employers. In New Zealand the IC&A system encouraged the proliferation of small craft 71 unions. The attitude of the farmers to the system was deeply ambivalent. On one hand, craft unionism was favoured because it curtailed militancy; on the other hand, it could inflate domestic costs. In the next chapter, this ambivalence is explored further, and some reasons are suggested why a more competitive labour market did not develop. It is difficult to see New Zealand's craft unions bearing the mantle of vigorous promotion of sectional interests which Olson's theory of Antipodean protectionism placed upon them. The willingness of the government to intervene in 'the national interest' - meaning in practice the interests of exporters - is a more striking feature of New Zealand's industrial relations history. It can be noted that the establishment of stable wage relativities by the Arbitration Court restricted the incentives for unions to lobby for protection. The reward to lobbying for protection could not take the form of a rise in the industry relative wage. The impact of protection was therefore confined to employment effects (protection could raise the level of employment, or prevent employment from falling). A further difficulty is that unions were formed on an occupational or craft basis, whereas the payoff to trade protection will tend to accrue to an industry. This chapter has discussed how Sweden's encompassing labour market organisations came into existence. Three factors seem to have played important roles: the relationship between the unions and the government, the strategies of employers, and the influence of the export sector unions within the trade union confederation. The relationship between the unions and the government was quite different to that found in New Zealand, because the unions had an organisational autonomy which 72 was lacking under the IC&A system. Not only were the unions not dependent on the government for the basis of their existence; they also enjoyed a legitimacy vis-a-vis the government which had its historical roots in the union role in the attainment of universal franchise, and which continued to be important because of the ability of the unions to mobilise class-based political allegiances. This meant that the Social Democrats in Sweden took much more notice of union views than Labour in New Zealand. Employer strategies were also completely at variance with those found in New Zealand. Industrial employers in Sweden enjoyed some of the status of the farmers in New Zealand, through their control over crucial economic activities. However, because they were not a numerically important group, they could not be sure of a politically sympathetic government once the franchise was extended. It therefore became important for the employers to be strategically organised to defend their interests vis-a-vis the government. The structure and organisation of the export sector played a large part in the development of a corporatist political economy in Sweden and a 'statist' configuration in New Zealand. The way in which Metall pressed for centralisation in the trade union movement suggests that encompassingness was a product of the competitive orientation of Swedish industry. This reverses the direction of causality implied by Olson's argument that encompassingness resulted in effective opposition to sectional protectionist measures. It would seem instead that free trade might generate encompassing organisation, or, more probably, that the connections between industrial unionism and free trade are not susceptible to a linear causal analysis. The 73 next chapter investigates these connections further by tracing the origins of industrial free trade in Sweden and its effects on the labour market structure. 74 Chapter 3 Industrial Relations and the Pattern of Trade This chapter analyses the connections between craft unionism and protectionism, and between industrial unionism and free trade, from the perspective of employers' competitive strategies and industrial relations practices. It is shown that the award system in New Zealand was, from the earliest years of its establishment, used to regulate competition between firms on the product market by preventing undercutting on labour costs. This regulation allowed the craft union structure to survive by limiting pressure from employers for changes in working practices. Obviously the award system did not cover employers abroad, and therefore could not be effective in sectors exposed to international competition. However the size of the nontradables sector and the extent of shelter provided by transport costs and the tariff were sufficient to mean that the system became established over a significant section of the labour market. It is assumed in this chapter that exposure to international competition imposes intolerable strains on a craft union structure, because of the competitive pressure imposed by technological advances and changes in working practices emanating from abroad. This does not mean that craft unionism entails trade protection; craft unionism may simply be confined to the naturally-sheltered sectors of the labour market. In these sectors, the competitive threat comes from the unemployed. It can be fended off either by restricting entry into the trade or craft (e.g. through barriers to 75 skill acquisition) or by setting minimum wages. The IC&A system operated by the latter process, although preference to unionists, craft distinctions and ratio clauses were deployed in ordering the allocation of the available jobs. The regulation of the labour market in the face of unemployment can be expected to result in the 'crowding' of workers into unregulated sectors, leading to a disparity in wages between regulated and unregulated sectors. In New Zealand the unregulated sector was agriculture. fortunes of agricultural exports. Unemployment was cyclical, following the The wage relativity between the sheltered and competitive sectors was, as a consequence, also cyclical. Incomes in competitive agriculture were highly variable. The small proprietor mode of organisation was seen as a way of managing this instability, and attempts were made to extend the security of land ownership throughout the competitive labour force. Furthermore, land settlement was the main policy used to combat unemployment. The effect of the land policy was to obscure the development of relative wages (or relative returns to labour) between the sheltered and competitive sectors; in other words, the effect was to segment the labour market between agriculture and the rest of the economy. In Sweden, craftsmen did not maintain control of important sectors of the economy as industrialisation proceeded. By contrast with many other countries, "the Swedish labour movement... has not had to overcome entrenched craft unionism" (Korpi, 1978, pp.74-75). The weakness of the crafts was a product of government economic policies which had been shaped, in the years prior to universal franchise, by the interests of propertied agriculturalists and large industrialists. Policies to free both internal and international trade were adopted at their instigation. 76 The result of this deregulation was that competitive conditions were established throughout the labour market. With a few exceptions, sectors not exposed to international competition were nonetheless competitive because of the lack of entry restrictions. The industrial relations practices of the sectors exposed to international competition set the tone of union and employer strategies throughout the labour market. Industry collective agreements were not used to prevent undercutting: wages were set below going rates in order to maximise employers' flexibility. Unions were forced to establish an active shopfloor presence in order to defend effectively the interests of their members. Craft demarcations were unsustainable in the face of technological advances; instead, the unions sought to win a share of productivity increases in increased wages for their members. One implication of this analysis is that a key difference between Sweden and New Zealand lay in the organisation of the competitive sector around wage labour in Sweden and small proprietorship in New Zealand. Overlaying this difference in economic structure was the difference in the political configuration arising from the early advent of the franchise in New Zealand. This contributed to the establishment of an industrial relations system which met the demands of small firms and their employees for defence against a competitive threat which lay within (in unemployment). Political and economic power was concentrated in fewer hands in Sweden, and large firms, oriented towards international competition, were able to establish their own industrial relations agenda. The Political Economy of Early Trade and Labour Policies in Sweden 77 At the end of the Napoleonic Wars, the Swedish economy was highly protected, both by import tariffs and by prohibitions on the export of certain raw materials and semi-finished goods, in order to reserve their processing for domestic industry (Montgomery, 1947, p.155). The system existed largely to protect the guilds; regulation of internal and international competition went hand in hand. Supporters of protection argued that "it would not be reasonable to open doors to foreign competition so long as free competition between domestic producers was not allowed" (ibid., p.162). The outcome of free trade and domestic regulation would be a contraction of the Swedish industry, as domestic regulation would prevent the industry becoming competitive. Once restrictions on enterprises within Sweden were removed and a more competitive domestic environment created, the way was open to the reductions in international trade barriers that occurred in the 1850s and 1860s. The abolition of the guilds was primarily a victory for agricultural interests. In the early nineteenth century, agriculture was the leading export sector, primarily because of the growth of the British market. Agriculture also occupied a dominant place in the Riksdag, where two of the four estates (the nobility and the peasantry or yeomanry) had their base in agriculture. The land-owning classes sought policies which would minimise the cost of labour to agriculture and promote the availability of cheap consumer goods (other than food). They pressed for the lifting of guild restrictions in order to increase the supply of male labour to agriculture and reduce the cost of products made in the towns. With population growth and advances in productivity, the labour supply question became less important by the middle of the century, but other factors kept up 78 the momentum towards free trade. The advance of factory organisation in England had yielded a new source of supply of cheap consumer goods, while at the same time the growth occurring in commercial agriculture opened up new markets for these products (see, e.g., Schön, 1979, on the textile industry). The interests of agriculture found intellectual support in the theories of the Physiocrats, who argued that agriculture should be stimulated by freeing trade and easing the burden of taxes upon the peasantry. Urban manufacturing, instead of being protected by trade restrictions, should be made more efficient and should base its growth on the provision of cheap goods to a thriving agricultural population (Qvist, 1960). These views were endorsed by the College of Commerce, the section of the civil service responsible for trade and taxation policy. There was also an interest on the part of taxpayers in the opening-up of employment opportunities to women. There was a considerable amount of urban pauperism in the mid-nineteenth century and most paupers were women (ibid., p.270). Certain occupations were open to women subject to a means test - in other words, as a kind of poor relief. In 1864 freedom of occupational choice was extended to women, despite reservations that this could lead to a shortage of servants (ibid, pp.295-296). According to Qvist, the major cause of women's advance was that they made the cheapest workforce. The College of Commerce praised the woman silkweavers for "the smaller working wage with which these people could be satisfied" (quoted ibid, p.330). At the same time it emphasised women's need for means of support and agriculture's need for workmen. Despite the clamour for freer trade, apparent in the Riksdag virtually from its 79 rehabilitation under a new constitution in 1809, King Karl XIV Johan resisted pressure for the abolition of the guilds. It was not until 1846, when Oscar I came to the throne, that the measures proposed by the Riksdag were partially implemented. The King's hesitation was well-founded; in 1848 small craftsmen concerned for their livelihoods joined radicals calling for universal suffrage in rioting in Stockholm (Oakley, 1966, p.194). As the comparison with New Zealand will shortly show, it is important that the agricultural interest in free trade was combined and allied with other interests in the deregulation of the labour market. In New Zealand, the agricultural interest in free trade was also present, but it was not accompanied by the promotion of competitive industrial relations. The importance of other competitive interests in Sweden grew as economic growth proceeded; by the end of the nineteenth century Swedish agriculture was no longer competitive, and it sought and obtained trade protection. New Zealand The Swedish case suggests that the competitive sector (agriculture, at the time in question) will seek free trade and the removal of restrictions in the labour market. This poses a puzzle as to why farmers in New Zealand did not resist the establishment of the IC&A system and other protective labour legislation introduced in the 1890s. One answer is that farmers were exempt from much of the legislation affecting hours and working conditions, which applied to shops and factories. They saw the labour legislation as addressing urban problems and therefore of limited importance to farming interests. The Minister of Labour, W.P. Reeves, found his programme of 80 legislation obstructed by farming indifference rather than outright hostility (Hamer, 1988, pp. 144-6). Later, when the IC&A system was established, farmers succeeded in limiting its direct impact on agricultural employment. While there was no legal obstacle to farm worker unionisation, the isolation of workers, their aspirations to become proprietors, and the presence of large numbers of family and seasonal workers were impediments to organisation (Martin, 1990). Shearers unionised and obtained an award in 1902, but this did not open the floodgates to organisation of labourers engaged by a single farmer (shearers worked in gangs and moved from farm to farm). In 1903 a Farm Labourers Union was formed in Canterbury and in 1906-7 it filed a dispute with the Arbitration Court, naming 7,221 Canterbury farmers as parties (Holt, 1986, p.77). After a prolonged hearing the Arbitration Court declined to make an award, citing the different employment conditions prevailing in agriculture. One expedient adopted by the Court was to decline to make an award when workers could be expected to have significant domestic resources, thereby limiting its coverage to those who were entirely dependent on wage labour. Rejecting another application from farm-hands for an award in the 1920s, the Court argued that the criteria for wage-setting in farming should be different to those employed elsewhere because of different household arrangements. Mr Justice Frazer argued that single farm workers generally received board and lodging from their employer, while married hands were supplied with a house at low rent, and usually received farm produce free or cheaply. Both groups benefitted from continuous and stable employment (BA, 1922, Vol 23, pp.341-342). This refusal to give IC&A protection to farm workers because of their domestic resources is discussed further below. 81 A second explanation of farmers' lack of opposition to protective labour legislation is that it may have been thought that the legislation would curtail the growth of urban activity and restrict the availability of industrial employment, thereby improving the supply of labour to agriculture. This prediction rested on the continuation of free international trade. Free trade and domestic restrictions would push labour out of industry. This would have the desirable effect of alleviating the great shortage of female domestic labour in particular. Farmers and the middle classes were united in their desire to see the employment of women in factories curtailed. However not all women were potential domestic servants. The imposition of general restrictions on women's work implied that those with children must be supported by their husbands. This could be accomplished if men were allowed privileged access to the restricted number of urban jobs. The acceptance in New Zealand of labour market 'structuring' and regulation of women's work makes an interesting contrast with the situation in Sweden, where the same groups favoured reducing restrictions on women's work. In their concern to obtain scarce labour on better terms, opponents of women's industrial employment in New Zealand attached little importance to the effect of restrictions on the prices of domestically-produced goods. Nor did they perhaps realise that such restrictions promoted the common interest of employers and employed workers in the regulation of competition emanating from unemployment. This common interest was freely expressed in submissions to a Royal Commission appointed in 1890 to inquire into "certain relations between employers of certain kinds of labour and the persons employed therein". The Sweating Commission, as it became known, gathered 82 evidence on the effect on the urban labour market of the unemployment of the 1880s. Both union representatives and employers testifying to the Commission saw the problem of securing wages primarily in terms of controlling the entry of new firms into the trade or industry, rather than as a problem of the balance of power between workers and the management of existing firms. Competition from imports was rarely mentioned; the pressure on wages and prices came from the unemployed. For example Matthew Baxter of the Christchurch Tailors' Union described the background to the formation of the union in these terms: "Prior to last June the trade was so bad with respect to the low wages paid to workers that the operatives decided, in order to protect themselves, to form a union. This state of things was greatly brought about in town by "sweaters" that is, small "bosses". The Kaiapoi factory employed a large number of hands, and were forced to come down to compete with these outside parties; and so they introduced very low prices for the work they were doing." (Sweating Commission, 1890 (Baxter), p.50) Restrictions against undercutting by new entrants were in the interests not only of the workers, but also of the existing firms, particularly where the entrants were smaller and employed a less organised workforce. One clothing trades employer claimed: "When the prices were coming down below what I thought a girl could make a fair wage on, I proposed to the girls that they should start a union. "I am pleased with the Union so long as it does not go too far, and cause the goods to be imported." (Ibid. (R Laidlaw), p.30) 83 Few employers mentioned the prospects for exports; few urban employers were engaged in the export trade. Arguably, the labour legislation of the 1890s ensured that competitive urban industries did not develop. A third explanation of the farmers' position is that the disadvantages of craft unionism were outweighed by the effectiveness of the IC&A system in maintaining industrial peace. The parliamentary debate on the IC&A Act focussed on the peaceful settlement of disputes, with the expectation that conciliation would usually succeed, although arbitration was available as a last resort. It was not predicted that 'blanket coverage' would become established, enabling employers to use the IC&A system to regulate competition between themselves. Across the Tasman, free-trading New South Wales had a Trade Disputes and Conciliation Act (1892) where the emphasis was on the settlement of disputes. In contrast, employers and unions had established a voluntary system of industry boards to regulate wages and conditions in protectionist Victoria (Macintyre, 1983, p.105). New Zealanders may have believed that they were getting the former type of system. As the New Zealand system developed in a more 'Victorian' direction in the 1900s, attempts were made through legislation to revive the conciliation (disputes settlement) process vis-a-vis arbitration, which was taking on a more regulatory function. However, by this stage, the common interest of employers and workers in regulation meant that they were able to circumvent these attempts. By 1911 some of the competition-restricting features of AC operation were beginning to be apparent, but farmers' interests in industrial peace overrode other reservations about the system. As the industrial unrest in 1911-13 showed, many workers organised in craft unions were willing to accept the constraints of arbitration 84 in return for the regulation of competition in the labour market. This divided them from the more militant industrial unionists, assisting the defeat of the latter, who posed a more direct threat to farming interests. The employer-worker alliance did not extend out of the small units engaged in home market production into sectors such as mining, shipping or agricultural produce processing (the export chain). However these competitive sectors were unable to set the agenda of industrial relations as they did in Sweden. One explanation is that this was because universal franchise came too early in New Zealand for competitive employers to have become established and organised. There was a connection between the early extension of the franchise and the land policy, insofar as land ownership was a widely-held aspiration, and a political majority could be assembled out of those who wanted land and those who would benefit from more intensive settlement, such as traders in small farming towns. (Sections of the urban middle class also appear to have believed that land settlement was a good idea for other people (Hamer, 1990, p.171).) The franchise and the land policy may in their turn have contributed to a lack of militancy and weakness of class identification among waged workers. The labour legislation preceded the development of industry, and thereby ensured that a competitive industrial sector would not readily develop. This contrasts with the effectiveness of Swedish employers in formulating and implementing an industrial relations strategy before the advent of universal franchise. It could be argued that the superior competitiveness of agriculture would have prevented a competitive industrial sector developing, regardless of the system of industrial relations that was adopted. The issue that this presents is why sheltered 85 trades and industries then set the pattern of industrial relations rather than agriculture. Despite the importance of the small proprietor model in agriculture, the sector also employed wage labour, both on farms and in the export chain. Land was the key to the segmentation of the agricultural labour force from the rest of the labour market. Farmers survived their exposure to unstable international conditions by their management of their land, which, in theory, could always provide subsistence at the very minimum. From 1890 to 1935 successive governments attempted to extend land ownership to provide security for competitive sector workers. The theory, or hope, was that if competitive sector workers had land, they would have the basic security of the needs of life necessary to survive their exposure to international shocks. Workers in the export chain would have less land than the farmers, and would cultivate it for subsistence rather than for profit. Money income needs would be met by entering the market for casual, seasonal workers. This structure would secure the pool of labour which agriculture required. This vision was pursued by the subdivision of land and the provision of finance. In 1906 the Liberal Government passed the Advances to Workers Act, which made available mortgages to workers to buy small sections of land and build houses on them. While the sections did not provide a living, the produce of the land reduced the household's requirement for a money income. The Government also attempted to create a smallholder class which engaged in part-time waged work, but it could not always find leasees for smallholdings it created in the course of its land redistribution policy. A detailed study of one subdivision undertaken in 1905-1908 has found that there were few applicants for the smallholdings compared with the runs and farms 86 (Hall, 1985, p 50). Despite these setbacks, the policy was continued in various guises. As late as 1930, the hope that smallholdings could accommodate the irregular or seasonal nature of work on the waterfronts or in the freezing works was expressed in a report on unemployment: "If these seasonal, casual workers could be provided with homes at a moderate cost on the outskirts of our cities, having sufficient land attached thereto for a garden, it would reduce their cost of living and provide profitable home-work during periods of enforced idleness. The amount of produce that can be taken from any half-acre of land efficiently worked is astonishing." (Unemployment Committee, 193O, p.18) The programme of land settlement for those engaged in the competitive sector had some clear implications for the AC. The Court recognised the undesirability of providing a fixed wage to workers who were closely connected with farming. In the 1920s the AC formulated an award for the shearers which linked piece rates to the (world) price of wool. This approach was in marked contrast to that adopted in other sectors, where the Court sought to achieve stability in wages. However the AC failed to apply the same caution in making awards to those who worked in the export chain but lived in the towns. In 1922 waterside workers succeeded in obtaining a 25% premium over the general labourers' hourly wage on the grounds that waterside work was exceptionally casual and irregular, and higher hourly rates were therefore required to obtain an adequate weekly income. Evidently the Court had failed to observe that the watersiders were meant to spend their hours without work cultivating their suburban plots of land. 87 More generally, one can interpret the criticism of the AC voiced by farmers in the 1920s as a product of the extension of full wage-earner protection into parts of the export chain. The flurry of legislation on wage-setting at the end of WWI had left the AC with the instruction from Parliament that wages should be sufficient to maintain a 'fair standard of living'. The Court's application of this principle to casual urban workers incidentally revealed that the policy of providing land for subsistence had not made a significant impact of the living conditions of the working class, although it had contributed to the creation of a distinctive sprawling suburban geography. By the 1930s it was also apparent that farmers themselves required some security of income. A retreat into subsistence entailed a massive drop in living standards compared with the conditions enjoyed when produce prices were high. Furthermore, many farmers were heavily indebted, so a loss of cash flow led to repossession and abandonment of land. The solution adopted by the first Labour Government was to extend the role of the marketing authorities for farm produce (some of which had been established in the 1920s) to include the administration of farm income stabilisation schemes. This was one step in the evolution of a policy of managing international shocks through protection and planning. Labour also finally abandoned the promotion of land settlement as a policy against unemployment. In the Depression, the Coalition Government tried to place the unemployed on small rural allotments. For example the 'ten acres and a cow' scheme saw the Government acquiring sections of land and building cottages in an attempt to relocate the unemployed to the countryside. These attempts to create a selfsufficient peasantry were a dismal failure. 88 To summarise, New Zealand's 'sheltered' model of industrial relations can be related to the distinctive organisation of the competitive sector. The wage-working class in agriculture was too weakly organised to set the agenda of industrial relations, and the government's policy was to promote a 'class-free' mode of organisation based on widespread land ownership. By the time the limitations of this model became apparent, the pattern of industrial relations in the sheltered sector was wellentrenched. The craft union structure had also proved useful in contributing to the defeat of industrial unionism, which was a particular threat in the export chain. A Note on the Swedish Franchise Both the early advent of the franchise and the land distribution policy pursued in New Zealand had their roots in the conditions of colonisation. Other countries of the New World also moved to universal franchise before Europe, and promoted schemes for land settlement. New Zealand is distinctive only in the vigour with which these policies were pursued and in the relatively favourable conditions for intensive settlement (although by no means favourable enough to ensure the success of the policies). The labour legislation of the 1890s coincided with a flurry of activity in land settlement, aided by the introduction of refrigerated sea transport, which allowed intensive meat farming to expand. Sweden would seem for its part to be typical of the Old World. The propertied classes maintained their grip on political power, and such land redistribution as occurred reduced the access of the poor to common land. Enclosure was a response to the new commercial opportunities in agriculture; the use of the land to provide 89 subsistence declined. The purpose of this section is to draw out the implications of this pattern of property rights and political power for the development of the union movement in Sweden. Kyle (1983) has argued that the lines of the franchise debate illustrate that by the 1890s a new political economy of class had evolved out of the old political economy of the household. In the first half of the nineteenth century, Liberal politicians in Sweden had adhered to the view that the political organisation of society could be viewed as a heirarchy in which individuals were organised into households and heads of households elected the representatives of government. Heads of households were subject to the authority of the state while members of households were, in turn, subject to the authority of the head. To give members of households the vote would disturb the structure of power relations within the household. Not only women but also male servants should not be entitled to vote, according to this reasoning. When the Riksdag was reformed in 1866, the Peasant Estate was replaced by a Second Chamber directly elected by men meeting a property or income requirement. While few waged workers could vote or were elected (in 1905 there were still only ten workers out of a membership of 190 (Verney, 1957, p.90)), the reform opened the way to enfranchisement of working men, provided they earned a sufficiently high income. This was closely connected with the establishment of a new status, of wage worker instead of servant. The trade unions played a central role in the establishment of this new status. Service played a large role in the preindustrial social order in Sweden. 90 Montgomery explains that "insofar as there was a system to it all", it was that society was divided into two classes, the independent peasantry or "husbonderna", and the servant underclass (1947, pp 50-51). Those without sufficient property to make their their own living were expected to work under the familial or patriarchal authority of the landowners. The service system functioned both as an employment relationship and as a system of social order. In the early nineteenth century, concern about both the shortage of servants and the increase in vagrancy, begging and crimes against property led to legislative action to pressure those without 'legal defence' (property or proof of employment) into taking up annual contracts of service. The 1833 revision to the Statute of Labourers provided that a person could be committed to the workhouse for failure to show legal defence even if no other offence (such as wandering about in an unauthorised manner) had been committed. The 1833 law was, Montgomery comments, "a full employment system, with forced service behind it" (1947, p 60). The service system was undermined by an expansion in the number of people living outside service but lacking sufficient property for their own support. This new underclass included not only smallholders but also lodgers: Helgesson quotes reports from the 1820s which found that men without property were registering themselves a resident at the house of one peasant, but without taking up a contract for service and board there, instead working for daily wages at the house of another peasant (1978, p 15). 'Free' labour contracts (waged work) did not perform the dual function of the service system: provision of labour and social security. Conservatives argued that service contracts, under which the employer was obliged to provide sustenance while exercising total control over the servant's life, were an indispensible element of a stable 91 society, and if every man could become a householder "the most disquieting disorder" would result (Helgesson, 1978, p.16). Despite the advantages of service as a poor relief system, there were considerable pressures for the law on defencelessness to be relaxed. Both larger agriculturalists and industrial employers advocated a freer labour market in which they could respond more readily to market forces. In the iron industry, which had existed for centuries, the lifting of trade restrictions precipitated the transition of the ironworks from stable community-based operations into capitalist firms. A feature of the transition was the termination of the custom of paying wages in kind, and the elimination (or 'rationalisation') of subsidiary agricultural activities undertaken by the works (L.Andersson, 1983, p.22; I.Andersson, 1960, p.296). The employment relationship became less paternalistic, opening up the conditions for union organisation of workers. For instance in the late 1870s the sawmill industry was hit by a sharp fall in the world price of timber, and sawmill owners responded with across-the-board wage-cutting. In the county of Sundsvall, where the industry was concentrated, some 5000 workers stopped work. The strike was not coordinated by a union, and the workers' demands were hardly militant. As Gårdlund puts it, employers were criticised not for their patriarchal standing in the sawmill communities but for their failure to properly discharge the obligations of their position (1942, p.409). In the emerging labour market conditions, the trade unions had a clear agenda: to defend the relative freedom of wage labour against service, while obtaining improved security in industrial employment. The unions abetted the removal of 92 patriarchal elements from the labour relationship, for example by campaigning for the replacement of benefits in kind with increased cash wages. Success in obtaining higher money wages gradually increased the proportion of wage-earners who were eligible to vote. Political mobilisation went further. Socialist campaigners within and outside the unions organised 'People's Parliaments' in 1893 and 1896. concessions. In 1902, a two day General Strike was called to demand franchise Working class organisation in the industrial sphere provided the foundation for representation in the political arena. In New Zealand the sequence was the opposite: political representation resulted in the legislation which laid the basis for union organisation. In New Zealand there was no Poor Law and no service system. The quest for security was not accompanied by a struggle against social controls or lack of civil status. Furthermore, many believed that security would be found in land ownership - the model of the selfsufficient household was promoted in New Zealand as it declined in Sweden. One striking consequence of the limited role of working class organisation in obtaining the franchise in New Zealand was the very early adoption of women's suffrage. Women got the vote in 1893 after a debate in which women's domestic role was given approbation as a key element in the process of colonial settlement and the establishment of a stable society (Dalziel, 1977). In Sweden, by contrast, the early working class campaigns excluded women for reasons of expediency - Kyle suggests that it was felt that to demand votes for women would cause the whole campaign to fail. As working class organisation improved, votes for women eventually came onto the agenda. It would seem that in Sweden the dominance of class politics delayed the 93 advent of the franchise for women, whereas in New Zealand the weakness of class politics and the importance of the household in the country's political economy led to the very early enfranchisement of women. A final twist to the story is that women were largely excluded from the process of unionisation in New Zealand. Such organisation as there was was sex-segregated: women joined women-only unions. This reflected craft divisions in the workplace. There was also a feeling, expressed for example to the Sweating Commission, that unionisation could not defend women's interests in the same way as men's, and that women required the 'benefit' of protective legislation instead. This also reflected craft organisation: the basic craft strategy of regulation of competition was much harder to apply to women's work, where entry was more difficult to control. In Sweden, women's unionisation rate was lower than men's, but unions accepted women as members, and in the 1960s Swedish unions actively sought to extend their female memberships. In New Zealand the union movement was not wellprepared to recruit the increasing number of women entering the labour market. In 1968 121 out of 362 registered unions were male-only. More than 400 of the 737 awards and agreements studied in a Labour Department survey in 1970 did not envisage the employment of women (LEG 1969, Vol. 19, No. 3, p.11; 1970, Vol. 20, No. 2, p.9). This structure was the product of detailed rules covering training and the demarcation of work. Competitive Sector Industrial Relations in Sweden Whereas in New Zealand the system of industrial relations was designed for 94 the sheltered sector, in Sweden the competitive sector dominated. This had several consequences. Employers did not attempt to use coordinated wage bargaining to regulate their product market competition. Innovative firms sought to achieve flexibility in working practices by defeating craft unionism and maintaining managerial prerogatives. The unions for their part were forced to concede flexibility, but did so only in return for wage increases. By the 1940s productivity bargaining had become sufficiently well established to be peaceful, reflecting a compromise whereby employers could make changes in the workplace, but worker co-operation had to be obtained, so that in practice managerial prerogatives were significantly curtailed. In New Zealand small firms participated in awards which regulated the intensity of competition on the domestic market by restricting scope for undercutting on labour costs. In Sweden the role of large firms was much greater, both on the home market and in the export sector. The regulation of wages would not have been effective for these firms in controlling competition, because competitors lay outside national borders. Furthermore, other methods of curtailing product market competition were available which did not require concessions to workers. Competition on the domestic market was curtailed by classical methods such as the formation of monopolies and cartels. Among exporters, the advantages of domestic concentration in the face of international competition were recognised and exploited. Johansson cites a resolution passed by the Swedish Technological Association in 1908, which stated that Swedish industrialists should seek to specialise their operations, so as to avoid detrimental domestic competition, while maintaining a sufficient scale of production that they 95 could meet external competition (1977, p.99). The concentrated industrial structure was ideally suited to the establishment of employer organisations that would operate effectively in the labour market. Large employers could exploit an element of monopsony by agreeing on negotiating tactics; in particular, by co-operating in the escalation of disputes through lockouts. Ingham has argued that: "The low level of competition within and between the sectors provides the basis for employer solidarity vis-a-vis the unions; that is employers are free to conclude agreements without jeopardising their economic position in relation to competitors." (1974, p.42) While seeking to bargain on an industrial basis, the employers' organisations did not attempt to achieve detailed control over the wages paid by their members. Instead they sought to conclude national agreements which maximised the flexibility available to member firms. In particular basic time rates of pay in collective agreements were kept below wages actually paid, which included productivity-related payments and other bonuses. By keeping basic wages low, employers not only restrained unit labour costs, but also retained the flexibility to offer superior rewards and an advantageous incentive structure to skilled workers. By minimising basic wage rates, employers sought to make the wage set in collective agreements of only marginal importance to the workers, thereby weakening the workers' ties to the unions. The unions were not strong enough to defeat this strategy in industry-level 96 negotiations leading to collective agreements. It was therefore necessary for the unions to achieve participation in the determination of bonuses and the operation of productivity-related payment schemes if they were not to be marginalised. Unions sought to participate in day-to-day piece rate negotiations and to conduct appeals on rate determinations on behalf of workers. On a national level, the union objective was to set out in the collective agreement the general principles upon which productivityrelated payments were to be determined. In many industries, agreement on these questions was not achieved until the 1930s and 1940s. In the engineering industry, the unions had a great struggle to achieve participation in the setting of piece rates. In the industry collective agreement of 1905, a minimum wage was conceded by the employers, who also accepted the workers' right to organise (Svensson, 1983, p.117). However the agreement did not prevent employers changing piece rates unilaterally. For instance, immediately after the 1905 dispute Lindholmen shipyard introduced a new premium piecework system which the union's investigator described as 'capriciously' organised and in breach of previous practices (ibid., p.133). Pressured by the poor economic conditions in 1907-09, employers sought to minimise the influence of the union and counter its victory in the collective agreement by exerting their ability to alter productivity payments when the organisation of work changed. In the first national textile collective agreement of 1914, a log of piece rates was set out but there were also 'rationalisation provisions' for the revision of rates. These provided that if changes were made in machines, work routines or working material, the price could be adjusted. This adjustment was, initially, carried out unilaterally by 97 the management. Workers were protected by an earnings guarantee: it was provided that with unchanged skill and labour input, a worker should be able to maintain his or her earnings in the face of a reduction in piece rates (De Geer, 1982, p.158). In the clothing trades, the standardisation of work had engendered a long tradition of working to a fixed scale of rates. Until 1926 the clothing industry collective agreement set out a fixed schedule of rates in a manner very similar to that of New Zealand awards (part of the log for 1920-21 is reproduced in Norgren, 1941, p.134). However in the 1920s the industry joined the general drive to rationalisation, under competitive pressure from imports. The outcome was a change to a system where payments could more easily be renegotiated. Agreement was obtained to the use of time-and-motion studies in determining piece rates. Dahmén comments: "Assembly-line 'tempo work', with a far more detailed division of labour than before, was introduced after the American pattern. Its adoption was made possible by important changes in the rate-setting rules agreed to in the collective bargaining of 1926." (1970, p.152) The employers sought to maintain piecework with great determination, because it provided them with a device for varying rates of pay that was at least partly independent of union influence. However the setting of rates was fraught with difficulties; its operation was a domain of 'ongoing guerilla war' between workers and management (Johansson, 1977, p.104). While the union was marginalised in piece rate 98 negotiations, those individual workers who exercised some control over the organisation of production were in a powerful position. Svensson observes that in the shipbuilding industry: "Each little piecework negotiation was an atomised wage bargain, where the lack of union strength could be compensated for by the knowledge of the workers" (1983, p.168). Ultimately it was to prove necessary, and beneficial to the employers, to gain the co-operation of the unions in determining piece rates. Successful negotiation over piecework required a positive-sum setting. If labour productivity was increased by a new process, labour costs per unit could be cut and workers' incomes could still rise. The ideas of scientific management or Taylorism were important in bringing about accelerated productivity growth in Sweden. The techniques of scientific management, in particular time-and-motion studies, provided an 'objective' basis for measuring work performance and determining piece rates. As early as the first decade of this century, the doctrine of scientific management was being publicised in Sweden through reports and commentaries by members of Sweden's managerial elite on production methods and work practices in America, then becoming the dominant industrial nation. Information from the USA indicated clear potential for productivity advances in Swedish industry, and management seized on this information as providing a solution to the problem of maintaining competitiveness in the face of increased militancy and improved organisation within the workforce. Johansson cites a report in Teknisk tidskrift in 1904 which emphasised that American workers had the possibility through intensive work to earn "a tremendously high wage", particularly if they were technically skilled. Piece rates were set so that a worker could earn a 50% premium on the time rate "if he put in 99 his very best" (Johansson, 1977, p.98). This coincidence of competitiveness and high wages was also observed upon in a report on emigration from the same period (ibid.; Jonsson, 1981, p.4). In the 1930s and 1940s many unions came round to the view that time-andmotion studies could be utilised on the workers' side; they were not just a means for employers to discover potential economies in production, but could also constitute a basis for piece rate determination. In the textile industry, the introduction of time-andmotion studies had initially been opposed by workers, and contributed to a strike in 1931, but by the mid-1940s "both parties made known their approval of time-andmotion studies as a tool for creating an objective basis for piece wage agreements" (De Geer, 1982, p.250). It was not until 1948 that agreement was finally reached in the engineering industry between Metall and SVF on the conduct of time studies to determine piece rates, and on the participation of local unions in the negotiations (Liljeström and Dahlström, 1981, p.95). Svensson argues that the eventual agreement on piecework was a manifestation of the 'historic compromise' between capital and labour. The term was coined by Korpi to describe the policy of co-operation around measures to improve the efficiency of production, symbolised in the Basic Agreement in 1938 (1978, p.83). The compromise entailed the acceptance by LO and its member unions of the disturbance to work patterns and loss of jobs and status sometimes caused by rationalisation, while on the employer side formal mechanisms whereby workers shared the fruits of productivity growth were conceded. The employers who led the way to the historic compromise were those whose 100 enterprises permitted the making of positive sum bargains with the workforce. Hugo Hammer of the shipbuilders Götaverkan and his counterpart Uno Forsberg at the ballbearing makers SKF argued that higher wages could be traded for improved productivity. In the Depression, when most of SVF (the engineering employers' confederation) considered a wage cut to be necessary, Hammer and Forsberg argued that employers should seek to reduce piecework rates in such a way that workers could maintain their real wage level by increasing the pace of work. Productivity gains could provide the essential leeway for turning a situation of conflict into one of compromise. At SKF, time studies to determine piecework rates had been introduced in the 1920s. Forsberg proposed that SKF should negotiate with Metall on the use of time studies throughout the engineering industry. The idea was far too advanced for most of his peers, as it entailed the recognition of the union's right to bargain over the piece prices. Nonetheless, Svensson concludes, the line taken by Forsberg and Hammer foreshadowed an acceptance among employers that the future course lay in cooperation and agreement, a view that the Social Democrats' advent to political power eventually forced employers to adopt (Svensson, 1983, pp.198-199). Sheltered Sector Industrial Relations in New Zealand The use of the IC&A system to regulate competition did not meet with the approval of all employers. Those who were most competitive saw the IC&A Act impeding their ability to make inroads into new markets. Holt comments that in some cases disputes were technically between unions and employers were actually quarrels 101 between different factions of employers (1986, p.45). For example, in the 1900s there was an ongoing struggle between both worker and employer representatives of the Wellington, Christchurch and Dunedin clothing trades against competition from Auckland. Piece rates in Auckland were lower than in other centres; the Auckland employers claimed that this was because they used more efficient techniques. For the Court to make Auckland adhere to the same piece rates would, one manager asserted, be in effect saying "you shall produce your goods in such and such a method" which was not the role of the Court (Labour Bills Committee, 1900, p.3). However defence of skills and traditional work methods was part of the issue: the representatives of the Southern towns argued that the Auckland work was 'ill-finished' and not done with the same exercise of skill. To prevent the deterioration of their trade, they sought to suppress the expansion of low-quality production (ibid., pp.15-16). In this objective, workers with skills acquired through apprenticeship gained the support of firms using traditional techniques and old equipment. Established firms appear to have enjoyed a stronger political position than budding entrepreneurs, to judge by the amendments made to the IC&A Act in the first decades of the century. In 1906 it was provided that, where goods were 'interchangeable', awards on wages and working conditions could have national coverage. A more general power to make national awards was introduced in 1911. It is difficult to know how much flexibility employers exercised in paying wages above the award minima. It was asserted by some that the minimum wage was the maximum, and that the absence of a productivity-based payment (an 'exertion wage') led to low effort and restriction of output ('ca'canny') (NZPD, 1908, Vol. 145, 102 p.209). However the Department of Labour's surveys of 'ruling rates' (wages actually paid) reveal that some workers obtained a premium over the award wage. The data from surveys of ruling rates were not presented in a systematic form, but they indicate that when a single wage was specified in the award, employers generally paid a range of wages starting at the minimum (DOL AR, 1926-1929). In 1927 it appeared that the minimum was not being widely paid, but in 1928 and 1929 the Department in its commentary claimed that wages were tending to move back towards award levels (award wages rose sharply in 1928). The AC did allow scope for a margin between award rates and ruling rates through its sensitivity to the position of less-profitable firms. In a decision in 1901 the judge declined to take one employer's high profits into account when making an award, because other less-profitable firms were equally affected by the award (Holt, 1986, p.68). The Court argued that profits could not be taken into account without fixing different wages for different employers. Perhaps the most important feature of the payment of above-award wages was that most unions did not establish a role in negotiating firm-by-firm additions to award wages. Instead, the premia remained under the control of employers (and, presumably, those individual workers who sought to negotiate). Only mining and parts of the export sector (the freezing works and watersides) featured an active union presence in day-to-day industrial relations. This lack of organisational presence was not remedied by the introduction of compulsory unionism in 1936, nor by the subsequent use of preference clauses enabling unions to ensure that all workers covered by an award joined the union. The 103 'free-rider' argument for compulsion (that non-members share in the gains negotiated by the union) was widely accepted, but it implied limited commitment to the wider union cause. Compulsory unionism allowed unions to retain their memberships without obtaining their loyalty. The conjunction of full employment and centralised wage restraint after WWII would seem to provide ideal conditions for workplace organisation and local bargaining to flourish. In some sectors this did indeed happen. The unions had a strong shopfloor presence in the meat freezing industry, and in the period 1964-73, the industry accounted for 43% of the working days lost in New Zealand due to industrial action (Turkington, 1976, p.22). Delegates from each 'shed' were elected annually and were seen as very responsive to workers' views (ibid, p.127). A notable feature of this workplace organisation was the lack of hierarchical authority of union officials over shopfloor delegates. In the freezing works, union officials were not always able to get workers to abide by agreements they had reached. In the construction industry, a delegate system became established on large sites which was partly in conflict with the official representation provided by unions. In Turkington's survey some managers claimed that paid union officials could not face up to delegates, and some unions confirmed that contact between delegates and officials was limited (ibid, pp.204-205). In effect, union activity under the IC&A system was separated from shopfloor representation. This tendency to 'parallel unionism' could also be observed in other industrial relations systems based on craft organisation, such as Britain's, but was perhaps particularly strong in New Zealand because of the heavy reliance of official union organisation on its legislated privileges. 104 The effect of regulation of competition in New Zealand was obviously to secure workers against undercutting by the unemployed. However it also had the effect of making incumbent firms more secure, especially as expansion-minded entrepreneurs using more efficient techniques, and potentially able to use less skilled labour, could be stymied by the application of award provisions to manning levels and the organisation of work. Employers' preferences for or against the IC&A system therefore rested on the balance between innovative and expansion-oriented firms, particularly those aiming at external markets, and the static incumbents. Incumbents benefited from the weak representation of unions on most shopfloors and the preservation of managerial prerogatives within the boundaries set by awards. Not until the 1980s did competitive firms gain the upper hand in influencing the legislative framework of industrial relations in New Zealand. Conclusion Comparing the development of industrial relations in Sweden with the configuration in New Zealand reveals some interesting contrasts. Missing from the New Zealand system were the pressures for flexibility, rationalisation and productivity advances, which contributed in turn to intense conflict between workers and employers, high levels of shopfloor bargaining, and a high degree of worker loyalty and commitment to the union. Because the competitive threat in a number of trades and crafts came from entry by the unemployed, workers and established employers had a common interest in the regulation of competition. The threat of entry also reflected the small size of most enterprises, which in its turn contributed to the 105 lack of union representation in the workplace. It is now possible to summarise the relationship between industrial unionism and free trade, and craft unionism and protectionism, as it developed in Sweden and New Zealand respectively. In Sweden the freeing-up of international trade and the removal of guild restrictions went hand-in-hand. A significant core of craft organisation did not remain, because the intensity of competition between potential suppliers of labour was too great for craft restrictions to survive without legislative assistance. In competitive market conditions a distinctive style of industrial unionism developed. While management retained the prerogatives to alter the organisation of work, unions bargained for a share of productivity gains. The unions were able to make incomes more secure by reducing employers' ability to alter wages unilaterally, but they were not able to make jobs secure. In New Zealand, trades and industries sheltered from international competition were important employers of labour. In the sheltered sector it was in the mutual interests of established employers and employed workers to regulate competition by setting the terms on which new entrants could operate. The IC&A Act provided the legal framework for doing this, although it is not clear that such was the intention of the framers or supporters of the Act. Among the groups whose interests were detrimentally affected, the farmers were most important, but their attitude to the IC&A system was ambivalent. They feared class-conscious industrial unionism more than the inflation of costs by craft unions. Furthermore, the impact of craft unionism was restrained so long as international trade was not restricted. 106 When the scope for further land settlement and development was exhausted, there were two routes open for further economic growth. New competitive industrial sectors could be developed, or employment could be created behind raised trade barriers. The former option would have required reforms to the organisation of the labour market, which may be thought to have made the latter course more attractive. However, there were several much more compelling reasons for a protectionist course to be chosen, as is shown in the next two chapters. 107 Chapter 4 Corporatism and Statism: The Union Side The previous chapters have highlighted several features of labour market organisation in Sweden and New Zealand which present difficulties for the 'interest group' approach to trade policy. One problem is the apparent political strength of the export sector in both countries, which would seem to suggest that protectionism would be opposed effectively in New Zealand as well as Sweden. However, in New Zealand, union organisation centred on the sheltered sector, so organised labour might be expected to lobby for protection. This presents the second difficulty, that the New Zealand unions were rather too weakly organised to be effective lobbyists. Successive governments steamrollered over union interests without adverse political consequences. It is common to describe Sweden as a 'corporatist' country, because of the high degree of political influence wielded by the union and employer organisations. This influence operates partly in a prosaic way through the connections between union membership and voting behaviour, but it is also entrenched in a more fundamental way in the institutional structure, the practice of consultation with labour market interest groups being integral to the legitimacy of actions taken by the government. In New Zealand, by contrast, successive governments appropriated the high ground of the 'national interest' to the exclusion of the labour market parties. It was noted in the Introduction that the political philosophy of the Liberals specifically denied legitimacy 108 to class interests, and this philosophy left an abiding legacy. The supremacy of national over class interests was possibly compounded by the first-past-the-post electoral system. Whereas the Swedish Social Democrats overcame the political limitations of their class basis by forming coalitions, Labour in New Zealand distanced itself from the unions in order to attract a sufficiently broad constituency to achieve a political majority. Armed with a majority, a government could do almost anything, constitutionally speaking. Not only did a custom of intervention become established; procedures of consultation and interest group negotiation were not a fundamental feature of the political scene. If Sweden is corporatist, New Zealand could be described as 'statist'. In this chapter, the implications of statism and corporatism are developed by making a strong assumption about the objectives of the government. It is assumed that the government's central objective is to maintain full employment, while achieving satisfactory outcomes in other areas, for example avoiding unsustainable inflation or trade deficits. This chapter and the next examine the policies adopted in order to achieve full employment. It is argued that corporatism constrains the government's choice of employment policies, while statism is reflected in a highly interventionist approach to economic management. Specifically, the use of trade protection as a full employment policy is ruled out in the corporatist structure but allowed in the statist configuration. Protection can be used both to reduce real wages and to facilitate an expansion in aggregate demand. This chapter concentrates on the real wage issue while chapter 5 examines demand management. Both chapters discuss the 1930s, when full 109 employment policies were devised in both countries, and the late 1940s and 1950s, when they were reconstructed after the war. (Chapters 6 and 7 discuss issues arising from the 'maturation' of full employment policies in the 1960s and 1970s.) It is argued that a strong centralised union movement will object to the reduction of real wages through protection, while capitalist interests will resist the restrictions which accompany a protectionist demand expansion. Only if the government is able to override both sets of objections will it proceed with the use of protection as a full employment policy. In the discussion which follows, the government is assumed to have a singleminded interest in the attainment of full employment, while other parties have more complex interests. Employers benefit from full employment because demand is expanded and real wages restrained; however, they will resist the erosion of managerial power which tends to occur in a buoyant labour market, and they will oppose 'planning', i.e. encroachment on their powers to determine prices, output, investment and employment levels for their firms. Unions for their part will prefer full employment to unemployment, but will also prefer a higher real wage to a lower wage. The government, even if it is labourcontrolled, is likely to prefer a lower wage and higher employment level than the union organisation. As Calmfors puts it: "Even a centralised trade union movement represents a smaller constituency than the government and therefore desires a higher real wage, because all of the benefits accrue to members whereas part of the 110 costs in terms of lower profits, output and employment are borne by non-members." (1985, p.333) The assumption that the government single-mindedly pursues full employment 'works' for Sweden and New Zealand until the 1980s. In the 1980s the maintenance of full employment ceased to be an electoral imperative. One consequence was that in the 1980s central union organisations in both countries sometimes showed more concern with the interests of those with the highest risk of unemployment than did the political wing of the labour movement. This led to episodes where the union confederation advocated policies which would reduce real wages and expand employment, which were rejected by the government. However, the significance of this reversal is limited, because the central union confederations suffered problems of membership control or 'organisational cohesion' which reduced their influence over government policy. This erosion of working class unity can perhaps be related to the change in the politics of full employment. This chapter examines why LO was determinedly opposed to industrial protection, while at the same time being willing to cooperate with the Social Democratic Government in restraining money wage bargaining and thereby controlling inflation under full employment. LO economists advocated policies which would maximise the real wage sustainable at full employment. These policies included free trade. On an organisational level, protectionism was opposed because it advanced the interests of the protected group while being detrimental to other 111 workers, and was therefore bad for unity within the labour movement. While LO's free-trading credentials were impeccable, coalition-building by the Social Democrats resulted in the extension of protection to agriculture at the beginning of the 1930s. This episode is interesting in illustrating the implications of Calmfors' argument that a government must have a broader political base than a union. In New Zealand, the real wage effects of protection were complicated by the effects on farmers' real incomes. If protection was used to secure employment by raising domestic prices above world prices, and if workers were able to raise their wages in response to the higher prices, then the costs of protection would fall on agriculture. It may have been widely believed that the costs of protection fell on agriculture, especially as the Stolper-Samuelson theorem suggested that protection would cause lower returns on land (see Introduction). It might be thought that this would be acceptable to a Labour government, but not to the conservative National government, which would imply that only Labour would favour protection. However the governments of both sides utilised protection, and both also paid considerable attention to the problem of maintaining real incomes in agriculture. Protection was used as an employment policy in conjunction with a programme of wage restraint, implemented through the IC&A system. In effect, trade protection did reduce real wages, but not in a clearly perceptible way. The government was able to manipulate real wages through the disguised effects of import controls. The success of LO in dissuading the Social Democrats from industrial protectionism reflected the government's reliance on LO to achieve wage restraint under full employment. This reliance can be contrasted with the situation in New 112 Zealand, where the government was able to achieve wage restraint under full employment without having to make concessions to the unions. After the Waterfront Strike, the government remained at arms-length from wage bargaining, using the quasi-judicial Arbitration Court to depoliticise wage determination, however superficially. When the IC&A system ceased to provide industrial peace and low wage increases in the 1970s, the government abandoned its arms-length stance and intervened more directly in wage-fixing. Agricultural Protection in Sweden The fact that Sweden was and remains protectionist in its agricultural policy is often ignored in the analysis of Swedish economic policy, because of the marginal importance of the agricultural sector. Increases in agricultural protection were conceded by the Social Democrats in order to gain the political support of the Agrarian Party in the 'Kohandeln' of 1932. This was a dramatic about-turn for the free-trading Social Democrats, and yet they managed to present the deal in a remarkably positive light. As was described in Chapter 3, agricultural interests led the drive for free trade in Sweden in the mid-nineteenth century, and took the main role in the abolition of the guilds. However the international trade position of agriculture was reversed in the 1870s, when competition from America and Russia caused a collapse in world grain prices. Sweden became a net importer of grain (Seyler, 1983, Table 3.1). In the 1880s some trade protection for agriculture was introduced, with the narrowest of majorities 113 in the Riksdag (Verney, 1957, pp.108-9). By the 1920s all branches of agriculture were experiencing severe competitive difficulties. Measures were taken by the Conservative Government to support the farmers. However when the Conservatives, supported by the Agrarian Party, attempted to introduce a tariff on grain in 1930, they were defeated by the combined forces of free trade, comprising the Liberals and the Social Democrats (Hirdman, 1979, p.264). Social Democratic opposition to tariffs had a long history. One of the movement's first political acts had been a demonstration in 1886 against the so-called 'famine tariff' on grain. It was argued that tariffs favoured large farmers at the expense of poor workers. The nature of the measures taken in the late 1920s and early 1930s somewhat supported this view. Large agriculturalists managed to regulate the market in margarine, sugar and milled grain through monopoly control. Svenska Sockerfabriks AB obtained a monopoly over sugar imports in return for offering a guaranteed price to local sugar beet growers (Seyler, 1983, pp.172-3). However the Social Democrats faced a sharp political dilemma over their opposition to agricultural protection. In 1930 almost 40% of the workforce was still engaged in agriculture. The Social Democrats could not hope to obtain a secure grip on power so long as the industrial workforce were a minority among voters. The problem, as Söderpalm puts it, was: "How could a party dominated by industrial workers in a country that was still strongly agrarian win the necessary votes among the poor rural population?" (1975, p.258) 114 The poverty of the rural population sharpened the problem. A survey of household expenditure conducted between 1932 and 1934 revealed living standards on small farms much lower than those of workers in towns and industrial areas (Seyler, 1983, p.149). According to the investigation, the diet of small-holders was heavily weighted towards milk, flour and potatoes, while town dwellers' food consumption was much more varied and nutritious. Thus even in food consumption (which made up a higher proportion of rural dwellers' total consumption) industrial workers and other town dwellers enjoyed a greater share of the fruits of the land than those who lived upon it. The unions' answer to agricultural poverty was to promote organisation among agricultural workers. In 1917 LO contributed funds towards a campaign to organise wage workers in agriculture (lantarbetarna), and in 1918 Svenska Lantarbetareforbundet was formed. However the unionisation drive could not reach small proprietors. Social Democrats had argued for years that the organisation of agriculture would polarise around a small group of landowner-employers and a large waged workforce. However the small proprietor class proved remarkably resilient to economic change. In 1940 there were 368,300 proprietors and nearly 200,000 family members assisting, along with a mere 129,000 waged workers (Seyler, 1983, p.155). LO's unionisation campaign bore fruit only slowly. In 1937 Lantarbetarforbundet had 34,000 members (Hansson, 1942, Table XVI). While the proportion of the population engaged in or supported by agriculture had fallen sharply between 1880 and 1920, by the 1920s the outflow from agriculture 115 (and inflow into industry) and slowed down. At the same time, the gap between agricultural and industrial wages had widened. Male industrial wages rose by nearly 130% between 1913 and 1929, while those of various classes of male agricultural labour rose by only 70% (Lönestatistisk årsbok, 1930). Some commentators, not all unsympathetic to the Social Democrats, saw these developments as indicative of restriction of opportunities in industry for which the unions were partly responsible. Commenting on the results of a massive study of wages in Sweden undertaken in the 1930s, Svennilson attributed an important role to the bargaining organisations in bringing about the divergence between industry and agriculture. He argued that the unions had contributed to a situation in which the industrial labour market was artificially insulated from pressure from the unemployed: "During and after the war the labour market showed features which markedly distinguish this period from the preceding ones. The industrial labour market was completely dominated by the labour and employers' organisations, which regulated the conditions of work by collective agreements. This has altered the conditions for migration between agriculture and industry, and must have influenced the connection between agricultural and industrial trends of wages." (1935, p.282) One can see in this statement the potential for a direct conflict between the Social Democratic Party and the unions. The party was concerned that its industrial core of 116 support should continue to grow, so as to generate a political majority; the unions, arguably, were more concerned with the interests of their existing members. It was clear by 1932 that neither union organisation of workers in agriculture nor migration from agriculture to industry would solve the problem of agricultural poverty in the short run. Furthermore, a large part of the population in agriculture would continue to support the Agrarian Party, which promised the measures of protection and price support which would directly and immediately reduce agricultural poverty. The free-trading Social Democrats would not appeal to this electorate, and this would preclude the attainment of an outright majority in the Riksdag. The agreement between the Social Democrats and the Agrarians in 1932 broke this political deadlock, but at the cost of conceding protectionist measures for agriculture. A range of tariff and subsidy measures was introduced. The free import of dairy products was ended in 1933 and in 1934 price support was introduced for meat, bacon and eggs. Prices paid by urban workers for food rose accordingly. The Social Democrats worked hard on celebrating the Red-Green alliance. In their manifesto for the 1936 elections the Social Democrats declared that "of course the Swedish working class will pay the price necessary to guarantee workers in agriculture and small farmers a tolerable living standard" (quoted in Hirdman, 1979, p.268). Concessions were made on the farmers' side: in particular, the Agrarian Party gave up its opposition to the expansion of relief works to combat unemployment, and relief wages were raised from 15% below the wage prevailing for unskilled workers in 117 the open market in the district; after 1933, the full unskilled wage was paid (Ohlin, 1935, p.683). The relief work concession was an important one because it removed a source of friction between the unions and the administrators of relief works; friction which had contributed to the fall of two Social Democratic minority governments in the 1920s. From the unions' point of view, the cost of conceding agricultural protection was counterbalanced by the changes in the administration of relief, which removed one of the main sources of downward pressure on wages exerted by the state. The relationship between the unions and the Social Democrats was eased through a deal which cut real wages by the 'back door' but enhanced the unions' ability to defend money wages in times of high unemployment. It is conceivable that the deal was costly to capital, insofar as the unions were able to achieve higher money wages under the more generous relief system. A striking feature of the kohandeln is that the costs of protection were clearly recognised and explicitly acknowledged by the losing parties. The losers were wellorganised and had been able to defend some previous attempts to protect parts of agriculture. Since agricultural protection did not benefit from low visibility or low 'psychic costs', one issue is why tariffs and price supports were preferred to more efficient and targeted measures to increase rural incomes, such as the provision of a social security benefit. (The farmers had played a key role in the introduction in 1913 of an old age pension which was noncontributory rather than based on insurance contributions, so the Agrarian Party was by no means without influence in the social security arena (Baldwin, 1990, pp.89-92).) Trade protection was the preferred policy of the Agrarian Party because it 118 maintained the economic location of the Party's supporters. If income transfers were made which were not contingent on the recipients continuing to be farmers, the voting base of the Party would shrink. This also suggests that the Social Democrats would prefer policies which remedied agricultural poverty while encouraging a movement of labour out of agriculture and into unionised sectors of employment. Indeed this is precisely what happened: rural depopulation occurred and the Social Democrats were able to dispense with the political support of the Agrarians (who, seeing their economic base disappear, eventually transformed into the economically amorphous Centre Party). Industrial Protection in Sweden The Social Democrats conceded protection to agriculture in order to broaden their political base and attain a political majority by coalition with the Agrarians. Ultimately it was in the Social Democrats' best interests that the agricultural population should fall, and that the proportion of the working-age population engaged in unionised employment should rise. This would facilitate a harmonious relationship with LO, by minimising the difference between the political and industrial constituencies of the Left. However, even with a large increase in the industrial labour force, there would still remain a difference between political and industrial constituencies. This section draws out the implications of Calmfors' argument that even a centralised trade union movement will desire a higher real wage than the government. It is shown that this made LO more committed to free trade than SAP. Furthermore, a centralised trade 119 union movement has to address problems of dissent and free-riding within its membership, in order to maintain its central authority. LO sought to suppress both the exercise of market power by member unions, in the form of wage drift, and political lobbying, in the form of bids for subsidisation or protection. LO also addressed the problem of organisational unity by advocating a wage equalisation policy, and this had implications for trade policy. In the years immediately after the war the Social Democratic Government imposed controls in order to restrain inflation. In 1948-49 a wage freeze was imposed via the device of prolonging existing collective agreements. However these attempts at stabilisation were not popular. There was widespread but uneven wage drift: some workers were able to increase their earnings within the framework of their existing collective agreements (Rehn, 1952, p.41). It was argued by LO that the controls increased inequality in the wage structure (Meidner, 1952, pp.20-21). It was most important to the relationship between SAP and LO that the Government's intervention in wage determination was temporary. In a statement in 1945, LO's executive committee pointed out to the Government that state regulation of wages would remove the central raison d'etre of the trade union movement and thereby limit its ability to recruit and retain its membership (ibid., pp.27-28). Any such decline in unionisation would also affect SAP's own financial and organisational base. The organisational and personal links between LO and SAP ensured that the Government did not readily embark on policies opposed by the unions. There were good reasons for the Social Democrats to seek to support the position of LO as the peak organisation of unions. A strong encompassing union 120 confederation would assist the implementation of the Government's full employment programme by maintaining industrial peace and restraining wage inflation. However, there was a quid pro quo to this relationship. The Government was restrained from using full employment policies which directly or indirectly undermined the prospects of growth in real wages. LO economists identified free trade in industry as an engine of real wage growth. By placing Swedish firms in a competitive environment, free trade and exchange rate stability ensured that wage increases could not be passed on in higher prices, which would defeat the unions' attempts to raise the real wages of their members. The Social Democrats were less opposed to industrial protection. Failure to give protection to declining sectors of industry made the task of maintaining full employment more difficult. LO's analysis of the gains from free trade envisaged that Sweden would occupy a position in the emerging international division of labour that was advantageous to the working class as a whole. Sweden's capital endowment, suitably augmented with a strategy to promote investment, would support high wages, while labour-intensive products could be imported cheaply from low-wage countries. Free trade would promote a rationalisation in the structure of the economy in which the lower-paid and less-skilled areas of employment would contract. For example, a report of LO's 1961 Congress identified the textile and clothing industries as expanding areas of third world production, implying (but not stating outright) that employment in these sectors in Sweden should fall (LO, 1963, pp.92-95). An illustration of the development of LO's trade and labour market policies came in the late 1950s, when the Government responded to a worldwide recession 121 with some small increases in tariffs on non-agricultural products. LO was very critical of this decision. LO economists argued that: "The opportunities for transferring people have never been better than they are at the present time. Swedish tariffs may be low by international standards, but we must not content ourselves with that. It is most regrettable that even a moderate raising of tariffs should have occurred in such favourable economic conditions.. "Sweden has been saddled with more old, unprofitable, low-wage types of activity than would otherwise have been the case.." (LO, 1963, p.97) It would be natural for workers to resist 'transferring', even from low-waged sectors, because of the mobility costs involved. However LO economists advocated 'active labour market policies' to meet the costs of adjustment. This assistance to workers in declining industries would reduce the incentive to seek protection, or, as Rehn put it, would "avoid protective and protectionist palliatives when changes in the world trade situation or other trade conditions create difficulties for various groups of citizens" (Rehn, 1961, p.1). LO had another case for the operation of active labour market policies which ensured that the Social Democrats would support such policies and reject protectionism. LO economists were concerned that the government's commitment to 122 full employment would lead it to maintain aggregate demand at higher levels than were consistent with the maintenance of centralised wage bargaining. Buoyant domestic demand allowed firms to increase prices, reducing the wage share and enlarging the profit share. Unions could counteract this in their wage bargaining, but only provided the inflation was fully anticipated. Unanticipated inflation would undermine centralised bargaining and contribute to wage drift, as Meidner explained: "Our experience is that inflation is disastrous to the union movement and the union organisation. The best milieu for unions and a wage policy, which aims at a solidaristic wage structure, is stability. I think from a union point of view there is no question. We have to fight all tendencies towards inflation, not only from the important point of view of balance of payments, but just for carrying out a rational wage policy. Inflation destroys the wage structure and it is useless, as has been said here before, for the unions to fight for a rational wage structure in an inflationistic milieu." (Meidner, 1969, p.153, my emphasis) Whatever its effect on individual workers in particular unions, inflation was perceived to have an adverse effect on the union movement and its central organisation. Evidently Meidner was not contemplating a 'balanced inflation', but a continual chasing-after-balance by a series of relatively-based claims. In a sense inflation in Meidner's statement was a codeword for independent bargaining outside LO's control. 123 The main problem for the centralised wage bargaining system was the restraint of drift at the local level. Rehn and Meidner argued that active labour market policy should be used to maintain full employment in preference to more 'aggregate' fiscal or monetary policies (Lindbeck, 1975, pp.39-40). The maintenance of full employment by general or aggregate measures would necessarily be inflationary because, in any dynamic economy, labour demand would be contracting in some sectors and expanding in others. Under the active labour market policy the government would fund the necessary training and mobility programmes to shift workers from declining to expanding sectors. The active labour market policy was primarily intended to discourage the government from maintaining an inflationary domestic environment by promoting the 'targetting' of employment promotion measures. At the same time, it was hoped that the policy would support centralised wage bargaining. Training and mobility measures would moderate drift by easing sectoral labour shortages, while the case for low settlements for firms in difficulty could be countered by improving the elasticity of labour supply. The implication of LO's strategy was that LO was more devoted to the principle of free trade than the Social Democratic Government, and, compared with the Government, LO preferred an enlargement of government expenditure (through expanded labour market programmes) to an increase in tariffs. The reason is not hard to deduce. The Government, concerned about its ability to maintain overall full employment, had no reason to favour employment reductions, except (for political reasons) in agriculture. LO, for its part, was more concerned about the negative effect 124 on real wages of increases in tariffs than the employment consequences. Furthermore, tariffs were divisive in their effects within the trade union movement, raising the welfare of one group of workers at the expense of others. The policies advocated by LO were implemented because they were necessary to the maintenance of centralised control over wage-fixing, and thereby to the control of inflation at full employment. The centralisation of wage bargaining, free trade, and active labour market policy were, therefore, integrally connected. The Social Democrats avoided protectionist policies because they were reliant on union organisational unity under LO to restrain inflation under full employment. LO was opposed to protection, which would reduce real wages and promote sectionalist tendencies in the union movement. The claims of individual unions for protection were, in their turn, moderated by the active labour market policy and by the gains to be made from participation in centralised wage-fixing arrangements. Protectionism and Wage Restraint in New Zealand The key to the Swedish model was that the government was dependent upon the central union confederation to achieve wage restraint under full employment. Full employment presented similar issues of wage control in New Zealand, but the government managed to achieve wage restraint without making the same policy concessions to the unions. The policies adopted by the 1935 Labour Government in its first years of power 125 had every appearance of rewarding the allegiance of the unions to the Party's cause and reflecting the personal and organisational links between the unions and the Party. In particular, Labour legislated for the long-standing demand: the determination of the basic male wage as a 'family wage', sufficient to support the man, a wife and three children. In the same measure (the IC&A Amendment Act of 1936), provision was made for the establishment of a central union organisation (previous Arbitration Court rulings had made membership of a central organisation ultra vires for a union registered under the IC&A Act). The 1936 Amendment also made it compulsory for workers covered by an award or collective agreement to join the union which had negotiated the coverage (a post-entry closed shop). However, as described in Chapter 2, the relationship between the Labour Government and the unions had soured considerably by the time Labour left office in 1949. To the Party, the unions had undermined the Government's economic programme with their demands; to the unions, the Government had failed to grapple with the task of distributing the fruits of prosperity to the workers. The Government's protectionist industrial development programme was part of that failure. Labour's economic programme in 1935 did not mention trade protection or exchange controls. Exchange controls were introduced in conditions of foreign exchange crisis in 1938, and then evolved into a long-term programme of import licensing. Commentators in 1938 'blamed' the family wage, the government's public works programme, and interest rate controls for the exchange crisis. Their arguments, which are discussed in more detail in chapter 5, highlighted the Government's disinterest in maintaining the confidence of private capital. Insofar as this loss of 126 confidence arose from raising wages and expanding employment, it might appear that Labour was acting in workers' interests in imposing exchange controls. The controls represented a refusal to allow capitalist resistance to bring the programme to a halt. The effect of trade restrictions on the income distribution was influenced by the operation of price controls. In the absence of price controls, the rationing of foreign exchange would have allowed rents to accrue to the selected recipients of import licences, generating high profits in their operations. However price controls were used to limit increases in the domestic price level as a result of the imposition of exchange control. The desire to prevent increases in the domestic prices of imported goods was one reason why, in the regime that evolved, import licensing was preferred to tariffs. Of course one consequence of binding price controls was that imported consumer goods were periodically in short supply and subject to queuing. Queues for cars persisted into the 1970s. The effect of price controls was to maintain real wages, as measured by official wage and price indices. 'True' real wages, in the sense of command over goods and services, were depressed by shortages caused by import licensing. Since the IC&A Amendment Act had established a fixed real wage for men based on the income needs of a family, the government could not cut the measured real wage. A devaluation or the imposition of tariffs would result in compensatory wage increases. However this indexation could be evaded by controls which reduced the true real wage but not the measured real wage. It would seem, therefore, that exchange controls were a singularly effective way of reducing real wages by the 'back door'. Their attractiveness was further increased 127 by the ability of the domestic economy to supply a high proportion of the 'necessities' of life, so that controls primarily affected the availability of 'luxuries'. The distinction between necessities and luxuries was the key to maintaining a fixed real 'family' wage while varying the shadow price of imports through the periodic imposition and relaxation of controls. As explained by the Department of Industries and Commerce, the expenditure of the community on goods could be divided into three main classes. These comprised basic consumer goods, mainly produced in New Zealand; "less essential goods, including luxuries and consumer durables", mainly imported or with a high import content; and capital expenditure, which also had a high import content (DIC AR, 1954, p.11). In export downturns, the supply of imported 'luxury' goods could be cut back without severe welfare consequences, because household necessities - food and shelter in particular - were largely New Zealand produced. The policy of import control on luxuries was supplemented, during and after World War Two, by subsidies on some 'essential' goods with a high weight in the consumer price index. The effectiveness of this policy in controlling the family wage was further consolidated by manipulation of the weights in the index. Not until 1948 was it admitted in principle that the price index used by the Arbitration Court in adjusting wages should be based on actual expenditure patterns, and even then the principle was not put immediately into practice. Tobacco, alcohol and the cost of motoring were not included in the index until the 1950s. By 1951 the FOL claimed that real award wages had fallen by 5.7% since the War due to the disparity between the price index used by the Arbitration Court and prices weighted by actual consumer expenditure (Book of Awards, 1951, p.8). 128 The manipulation of real wages by the government through the import licensing system suggests that unionists had little cause to support the controls. However, union criticisms of Labour's policy were not primarily directed at trade controls, but focussed instead on the restraint of wages. The wage restraining policies of the government were tolerated during the War, but after 1945 there was strong pressure for increases in wages above what, by then, appeared as an 'austerity wage'. The Labour Government's response to these demands was unenthusiastic. In an environment of severe shortages of many consumer goods (most notably cars, but also domestic appliances and high quality clothing and shoes), wage increases were thought likely to increase inflation. Increased imports of consumer goods could offset this pressure, but this would involve expenditure of valuable overseas funds, which Labour wished to use to purchase capital equipment and pay off overseas debt. These objectives were, in principle, supported by the unions. The use of the 'family wage' concept by the Government illustrates the basis of some of the tensions between Labour and the unions. After WWII unionists increasingly came to recognise that the family wage could as easily be a device for controlling wages as for advancing the interests of the working class. This reflected the limitations of the family wage concept itself. Insofar as the legislation for a family wage was a victory for the working class, it was for class interests substantially modified by their expression through political rather than industrial channels. The support and preservation of the family was as much an objective of the right as the left. In many countries the unions looked dubiously upon family wages and family allowances as devices which would enable employers to minimise wages, paying 129 workers only what they needed and not what they had earned through their productive labour. There is no fundamental reason for the family wage always to be higher than the market wage, although it happened to be so when introduced in New Zealand. The double-edged qualities of the family wage were well-illustrated by the Labour Government's use of child benefits. In 1926 New Zealand had become the first country in the world to introduce a child benefit. The Family Allowances Act provided a means-tested benefit of 2s.6d. per week for third and subsequent children. The debate leading to the 1926 Act was initiated by the Arbitration Court, which came under pressure in the early 1920s to set a family wage. The Court resisted this pressure by noting that the average family in New Zealand had only 1.57 children under 14 years of age, and that there was only 0.94 of a child per male worker in the country (Book of Awards, 1922, Vol. 23, p.350). The Court went on to observe that if the same basic wage was set for all male workers, only some would be fairly treated; some would get too much and others too little. A possible solution to this problem would be the establishment of a State fund, out of which child allowances would be paid. Parliament considered the question of child allowances in a succession of private members' bills, beginning with the Child Sustenance Bill of 1922. This bill took up the suggestion of the Arbitration Court, proposing that the basic wage should be sufficient to support a man and wife, while payment for children should be made out of a central fund of employer contributions. Labour M.P.s (in opposition) rejected this formulation as a device to prune the basic wage, advocating instead a benefit payable only for third and subsequent 130 children, financed out of general tax revenue. This formulation was accepted in 1926, although the level of benefit was only a quarter of that proposed by Labour. When Labour became the government, it both legislated for a family wage and raised the child benefit, provoking opposition claims that the third child in a family was 'paid for' twice, as the family wage was meant to be sufficient support a family of five. What was not mentioned in the parliamentary debate was that the availability of an improved child benefit lowered the wage necessary to support a family. This became starkly apparent during WWII when the benefit was further increased. In 1945 the means test was dropped and a benefit of 10s. per week became payable in respect of all children. In 1945 the minimum male adult wage was 5.5s.; a mother of four obtained from the state an income of more than half the female minimum wage of 3.3s. The availability of the child benefit helped the Arbitration Court to adopt a restrictive attitude towards what was a sufficient wage to support a family. This provoked opposition from trade unionists, who had not advanced the family wage principle to see the wage system pushed aside by benefit payments in this way. An interesting sidelight on Labour's policy comes from the development economics literature on economic policy design for countries where institutional limitations on taxation lead governments to rely on tariffs for revenue. Bhagwati and Srinivasan (1980) have analysed the case where the wage exceeds the marginal social cost of labour, and the government is constrained in raising revenue for a labour subsidy except via tariffs. They find that the optimal policy is to impose a tariff and use the revenues to subsidise labour. It would be possible to apply this analysis to the New Zealand case if the Labour Government had used tariffs rather than import 131 licensing. In particular, the raising of child benefit to control the wage had some of the same effects as a subsidy on labour. However the Labour Government did not raise tariffs, perhaps because tariffs would drive the wage up further and thereby worsen the domestic distortion. Nonetheless, import licensing exerted a positive effect on government revenue by raising employment and output. The declared policy of the National Government, which took power late in 1949, was to roll back Labour's highly interventionist approach both in trade policy and in wage determination. Restrictions on the payment of above-award wages were lifted and import controls were reduced. Consumer subsidies which had held down the prices of 'necessities', were reduced and the Arbitration Court invited to award a compensatory wage increase (The Budget, 1950, p.9). These measures coincided with the Korean War boom. It may be that the Government predicted that the export boom and the removal of wage controls would lead to a rise in wages even if subsidies stayed in place, and there was therefore nothing to be lost by reducing subsidies. The use of import controls to maintain full employment generated a tension between the bargaining power of the unions under buoyant labour market conditions and the negative effects of controls on real wages. Labour had used wage controls to address this problem; National removed the controls. Several factors enabled the Government to avoid a wage explosion. The most obvious was that, soon after taking office, the Government crushed the more militant unions in the Waterfront dispute (chapter 2). Victory in the dispute won for the Government a quiescent union movement which accepted the principle of arbitration and the consequence that strikes 132 were almost invariably illegal. Another part of the explanation of the low rates of wage increase recorded in the 1950s and 1960s was that the unions were rather weakly organised by comparison with Sweden. While the unionisation rate was high, standing at about 60% in 1960, this was a misleading indicator of union strength because of compulsory unionism. The IC&A Amendment Act of 1936 required all workers subject to an award or industrial agreement to join their union. Compulsory unionism contributed to an increase in the number of union members from a nadir of 72,000 in 1933 to 255,000 in 1939. However many of the new members were not committed unionists and not sympathetic to militancy (Hare, 1946, p.179). The National Party came to power on a platform of abolishing compulsory unionism, but was quick to realise the advantages which lay with retaining it. When the Government reviewed the IC&A Act after the Waterfront dispute ended in 1951, it chose not to end compulsory unionism (Bassett, 1972, p.205). Compulsory unionism ensured that moderates outweighed militants within the trade union movement. It was argued in Chapters 2 and 3 that the IC&A Act distinctively shaped the union movement, producing a large number of small unions operating only within the conciliation and arbitration procedures, with members who paid their (small) dues under compulsory unionism but were otherwise weakly committed to organisation. There were exceptions to this pattern, but few unions had a significant shopfloor presence, and the IC&A system greatly constrained what could legally be done by shopfloor representatives in any case. In particular, industrial action to obtain aboveaward payments was illegal. Above-award payments were a 'vent' out of the 133 centralised negotiating system. The employers' basic strategy in the post-war years was to minimise award settlements so as to maximise their flexibility in making aboveaward payments. The unions had little influence over this process; most importantly, they were unable to persuade the AC to raise award wages to catch up with drift that had occurred (in Sweden, by contrast, the central agreement included 'drift compensation' - see ch. 7). This led to a cumulative divergence of wages paid from award wages, with the unions left negotiating over award wages. Eventually this structure of wage restraint failed (in 1968-70), but, in its heyday, wage increases were kept to lower levels than in Sweden. It was suggested in the discussion of Sweden that the government's reliance on LO to implement centralised wage restraint led it to avoid industrial protection and to implement the active labour market policy. In New Zealand the government's corresponding policy was to maintain stability in the structure of craft unionism, which provided a stable set of wage relativities and differentials. This stability facilitated the centralised administration of wage restraint by the Arbitration Court. It was argued in Chapter 3 that industrial protection and craft stability are connected, insofar as protection reduces the rate of technological change in the workplace, and reduces the competitive pressure on employers to undertake rationalisation. It is possible that this, in itself, contributed to the low rate of wage drift in New Zealand. Employers did not press for changes in working practices which would require wage concessions. The system, while capable of generating low wage growth, also promoted industrial relations practices which depressed productivity growth. Immigration was also used by the government to maintain stability in the 134 industrial relations structure and restrain wage increases. Immigration was the direct counterpart in New Zealand of the active labour market policy in Sweden. The Department of Labour spent more than half its budget on assisting immigration. The UK could supply to New Zealand workers sharing the same craft traditions and apprenticeship-acquired qualifications as their New Zealand counterparts. If labour shortages had not been met by immigration, employers might have pressed for changes in job demarcations and in conditions of entry into skilled trades. Such changes would have threatened the survival of the small craft unions which had proliferated under the IC&A system. It has been argued that a central union confederation can be expected to oppose protection, despite its advantages for some member unions, especially craft unions. However, the President of the Federation of Labour in the 1950s, F.P. Walsh, was a strong advocate of import licensing. One explanation is that the FOL merely gave voice to the views of its members, rather than articulating a coherent strategy for advancing the interests of unionists as a whole. Another is that import licensing was preferred to other systems of exchange allocation under which more rents may have accrued to traders and fewer to workers. Another issue was that the real alternative to import licensing was devaluation, and devaluation was opposed as a 'class tax' which redistributed income from workers to farmers. Neither the adverse effect of protection itself on real wages, nor the prospect that a rising proportion of workers could become employed in competitive industries (which would benefit from depreciation) influenced union views. If the negative effects of protection on real wages were noticed, no alternative strategy presented itself to the union movement. 135 Conclusion In this chapter it has been argued that trade protection may be seen as a 'back door' method of reducing real wages, and thereby may be a useful policy instrument for a government seeking to achieve full employment. However its usefulness depends on the government's ability to suppress the money wage response to backdoor wage cuts. This presents a paradox, because if the union movement is weak, the government can control wages by direct methods, and protectionism is therefore unnecessary. If the union movement is strong, protectionism will not be acceptable to the unions and the government will have to find other policy instruments to maintain full employment. In the case of New Zealand, part of the answer to the paradox was that protectionism 'fitted' uniquely well with the family wage principle and the IC&A structure of union organisation. It was therefore effective to use protection to reduce real wages although more direct methods of wage control were also available. The other part of the answer was that protection facilitated the implementation of full employment demand management policies; this is the subject of the next chapter. The main anomaly in the Swedish case is the adoption of protectionist policies in agriculture. While the concession of agricultural protection was of great political importance, it played no role in the government's full employment policies: on the contrary, a programme of urbanisation and agricultural depopulation was embarked on by the Social Democrats. This curtailed the cost of protection compared with what it would have been if the sector had not contracted, although the cost remained 136 substantial (Gulbrandsen and Lindbeck, 1973). Another important feature of the Swedish model was the suppression of sectional protectionist interests within the trade union movement. The counterpart to this suppression was the enhancement of the power of the central confederation, LO. The influence of LO was consolidated by its relationship with the Social Democratic Government. A feature of the corporatist political economy of Sweden was that the government avoided direct intervention in wage-fixing, apart from a short period after WWII. The government's reliance on LO to coordinate bargaining to achieve wage restraint contributed to its receptiveness to policies advocated by LO, most notably the active labour market policy. 137 Chapter 5 Planning and Controls in the Implementation of Full Employment Policies One innovation of Keynesian economics in the 1930s was to provide an account of how an expansion of aggregate demand by the government could be in the interests of all groups in society, including traditional advocates of laissez-faire. However, the implementation of a demand management policy entails an increase in the power and 'activism' of the government, about which capital may harbour reservations. Fiscal expansion may 'crowd out' areas of profitable private sector activity. A monetary expansion in an open economy may generate pressure for capital controls, to avoid depreciation of the exchange rate. If private investment is slow to respond to the stimulus of lower interest rates, the government's appetite for intervention may lead it towards direct involvement in investment promotion and planning. In this chapter it is shown that the implementation of policies to promote and stabilise private sector investment in Sweden was characterised by the delineation of clear boundaries on the extent of state intervention. Fiscal policy was also constrained from encroaching on the core of profitable business activity. This drawing of boundaries did not occur in the same way in New Zealand, where pragmatic grounds for government intervention prevailed over ideological argument. This difference reflected the much greater economic power, political influence, and strategic sophistication of capital in Sweden. This was related to the development of Sweden's 138 domestic capacity for capital accumulation. By the 1920s, Sweden had become a capital exporter. New Zealand, by contrast, continued to import capital, and, furthermore, the state was a major international borrower and a primary agent in the investment process. In both Sweden and New Zealand, the extension of the role of the state in the course of implementing full employment policies can be divided into two phases. In the first phase, the 1930s, governments in both countries sought to implement countercyclical monetary and fiscal policies in the face of the constraint of limited 'international space' due to the depression in the world economy. In this period, exchange rate policy was used very effectively in Sweden to allow a monetary expansion, while fiscal policy proceeded cautiously. In New Zealand devaluation was not effective and fiscal policy under Labour was not at all cautious. New Zealand ended the decade with exchange controls in force, called forth by the debt management problems of the government. The second phase, 1945-50, saw both countries emerge from the war years with a vast array of economic controls in place and great anxiety and uncertainty about the avoidance of a postwar depression. In New Zealand many wartime regulatory powers were retained by the government, including import controls. Despite a great improvement in the government's fiscal position and the debt management situation in London compared with 1938, the legacy of the 1930s remained in the opposition of Labour to new borrowing and to devaluation. In effect, the government continued its historically-important role in the management of the economy, but used new instruments which insulated it from the strictures of London and the vagaries of the 139 world economy. Whereas before the war the main purposes of exchange controls had been to finance the government deficit and prevent a capital outflow, after the war controls were used to regulate and direct private investment. By contrast with New Zealand, there was serious opposition from domestic capital to the maintenance of wartime controls in Sweden. While capital controls were continued, allowing the maintenance of low interest rates and the rationing of credit to priority sectors, detailed intervention in investment decisions was ended and trade restrictions lifted. A model of the role of the state in a mixed economy was developed which appeared to confine the public sector to welfare-related activities which did not encroach on the private sector sphere, although in practice this model allowed for a considerable expansion in government expenditure. It is therefore possible to say that in both Sweden and New Zealand the implementation of full employment policies was accompanied by extension of the role of the state. In Sweden this extension was constrained by opposition from domestic capital, and was accommodated by marking out spheres of private market and public welfare activity. In New Zealand the main opposition to the implementation of expansionary demand management policies came from London, and London was defied rather than accommodated. Domestic political conditions did not greatly restrict the powers which could be appropriated by the state nor the areas in which it could intervene. Phase One, Part One: Monetary Policy in the 1930s At the onset of the Depression, the external balance problems of Sweden and 140 New Zealand were quite different. Sweden had a current account surplus in most years in the 1920s and 1930s, whereas New Zealand had a chronic current account deficit, although the trade account was frequently in surplus. Summary information on the balance of payments position for Sweden is presented in Table 5.1. A striking feature is the negative balance on the capital account in the late 1920s. The 1920s saw the flourishing of Swedish multinational companies. Their overseas operations were a source of national pride: it seemed that Sweden was on its way to becoming a great power once again (Kock, 1961, p.77). There were recognised to be connections between investment abroad and the development of production for export in Sweden: overseas subsidiaries or 'dotterföretag' were supplied with Swedish components and materials and gave Swedish firms points of entry into otherwise protected markets. A short-term capital outflow could be expected because the increasing proportion of capital goods in Swedish exports made it necessary to offer export credit to develop markets. 141 Table 5.1 The Swedish Balance of Payments 1928-1935 Mill Kr. Change in 1928 Current Capital Account Account + 82 - 193 Deficit (-) Foreign to be financed - 111 + 19 1929 + 281 - 55 + 226 + 6 1930 + 100 - 386 - 286 + 138 1931 - 130 - 138 - 268 - 179 1932 + 92 + 75 + 167 - 7 1933 + 212 + 136 1934 + 202 - 89 + 113 - 21 1935 + 61 + 70 + 131 + 37 + 348 Deposits + 32 Source: Kock, 1961, p.84 and p.149 However the outflow of capital also presented problems and dangers. The fundamental problem was that unemployment and underemployment in Sweden pointed to a need to promote investment at home. An immediate problem was that some Swedish companies were using highly speculative financial techniques. Bank 142 loans supplemented bond issues in financing ambitious acquisition programmes. One result was that Swedish banks sought to attract foreign deposits to shore up their liquidity position; these deposits appear in the fourth column of Table 5.1. This made Sweden vulnerable to financial crisis elsewhere in Europe. The collapse of the Austrian banking concern Credit Anstalt in May 1931 and the imposition of exchange controls and a standstill on repayments in Germany were followed by a run on Swedish banks, caused partly by other countries' requirements that their citizens repatriate their holdings (Kock, 1961, p.345). The Riksbank first raised the discount rate but the loss of reserves continued. It then attempted unsuccessfully to raise a loan abroad, before leaving the gold standard on 27 September 1931, a week after Britain. After Sweden left the gold standard, the krona was allowed to depreciate without Riksbank intervention. However when the fortunes of the currency turned, the bank acted to curtail the appreciation. This meant that the Riksbank managed to accumulate substantial reserves, which allowed monetary conditions to become very liquid, and interest rates declined. In effect, Sweden was able to operate an independent monetary policy by leaving the gold standard, i.e. by adopting a flexible exchange rate policy, in the textbook fashion. Exchange and interest rate policy was the responsibility of the Riksbank under the supervision of the Banking Committee of the Riksdag. A rule was developed that monetary policy should be operated to maintain stability in the internal purchasing power of the krona, and the Riksbank enjoyed a remarkable degree of success in meeting this objective (Kock, 1961, p.129). Because of deflation abroad, price stability was consistent with the depreciation of the krona in 1931-32. When confidence in the 143 krona returned, the absence of domestic inflationary pressure allowed the Riksbank to reduce interest rates. While Swedish monetary policy in the Depression was much admired (Thomas, 1936), there was an element of luck in the fortunes of the currency. Depreciation need not always create an expectation of future appreciation, allowing interest rates to fall. Gunnar Myrdal argued that capital controls would be necessary to allow a lowinterest rate policy to be implemented (1934, p.237), but, lacking an overall majority in the Riksdag, the Social Democrats were unable to introduce controls. (When war intervened, extensive powers were granted to the government. The Foreign Exchange Law of 1939 was framed as an emergency law, authorising the government in times of "war, danger of war, or extraordinary conditions caused by war" to introduce centralised control over all payments to and from foreign countries, if this became necessary for reasons of monetary policy (Lindh, 1963, p.318).) The Social Democrats were lucky in that they were assisted by imperfections in the world capital market. Capital export from Sweden was curtailed by developments overseas. The insecure conditions prevailing on the foreign exchange market in the latter part of the 1930s deterred portfolio investments abroad. Some Swedish enterprises broke their connections with their overseas operations, while Swedish banks confined their deposits abroad to the levels necessary for international payments requirements (Kock, 1961, p.536). New Zealand New Zealand also experienced a financial crisis in 1931-32, but its origins were 144 quite different. In the 1920s national and local governments had borrowed steadily on the London market. Since export earnings fluctuated around a static trend, the debt/export ratio also grew steadily. Despite the increase in the ratio, New Zealand can probably be judged to have been solvent, because of the ability of the economy to generate substantial trade surpluses. However the country also faced a liquidity constraint. The fall in the value of exports and disappearance of the trade surplus in 1930 presented the government with difficulties in meeting interest payments. These were compounded by restrictions on refinancing loans falling due. The Bank of England imposed controls on new issues of securities in London in 1931, and the New Zealand Government was asked to cease short-term borrowing (Drummond, 1981, p.11; Sinclair and Mandle, 1961, p.196). With debt servicing obligations in London estimated at some 12m. for 1932, the Government was faced with a calamitous shortage of foreign exchange (Tocker, 1932, p.113). Table 5.2 Debt and Exports ( s million) Dec Foreign Debt/X Trade Years Exports Debt Ratio Public Debt Surplus Interest (Years ending March) 1925 55.2 152.8 2.8 4.9 6.2 145 1930 43.1 191.1 4.4 6.3 -0.6 8.3 -0.8 8.4 9.0 7.9 1931 31.8 200.5 1932 32.4 205.6 6.3 1933 32.4 206.4 6.4 12.3 7.1 1934 37.9 202.7 5.4 15.7 7.1 1935 37.5 204.6 5.5 11.9 6.9 Notes: Exports, the trade balance and interest payments are in pounds sterling. The debt was not revalued into NZ after devaluation. The foreign debt has been estimated by taking the total central government and local authority debt (NZOY, Statistical Summary) and applying the ratios of domicile given elsewhere in the yearbook. Source: NZOY In December 1931, New Zealand followed Australia, among other countries, in introducing exchange control. The purpose of the controls was to ensure that debt servicing obligations would be met. The banks guaranteed to provide the necessary funds to the Government, in return for which they were granted a monopoly in the conduct of foreign exchange transactions. Exports were licensed and the market for foreign exchange outside the banks eliminated. It is interesting that the New Zealand Government responded to the crisis with controls, whereas the Riksbank represented by floating the krona. The Government in New Zealand was in principle conservative, and the controls were not adopted as part of an overall strategy for increasing the role of the government in the economy. The 146 controls were removed at the first opportunity, in June 1932, shortly after a new loan was raised in London (Moore and Barton, 1935, p.365). However the dalliance with controls revealed that the government was unavoidably implicated in the management of the foreign exchange position, because of its overseas debt. It is possible that the Riksbank's policy of floating the exchange rate could not be adopted because no market-clearing exchange rate existed, but the government had its own reasons in any case for resisting devaluation. (Devaluation here refers to a breaking of the link between the New Zealand and British pounds; New Zealand left the gold standard with sterling, but this did not constitute an effective devaluation.) Devaluation would raise the NZ cost of servicing the debt, thereby worsening the government's budgetary position. Since the orthodoxy of budget balance prevailed, devaluation would have to be accompanied by contractionary fiscal policies. This was indeed what happened when devaluation was eventually undertaken in 1933 (Hawke, 1973). The New Zealand Government was also unable to put in place policies to achieve a monetary expansion. The devaluation in 1933 was opposed by the banks, which demanded indemnification from losses arising from any future exchange appreciation. The Banks Indemnity Act committed the Government to exchanging 5% Treasury Bills for any sterling offered by the banks. The effect was to constrain the interest rate on lending in New Zealand to not less than 5% (Hawke, 1973, pp.24-25). This meant that the devaluation did not facilitate an expansion of bank lending in New Zealand. A fundamental problem underlay the Government's difficulties in engineering 147 a monetary expansion by devaluation. New Zealand operated under a 'colonial gold standard', sterling deposits in London taking the place of gold as the reserve asset of the banking system. The banks set interest rates and exchange rates to regulate the demand for advances in accordance with the condition of their London balances. When export earnings were buoyant, interest rates were lowered and sterling sold at a discount (Simkin, 1952). Prevailing banking practice thereby generated a correlation between low interest rates and currency appreciation. The prospect that currency depreciation would allow a larger expansion in lending, avoiding a loss of London funds, was an unfamiliar one for the banks. They predicted that the 1933 devaluation would cause an accumulation of reserves in London, and, because of the Banks Indemnity Act, they were proved right. The contrasting effects of devaluation in Sweden and New Zealand relate to the differences in the structure of their capital accounts. Sweden's was dominated by private capital flows while the government was the main player in New Zealand. Despite some instability, particularly stemming from the collapse of the Kreuger empire, it was possible for the Riksbank to regulate the balance of payments and domestic monetary conditions by judicious exchange rate and interest rate policy. These market instruments were not able to be deployed effectively in New Zealand, for reasons connected with the colonial structure of the financial system and the government's dominant role in operating it. Phase One, Part Two: Fiscal Policy In both Sweden and New Zealand, public works schemes had been used before 148 the Depression to counter unemployment. In Sweden, the limitations of the schemes, and the obstacles to expanding them sufficiently in the face of unprecedented unemployment, stemmed from ideological debate about the effect of government intervention in the labour market, as well as from the problem of finance. In New Zealand, the financing of schemes was the only important consideration. In colonial New Zealand, the government had established a major presence as an employer in both good times and bad, but had not developed an effective contracyclical programme. The role of the New Zealand government as an investor and developer began with the raising of finance in London, but went beyond this to include the planning and construction of projects by the Public Works Department. When completed, projects remained in state ownership and were operated by government departments (the Railways Department, the Electricity Department). This meant that the institutional structure for an expansion in public sector employment was well in place before the Depression. However, a contracyclical fiscal policy had never been operated. In general, government borrowing was reduced as export revenue fell, because debt servicing became more difficult. Expenditure on public works was not expanded in depressions; instead expenditure was related to "either financial or political considerations or to what might be called the logic of construction" (Gibbons, 1977, p.56). In depressions successive governments attempted to expand the numbers employed on public works while simultaneously reducing expenditure: this led to a cyclical pattern in wages, conditions, and the labour-intensity of methods of work. In 149 times of high unemployment, conditions on public works schemes were changed so that they took on the character of relief works, providing only minimal wages under poor living conditions. In 1920 the New Zealand Workers Union succeeded in negotiating an agreement on pay and conditions with the Public Works Department, but the agreement proved difficult to enforce, as works designated as relief works were not covered by it. The economic crisis of 1921 meant that union officials almost immediately saw their agreement circumvented by the reclassification of ordinary works schemes as relief works (Noonan, 1975, p.107). When Labour came to power in 1935, its policy was that relief works would be converted into ordinary public works and wages raised to 'market' levels - the 'market' level having been set by the Arbitration Court under legislative instruction. Expenditure on public works and employment by the Public Works Department almost doubled between 1935 and 1937 (NZOY, 'Employment and Unemployment', 1937-39). There was little difficulty in finding schemes and launching them - in some cases, plans suspended at the beginning of the Depression were simply revived. Labour financed its programme by borrowing from the newly-created Reserve Bank and from the government-owned Post Office Savings Bank. The Reserve Bank Act was amended to compel the governor to act on the instructions of the Minister of Finance. Interest rate controls were imposed on the trading banks, which enabled the Post Office Savings Bank to attract considerable funds. At first, these measures caused no difficulty, because of the high level of reserves accumulated in London by the previous government. However by 1938 reserves were substantially diminished. The interest rate controls contributed to an outflow of capital from New Zealand, mainly to 150 Australia. According to economists of the day, the public works programme itself contributed to the capital outflow by raising wages, fuelling a belief among investors that the prospects for the private sector in New Zealand were not good. Holt argued: "[T]he low rates of interest allowed on deposits in commercial houses have caused funds to move to the Post Office Savings Bank, where they have helped to finance the Government Public Works programme. This programme has been held necessary to absorb labour owing to the slow rate of investment in private industry." (Holt, 1939, p.67) The margin of profit obtainable in industry was too low - partly because of "the necessity of competing against the Public Works Department's standard of wages and working conditions when engaging labour" (ibid.). Copland also criticised Labour's programme as flawed because of the fixing of wages at too high a level. The consequence of "a level of costs that inhibits enterprise" is ".. a struggle .. as to the respective places of public and private enterprise. As usual in such a conflict, the liquidity preference of entrepreneurs is strong. It shows itself in some contraction of enterprise at home but more aggressively in the transfer of capital abroad." (1939, p.29) In principle, Labour could have raised interest rates to stem the outflow, thereby arriving at the textbook position for a country facing a current account deficit at full employment, of expansionary fiscal policy and tight monetary policy. Higher interest 151 rates might have stimulated domestic saving, reduced private investment, and attracted an inflow of capital to finance the government deficit. However it is not certain that raising interest rates would have been sufficient to avoid exchange controls, because of fundamental problems in the relationship between the Labour Government and the London financial markets. London wanted a change in fiscal policy, for reasons discussed further below. In any case, higher interest rates were not politically acceptable nor fiscally convenient. Exchange controls, covering all current and capital account transactions, were imposed in December 1938, shortly after Labour's sweeping victory in the 1938 election. Sweden In Sweden, the institutional structure for the provision of relief works was more recent and less entrenched in the heart of the public sector than in New Zealand. In 1912 the Riksdag commissioned a report on the planning of state and communal works with reference to their use against cyclical unemployment. A seven year plan was formulated for the railways, designed to be of contracyclical effect (Gustafsson, 1977, p.121). In 1914 the Unemployment Commission (Arbetslöshetskommission, AK) was set up, and a grant of 5m.kr. was made by the national government to support commune relief to the unemployed (Heclo, 1974, p.93). Whereas in New Zealand wages on relief works were lower than on ordinary public works for financial reasons, in Sweden the principle of 'less eligibility' was advocated, in the belief that unemployment was caused by wages being too high. The use of low-waged relief work to undermine market wages was therefore acceptable to 152 bourgeois opinion and AK administrators. This brought AK into direct conflict with the unions. In the 1920s two Social Democratic minority governments were forced to resign because of conflicts between the unions and AK which the Social Democrats were unable to resolve in the unions' favour. Conflict over relief works administration was sufficiently intense that the main anti-unemployment policy advocated by the Social Democrats in the 1920s was the extension of unemployment insurance. After a decade of deadlock with the bourgeois parties, the Social Democrats fought the 1932 election with a new programme in which insurance was pushed to one side. For relief of unemployment, SAP proposed the expansion of loan-financed public works employing workers at union wage rates. Yet again, a majority in the Riksdag eluded the party, but the policy was nonetheless implemented by agreement with the Agrarian Party. In the 'kohandeln', the Social Democrats approved measures to support prices in agriculture and the Agrarian Party gave up its opposition to the expansion of relief works and the raising of wages (chapter 4). The financing of additional public works required a relaxation of the Budget Code. The Code dictated that borrowing could only be undertaken for self-liquidating capital projects, and that, aside from such borrowing, budget balance had to be maintained. Gunnar Myrdal formulated a proposal for a new budget rule of 'cycle budget balance (CBB) whereby the deficits of depressions would be repaid by running surpluses in booms. Myrdal argued that with a stable tax scale, tax revenue fell with any fall in private income, and the government exacerbated the depression when it cut its spending to balance the budget. On the expenditure side, central and local governments could not avoid the 'social overhead cost' of unemployment-related 153 expenditure. These automatic elements in the budget had led to deficits in 1931-32 and 1932-33 under the Liberal Government, which financed them by raiding the Alcoholic Beverage Fund (Uhr, 1977, p.117). It was widely recognised that to balance the budget in a depression was very difficult even for a conservative government. The CBB idea proved highly saleable to capitalists. It appeared to allow the government to use its economic management potential without increasing the public debt or the relative size of the public sector in the long term. The editors of Fortune magazine commented: "The incredible fact to be noted by Americans of every stripe is that Sweden has gone in for a far-reaching New Dealism without scaring, overtaxing, or otherwise discouraging private enterprise an investments. One of the chief instruments for accomplishing that seeming miracle is a budget; a budget that ultimately balances in fact but is nominally unbalanced all the time." ('That Wonderful Swedish Budget', Fortune, Sept 1938, p.66) The applause of the editors of Fortune magazine for the expenditure proposals of a Swedish government may seem remarkable with hindsight, but the Government had shown great caution in the implementation of a fiscal expansion. Not only did the Social Democrats run a lower deficit in 1933 and 1934 than did the Liberals in 1932, they also reduced the debt in 1935-37 (Kock, 1961, p.179). The success of monetary policy, and an improvement in export demand, meant that unemployment fell without 154 massive fiscal intervention, and tax revenue recovered. Furthermore, the expansionary monetary conditions enabled the Government to finance its deficits in 1933-34 without provoking a rise in interest rates. Planning and the Role of Government in the Postwar Years New Zealand In this section it is argued that the attachment of successive New Zealand governments to intervention and regulation, particularly through the use of import and exchange controls, stemmed from the conjunction of two factors. The first was the long-standing role of the government in developing the New Zealand economy; the legacy of 'colonial socialism', in Butlin's memorable phrase. The second was the decision to reduce overseas borrowing, which began as an anti-colonialist policy on Labour's part, but was continued after 1949 by the right-wing National Government, somewhat paradoxically, as part of the programme of maintaining the sterling area and helping Britain to 'win the peace'. In Butlin's account of trends in public/private relationships in Australia, "'colonial socialism' entailed direct action by governments to attract foreign (British) resources of capital and labour, through public borrowing overseas and large-scale programmes of publicly-assisted migration; the investment of British capital in publicly-owned fixed assets in Australia; the concentration of this investment in public business undertakings, primarily in transport and communications; and the delivery of marketed services by these public enterprises" (Butlin, 1983, p.82). New Zealand's 155 first 'colonial socialist' was Julius Vogel, colonial treasurer, premier, and AgentGeneral in London at various times from 1869 to 1887. Vogel's programme rested on borrowing for public works and the promotion of immigration, measures which would yield the export growth and tax base for the government to service the debt. Despite a backlash against Vogelism in the 1880s, the raising of loans in London continued to be a route to political popularity in the following decades. Successive governments made heavy use of the privileged access to the London financial markets granted by the Colonial Stock Acts. These Acts made colonial government stock an authorised trustee investment. The availability of local British authorised investments was often limited, virtually guaranteeing an outflow of capital to the colonies (Strange, 1971, pp.45-6 and pp.141-2). The role assumed by the government also arose from private sector weakness. Speculative non-government borrowing for farmland purchases had culminated in a crisis of confidence in private New Zealand borrowers in the 1880s, with major mortgage lenders in severe difficulties. The Liberal Government sought to ensure a continued flow of money into farming in the 1890s by offering its guarantee on such borrowing in London. It also took the Bank of New Zealand, the only domestic bank (others were joint Australia-New Zealand operations) into public ownership when it faced bankruptcy in 1894. Among the factors contributing to the dominant role of the government, one must include the distinctive organisational structure of the export trade. While the export sector was under private ownership, and in its own way was highly entrepreneurial, farmers were not hostile to government activity in many areas. Small 156 proprietorship created a need for larger collective and cooperative organisations to service agriculture. While farmers established their own nongovernment cooperatives to undertake some functions, they were also strong advocates of government involvement in the provision of services to farming. The influence of the farmers is one explanation of the absence of a truly laissez-faire political party (until the 1980s). A high level of government involvement in the economy was favoured by the political right as well as the left. A fundamental reason for farming interventionism was that farmers were not only economically but also politically powerful. Until 1945 they were explicitly favoured by the 'country quota' in the electoral system. Under the country quota, 28% was added to the population living outside boroughs and towns for the purpose of defining electorates. In 1889, when the 28% quota was set, there were seventy M.P.s, fifty-eight from rural electorates and twelve from city electorates. M.P.s for urban electorates spoke against the underrepresentation of the urban minority in the parliamentary debate, but they were outvoted by country members. The quota was first established in 1881 (at 33.3%), and it is possible that its establishment and subsequent revisions were connected with the reduction and (finally, in 1889) abolition of plural voting on the basis of landholding. A significant part of the private sector which developed outside agriculture operated hand-in-glove with the government. Gardner notes that in the Vogel era "the colony's 'business politicians' .. moved easily between dealing with public and private affairs (including their own), regarding the two as readily compatible, and commercial contacts as part of a politician's necessary equipment." (1981, p.72) 157 Sinclair has suggested that there were "unacceptably close links between business and politics" in nineteenth century New Zealand (1969, p.163). It could be argued that personal contacts between business and government are a natural feature of a small society. Olsson notes the close relationship which developed between business and the Swedish state during WWII, "above all as the result of personal 'infiltration' into the war administration" (1977, p.177). However, the difference between corporatism and statism can be discerned in this area also. In Sweden the relationship between capital and the Social Democratic Government was inevitably constrained by the relationship between the Social Democrats and the unions. In New Zealand, the lack of union influence over the government left even Labour politicians free to promote industrial development by dealing with businessmen, as always in 'the national interest'. A striking example is the relationship between the first Labour Government and the builder James Fletcher. Despite criticism from the unions over the exclusion of individual builders and union cooperatives, the Government entrusted Fletcher with its house-building programme. "Savage [the Prime Minister] was not going to allow the unions to play with the millions of pounds being spent on housing." (Gustafson, 1986, p.198) However, there was one section of capital which Labour could not coexist with: the financial interests domiciled in London and backed by the British Government. When comprehensive exchange controls were introduced by Labour in 1938, they provoked a crisis in UK-New Zealand relations. The British Government and the Bank of England maintained a close critical scrutiny of Labour's public works expenditure, the social security scheme, and the industry development plans. When exchange 158 controls were imposed, the Government was informed that access to the British market for New Zealand exports might be reduced if the public works and social security measures were not reviewed. Refinancing of a loan falling due in 1939 was accomplished only after long negotiations, on conditions regarded by the New Zealand Government as humiliating (Gustafson, 1986, pp.245-6). While relations improved during the war, the 'replacement of London indebtedness' remained a key part of policy after the war ended (Wilson, 1950). London's approach to the management of New Zealand's sovereign debt necessarily had political as well as financial aspects, because of the risk of repudiation. This risk was small, but some left-wing members of the Labour party did advocate default. The debt was an obstacle to socialism: London resisted lending to New Zealand for 'social' expenditure, preferring to invest in projects which provided the infrastructure of export development. The British Government also criticised and opposed Labour's industrialisation plans. London's preferences could be explained by the political pressure exerted by British industrialists. The City could also have taken a view of country risk in which the promotion of exports reduced the risk of default. Aizenman has suggested that a reduction in trade dependency will increase the risk of default by lowering the cost of economic closure for the defaulting country (Aizenman, 1990). This logic can rationalise London's opposition to social expenditure and industrial development, yet in reality the risk of default was small, as New Zealand's trade dependency was very high and would remain so even if an industrialisation programme was vigorously implemented. Opportunities to sell elsewhere than Britain were so limited that the 159 closure of access which would follow default would be enormously costly to New Zealand. When Labour left office in 1949, the domestic political conditions for the removal of exchange controls and the resumption of borrowing were in place, but international conditions now conspired to prevent this. New Zealand was part of the sterling area and agreed to contribute to the viability of the area by achieving a surplus on nonsterling transactions. New Zealand also entered into long-term contracts for the supply of food to Britain, while giving preference to British imports. There are several indications that these arrangements reduced the gains from trade. In the early 1950s, prices set in the long-term contracts fell below those achieved by Argentina, Denmark and the Netherlands in their sales on the London market. At the same time, complaints were voiced in New Zealand about the quality of goods supplied by Britain (EIU, 1952, No 2; 1954, No 10). The National Government attempted to reduce government intervention and planning by removing sterling area and European Payments Union (EPU) import licensing, but it retained an exchange allocation system which rationed foreign exchange on the basis of past usage. When the Korean War boom ended, allocations had to be cut. Criticisms of the exchange allocation system came particularly from manufacturers, who argued that exchange allocations did not secure the necessary supplies of raw materials for industry to maintain employment and operate to capacity. 'Planning' had gained some influential supporters. The arbitrariness of the exchange allocation system was the cause of this problem, and the implementation of a market mechanism for the allocation of foreign 160 exchange might have appeased the manufacturing faction. In 1954 the exchange allocation system was ended, and monetary policy began to be used to control demand for foreign exchange. The practice of monetary control was itself replete with rationing devices. Interest rates were controlled, and a Capital Issues Committee regulated long-term borrowing. In 1955/56 monetary conditions became very tight, but National managed to avoid the restoration of import controls, only to lose the 1957 election to Labour, which reimposed a comprehensive system. Labour only held office until 1960, but import licensing endured longer. Fundamentally, the reason was that National could not reconcile the use of monetary policy to regulate the demand for foreign exchange with the maintenance of full employment. An additional instrument was needed. Devaluation was the obvious candidate, but economic advisors to the government recommended the maintenance of a stable exchange rate. The case against devaluation was presented by the Royal Commission on Monetary, Banking and Credit Systems, which reported in 1956. The Commission rejected the use of exchange rate adjustment to manage New Zealand's current account on several grounds. A technical objection to floating the exchange rate was the thinness of the foreign exchange market. A flexible exchange rate would have to be administered by the Reserve Bank. The appreciation and depreciation of the currency in line with rises and falls in export prices was regarded as destabilising to the domestic economy and a deterrent to the development of manufacturing industry. The export cycle would be better managed by maintaining a high average level of foreign exchange reserves (1956, para.794). The Commission argued that exchange rate adjustment did not affect real 161 national income (implicitly, it assumed that New Zealand was a price-taker in world markets and the terms of trade would therefore be unaffected). The ramifications of this argument were twofold: to discount any incentives to export development or import substitution generated by depreciation, and to emphasise the effect of depreciation on the distribution of income (bearing in mind that changes in the distribution were assumed to exert no effect on total income). An explanation for the Commission's neglect of incentives is the pervasive 'elasticity pessimism' of the time. A study published in 1951 argued that the short run price elasticity of supply of exports was "almost certainly negative". This perverse behaviour stemmed from the special conditions prevailing in agriculture. The author of the study pointed out that this result, along with a low demand elasticity on the import side, meant that exchange rate variations could not correct short-term movements on the current account (Bergstrom, 1951, p.28). It was unlikely that the long run response to devaluation would be so unhelpful, but the long run would not arrive because of the domestic response to the effect of devaluation on the income distribution. The Commission was keenly aware that depreciation would cause not only a rise in import costs, but also a subsequent increase in domestic costs (para.301). The likely response of wage bargainers to a devaluation was clear if unhelpful. The FOL indicated that, in effect, it supported exchange rate appreciation but not depreciation (!) (para.766). Since the AC was required to take changes in the cost of living into account in determinating General Wage Orders, it was inevitable that wages would rise upon a devaluation. The Commission noted that such an effect would arise even without the formal mechanism 162 of an AC order, a perspicacious remark in the light of events in 1968, after New Zealand did finally devalue (see ch.7). The Commission declared itself in favour of the use of monetary policy to manage the trade balance, in preference to import controls, but it reserved escape clauses which indicate how deeply government regulation had become entrenched in policy discussions. If deficits persisted when monetary and fiscal policy had restrained demand to a point where "any further reduction would cause serious unemployment", controls would be "essential in the national interest" (para.754). The Commission recommended that controls on capital flows should remain at all times. In the end, successive governments failed to maintain free trade because of their commitment to full employment. Given the structural and institutional conditions facing them, they could not see a route to allowing market forces to rule in international trade. Elasticity pessimism was closely connected to doubts about the ability of the private sector to respond to changes in incentives and to achieve gains from trade. These doubts stemmed in turn from the government's historically dominant role in developing the economy. As summarised by an early observer of the National Party's attraction to Labour's planning policies: "Government initiative remains dominant... This state of affairs dates from pioneering days... it endures and by maintaining onditions unfavourable for the development to maturity of a private capital market and private entrepreneurship, tends to perpetuate itself." (Blakey, 1958, p.198) 163 Sweden In Sweden, as in most countries, the powers of the government to regulate the economy were greatly extended during WWII. When the war ended, the Myrdal Commission for Postwar Economic Planning proposed continuation of some wartime powers. Business responded with a campaign against planning: the planhushållningsmotständet (PHM), which was ultimately victorious. Import controls were relaxed in 1945-6, but reimposed in the period 1947-9. In the 1950s controls were steadily removed. The credit market remained regulated, largely to provide lowinterest finance for housebuilding, but overall the 'anti-planners' had won. A compromise was reached whereby the Social Democrats were able to achieve their main aims (full employment and expansion of the welfare state) without taking over ownership of capital or significantly curtailing the managerial powers of owners. Many commentators have emphasised the political conditions leading to compromise, which stemmed from the system of proportional representation (PR). The effect of PR was that the Social Democrats rarely had an outright majority in the Riksdag during the entire period (from 1932 to 1976) when they dominated the government. At the same time, their solidly high representation also ensured that a government without the Social Democrats was most unlikely. Businesses intending to remain in Sweden would have to live with the Social Democrats. As the Minister of Finance, Ernst Wigforss, put it, the political situation meant that those with power in the private sector did not assume "that the current tendencies in government are a 164 transitory phenomenon, that a political change will take place in the future near enough that a discussion based on the possibility of concessions, accommodations and compromises becomes unnecessary" (quoted in Martin, 1981, p. 145). On the Social Democrats' side, the constraints of the electoral system were reinforced by the recognition that large parts of private sector activity, including multinational operations, could not be managed effectively by the government. The potential costs of confrontation with the business community were high. SAF sponsored a publicity campaign against planning and raised threats of an investment strike and an outflow of capital from Sweden. But realism on the part of the Social Democrats was not enough: it was essential that ways were found of achieving full employment within the boundaries set by the need for cooperation with capital. One part of the negotiated settlement to the planning debate saw the government able to implement contra-cyclical demand management policies, but excluded from micro-level involvement in investment planning. Pontusson gives an example from the conduct of monetary policy. While the Riksbank imposed lending requirements on financial institutions to ensure a supply of cheap credit to central government and the housing sector, "the central bank consistently avoided detailed intervention in the supply of credit to business. Whenever the central bank restricted the release of corporate bonds, the commercial banks (all but one private) were allowed to issue corporate bonds on a rotating basis, and it was up to each bank to decide which bonds to issue when its turn came. In this and other respects, the big private banks can be said to have shielded business against the state." (Pontusson, 1991, p. 167). Pontusson argues that institutional arrangements which "would seem to 165 provide the potential for selective state intervention" were not in fact used selectively within the corporate sector; for example, public pension funds were not used to extend public control over investment because of legal rules governing the lending practices of the funds (ibid.). (Pontusson argues that selective state intervention became more widespread in the 1970s, but was confined to defensive 'rescue policy'. The state continued to be excluded from involvement in financially healthy operations.) Manipulation of the tax system also provided some leeway for compromise. Sweden's favourable corporation tax regime is a striking indicator of the incentives to private sector investment put in place by the government. The system of cyclical investment reserve funds, a Keynesian stabilisation measure, contained major tax breaks. Throughout the postwar years corporation tax was reduced as gross profit rates came under pressure from rising labour costs (Lindbeck, 1975, *). By 1985, the effective marginal tax rate on capital was approximately zero, becoming negative for higher rates of inflation (Steinmo, 1989, p. 519). Large firms were best placed to exploit the advantages of the tax system. The relatively advantageous treatment of large, established firms compared with new, small firms reflected the influence of the former in SAF and their role in Sweden's export trade. Favourable treatment of large firms is also apparent in Sweden's leniency towards concentration of ownership and lax regulation of monopoly and merger activity (Israel, 1978; Kurzer, 1993). The need to compromise with capital was a clear restriction on the implementation of a socialist agenda. However, it did not dictate that the government would be confined to the conduct of aggregate monetary and fiscal policies. 166 Socialisation could still occur through the collective provision of services which were not provided by the private capitalist sector; a socialisation of the household, in effect. There are many accounts of the development of the Swedish welfare state, but, from the perspective of the 'negotiation' with capital, the emphasis on social reproduction is particularly interesting. In the 1930s, the 'Population Question' was of almost as much concern as the unemployment problem. The 1920s had seen a sharp decline in Sweden's birthrate. Right-wing commentators were the first to become concerned at the prospect of a decline in the Swedish population. Alva and Gunnar Myrdal were responsible for bringing population policy to the attention of the Left with their book Kris i befolkningsfrågan (Crisis in the Population Question (1934)). They argued that the population crisis was a consequence of the declining economic role of households and the marginalisation of the family in the structure of the economy. The changing social structure of old-age support was one cause of Sweden's declining birthrate. The development of pensions and old-age insurance meant that security in old age was no longer dependent on one's own children. However, for society as a whole, an adequate rate of reproduction was required to maintain the productive capacity of the economy and its ability to support its old. For the government, an aging population could induce a fiscal crisis as tax revenue from the working-age population fell relative to expenditure obligations. The Population Question provided the basis for a wholesale review of the scope of government activity. In the 1930s, this review was focussed on the restriction in the Budget Code which stated that capital projects had to be self-liquidating. Classical 167 economic theory argued against loan-financed consumption expenditure on the grounds that such borrowing imposed a burden on future generations. This argument depended on the equation of consumption expenditure with unproductive expenditure, so that "unproductive expenditure, as opposed to productive expenditure, is to be regarded as consumption from the present generation's side, of a character such that it does not improve economic conditions in the future." (Myrdal, 1934, p.106) Myrdal, supported by Lindahl, identified a large category of expenditure projects which were not self-liquidating but which were, nonetheless, 'capital' projects in the sense that they increased the potential future income of the economy. There is a wide range of conditions under which the public good characteristics of an investment project might prevent recovery of the income generated, but Myrdal and Lindahl focused on one particular area: human capital investment. Public sector projects which raised the human capital stock would not yield a dedicated income stream, but would raise the permanent income level in the economy, and the potential (full employment) tax revenue of the government. The invocation of the concept of human capital introduced great fluidity into the definition of current and capital expenditure. Many current expenditures turned out to preserve or augment human capital. For example, the payment of sustenance to unemployed workers was a minimum requirement to prevent a loss of human capital, 168 and the substitution of relief works for sustenance payments could accomplish an additional increase in economic activity and permanent income. Public works increased the morale of the labour force and its future production capacity: "In considering additional government expenditure on public works etc., one should further observe that a certain part of the increased consumption, in particular that which is the working class's share, is of a productive character. Those subject to unemployment are forced to a lower living standard which one can see on a longer view causes deterioration in the nation's human capital, i.e. the unemployed and their relatives' productive capacity for the future." (Myrdal, 1934, pp.203-204) Lindahl suggested that the public works programme should be extended to nonrevenue-generating works such as schools. Projects would be paid for out of current revenue but over a period corresponding to the service life of the capital. Fortune magazine explained: "[H]ospitals, schools, public buildings, and housing for the poorest classes - which are precisely the public works that the Social Democrats are most anxious to undertake - are not going to be income-earning investments in the strict sense of the word. And on the other hand they are too expensive to be financed by piling up deficits in the ordinary budget to be paid back in five years [under the CBB rule]. ... "[S]uch works should pay interest on their investment; but since many worthwhile social enterprises would be unable to earn the required rate 169 of interest, they will be subsidised out of the ordinary budget to enable them to pay it. ... "[This system] allows the government to borrow in the open market for housing, hospitals, public buildings, etc., even though these undertakings will never make an adequate profit." (1938, p.145) It seems to have been an important selling-point of Lindahl's proposal that it called for increased capital expenditure (on schools, hospitals, etc.). Capital projects could be phased out in an upturn, ensuring that private activity was not crowded out (Uhr, 1977, p.97). It was also convenient that the life of the capital could be taken to imply an orthodox repayment period, even though the repayment had to be from increased taxes. However, both these arguments were spurious: the first because the capital investment was merely the starting point for a reorganisation of production that would subsequently require considerable current expenditure, the second because the true 'repayment period' should be based upon the increased productivity of workers with augmented human capital - i.e. on their working lives. It is not surprising to find that by the end of the 1950s, many Swedish economists agreed that the budgetary distinction between capital and current expenditure was unhelpful and prone to manipulation by the government (Lindbeck, 1975, pp.83-85). The population policy debate delineated and justified a large area of new activity for the state. Public sector expansion into human capital investment did not provoke complaints of crowding out from the private sector, as capitalist activity had 170 not extended to health or education provision for the mass of the population. The sectors on which the state encroached were sectors in which household production had previously dominated, where the work was done by wives, daughters, governesses, nurses and servants employed in the home. It was necessary to bring some members of the professional middle classes, such as doctors, into state employment, and this evoked some resistance, but the government was not encroaching on the core of capitalist activity by extending its expenditure in this direction. It is even conceivable that the approach to population policy taken by the Social Democrats was more advantageous to capitalist interests than that advocated by the right-wing parties. There was a political consensus that the population problem justified state intervention, but the Right preferred interventions in domestic life and household organisation, such as limitations on birth control and restrictions on women's work. Such measures would adversely affect firms which utilised female labour. By contrast, there were some elements of symbiosis between the new areas of public activity and capitalist enterprise, previously constrained by poverty and low labour force quality. The education programme addressed the problem of how to slow the tendency to capital export that had emerged in the 1920s, while the housing programme, in particular, provided a market for building materials, including innovations in prefabrication, and for domestic appliances. The domestic market provided a platform for the launch of new exports for companies such as Elektrolux and Husqvarna. In New Zealand there was also concern at the fall in the rate of natural increase in the population. There was potential for conflict within the Labour Party between 171 the Catholic wing and others over issues such as abortion, which was the subject of a Commission of Inquiry. However, the form of state intervention in the economy adopted by Labour satisfied both sides - the family wage and child benefit supported the family, raised men's incomes, and facilitated full-time housework by women. A stronger capitalist class in New Zealand might have presented Labour with starker choices. Conclusion In the last chapter, statism and corporatism were contrasted from the perspective of labour; in this chapter, the same contrast emerges on the side of capital. The imposition of restrictions on international trade and capital flows can be seen as entailing the appropriation by the government of additional economic policy instruments and as a curtailment of private sector freedom or power. The restriction of currency convertibility is a part-way step towards a planned economy, in which firms are not freely able to convert their domestic currency holdings into either foreign currency or goods and services. In New Zealand the government appropriated these powers of planning with remarkably little debate. The controls imposed in 1938 had previously been used by a conservative government in 1932. After the controls were in place, the government realised that the powers appropriated to deal with the exchange crisis would also allow the introduction of a planned programme of industrialisation. The Opposition criticised this extension of the role of the state, but war intervened, and in the 1950s the National party proved incapable of entirely discarding such a useful instrument of 172 policy. There was considerable support among economists for the strategy of protection, based on the dynamic gains from industrialisation, which were thought to outweigh the static costs of inefficiencies arising from protection. These ideas are now largely forgotten in the face of the discovery of substantial dynamic gains from exportoriented development. These gains are supposed to arise because an outward- oriented policy allows entrepreneurship to thrive, and economic growth is thereby promoted while monopolistic distortions are avoided (see, e.g., Meier, 1990). There were several historical and practical (rather than ideological) reasons why New Zealand governments had little faith in entrepreneurship. Government policies then validated these beliefs. One important 'objective' difference between Sweden and New Zealand concerned their conditions of access to export markets. The implications of New Zealand's dependence on the British market have already been noted. In the postwar years destinations of exports were diversified, but access to markets still had to be tediously negotiated by government officials, and continued to be affected by political alignments. By contrast, Sweden contrived to remain neutral in two world wars, and fended off pressures to join a trading bloc. The Swedish response to British pressure to enter a bilateral clearing arrangement in the 1930s provides an interesting insight into Swedish political economy. Swedish officials claimed that clearing amounted to a state-controlled external trade system, and that the introduction of clearing would push Sweden towards Germany, which operated a government-regulated trade system. Sweden proposed to deal with its trade surplus with Britain by voluntary 173 action on the part of importers, and, lending credibility to this suggestion, leading figures in industry entered the negotiations, including Wallenberg and Forsberg (of SKF). Marcus Wallenberg observed that Sweden could easily lend to Britain to cover the trade deficit, arguing that it was absurd to suggest that every country had to have trade balance (Nilson, 1983, pp.144-147). It is somewhat paradoxical that New Zealand, with its history of large-scale capital imports, should have adopted controls on capital flows, while Sweden did not adopt controls despite a tendency to capital outflow. It would seem at first sight that Sweden had more to gain from restricting capital mobility. One answer to the paradox is that capital mobility was sharply reduced by international events in the course of the 1930s. This was to Sweden's advantage (in terms of the effects on employment and real wages), while New Zealand was faced with finding a development policy which was not as reliant on capital inflows as previously. Another answer is that Swedish capital outflow was the consequence of the much greater role of capitalists in the country's political economy, whereas New Zealand's borrowing was an aspect of the dominant role of the government in the economy. Government dominance led to controls; capitalist influence restrained the inclination towards controls in Sweden. Butlin argues that the Depression saw a sea-change in the practice of colonial socialism in Australia, with the disavowal of borrowing coinciding with recognition that the rural economy could not absorb more labour. The years after WWII were marked by a 'relative withdrawal' of government, reflected in the declining share of public sector investment in total investment. However this was counteracted by the increased regulatory powers assumed by the Federal Government (Butlin, 1983). In 174 New Zealand this tendency was even more marked because of the absence of constitutional restrictions on the powers of (central) government. It would seem that colonial socialism did not die, but merely changed its stripes. The government retained its dominant role in the development process, but in place of London borrowing and public investment, it utilised planning, economic regulation and import controls. The necessity of obtaining private sector compliance and co-operation led the Social Democrats in Sweden to adopt policies which were at first sight less radical and ambitious than those of Labour in New Zealand. However, Social Democratic thinkers marked out a large area of social expenditure for government programmes, and thereby laid the long-term basis for a large expansion in government activity in Sweden. By contrast, Labour was socially conservative. The welfare state that the party put in place in 1938 failed to grow and develop after WWII, as is discussed further in chapter 8. 175 Chapter 6 Full Employment 1950-1980 It has been argued that New Zealand adopted protectionist policies because, in the absence of effective opposition from the labour market parties, protectionism offered an attractive instrument with which to maintain full employment. This chapter examines how this instrument was used and why a policy of trade liberalisation and reduction in barriers was eventually embarked upon. It is argued that protectionism in New Zealand led to a worsening of the import dependence it was intended to reduce, casting doubts on its prospects as an effective employment policy. The country did not succeed in developing new competitive industries while maintaining full employment, and, in the end, full employment was abandoned. In Sweden the maintenance of full employment centred on investment, with policies designed to reduce fluctuations in private sector investment augmented by the expansion of the welfare state. The policy of promoting and stabilising private investment proved to have severe limitations. The public sector role increased and the competitive sector contracted. This eventually caused a breakdown in the postwar 'corporate compromise', as well as bringing fiscal and current account difficulties. The inability of both countries to achieve sufficient competitiveness while maintaining full employment raises some questions about the connections between labour market performance and trade policy. One explanation of the apparent conflict between competitiveness and full employment is that there is excessive wage pressure 176 at full employment. This chapter and the next investigate this proposition. Excessive wage pressure occurs when bargained real wage increases exceed warranted real wage increases. This chapter examines the determinants of warranted real wage growth. It is argued that the instruments used to maintain full employment - protection in New Zealand and public sector expansion in Sweden - depressed productivity and thereby depressed warranted wage growth. New Zealand's productivity performance was worse than Sweden's, possibly because the productivity effects of protection were worse than the effects of public sector growth. New Zealand: Trade Restriction as an Employment Policy A pessimistic appraisal of the potential for growth in traditional exports, or diversification into new exports, led to an emphasis on import substitution as a strategy for growth in postwar New Zealand. The objectives of both Labour and National governments included the maintenance of a net population inflow, which also had the effect of stimulating the domestic economy, particularly the construction sector. Policy was therefore oriented to 'extensive' growth, rather than increases in real wages and productivity, although this emphasis began to be reviewed in the late 1960s. An important implication of the 'extensive' orientation was that industry closures were avoided, despite low unemployment. The development of new industries was achieved by the introduction of 'new' labour rather than the shifting of existing workers. Industrial employment could be promoted (i.e., implicitly subsidised) through two channels: the making available of imported inputs at the overvalued exchange 177 rate, and the exclusion of imported final goods which would compete with the target industry. Arguably the first of these channels had mixed effects on employment, as firms tended to favour import-intensive processes. However this tendency was controlled by the Department of Industries and Commerce, which aimed to maximise the employment-creation stemming from the granting of licences, within limits. It was recognised that simple employment-maximisation would entail efficiency losses, and attempts were made to identify the most productive areas of employment. However the judgments made by the Department of Industries and Commerce contained significant social policy 'biases'. Administrative decisions created and maintained employment in 'the national interest'. Under the rubric of the national interest came diversified economic development, reduction of external trade dependence, development of strategic industries, utilisation of indigenous raw materials, and maximisation of 'productive and useful' employment (Department of Industries and Commerce Annual Reports (DIC AR), 1947, p.5; 1958, pp.12-19). One sector favoured for development under these criteria was the building industry, which was protected from the import of prefabricated components. An early report emphasised the employment-creating potential of this sector: "The group of industries is an important one not only because of the essential end-use of its production, but also because of the relatively high incidence of male labour involved, and the fact that indigenous raw materials [wood] enter largely into the production." 178 (DIC AR, 1947, p.5). Three elements came together in the building industry: male labour, either unskilled or with traditional skills acquired through apprenticeship; an 'essential' product, housing, accorded social priority with little regard to opportunity cost; and use of domestic raw materials. The last consideration flowed from the desire to reduce import dependency, but in terms of the overall effect on the balance of trade, the results were equivocal. The development of the export potential of forest products was impeded by the low export price caused by the overvalued exchange rate. One measure used to ascertain whether an industry was efficient or economic was 'New Zealand value-added', defined as price per unit less import costs. The use of this criterion had advantageous consequences for industries with high labour costs, which would exhibit high New Zealand value-added, so long as those costs could be passed on into prices. (Prices were often subject to controls, but the purpose of controls was to limit profits, not to restrain costs. Indeed, profit control was preferred to price control in the 1970s.) The promotion of competition played no part in the import licensing regime; instead, great importance was attached to the existence of economies of scale, and it seems that administrators were resigned to a monopolistic industrial structure because of the small size of the local market. It was possible to check for distortions introduced by protection by comparing New Zealand prices with world prices (for an analysis on this basis, see Lane, 1970). However relatively high New Zealand prices were not always seen as a reason for the reduction of protection, especially when high labour costs were the cause of the discrepancy: 179 "It may not always be possible to achieve close price comparability with imports. When labour is a large element in cost - and this is so in some of New Zealand's older industries which have developed over the years - it is not necessarily in the best interests of the economy or of society to insist on the New Zealand industries' competing in price with imports which from time to time may undercut the New Zealand price." (DIC AR, 1960, p.12) The Manufacturers Federation also pointed to the social advantages of protecting industries with high labour costs. The Federation claimed that "local industry must have adequate and permanent protection to safeguard 'the standard of living, the livelihood of all those engaged in industries'" (Simkin, 1962, p.390). Simkin commented that this attitude was "largely common ground for politicians, trade unionists, and manufacturers, and the greatest of all impediments to a competitive economy in New Zealand" (ibid.). A tendency for protection to accommodate high labour costs was also a feature of the Australian trade regime, although in Australia tariffs were preferred to import controls with the exception of a period from the late 1940s to 1960. Australian tariffs were 'made to measure' to compensate producers for the cost disability brought about by high wages. This meant that the highest rates of protection were accorded to the most labour-intensive industries (Anderson, 1987, p.168), a pattern one would also expect to find in New Zealand. If labour intensity was also associated with low skill levels, then this would imply that the benefits of protection accrued most greatly to 180 unskilled and semi-skilled workers, supporting their wages, which were historically high relative to the wages of skilled workers. A bias towards less-skilled labour could also be expected for other reasons. It would seem likely that this policy decisions of the Department of Industries and Commerce would favour protection for those workers most vulnerable to unemployment, and would promote the development of industries which would create jobs which could readily be filled by less-skilled workers. There is limited evidence on this issue, but a study by Lang found that levels of effective protection were negatively correlated with industry average wages (1989, p.41). Other hypotheses modify the prediction that protection favoured less-skilled workers at the bottom end of the wage hierarchy. To the extent that protection slowed the rate of technological change, it may be thought to have been in the interests of workers with traditional crafts and skills. There were some signs of a pro-male bias in New Zealand trade policy; for example in the Korean War boom women's employment in manufacturing declined because the government took advantage of the favourable terms of trade to ease import controls on clothing. More generally, manufacturing industry was male-dominated relative to the service sector, which did not benefit from protection due to being 'naturally' sheltered. It is conceivable that protectionism slowed the growth of the service sector by creating disincentives to women entering the labour market. If the 'family wage' earned by men was indeed sufficient to purchase all the household's necessities, then would only enter the labour force to earn money to purchase 'luxuries'. If these were very expensive, or not available, then the real wage (in terms of consumption goods available for purchase) 181 facing women was accordingly rather low. However, if protection sustained higher levels of unskilled and semi-skilled employment than would have been maintained under free trade, this might be expected to raise the representation of women in industry. In fact the proportion of women employed in industry has been similar in Sweden and New Zealand. A systematic attempt to test the pattern of trade protection as it stood in 1981/82 has been made by Gibson and Lattimore (1991). They tested four hypotheses which fell broadly into two categories of model: self-interest models of public choice based on industry voting strength and the formation of effective pressure groups, and 'social concern' models reflecting a desire to protect low waged, less-skilled workers and to diversify the economy. Gibson and Lattimore confirmed Lang's finding that assistance was greatest for low wage industries employing unskilled labour, but they also suggested that labour-intensive industries were particularly favoured when they employed large numbers of workers, which is consistent with a 'voting strength' hypothesis. One would expect that the protection pattern in 1981/82 would reflect lobbying strength to some extent, as by that time the government had been trying to reduce protection for some years, and interest groups had become established to defend their position. This 'degeneration' does not signify much about the origins of protection, but does indicate that there will be political consequences in the form of rent-seeking activity. The studies of both Lang and Gibson and Lattimore encountered considerable econometric difficulties in giving a clear answer to the question of which groups of 182 workers benefitted from protection. It is possible that this was because the effects of import licensing were so complex. An industry favoured by policy-makers could be 'accidentally' damaged by high levels of protection granted to suppliers of raw materials. Lang found evidence of these contradictory effects and observed that perhaps "the full impact of such import barriers was not fully recognised by those who initiated them" (1989, p.41). Cyclical Management In its heyday import licensing was used not only as an instrument of structural employment expansion but also as a system of cyclical employment stabilisation. It was hoped that the expansion of domestic industry would reduce the vulnerability of the economy to fluctuations in export income, which were much greater than in Sweden. However, the overvaluation of the exchange rate led to a pattern of importdependent industrialisation which ultimately increased the vulnerability of the economy and contributed to the pressure for a reversal of trade policy. Because export income from agriculture fluctuated, New Zealand experienced a cycle in the level of domestic demand, employment and output that could be sustained without balance of payments crises. In order to maintain a stable level of employment, it was necessary not only to protect the supply of imported inputs at times when export receipts were down, but also to control the inflow of inputs when export receipts were high. High export receipts initiated an expansion of consumer demand, commencing with increased farm incomes. If New Zealand output expanded to meet this demand, employment increased to a level unsustainable when export receipts fell. 183 One solution to the problem of cyclical instability generated by fluctuations in export receipts was to allow imports of consumer goods to enter the country in booms. The issue of car import licences was a popular way of mopping up excess demand in an export boom. Despite the development of a domestic car-assembly industry, the government persisted in the use of this device as late as 1971, when the decision to issue more car import licences was made in order to "assist in diverting spending away from areas which would add to pressures on the domestic economy" (The Budget, 1971, p.15). In the period 1948-1963, the income elasticity of demand for cars in New Zealand was about 5, making the availability of cars an ideal instrument of demand management (Turnovsky, 1968, p.787). The growth of the economy, particularly in the 1960s, was accompanied by increased difficulty in countering the effects of the export cycle. In an attempt to meet aspirations for rising living standards, the 'deflationary' policy of importing consumption goods in booms was replaced by a policy of accelerating industrialisation by importing capital and components for manufacturing industry. As Zanetti observed, this resulted in export-led cycles in domestic production, with improvements in the supply of imports stimulating domestic activity: "The crude idea that [additional] imports are deflationary depends ultimately on the idea that they are causally unconnected with the level of domestic expenditure; if imports comprised only consumer goods there might be something to be said for this; but the increasing emphasis on manufacturing inputs in imports implies that imports are associated positively with domestic expenditure on production." 184 (Zanetti, 1967, p.11) The substitution of New Zealand-produced goods for imports meant that the composition of imports changed, with goods for final consumption being largely replaced by raw materials. However the 'import reliance' on the New Zealand economy, measured by the ratio of imports to GNP, remained stubbornly constant (Rowe, 1966; Brownlie, 1967). Furthermore, decline in exports could no longer be met by cutting back 'luxury' imports. As summarised in a 1978 report: "With a greater proportion of New Zealand's imports now comprising essential inputs to production and no concomitant reduction in the overall reliance on imports, changes in the level of importing now have important consequences for domestic production and employment." (Economic Monitoring Group, 1978, p.6). 185 Trade Policy Reform While the problems with the import-substitution policy were apparent in the 1960s, it took many years for trade policy to alter fundamentally. In particular, the conflict between import licensing and export diversification was not recognised. Diversification was attempted without major reforms on the import side. The labour market consequences were that trade policy exerted increasingly negative effects on real wages while operating to avoid job losses throughout the economy. Since the wage bargaining system failed to generate the control over money wages that the government needed, the economy became more inflationary, levels of effective protection rose, and the government's fiscal position worsened. A policy of export diversification had been officially supported by the government since the early 1960s. However competition for resources from protected import-substituting industries presented a major obstacle to export diversification. In the early 1960s, policymakers realised that the tight condition of the labour market would present new export industries with labour supply problems. However they did not envisage that labour would have to be transferred from existing industries. Instead, immigration was seen as the solution to labour supply problems. With virtually no male unemployment, it seemed obvious to policymakers that the labour for export diversification would have to come from abroad (Export Development Conference, Report of the Working Party on Export Product and Market Diversification, 1963, p.7). Measures taken to encourage export diversification also continued the 186 established pattern of reliance on cheap imported inputs. In the early 1960s the import licensing scheme was amended to give exporters a preferential entitlement to imported raw materials and components (Gould, 1982, p.105; DIC AR, 1963, pp.1314). At the time, this decision was seen as assisting the allocation of scarce imported capital to the most fruitful areas for future development. However with hindsight it is clear that the cheapness of imported inputs relative to New Zealand inputs contributed to a pattern of import-dependent export development. Major reforms to trade policy were attempted in 1967. New Zealand followed the devaluation of sterling, and devalued by a further 6% against sterling and by 19.5% against the U.S. and Australian dollars. In 1966 a free trade agreement had been negotiated with Australia, and the devaluation spurred an expansion of exports. However, because of the adverse cyclical conditions prevailing, no deregulation of imports was embarked upon. This meant that there was no reduction in the premium of New Zealand prices over world prices caused by protection to set against the effects of the devaluation, so real wages were reduced. Indeed the negative real wage effects of the devaluation were compounded by a reduction of consumer subsidies and increases in government charges in the 1967 budget. In effect, the government was aiming both to maintain existing protected industries and to spur the creation of new export industries. Government policy was influenced by a fear of unemployment, which rose to more than 1% of the labour force in 1968 for the first time since the war. Yet if there was to be a restructuring of employment, unemployment would have to rise to a level consistent 187 with frictional movement, perhaps of 2-3%, as in Sweden. The refusal to allow such levels to emerge was accompanied by a continued desire to achieve a net migration inflow, which fuelled the belief that competitive industries could be developed without closing protected industries. The implementation of any reductions in protection was greatly complicated by the use of import controls in preference to tariffs. Indeed an orderly lifting of import controls was impossible. At the National Development Conference in 1968, the participants, representing the major economic interest groups, agreed on a key recommendation, No. 209A, which proposed that import licensing should be phased out and replaced by tariffs. Tariffs would provide a more manageable structure of trade protection, facilitating the reduction of distortions and the phasing out of protection through a timetable of tariff reductions. The replacement of quotas with tariffs proceeded very slowly. A lengthy consultation process was embarked upon, with government officials and business and labour representatives undertaking detailed industry studies prior to any change in the protective arrangements. Reports of the Department of Trade and Industry throughout the 1970s and early 1980s provide a catalogue of minor interventions and alterations to the licensing system (the most important being the introduction of tendering for licences), along with distant deadlines for the introduction of tariffs. It would appear with hindsight that the 1967 devaluation was a premature step in the reform process. Since there was virtual full employment, devaluation should have been offset by reductions in protection in order to maintain real wages. 188 However, the government had not prepared the ground for such reductions. As the 1970s wore on, the prospect of a tariff reduction linked to devaluation became less and less likely, because unemployment rose and the defence of existing jobs assumed greater importance. In 1979, Prime Minister Muldoon declared that: "It has been suggested that New Zealand should dismantle the system of import licensing which has operated for forty years. I do not subscribe to that view. I have no intention of letting efficient industries go to the wall for the sake of a theory. Many thousands are employed in firms that would not have been started had it not been for a secure home market." (The Budget, 1979, p.5) In 1984 Treasury reported that on the basis of tariffs alone New Zealand's secondary industry was the most highly protected in the OECD, while in addition New Zealand was the only advanced country to operate comprehensive quantitative controls on manufactured imports (1984, p.304). In the light of the failure to reduce protection, the degree of export diversification achieved between 1950 and 1980 is remarkable (Table 6.1). However diversification imposed high fiscal costs in the form of export incentives. Initially, export incentives were directed towards non-traditional ventures, but in the 1970s schemes expanded in coverage and expenditure. By the 1980s, agriculture was a major recipient of subsidies. This was a clear signal of the increasing costs that protection was imposing on the competitive sectors of the economy. Table 6.1 189 Export Diversification As % total exports Meat, Wool Wood, pulp Manufactured & Dairy & paper Goods * 1950 87 .. .. 67 1955 87 1 .. 65 1960 84 3 .. 53 1965 82 3 4 51 1970 71 5 8 36 1975 62 6 17 22 1980 56 7 21 14 Exports to U.K. * Includes pulp and paper. Source: Report and Analysis of External Trade, various years. Another approach to export diversification was the 'Think Big' industrial policy. The government, alone or in joint ventures with multinational companies, undertook large-scale capital-intensive development of New Zealand's natural resources. The export strategy was concentrated in capital-intensive sectors on the grounds that prosperous New Zealand could not compete with its low-waged Asian neighbours in labour-intensive production. 'Think Big' was a strategy to bring maximum balance of payments advantages with minimum impact on the 190 employment structure. The major projects helped to ensure that industrial employment remained stable in New Zealand between the 1976 and 1981 censuses, whereas in most high-income countries industrial employment fell. The fiscal burden of the government's industrial and export incentive policy mounted sharply in the 1980s. In 1983-84 the government spent $350m on meat and wool price support and $346m on export taxation incentives and other subsidies to non-traditional exports (The Treasury, 1984, p.197). This amounted to 5% of government expenditure and 2% of GDP. Major project financing contributed to mounting debt servicing costs: interest payments reached 14% of government of expenditure in 1983/4 (OECD, 1985, p.20) while interest on the public debt payable abroad stood at 9.4% of export revenue (ibid., p.39). In a long historical perspective, the 'Think Big' policy was a return to the days of colonial socialism, when the government had used its strong position in the international capital market to provide the finance for export development. In the context of the 1970s, there were fundamental problems with this strategy, arising particularly from the limited entrepreneurial capacity of the government. Several major projects were competitive failures. Ironically, the quest for profitable investments (self-liquidating investments, in the Swedish terminology) with an immediate positive current account impact may have closed off interest in the potential for social investments of greater long-term benefit. The adverse effects of New Zealand's import substitution policy were probably very similar to those found in other developing countries which utilised exchange controls. One would expect to find that the choice of techniques was 191 biased towards imports, competition on the domestic market was reduced, administrative manoeuvering and lobbying displaced entrepreneurship, and innovation and technical change in established domestic industries was curtailed (Bhagwati, 1978). However, comparatively high living standards in New Zealand resulted in different labour market outcomes compared with lower-income developing countries. Full employment was achieved, with a low level of labour market segmentation and a compressed wage structure. Full Employment in Sweden After the period in the late 1940s when the Social Democrats contemplated an extension of government economic planning and nationalisation, full employment policy centred on the stabilisation and promotion of private investment. To stabilise private investment, investment reserve funds were set up, and to maintain investment at high levels the rate of corporation tax was steadily reduced (Lindbeck, 1975). However the rate of investment in industry was not sufficient to maintain stable industrial employment in the 1960s and 1970s. The causes of the industrial investment shortfall are complex to identify. An obvious possibility is that investment was depressed by an inadequate rate of profit, caused in its turn by too-high wages. However wage pressure was not itself necessarily exogenous to the process of rationalisation and technical progress in industry. This question had been debated in Sweden in the 1930s. Economists such as Johansson disputed the classical view that wage pressure had caused rationalisation and that wage-cutting could reverse the process. Johansson argued 192 that it was by no means certain that wage reductions would cause a shift towards more labour intensive methods. The process of rationalisation might not be reversible. It might not be possible to achieve a return to the degree of mechanisation that industry reached at some earlier time in its technical development (Johansson, 1934, p.32). Such a historical regression would require abandoning the advances of research and invention. Furthermore, a leading position in technical development was a source of international competitive advantage, insofar as the quality of output was improved. Low labour costs would not necessarily provide a symmetrical advantage. (In the 1920s high technology products were beginning to displace natural resource-based exports such as iron and timber.) The argument that rationalisation was a source of competitive advantage for Swedish exports was a vital argument in establishing the existence of gains from trade which could be shared by the waged workforce. It has already been shown (chapter 3) that the unions' bargaining strategy was to co-operate with the introduction of new processes while bargaining for wage increases to reflect the productivity gains. The difficulty with rationalisation and technological advance in the export sector was how to distribute these gains across the working class by achieving full employment. To bring more workers into the advancing sectors required an increased rate of investment. Johansson's rejection of the argument that wage growth should be restrained because of unemployment rested on the view that technological advances and rationalisation would be initiated by employers regardless of the wage claims of the 193 unions; in other words, that productivity growth was exogenous to wage growth. If productivity growth determined wage growth rather than vice-versa, then excess wage pressure could not be 'blamed' for low investment. The achievement of a sufficient rate of investment to maintain full employment rested instead on lowering the required rate of profit by improving the supply of investment funds. In the Depression, Swedish Keynesian economists had argued that the single most influential factor affecting the level of investment was the rate of interest. Investment could be increased if an expansionary monetary policy was implemented. In a depression, there was a surplus of ex ante saving over ex ante investment, and monetary policy could stimulate the required investment. After the war, this form of macroeconomic disequilibrium was no longer present. The task, in the eyes of economists such as Gösta Rehn, was to achieve a sufficiently high level of ex ante saving, in order to facilitate the necessary investment. So long as retained profits (corporate saving) occupied a key place in the investment process, the attainment of a sufficient rate of investment dictated the maintenance of a certain rate of profit (along with incentives for the investment of profits in preference to their dispersal in dividends). However, the rate of profit could fall without adverse effects on investment if other sources of funds assumed greater importance. Two sources in particular were highlighted by Rehn: collective saving by workers, such as through the ATP pension scheme, and public sector saving through the operation of a tight fiscal policy. (As was noted in chapter 4, Rehn also advocated a restrictive fiscal policy in order to prevent inflation, which would undermine orderly wage bargaining.) 194 In Rehn's model, the highest rates of investment would occur in 'advancing' sectors, characterised by high rates of productivity growth, due in turn to technical progress. Investment in these areas would create jobs, and active labour market policy would shift workers from declining to advancing sectors. It would seem that this pattern of investment would be in accordance with 'market forces', assuming that high productivity growth was correlated with above-average profitability, and technical progress with opportunities for expansion. This meant that it was not necessary for the government to intervene in the direction of investment. Investment decision-making could be left to business, provided that a sufficient supply of funds was forthcoming. The burden of adjustment fell on labour. As Pontusson puts it, "active labor market policy is essentially a matter of adjusting the labor force to corporate investment choices" (1991, p.172). The competitive sector, particularly the export sector, had a special place in the investment-promotion strategy. It was assumed that Sweden had a comparative advantage in relatively capital-intensive goods, and that exports would continue to expand into new markets, not because of low Swedish wage costs, but because of high investment. Swedish firms would maintain a strong competitive position through their modern, specialised capital stock. The competitive sector exhibited a superior productivity performance compared with the sheltered sector, which was explained by the high rate of capital accumulation occurring, better possibilities for achieving economies of scale, and the advantages of specialisation and an increased international division of labour. Expansion of the sector would provide a sustainable basis for real wage growth. 195 However, full employment could undermine the prospects for the competitive sector. If demand conditions at home were highly accommodating, wages and sheltered sector prices would rise too fast, imposing a profit squeeze on competitive firms, which were price-takers. This squeeze would not be in the longrun interests of labour, because wage increases would be dissipated in price increases. The investment-promotion problem for Swedish labour was, therefore, to ensure that a sufficient supply of investment funds was forthcoming and that relative profitability in the competitive sector was defended, to ensure continued expansion of the sector. A solution to this problem was outlined in the EFO (Edgren, Faxén, Odhner, 1973) report. The EFO report was the joint product of economists from TCO (the white-collar workers' confederation), SAF, and LO. The report argued that, to control inflation and maximise real wage growth, it was necessary that the competitive sector should 'lead' the wage bargaining process, and sheltered sector wage increases should not exceed those in the competitive sector. This consensus between the parties to wage bargaining was based on their longer-term interests in a positive-sum solution: "a concerted export and investment strategy" (Crouch, 1980, p 95). If wage increases in the competitive sector were equal to the increase in world prices for Swedish exports plus the rate of productivity growth in the sector, stable profitability would be maintained. The rate of wage increase would be uniform across the whole economy under centralised bargaining, and a Rehn-style employment shift from declining to advancing industries within the competitive 196 sector should occur. Average productivity growth in the competitive sector exceeded that of the sheltered sector, but low productivity sheltered industries would not be sent into decline, so long as they could pass wage increases on into prices. The Rehn model of efficient restructuring under centralised bargaining was, therefore, only partly applicable, but at least the leading position of the competitive sector in wage bargaining meant that domestically-generated inflation would not jeopardise competitiveness. EFO data on the ex post operation of their model is given in Table 6.2. 197 Table 6.2 Wages and Productivity 1955-68 (Average annual rates of change) "Space"* Compet Profit Negoti- Wage Total Price (1) -itive Squeeze ated Drift Wage Infla- Sector (2-1) Wage Incr tion Wage Incr - Incr All (2) Sectors 1956-59 5.7 6.3 0.65 2.9 2.7 5.6 3.5 1960-65 8.9 9.8 0.9 5.1 4.4 9.5 3.7 1966-68 8.3 10.0 1.7 4.4 3.6 8.0 4.2 * "Space" equals nominal sector product per man hour in the competitive sector. Source: EFO, 1973, p 136 and p 192 It can be seen that much of the growth in real wages from the mid-1950s to the late 1960s came from drift. Furthermore, the competitive sector increase exceeded the space for wage increases, leading to a trend of decline in competitive sector operating surplus. This did not occur in the sheltered sector, where firms were able 198 to maintain their profits by passing on wage increases into prices (EFO, 1973, p.179 and p.198). Clearly the central organisations had not been able to exercise enough control over wage bargaining to ensure compliance with the EFO model. The reasons for drift are discussed in chapter 7. By 1970 there was some concern over the performance of the competitive sector. The current account balance had slipped into deficit, and, most importantly, employment in manufacturing declined by 4.4% between 1965 and 1970 (Arbetsmarknadsstatistisk årsbok, 1981, tab 2.3.4). The direction of employment restructuring was not that advocated by the Rehn model. Employment in the high-productivity competitive sector was falling, while the sheltered sector, particularly the public sector, was expanding. Neoclassical theorists such as Lindbeck (1979) and Söderström and Viotti (1979) argued that the problem of excessive wage increases in the competitive sector was even greater than indicated by the EFO model. They argued that the EFO model overstated the 'space' for wage increases by including not only exogenous productivity growth (due to investment and technical progress) but also endogenous productivity growth due to lower employment. If firms responded to wage pressure by achieving higher productivity by dismissing less-productive workers, they would increase the space for wage increases. The same problem did not arise in the sheltered sector because of the different pricing conditions prevailing in the two sectors. In the sheltered sector firms could price on a cost-plus basis, and therefore did not experience increases in the real product wage when wages rose. It could therefore be expected that, even if wage increases kept within the EFO space, 199 employment in the competitive sector would continue to fall. This argument challenged a basic tenet of the Rehn model and the EFO model: that productivity growth was exogenous, and wage increases were reactive a response to rationalisation initiated by the employer. Lindbeck et al revived the classical view, advanced in the 1920s, that excessive wage pressure was a cause of lower employment. As in the debate in the 1930s, the alternative to this view rested on finding policies which would promote investment in the competitive sector and reverse the employment decline. It had become clear that market forces would not direct investment into the competitive sector, which was subject to more difficult market conditions than the sheltered sector. It should be noted that there was no reason why the proportions of employment accounted for by the competitive and sheltered sectors should remain constant through time, in a dynamic economy. Because of Sweden's pattern of international comparative advantage, the competitive sector could be expected to follow a more capital-intensive path of development than the sheltered sector. At the same time, the growth of a labour-intensive service sector was a natural consequence of higher living standards. When Branson and Myhrman (1976) investigated the implications of the rise in sheltered prices relative to competitive prices which was built into the EFO model (the two sectors had the same rate of wage increase, but productivity grew more in the competitive sector), they argued that it was likely that the income elasticity of demand for sheltered products was greater than for competitive products. This meant that the change in relative prices would not cause a shift to competitive consumption (and consequent current 200 account deterioration) provided income grew at a sufficient rate. Branson and Myhrman based their view of the relative income elasticities of demand on the observation that high-income countries tended to have larger service and government sectors than low income countries. In Sweden, much of the sheltered sector expansion was organised by the public sector. This could reflect the demand for collective goods and services generated by higher living standards. However it was also possible that public sector expansion was taking up a shortfall in private investment, in order to maintain full employment. Söderström and Viotti (1979) argued that the public sector expansion was accommodating the decline of the competitive sector, caused in its turn by too-high wage increases (see above). If this was the case, the implications for Swedish competitiveness were doubly negative. The tax burden on the competitive sector (labour and/or capital) would rise, reducing factor rewards and provoking additional wage demands and a movement of capital abroad or into less competitive activities. It was not difficult to identify some elements in public sector growth which were accommodating, because the active labour market policy included a job guarantee, and job creation in the public sector was used to ensure that this guarantee could be fulfilled. However job creation schemes accounted for only a small fraction of the public sector employment expansion in the 1960s and early 1970s. In this period, the public sector expansion was driven by the aim of achieving collective provision of services in order to promote welfare and equality (the aim of 'de-commodification' in Esping-Andersen's (1990) terminology). It was argued in 201 Chapter 5 that Swedish public sector expansion was centred on the socialisation of activities undertaken by the household. This meant that public sector expansion was a poor substitute for industrial employment, because it was oriented to traditionally female areas of activity. A high level of geographical and occupational mobility and an unlikely disregard of gender divisions at work would be needed if men were to shift from declining industrial sectors into the public sector. One consequence of public sector expansion in Sweden was that the female labour force participation rate rose to high levels compared with other countries at a similar stage of development. This presents a problem for the 'accommodation' thesis, as it suggests that the public sector expansion was greater than was needed to maintain full employment, having the effect instead of drawing additional workers into the labour force. It has even been argued that public sector expansion contributed to labour shortages in the late 1960s (EFO, 1973, p.317). It is interesting to contrast the rise in female labour force participation in Sweden with the emphasis on immigration in New Zealand. The promotion of immigration was an objective of industrial policy in New Zealand, whereas in Sweden the unions advocated restriction of immigration. Kyle has argued that a central factor in LO and government policy towards the employment of women was the change in immigration policy that occurred in the mid-1960s. In the 1950s immigration had been resisted by unions in some sectors, but the union movement had not been able to mobilise opinion against immigration. Immigration was seen as meeting a severe labour shortage, and Sweden also had to adjust to the return home of many Norwegians and Danes at the end of the War. To a large extent, 202 immigration and emigration fluctuated with the business cycle, and it appeared that the utilisation of the labour surplus of continental Europe was entirely to Sweden's advantage (Kyle, 1979, pp 203-204). The situation changed in the early 1960s with the first wave of immigration from Turkey and the Balkans. This 'spontaneous' immigration was not so well-received by the unions, and union representatives on labour market boards sought greater regulation of immigration. The conclusion of an immigration enquiry in the 1960s was that the country should meet the labour shortage by deploying its own underutilised labour reserves, particularly women, the old and the handicapped. Arguments from industry that immigrants were needed because of labour shortages were rejected by LO. LO claimed that "[e]xperience had shown that immigrants were concentrated in low-wage branches, which were thereby allowed unwarranted possibilities of survival, to the detriment of the whole wage-earning collectivity" (ibid, pp.213-214). In other words, immigration was preventing the restructuring of employment to maximise productivity growth. One can speculate that, had immigration been an objective of policy in Sweden as it was in New Zealand, or had the unions been unsuccessful in obtaining restrictions on immigration, the decline in manufacturing employment would have aroused concern sooner than it did. Public sector expansion only served to obscure the decline in manufacturing because it was accompanied by a large change in the composition of the labour force. The number of men in employment fell 6% between 1965 and 1980; the number of women rose 39% (these figures are for those working 20+ hours per week; the rise in women's employment was even greater when all 203 part-timers are included). It would therefore seem that the expansion of the public sector only provided a route to full employment under quite distinctive labour market conditions. Furthermore, Rehn's model of the maintenance of investment through collective (worker) and public sector saving had not succeeded in avoiding competitive sector decline. In Martin's analysis, the model had not grappled with the problem of how to direct collective saving into industrial investment (1981, p.167). Several commentators argued that loan capital from the ATP fund was not a perfect substitute for equity capital. The government's response was to establish the 'Fourth Fund' in 1974, under which ATP income could be used to purchase shares. The establishment of this fund was closely followed by the Meidner proposal for employee investment funds, under which a share of enterprise profits would be allocated to union-administered funds for investment. This scheme departed critically from the postwar corporate compromise, by endeavouring to increase union participation in investment decision-making. It provoked a political upheaval, and was never fully implemented (Pontusson, 1987). The Meidner proposal was only the most visible and controversial element of a policy shift that occurred in the 1970s in response to industrial decline. The shift began with the launch of an 'active industrial policy' in the late 1960s. Rationalisation in the mining and timber industries had accelerated the decline of the northern counties and increased the political importance of regional policy. The Social Democrats began to reverse their policy towards nationalisation and state involvement in industrial activity (Pontusson, 1987, p.11). In 1967 a state investment 204 bank (Sveriges Investeringsbank AB) was established to provide capital to some major industries deemed to be in need of new investment for restructuring. Contrary to the original proposals of the Rehn model, attempts were made to alter the allocation of capital arrived at by private sector investors. Funds were poured into shipbuilding and steel; the subsequent collapse of these industries led to their nationalisation in the late 1970s (Waara, 1980, pp.160-61). It is surprising at first sight that nationalisation and industrial subsidisation were greatly expanded by the bourgeois coalition Government, which was in power from 1976 to 1982. Its policies were quite similar to those pursued by the right-wing National Government in New Zealand in the same period. Two factors behind this right-wing interventionism can be noted. Firstly, industrial subsidies and bailouts did not challenge the position of capital in the profound way envisaged by the Meidner proposal, and in any case the crisis conditions in industry weakened capitalist resistance to government intervention. Secondly, the bourgeois Government was drawn to 'rescue policy' because the conservative parties did not support the socialisation of the household, and were therefore inclined to roll back public welfare activity, albeit while expanding state industrial activity. Conclusion The role of the public sector expansion in employment creation suggests that the Swedish strategy for maintaining full employment was not as different to the New Zealand strategy as one might first imagine. Both strategies involved an erosion of real returns to factors employed in the competitive sector. In New 205 Zealand this was because import licensing resulted in higher prices in protected sectors. The costs were concentrated on the competitive sector because sheltered firms could respond to higher protected prices with increases in their own wage and price levels. In Sweden, the public sector expansion resulted in higher taxes on both capital and labour in the competitive sector. While public sector growth provided a fertile ground for union organisation and for negotiating improvements in wages and working conditions, it eventually became apparent that there was a conflict of interests between public and private sector workers, which the organisational unity of LO was unable to disguise. Tensions over drift compensation (next chapter) burst out in 1986 with claims from Metall that public sector pay claims were 'irresponsible', and from the Factory Workers Union that the public sector workers were 'pay parasites' (Swenson, 1991, p 383). By 1980, both Sweden and New Zealand had large fiscal deficits and significant current account deficits, although New Zealand's trade position was weaker than Sweden's. Both countries had kept unemployment to low levels, although it was evident that the employment situation was worsening. Both economies had become substantially more inflationary after 1970. Productivity growth had declined. Alongside these similarities, the effects of policy differences are also discernible. Over the 1950-80 period productivity growth had been significantly lower in New Zealand, while employment creation had proceeded at a higher rate, absorbing an increase in population through immigration. In the 1980s both countries responded to their competitive difficulties by allowing unemployment to emerge. Centralised wage-fixing was abandoned in 206 New Zealand and severely undermined in Sweden. These policy changes allowed a worsening of the relative position of weaker groups within the labour force, whereas full employment and centralised wage bargaining had led to improvement in the relative position of the low-paid. Both trade protection and public sector expansion were devices to facilitate that improvement. Both involved the levying of a tax albiet an implicit tax in the case of protection - on other workers. It has been shown that implicit taxation was accompanied by greater stability in the economic structure and in the occupational and geographical location of workers than explicit taxation. The willingness of the labour market parties in Sweden to accept a high degree of restructuring and labour mobility was related to the high degree of centralisation in the union structure and to the political influence of the central union confederation. This influence also led to the adoption of a policy of restraining immigration. The high level of explicit taxation in Sweden was also connected to the 'compromise' with capital, whereby the government avoided direct intervention in investment decision-making and confined its employment-creation to the expansion of the welfare state. By contrast, implicit taxation in New Zealand reflected the government's role in 'managing' economic development, promoting extensive growth, and encouraging immigration. 207 Chapter 7 Economic Openness and Wage Bargaining This chapter contrasts the wage determination systems of Sweden and New Zealand in the years 1950-1984, during which full employment was maintained, albiet with increasing difficulty, in both countries. Both systems were apparently centralised, but Sweden's was centralised around strong worker and employer organisations, whereas New Zealand's was centralised through the authority of the state - at first latently, and later more explicitly. Furthermore, an important sector of Swedish employment was exposed to international competition, whereas New Zealand's system was dominated by sheltered firms. Both countries' systems suffered from a deterioration in performance after about 1968. This date marked a shift in wage bargaining patterns throughout the Western economies, and one could say that both countries fell victim to the increase in international economic instability after 1968. External pressures destabilised wage bargaining, particularly by introducing much larger departures between expectations and outcomes than had previously occurred. Despite the importance of these pressures, this chapter focuses on the country-specific problems with wage bargaining structures that led to worsening inflation-unemployment outcomes. The topic which it addresses is the effect of economic openness on the performance of the two wage bargaining systems. As it has been argued that openness is connected with corporatism, and protectionism with statism, this topic also concerns the different effects of corporatism and statism on wage bargaining. The hypothesis is 208 that economic openness adds to wage pressure, other things being equal; the implication is that the maintenance of full employment is more difficult in an open economy, although the superior productivity growth of an open economy mitigates this problem. With the benefit of hindsight, it is apparent that both Sweden and New Zealand achieved a high degree of wage restraint in the 1950s and 1960s, despite low unemployment. In New Zealand, registered unemployment remained well below 1% until 1968, while census unemployment hovered around the 1% mark. These measures are broadly comparable with Swedish insured unemployment and surveyed unemployment respectively. In Sweden, insured unemployment was between 0.5% and 1% for most of the 1960s, while surveyed unemployment was slightly above 1%. In the light of these low unemployment rates, both wage and price inflation was moderate in both countries (see Tables 6.2 and 7.1). It is also striking that whereas real wages grew strongly in Sweden, the rate of real wage increase in New Zealand was very low. A low rate of real wage increase might be expected to contribute to acceleration of inflation, but New Zealand's inflation rate remained slightly lower than Sweden's for most of the period. The Centralisation of Wage Bargaining in Sweden The 'corporate compromise', symbolised by the Basic Agreement between SAF and LO, did not entail centralisation of wage bargaining, although the compromise can be seen as a prerequisite for centralisation. The powers of LO and SAF to intervene in disputes implied a degree of centralisation, insofar as both 209 organisations could be expected to form a view about the acceptability of a proposed settlement, and this view could be pressed upon members by refusing to support members who did not settle. However, LO had no power to impose a settlement on its member unions. Even after central negotiations became established, member unions "could stay outside the central negotiations if they wished and were not obliged to accept the central agreement or submit their own agreements to the LO for approval" (Fulcher, 1991, p.189). SAF had more formal authority, including the ability to fine employers who made settlements it disapproved of. Fulcher argues that SAF was the moving force behind centralisation (ibid., pp.192-3). For employers, one of the main advantages of centralised wage bargaining is the prevention of 'relativity rivalry' and 'leapfrogging' which arises as workers in one sector seek to defend some desired position vis-a-vis those in another sector. The prevention of leapfrogging is also an advantage to the union movement, insofar as it enhances unity and facilitates the conduct of campaigns to improve the position of workers overall. If 'excess' wage settlements result in inflation, then the restraint of leapfrogging is not costly to workers as a whole, and may even be beneficial in facilitating the maintenance of full employment. However the realisation of these benefits requires a high level of organisational cohesion in the trade union movement. Competition between unions over relative wages has to be avoided, and principles for the determination of fair relativities established. In Sweden, a wage policy of solidarity was adopted by LO, whereby central agreements awarded larger wage increases to lower-paid workers. Andrew Martin has suggested that solidarity is a rough-and-ready approximation to equal pay for 210 equal work in a situation where comprehensive job evaluation is not possible (1981, p.153). Its foundation in "the traditional norm of fairness" has ensured its wide support among LO's member unions. Other commentators, especially those writing more recently, are less sanguine about the acceptability of solidarity, as is discussed further below. A number of studies have suggested that centralisation of bargaining assists in restraining wage pressure under full employment (Schott, 1984, ch.4; Calmfors and Driffill, 1988). Katzenstein notes that wage control through centralised bargaining is a feature of all the small open European economies (1985, p.49). The main reason for supposing that centralisation will assist the competitive sector stems from the likely behaviour of sheltered firms under full employment. Sheltered firms benefit from the maintenance of buoyant domestic demand conditions. Their market position may enable at least some firms to pursue cost-plus pricing policies, whereas competitive sector firms will usually be price-takers. This suggests that firms in the sheltered sector will concede higher wage increases than competitive firms if full employment is maintained. By restraining the rate of wage increase and maintaining a stable wage relativity across sectors, centralised bargaining assists the competitive sector. It seems plausible that the coordination of wage bargaining by SAF would prevent weak employers conceding large wage increases, and that this would be to the advantage of competitive firms. It is somewhat surprising, therefore, to find that export sector employers have been among the main dissenters from centralisation. The explanation lies in the tension between overall wage restraint and flexibility in 211 the wage structure. While overall wage restraint may be best achieved by centralisation, flexibility is best attained through negotiations at the local level in response to local priorities, which could be to promote more productive work practices, to retain skilled workers, or other industrial relations objectives. The attachment to productivity bargaining in the competitive sector has already been noted (chapter 3). Local wage concessions were a means of securing worker cooperation in the introduction of new technology and other productivityraising innovations. Centralised bargaining was opposed by competitive employers when it limited their room for manoeuvre. For example, in 1963 a group of exporters opposed the central agreement because they thought it too high to allow sufficient room for lower-level negotiations that would link wages to productivity (Fulcher, 1991, p.192, fn.4). Resistance intensified when central bargaining pressure to obtain wage compression ("solidarity") increased in the 1970s, and eventually, in the 1980s, the export-oriented engineering industries initiated the breakdown of centralised bargaining (Pontusson and Swenson, 1993). The EFO model can be seen as a concession to the concerns of competitive sector employers, with its emphasis on relating wage increases to productivity growth, and the 'leading' position it accorded to the competitive sector in the determination of the overall rate of wage increase. The EFO model envisaged a stable wage relativity between the competitive and sheltered sectors, with the overall rate of wage increase determined (centrally) by the rate of productivity growth in the competitive sector and the rate of increase in world prices. However actual wage increases exceeded the 'space', as defined by EFO, once drift was added 212 on to the central bargain (see table 6.3). Drift occurred at a higher rate in the competitive sector than the sheltered sector. Swedish commentators have advanced two main competing interpretations of drift. Some see drift as a corrective to the distortions of central agreements; others as a result of management-initiated changes in work practices and the accompanying productivity bargaining. A representative of the former view was Hugo Hegeland, who argued that drift was "the market's protest" against the compression of differentials in central agreements under the solidaristic wage policy: "Each attempt to reduce the gap between high and low waged groups, between qualified and unqualified labour, results in drift because only by the maintenance of wage differentials can businesses retain their labour forces." (Quoted in Ullenhag, 1971, p.103) Others failed to find a positive correlation between equalising provisions in central agreements and the level of drift, noting instead the effects of intensification of work and rationalisation of production (Hedborg and Meidner, 1984, p.38; Regini and Esping-Andersen, 1980, p.111; Fulcher, 1991, p.265). The process of rationalisation had seen productivity per worker rise and employment fall in the competitive sector during the 1960s. On this view, management-initiated rationalisation led to shopfloor discontent, which employers countered with wage increases. While this second view avoided the implication that the central agreement caused drift, it carried with it the conclusion that the provisions of central 213 agreements were not adequate to keep workers happy and avoid shopfloor industrial unrest. This problem came home to both employers and union leaders in the late 1960s, when wildcat strikes occurred in the mining industry and the docks. Following the same line of argument as Hegeland, the chief economist of SAF, K-O Faxén, argued that wildcat strikes occurred among relatively well-paid workers and came shortly after the conclusion of collective agreements. This implied that the strikes represented some sort of protest against the provisions of the collective agreements (Flanagan et al, 1983, p.329). LO for its part recognised that union leaders were failing to carry members with them in accepting agreements they had reached, but interpreted this to be a product of the power that employers were able to exercise over shopfloor working conditions. The challenge issued by strikers was for a more democratic and responsive union movement, and LO responded by pressing for more worker participation and industrial democracy (Fulcher, 1991, p.271). These developments are discussed further below; the issue here is whether and how centralised bargaining can operate effectively to maintain competitiveness in the face of drift and wildcat industrial action in the competitive sector. Faced with increasing problems of recruitment and absenteeism as well as shopfloor industrial unrest, competitive sector employers sought to improve their relative wages. This was inconsistent with centralised bargaining. Indeed the solidaristic wage policy raised the relative wages of low-paid workers who were more heavily concentrated in the sheltered sector. (It is remarkable to find that, in the early years of centralised bargaining, competitive sector employers approved of the solidaristic wage policy, 214 because this restrained higher wages by a relatively greater amount and thereby gave the competitive sector a lower rate of wage growth (Swenson, 1991, p.384).) Centralisation may enable a lower overall rate of wage increase to be achieved than under decentralised bargaining, but it would seem that competitive employers were forced in the course of the 1960s to become concerned not only with minimising their own wage costs but also with improving the attractiveness of their jobs relative to the sheltered sector. 215 The only way to achieve increases in relative wages in the competitive sector while maintaining the centralised bargaining framework was for a central agreement to bind the sheltered sector while the competitive sector improved its relative position through drift. By allowing divergences to arise between the centrallydetermined wage structure and actual wages paid, drift could function as a 'safety vent' in the system. However, two problems arose from allowing wage outcomes to deviate from 'plans' through drift. Firstly, the occurance of drift reduced the effectiveness of the centralised system in restraining wage inflation, as has already been noted. Total wage increases exceeded the available 'international space'. Secondly, unions with a strong commitment to achieving 'plans' would be discontented with drift, and could devise strategies to anticipate or catch up with drift, thereby destabilising the system. There is an analogy with the bargaining response to unexpected inflation: bargainers will revise their strategies if expectations are incorrect. 216 This revision of strategies took place towards the end of the 1960s. Leaders of unions with a higher proportion of low-paid workers argued that the centralised system was failing to achieve the desired improvement in the relative position of the low-paid. Special solidarity wage premia for low-paid workers had been incorporated in central wage bargains since the 1957-58 wage round, but these had had little impact on the wage structure, because they had been outweighed by wage drift (Cook, 1980, p.63). While employment in low-paying industries had declined, there had been virtually no progress towards wage equalisation across industries between 1950 and 1965 (Ullenhag, 1971, p.152). Such narrowing of differentials that did occur was largely due to the introduction of equal pay for equal work for women in 1960, but by 1965 the abolition of separate pay scales was complete, and women's average wage was still only 75% that of men. These findings provided the rationale for the adoption of a much more aggressive bargaining strategy by LO towards the end of the 1960s. The LO economist Ekström argued that the SAF protected the interests of its less-profitable member firms by minimising the wage growth conceded in centralised bargaining. More profitable firms then had leeway for drift. Ekström argued that in order to reduce drift, considerably more wage pressure had to be applied in central negotiations. Furthermore, to make any progress towards wage equalisation, the magnitude of special premia for the low-paid had to be increased (Ullenhag, 1971, p.155). These recommendations amounted to an attempt to close the vent provided by drift. At the same time, the issue of drift compensation became more vexed, with 217 the emergence of conflict between LO and TCO, the central organisation of whitecollar unions. White collar workers obtained lower drift than blue-collar workers because of the absence of productivity-related payments. TCO sought 'wage development guarantees' to ensure the same increase for white-collar as blue-collar workers (A.Olsson, 1990, p.78). This conflicted with the objective of solidarity, as salaried workers were often relatively well-paid. Furthermore, LO argued that TCO's claims did not take sufficient account of 'grade drift' generated by promotion in salaried systems. LO's campaign to achieve compression of the wage structure was highly effective, at least within the LO-SAF bargaining sphere (i.e. excluding the TCO-SAF sphere and the public sector). Within the LO-SAF bargaining sphere the average wage of the bottom 50% of earners rose from 74% of the average for the top 50% to 87% between 1965 and 1980. Women's average wages in industry reached 90% of men's by 1980 (Hedborg and Meidner, 1984, p 62). LO's increased determination to implement wage solidarity, combined with the emergence of more local unrest in the form of wildcat strikes, had the effect of reducing the employers' commitment to the centralised system. Clearly employers are party to the process of drift, finding it expedient to pay wage increments to attract workers, improve motivation, or smooth over a process of restructuring. One benefit of centralisation for employers is that the unions' greatest bargaining weapon, official industrial action, is disarmed by entering a central agreement. Bargaining over drift occurs with the balance of power tilted towards the employer by the exclusion of official union involvement. However, if wildcat strikes were to 218 become a common occurance, then the benefits of centralisation would be very much reduced in the employers' eyes. Implicit in employers' analyses of centralised bargaining in Sweden is criticism of LO for pursuing the solidaristic wage policy. In particular, the compression of differentials was effectively a departure from the principle of a stable relativity between the sheltered and competitive sectors as accepted by all parties in the EFO report. The implication is that centralised wage bargaining in Sweden would have been more effective and sustainable if the union side had not been subverted by its lower-paid members. However, this criticism fails to acknowledge the role of the solidaristic wage policy in maintaining organisational cohesion within the union movement. Swenson has argued that: "it was union leaders' desire for organisational unity against employer power that caused blue-collar unions to equalise wages within and across firms and industries to an extent unparalleled elsewhere." (1989, pp.25-26) A research project on union democracy conducted at Uppsala University in the mid1970s revealed that the policy of solidarity was more heavily supported by the leadership of the unions than the membership, with support rising as the membership hierarchy was ascended (Lewin, 1980, Table 3.8). This suggests that solidarity was part of the strategy developed by the leadership to maintain control, with leaders supporting the policy not only for its substantive qualities but also for its procedural or participatory advantages. 219 A related argument has been developed by Iversen (1994), who analyses the scope for coalition-forming among groups of workers around the maintenance of centralised bargaining. Following Swenson, the export sector unions are identified as key advocates of centralised bargaining, but they must find support from other unions, which benefit from centralisation for other reasons. Candidates include unions in th 'market vulnerable' sector of workers in a weak market position because of low skill levels or ease of entry by competitors. These unions enjoy greater power in the union movement (through strength of numbers) than in the labour market, and therefore benefit from an institutionally-determined wage structure relative to a market-determined wage structure. The support of the 'market vulnerable' sector for centralised, solidaristic wage bargaining is in some ways symbiotic with the maintenance of full employment. Full employment should improve the relative position of market vulnerable workers by reducing the threat posed by competition from the unemployed. The LO economists Rehn and Meidner argued that there was a fundamental connection between full employment and centralised wage-fixing, if full employment was defined to exclude all 'crowding' into low-waged occupations and to entail the payment of equal wages to equal workers throughout the economy. On this view, 'true' full employment entailed the elimination of wage differentials arising from unequal competitive pressures on different groups of workers, leaving differentials related to workers' inherent productive characteristics only. (These differentials in their turn would be narrowed by ready access to training.) 220 New Zealand The formal or official wage-fixing system in New Zealand in the postwar years had two parts: the making of General Wage Orders (GWOs) affecting all awards and agreements in force, and the renewal of awards and agreements upon expiry. Drift, in the form of payment of above-award wages, constituted another, unofficial, tier. In the period from 1956 to April 1970, the 'Nominal Weekly Wage Index', measuring award wages, grew at an average annual rate only fractionally above that of the CPI (Table 7.1). Actual weekly earnings grew at a rate about 1% p.a. greater. This average rate of drift may have concealed great differences in drift among different groups of workers, as is explained further below. Table 7.1 Wages and Productivity Growth (Average annual rate of change) Award Wages Actual Consumer Wages Prices Real Wages 1956-60 2.9 3.7 2.9 1961-65 3.2 4.4 2.7 1966-70 4.7** 5.4 4.9 1971-75 15.1 14.5 10.2 4.3 2.3 1976-80 14.0 12.0 14.8 -2.8 -0.8 1981-85 8.9 8.7 12.0 0.8 1.7 2.1 2.2 0.5 -3.3 1.1 1.3 221 Productivity* * Difference between real GDP growth and growth in employment (20+ hours). ** To April 1970. In June-Sept 1970 the government attempted to facilitate a process of updating awards so that their provisions more closely reflected actual wages in industry. This was intended to encourage a restoration of the IC&A system, but was unsuccessful (Boston, 1984, p 97). However in the year to April 1971 award wages rose by 27% (Monthly Abstract of Statistics, Tab 113). Sources: Award wages: Nominal Weekly Wage Index, adult males to Sept 1977, all adults thereafter; Monthly Abstract of Statistics Actual wages: Average Weekly Earnings, all workers, including overtime; Monthly Abstract of Statistics Consumer prices: Monthly Abstract of Statistics Compared with Sweden, two factors would seem to point to greater strength and stability in the centralised wage-fixing system in New Zealand. The first factor was that the level of drift was much lower than in Sweden; the second, that only a very limited 'drift compensation' process was implemented, at least before 1970. Award wages were allowed to diverge cumulatively from ruling rates - in 1966, the average divergence was 30.5% (Mardle, 1967, p. 25). (In 1970 award wages were raised into line with ruling rates in an attempt to strengthen the central system, which was being pushed aside by local bargaining.) However, while the absence of drift compensation might appear to be an advantage, allowing the benefits of centralised restraint without losing the flexibility 222 of local adjustments, it signalled the fundamental weakness of the system. The FOL did not administer an agreed wage strategy on behalf of its members. Unions did not assign power to reach agreements on their behalf to the FOL, although the FOL represented them at GWO hearings. The Federation had no power to control the use of industrial action in local bargaining. The union movement lacked organisational cohesion; it needed only minor 'triggers' for relativity rivalries to emerge. It was only a matter of time before the attention of official union negotiators shifted from award rates to ruling rates. The public sector unions (which did not belong to the FOL or come under the IC&A system, with a few exceptions) speeded up the process by making a case for 'fair relativity' against ruling rates rather than award rates in the private sector. The ease with which the IC&A system was pushed aside, once local bargaining got underway, indicates that the system was so fragile that with hindsight it is difficult to explain how it functioned for so long. The key to the system was that by registering under the IC&A Act, unions accepted, in law, that arbitration could be invoked in place of industrial action. The problem of persuading the unions to comply with the restrictions of the system, when full employment greatly increased their power, was solved in the 1950s by the defeat of militant unions in the Waterfront strike and the use of cold war politics against any new rumblings of militancy in the union movement. However, with full employment persisting, some union organisers became increasingly confident that they could organise workers and be heard by employers without the assistance of the AC. 223 This confidence was voiced as early as 1961, when the National Government, newly returned to power, irritated the unions by proclaiming a more stridently antiunion line than previously and proposing to bring compulsory union membership to an end. This was argued by the FOL leadership to be a betrayal of the compromise which had reigned in the 1950s, whereby compulsory unionism was the counterpart of union adherence to the conciliation and arbitration procedures. The President of the FOL stated that the Government's proposals would cause the unions to abandon their "present mass adherence to the [IC&A] Act and its repressive provisions" (Walsh, 1961, p.35). One can speculate that, whatever the unions' concern about the effect on their membership and finances of a change in the law, other factors were leading to a loss of faith in arbitration. In the 1950s award wages had only kept pace with prices. With very low unemployment, employers would not be inclined to resist claims if unions bargained outside the IC&A system. Furthermore, the disappointing performance of Labour in office, and the party's inability to hold on to power, gave impetus to the search for more effective industrial strategies for advancing labour interests. Since award wages were only minima, it was possible for workplace groups to apply local pressure for increases in wages paid without withdrawing from the IC&A system. However participation in the system did mean that industrial action in support of above-award claims was illegal. That the sanctions were not very effective is indicated by a steady increase in the number of working days lost through industrial action in the early 1960s. In any case, employer resistance to 224 above-award claims was low enough to mean that a strike was not always required, although it might be threatened. In 1961 the immediate threat of abandonment of arbitration was fended off. The law on union membership was changed, but it proved to be of little importance, as 'unqualified preference' or post-entry closed shop clauses were inserted in awards. However the episode was a reminder that, in a buoyant labour market, union compliance with the IC&A Act was not guaranteed. While unions could be fined or deregistered for taking industrial action in breach of the Act, such action would not solve the problem of achieving uninterrupted working on the country's shop floors. Unrest was often initiated by shop stewards rather than union officials, and unions sometimes lacked the authority to achieve a return to work. To maintain its legitimacy in the eyes of the unions, the AC took great care over the continuation of historically accepted relativities. In a sense, the Court assumed the role vested in LO in Sweden, of maintaining organisational cohesion in the union movement in order to operate the centralised system. The Court appealed to some of the same principles in its adjudications that LO developed to mediate among its members. While the word 'solidarity' was never mentioned, the Court did seem to find legitimacy in a claim to defend minimum acceptable living standards, which led to particular attention to the position of the lowest-paid. However, in the 1960s the Court was criticised for allowing margins for skill to become compressed. Both unions and employers made these criticisms, although the unions' position was somewhat contradictory, as they had pushed the AC towards compression by their claims on behalf of the lower-paid (Mardle, 1967). In effect, the unions transmitted 225 on to the Court the problem of resolving their own internal conflicts. The employers participated in IC&A proceedings and AC hearings without ever showing much committment to maintaining the system and restraining drift. It became customary for the employers' representatives to oppose GWOs, on the basis that the GWO system was an unnecessary tier in the wage-fixing process. The employers also opposed any sort of drift compensation, arguing that if increases in ruling wages put pressure on the AC to raise awards, this would mean that the IC&A system operated as a mechanism for centralised wage 'catch-up' rather than wage restraint. The employers' criticisms of GWOs ignored their usefulness in maintaining stability in wage relativities in an environment of rising prices where awards had different expiry dates. The employers also apparently saw no advantage in providing a forum for the FOL. By contrast with Sweden, the employers in New Zealand did not perceive the central organisation of unions as a useful partner in controlling militancy at lower levels. This may have been because the employers had become accustomed to relying on the government to defeat militancy; it also reflected deficiencies in the structure of authority in the unions. It is clear with hindsight that the employers' hostility to GWOs showed a lack of strategic analysis of how wages could be restrained under full employment. This was apparent upon the occasion of the 'nil GWO', when employers reversed their view of the system in a very short time. In early 1968 the employers' representative on the AC formed a majority with the judge in agreeing that no GWO should be made to compensate workers for the devaluation of the $NZ in November 1967 and the removal of many consumer subsidies in the 1967 budget. The Government 226 argued that wages should not be raised if the devaluation was to have the desired effect of remedying the current account deficit, and this view was accepted by the judge. The result was a wave of industrial unrest, which the Government's legal powers proved inadequate to control. The Employers' Federation returned hastily to the AC with the FOL and obtained a 5% GWO by majority worker-employer vote, with the judge dissenting. The EF also acquiesced in an FOL campaign to revise the GWO criteria to give more emphasis to cost-of-living changes: this was incorporated in new legislation in 1969. It was argued in the previous chapter that the government failed to prepare the ground for the 1967 devaluation, insofar as the devaluation should have been accompanied by tariff reductions or other measures to avoid a reduction in real wages. Whatever the 'market' response to real wage reductions in an environment of virtually full employment, the government should have been aware that an uncompensated devaluation would be unacceptable to the unions. The conclusions of the Tyndall Commission on monetary policy had highlighted the unions' opposition to devaluation (chapter 5). It indicates the remarkably low importance attached to consensus with the unions that the government believed that it could impose a real wage cut via devaluation. The 'nil GWO' episode also revealed the underlying contradictions in the Court's position. As the coordinating authority of a centralised system, it had the task of maintaining cohesion, which in Sweden was vested in LO and SAF. However the Court was a completely different type of organisation, being a creation of the state rather than of autonomous organisations. The Court was successful so 227 long as the objectives of unions and employers did not conflict too strongly with those of the state, but when they did, as in 1968, its position became untenable. The employers' advocate before the AC disclosed that employers really had no reason of their own to oppose wage increases, arguing that "[the] real question is not whether the employers could stand the strain [of a GWO] but whether the national economy could" (Book of Awards, 1968, Vol.68, p.1286). Once employers and unions agreed to hijack the Court, the government could no longer remain at arms-length from wage-fixing. From 1971 until 1984 the government undertook a succession of interventions in wage determination. Only for eight months in 1973 was no guideline or control system in force. Wage orders were made by a Remuneration Authority (1971-72), the government itself (1973-77, 1979, 1982-84), a Wage Hearing Tribunal (1977), and the Arbitration Court, reinstated in 1977 but stripped of its power to make general wage orders in 1979, reinstated late in 1980 but soon constrained again by a Wage Freeze (1982-84) (Boston, 1984, Tables 1.6 and 1.7). Interventions were made under a variety of Acts and Regulations. The Remuneration Act, 1979, is perhaps the most striking example of the increasingly dirigiste stance of the government. The government repealed the General Wage Orders Act just weeks before the AC was to hear a claim by the FOL for an order setting a Minimum Living Wage for all workers. The Remuneration Act was then passed. The Act empowered the government to intervene in any wage bargain at any level to prevent or roll back wage increases which it judged to be excessive. This "novel strategy" resulted in a General Strike, and the powers were not extensively used (Boston, 1984, pp 193-4). 228 The government periodically attempted to reduce its involvement in wagefixing, but two fundamental problems prevented it doing so. One was the absence of significant competitive sector representation on the employer side. This led to repeat occurances of the 1968 situation, with the unions and employers agreeing on settlements which were unacceptable to the government. This was, of course, the historical reason why the government had become so enmeshed in wage-fixing, although the 'third party' interests of the farmers had become less important relative to the interests of the new export industries. The other problem was that both the EF and the FOL lacked power over their memberships. Agreements they entered into could not necessarily be enforced. In 1973, under the third Labour Government, an Industrial Relations Act was passed to replace the IC&A Act. This Act gave formal recognition to the central organisations, establishing an Industrial Council which provided the EF and the FOL with a forum for consultation on labour market policy and industrial relations. It also replaced the arbitration function of the Arbitration Court with an Industrial Commission (and the judicial function, of ruling on disputes of right, with an Industrial Court). The EF and the FOL also had a nominee each on the Industrial Commission and the Court. This attempt to create a corporatist structure was coupled with a drive to reduce the number of unions and raise their size. It was hoped that this would assist the FOL in achieving central control, but this ignored the fundamental historical factors militating against corporatism. There was little reason for unions to cede power to a central organisation. Escalation via lockouts and other aggressive employer tactics were rare, because of the legislative framework and the weak organisational 229 structure of the employers. While Labour lost power in 1975, the government's search for a corporatist solution continued, although it was impeded by distrust and hostility between the National Government and the unions. High-level discussions on wage-fixing were based on the assumption that the FOL and the EF could agree on new wage-fixing procedures and maintain them, whereas "[i]n fact... several union leaders conceded that it might be necessary for the Government to retain reserve powers of some kind to underpin the new wage-fixing procedures", and "[t]he Employers' Federation also wanted the Government to retain a measure of ongoing control over the new system" (Boston, 1984, pp.176-177). The Maintenance of Competitiveness The increased involvement of the state in wage-fixing under the National Government of R D Muldoon can be traced, at least in part, to New Zealand's problems of international competitiveness. When Britain joined the European Community, the urgent task of developing new exports dominated government policy. Control of labour costs was an important part of the policy. While the government was prepared to devalue the currency to improve competitiveness, the exchange rate instrument alone was inadequate because of domestic inflationary pressure. While intervention was intended to maintain competitiveness, businessmen in the new export sectors did not applaud the government's efforts on their behalf. An influential group advocated decentralisation of wage bargaining and a reduction in 230 government intervention. Some insight into the reasons for their position can be found in the strategies of competitive sector employers in Sweden. In the 1980s these employers were instrumental in undermining centralisation in Sweden. The growing discontent of Swedish employers with centralised bargaining can be traced to two developments: the wildcat strikes of the late 1960s and subsequent introduction of 'codetermination' laws, and the tension and rivalry between different union blocs, particularly over 'drift compensation'. The weakening of the Social Democrats' electoral position, culminating in the loss of office in 1976, is also part of this picture. In the early 1970s, it appeared that LO might have found a solution to the problem of membership unrest - a solution which utilised the political-industrial alliance of the left to the full. The solution was to increase the unions' capacity to 'deliver' results on shopfloor issues by curtailing managerial prerogatives. The Law on Codetermination in Working Life (1976) introduced provisions requiring the employer to undertake prior consultation with the unions on the reorganisation of production and the hiring or dismissal of workers. This law was preceded by two laws on employment, the Employment Promotion Act (1974) and the Security of Employment Act (also 1974), which introduced new rights for workers threatened with redundancy. The intention of these measures was that unions would be able to address members' concerns without foregoing centralised wage restraint (Martin, 1977, p.66). Furthermore, if shopfloor union activity could slow down the pace of rationalisation, the pressures on the centralised system induced by intensification of work and the associated drift would be reduced. 231 In the mid-1970s industrial unrest fell back to low levels, although the peace of the 1960s was never fully restored. However, the outcome in other respects was not so favourable. Productivity growth fell sharply, a development which can be attributed to the employment-protection measures (Flanagan et al, 1983, pp.320-322). The level of wage restraint was not sufficient to prevent a sharp rise in unit labour costs; indeed, real hourly compensation increased strongly at just the time that productivity growth declined (ibid.). While competitiveness was salvaged by several devaluations, the sustainability of full employment was increasingly called into question, as the current account position and the government deficit deteriorated. The codetermination measures did not resolve the problems of organisational cohesion facing the union movement, for two reasons. Firstly, the blue collar/white collar and public/private divisions remained, and, secondly, some employers responded by developing a new 'corporate' style of industrial relations which undermined the unions. The most visible sign of the new 'bourgeois' industrial relations was the rising popularity of employee share ownership schemes, in the form of loan/share 'Convertibles' (Fulcher, 1991, p.287). Other measures included the replacement of productivity-based payment systems with monthly salaries (ibid., p.270). It had been hoped that codetermination would help to bridge the blue-white collar divide, as TCO had always had an interest in industrial democracy, but instead new demarcation issues arose when workers moved from wages to salaries. Meanwhile, outright conflict emerged between the public and private sector unions within LO (Swenson, 1991, p. 383). The public sector had gradually shifted towards 232 a leading position in wage bargaining and dominance within LO. Changes in pay fixing meant that drift became a feature of the public sector instead of being the preserve of the private sector. At the same time, public sector unions were able to make much more extensive use of the codetermination legislation than those in the competitive private sector (Fulcher, 1991, pp.278-9). In 1983, the engineering employers' confederation (SVF) led the move away from centralised bargaining, reaching a separate agreement with Metall. SVF offered higher wage increases to more skilled workers. By obtaining a less compressed wage structure, engineering employers could improve incentives to acquire training and seek promotion in the internal labour markets of the large firms which dominated the sector (Lash, 1985, p.218). By increasing wages in engineering as a whole relative to other sectors, engineering employers could also improve recruitment (Ahlén, 1989, p.335). The new strategy of SVF placed the SAF in a difficult position. Evidently if all employers tried to improve their relative wages, the outcome would be an overall increase in costs which would be damaging to all employers' interests. At first, SAF tried to maintain the centralised system, in which it had a heavy investment (Fulcher, 1991, pp.295-6). However, the increasing prospect that the government would have to allow unemployment to emerge and the conflict between different wings of the union movement combined to make decentralisation more attractive. There was some prospect that decentralised bargaining would enable private sector pay to increase relative to the public sector, and skilled workers' pay relative to the unskilled. Even if decentralisation did produce a higher overall rate of wage 233 increase than under centralised bargaining, these relativity changes would be in the interests of employers in the private sector. Wage Bargaining and the Development of a Competitive Economy in New Zealand It has been shown that in Sweden there was an ambivalent relationship between the competitive sector and the centralised wage-fixing system. The centralised system was apparently intended to defend the competitive sector against excessive wage pressure from the sheltered sector in conditions of full employment, yet competitive sector employers and unions have not always been strong supporters of centralisation. In New Zealand, the attitude to centralised bargaining among employers in the nonagricultural export sector was not ambivalent, but simply hostile. These employers claimed that the award system was an obstacle to efficient workplace organisation, and that the bargaining system had to be reorganised to eliminate multi-union coverage in workplaces and promote opportunities for bargaining at the enterprise level with representatives of the entire workforce. These views intersected conveniently with those of right-wing economists, who argued that greater flexibility in wage determination was necessary if an open, competitive economy was to develop. History provides a partial explanation of competitive employers' hostility to the arbitration system. The system had, in its heyday, achieved a delicate balance between farmers and workers in which the interests of employers had not played a major role. Awards clearly denied employers certain powers, such as the power to offer a wage below the award wage, the power to deny recognition to the union, or 234 the power to employ a worker under one award to do work covered by another award. However, small employers lived with these restrictions without much protest, perhaps because variation to awards, particularly over exactly what work was done, could be achieved informally in a small workplace. Employer discontent with the award system was very much related to enterprise size. When the government consulted over reforms to the system prior to passing the 1987 Labour Relations Act, the employers who supported the retention of the national award system were "without exception, small employers, or organisations representing small employers" (Department of Labour, 1986, p.28). Employers in larger enterprises favoured the replacement of awards with individual or enterprise-level collective contracts (ibid., p.30). Competitive sector employers did not see the 1970s pattern of governmentadministered wage restraint as being beneficial to their interests, because it was accompanied by an effective erosion of managerial power. When wage controls were in force, employers could not bargain wage concessions against changes in working practices or other industrial relations objectives. Formally, managerial prerogatives were intact, but in practice they were undermined by the removal of wages from the workplace bargaining arena. The comparison with Sweden highlights the importance of this issue. In the heyday of centralised bargaining, Swedish employers had circumvented the restriction on managerial prerogatives implicit in centralisation by making use of the degree of freedom provided by drift. The more LO attempted to reduce drift, the greater the reservations among competitive employers about the system. The 235 codetermination legislation of the 1970s went to the heart of the matter, substituting an explicit restraint on managerial prerogatives for the restraint implicit in the centralisation of wage bargaining. In New Zealand, employers' claims about the superiority of decentralised bargaining found support from right-wing economists, particularly in the Treasury. One argument for 'flexibility' through decentralisation was that changes in occupational and industrial wage relativities were necessary to promote the restructuring of the New Zealand economy. Rewards to factors in competitive sectors should be allowed to rise relative to rewards in sectors which had benefitted from protection. Where the factor in question was labour, changes in wage relativities would provide incentives for the reallocation of labour from protected to competitive sectors. The Swedish case casts an interesting light on this argument. A feature of the active labour market policy was that an efficient allocation of labour was to be achieved by 'quantity adjustments' (measures to meet excess demand or excess supply) without relying on price signals. This approach was endorsed by studies which suggested that the mobility of labour in response to relative wage signals was low. Labour market policies such as retraining and mobility allowances would promote a speedier reallocation of labour than relying on wage incentives. The case for active labour market policy was further strengthened by the observation that wage flexibility could allow inefficiency in the economy to persist. Low-productivity firms would be enabled to pay low wages and thereby stay in business, where centralised bargaining would drive them out of business, 236 compelling the creation of new, higher-productivity jobs for the workers whose jobs were destroyed. It is not difficult to see why the New Zealand Treasury regarded this 'fault' with wage flexibility with less hostility than the Swedish trade unions. The destruction of low-wage, low-productivity jobs placed a substantial financial burden on the labour market agencies. Not only did training places have to be created; the job guarantee which ultimately ensured the credibility of the active labour market policy also had to be financed. Treasury favoured a less fiscally expensive route to restructuring, even if it did have efficiency costs. The example of Sweden suggests that the adoption of active labour market policies rests on the existence of a powerful central union organisation with a cooperative relationship with the government (chapter 4). In the absence of this configuration in New Zealand, the Treasury view prevailed. The Treasury also invoked the use of a 'needs-basis' for wage determination by the AC as proof that the old wage fixing system could not survive the transition to an open, competitive economy. The implication was that protectionism had allowed 'non-market' considerations to become established in wage fixing, in a way which would be unsustainable when the economy was exposed to international market forces. However, the main feature of a needs-based wage system is shared by any centralised wage-fixing system; that is, that wages cannot vary in response to variations in industry ability-to-pay. The needs-basis for wage fixing served the same function as the solidaristic wage policy, of promoting organisational cohesion among unions in the central union confederation, and among members in unions. Most unions were prepared to endorse the concept of needs-based minimum wages, 237 as reflected, for example, in their support for the claim for a Minimum Living Wage made by the FOL in 1979. 238 It is interesting to note that the needs-based minimum wage had two important weaknesses compared with the solidaristic wage policy. One weakness was that it demanded, or implied, a smaller commitment to unity on the part of members and unions. Whereas the solidaristic wage policy envisaged compression of the wage structure through the raising of the relative wages of the lowest-paid, the needs-based minimum wage merely proposed to raise the absolute level of the minimum. Customary relativities would be added to the higher minimum. The other weakness was that the case for needs-based wages could be undermined by the social security system. In chapter 4 it was argued that Labour used child benefit to control the family wage in the 1940s. In 1979, the government argued that needsbased wage fixing was redundant, as the social security system could more effectively ensure that the incomes of different families were adequate to their needs. What both these episodes have in common is that the government could manipulate the needs-basis, hijack the principle for its own ends, and thereby undermine the unions' attempts to claim a wider social remit for their bargaining strategies. Conclusion In both Sweden and New Zealand, restraint of inflation at full employment was achieved by operating a centralised wage bargaining system. So long as centralisation was consistent with the maintenance of competitiveness, Sweden faced no conflict between full employment and international openness. This was the outcome that the EFO model described, but reality departed from EFO in crucial respects. 239 It has been argued that the competitive sector will tend to experience a higher rate of productivity growth and technological change than the sheltered sector. To attract workers with sufficient skills into the sector, and to motivate workers in the face of rationalisation and intensification of work, competitive sector employers may aim to increase wages relative to the sheltered sector. The centralised wage bargaining system prevents them doing so. Indeed, the requirements of union organisational cohesion under centralisation may lead to a decline in competitive sector relative wages, for example if 'solidarity' is pursued and there are more lowpaid workers in the sheltered sector. This was broadly what happened in Sweden. It could be argued that the real problem for the competitive sector was not the centralised wage-fixing system but the maintenance of full employment. The reason is that, even without centralisation, a major obstacle confronts the competitive sector in any attempt to increase relative wages. So long as full employment demand management policies are pursued, the sheltered sector will be able to keep up with wage settlements in the competitive sector. Full employment demand management policies necessarily put the competitive sector at a disadvantage in maintaining relative wages, insofar as demand management ensures stable and accommodating markets for the sheltered sector. At the same time, tight labour market conditions heighten the importance of achieving a high relative wage in the competitive sector, in order to attract labour. The issue is whether these problems of full employment are minimised by centralisation of bargaining or by decentralisation. The case for centralisation is that the competitive sector could at least benefit from overall wage restraint, even if relative wages did not develop in an ideal way. 240 It is also clear that the preferred system for competitive sector employers depends on their predictions about the government's future policies. If the government can be swayed away from full employment, then decentralisation may be the better system for the competitive sector. By the mid-1980s, the ability of governments to maintain full employment through demand management was very much in question, presenting employers with the possibility that they would be better off under decentralised bargaining. One factor which called the maintenance of full employment into question in Sweden was the decline in the organisational cohesion of the trade union movement. If the trade union movement is united and has a close cooperative relationship with the government, the likelihood that the full employment-centralisation configuration will be adopted and sustained is increased. If the union movement is weak or disunited, and unable to 'deliver' either wage restraint or votes to the labour party, then both the political and economic conditions for the maintenance of full employment are damaged. In New Zealand the attainment of full employment never relied, either politically or economically, on the organisational cohesion of the trade union movement. The opposition of key business interests to the interventionist stance of the government was one factor leading to the abandonment of full employment and the promotion of decentralised bargaining. Competitive employers associated the institutional structures of centralisation with the erosion of managerial prerogatives. In Sweden this problem also existed, but the terms negotiated in the 1938 Basic Agreement represented a compromise which was acceptable for many years. 241 Indeed, employers were motivated to reach agreement with the unions in the belief that union leaders could assist them in improving productivity by preventing unofficial disruption and ensuring that agreements made were adhered to. However, this fundamental component of the corporate compromise fell apart in the 1970s as LO struggled to maintain its organisational cohesion. In the end, the views of competitive sector employers prevailed in both Sweden and New Zealand as governments ran out of options for maintaining full employment. Trade deficits made the promotion of the competitive sector an overriding objective, while government budget deficits restricted the scope for stateled development. 242 Chapter 8 The Welfare State and International Openness Previous chapters have shown that the trade policies adopted in Sweden and New Zealand were connected in a variety of ways with the structure of the labour market interest groups, and with the relationship between those groups and the government. This chapter shifts the focus from trade policy to social security. Because a country's trade and social policies are the product of a single political configuration, it should be possible to draw some connections between trade policy and welfare state development. This chapter investigates whether received accounts of the development of the Swedish and New Zealand welfare states are consistent with the analysis of trade policy that has been advanced, and draws out the implications for the relationship between economic openness and welfare state development. In Sweden the levels of public sector employment and expenditure on social security benefits are much greater than in New Zealand. However, the role of government in the economy, until recently, was at least as great in New Zealand as in Sweden, due to the extensive regulatory structure, of which trade protection was a central part. The two countries could therefore be seen as fitting into a pattern in which economic openness is accompanied by extensive 'explicit' tax and expenditure activity by the government, while economic closure results in less tax/expenditure activity, although there may be high levels of 'implicit' redistribution by the 243 government. This chapter investigates what processes have produced this pattern. Will it always be the case that economic openness is accompanied by welfare expansion? Through what channel is economic closure connected with restriction of the tax and expenditure activities of the public sector? Several commentators have suggested that there is some connection between the openness of the economy and the development of the welfare state (see, e.g. Cameron, 1978, pp.1249-1251). Katzenstein has argued that Sweden, along with other small open European economies, operates "a variety of economic and social policies that prevent the costs of change from causing political eruptions" (1985, p.24). These policies of 'domestic compensation' extend beyond social security transfers to include the whole range of policies used to maintain full employment industrial subsidisation, public sector employment creation, and even government involvement in achieving wage restraint through centralised wage-fixing arrangements. Not all of the policies mentioned by Katzenstein take the form of public expenditure, but the general implication is that policies of domestic compensation contribute to the large size of the public sector in several small Western European economies. Castles (1985, 1988, 1989) examines the reasons why Australia has a relatively small public sector and concludes that trade protection has operated as a policy of 'domestic defence', allowing social welfare objectives to be achieved without public sector expansion. Castles suggests that the analysis is broadly applicable to New Zealand, although New Zealand has not always been such a 'welfare laggard' as Australia, particularly during the period of the first Labour 244 Government (1935-1949). A third contribution in a similar vein comes from Olson (1990). Olson argues that trade protection and social security are alternative modes of income redistribution, with trade protection having much more adverse efficiency consequences. He suggests that the Swedish welfare state has not led to as poor an economic performance as one might expect, because it is accompanied by a free trade policy, and he offers some suggestions as to why this configuration has arisen, derived from his theory of interest group behaviour. One difficulty in presenting the arguments of Olson, Katzenstein and Castles is that each focuses on different areas of public sector redistributive activity. To clarify the discussion, it is useful to distinguish between four types of transfer, contingent on economic location in different ways, as follows: I. Transfers contingent on occupancy of the same job (where 'job' refers to continued use of the same technology and skills); II. Transfers contingent on continued employment; III. Transfers contingent on past employment; IV. Transfers contingent on low income, relative to needs, either actual (ascertained by an income test) or 'deemed' (by category membership rules). An example of a type I transfer is trade protection, while type II transfers include public sector employment creation, and relocation and retraining subsidies. On the spectrum between type I and type II one finds different industrial subsidies, some of 245 which veer towards 'adjustment assistance' (type II) while others support workers in their current activity (type I). Social insurance is a type III transfer while incometested cash benefits fall into type IV; many social security systems have elements of types III and IV. The distinction between 'explicit' transfers which appear in the government's budget and 'implicit' transfers arising from protection is a distinction between policies which could take any form (type I-IV), and a policy which must be type I. If the focus is on the distinction between transfers affecting factor income (wages and profits) and transfers affecting final income (after taxes and benefits), then the distinction is between type I and II transfers on one hand and type III and IV on the other. Olson's analysis contrasts type I protectionism with type IV social security provision. Katzenstein draws connections between economic openness, rejection of type I policies, and expansion of all of the type II-IV policies. In Castles' analysis, a distinction is drawn between government intervention in the economy to alter the primary distribution of income and secondary redistributive activities. In this framework, economic openness implies the development of social security policies of type III or IV. 246 So far as can be ascertained from the available statistics, all areas of 'explicit' government activity record higher levels (as a proportion of GDP) in Sweden than in New Zealand (Table 8.1). That is, not only social security expenditure but also government consumption (primarily employment) and expenditure on subsidies is higher in Sweden than New Zealand. The following discussion concentrates on social security provision, as the common ground between Olson, Katzenstein and Castles is that economic openness may be associated with higher levels of social security provision. It will be shown that the pattern of association between the presence or absence of type I transfers and the other policies is complex. The overall redistributive system in New Zealand comprised a type I industrial policy and a type IV social security system, while Sweden has had a type II industrial policy and many type III features in the social security system. Table 8.1 Components of Government Expenditure as % GDP Average for the period 1981-85 Sweden Government Consumption* New Zealand 31.6% 19.9% Subsidies 4.5% 1.8% Other Transfers 25.0% n.a. (mainly social security and social assistance) Social Security and Social 23.0% 10.5%** 247 Assistance Sources and Notes: OECD National Accounts, Vol 2, 1989, except **. * About 70% of government consumption is 'compensation of employees' in both countries. ** Payments under the Social Security Act, NZOY, various years. 8.1. Social Security in Sweden and New Zealand Compared New Zealand is nowadays a welfare laggard, and Sweden a welfare leader. However this has not always been the case. Up until the 1950s the two countries' systems had several important similarities, and in 1938, when New Zealand's Social Security Act was passed, many aspects of provision in New Zealand were superior. In the 1950s and 1960s benefits failed to keep up with rising living standards in New Zealand, while in Sweden an additional pension scheme was introduced. This scheme, ATP, largely accounts for the superiority of Swedish old age and disability provision. In the 1970s, major improvements were made to age pensions and accident compensation in New Zealand, but the increases in benefits have not been sustained fully in the 1980s. However, at the end of the 1980s the age pension remained high on an international comparison (OECD, 1988/89, Table 19). 'Laggardlyness' was more apparent in the levels of other benefits and in the rules governing benefit receipt, as benefits were income-tested or (in the case of the age pension) 'supertaxed'. 248 Prior to the introduction of ATP in Sweden, old age pension provision in both countries was made through a tax-financed benefit, payable to all citizens of pension age at more or less a flat rate, although with some means-testing or needs-based supplementation. In Sweden a small pension had been available to all over 67 since 1913; the majority of pensioners also claimed a means-tested supplement. In the 1946 reform the universal pension was raised considerably, and from then only on a minority claimed the income-tested housing supplement (S. Olsson, 1990, pp.95-96). In New Zealand a means-tested pension was introduced in 1898; over the years eligibility was broadened gradually, so that by 1938 about 43% of men over 65 and women over 60 received it (a proportion that probably rose with age) (NZOY 1939, p.77 and p.521). The 1938 Social Security Act provided for the introduction, in 1940, of a small 'superannuation' payment that was not income-tested, to all citizens over 65 of 10 years residence. An age benefit similar to the previously-existing pension remained in place, but the plan was that this would be phased out by steady increases in the superannuation benefit. Inflation disrupted the timetable, but in 1960 the two amounts were equalised. The age benefit continued to be claimed by more than 40% of elderly beneficiaries, however, because it was not taxable and was payable at a younger age. Furthermore, the superannuation residence requirement had been lengthened (to 20 years), while the property component of the means test for the age pension had been abolished, making the pension easier to claim. In 1976, after a short-lived Labour Government had attempted to establish a funded earnings-related pension scheme, the superannuation payment was substantially raised and the two age benefits were unified. 249 A significant feature of the 1976 changes was that the age pension was raised much more than other benefits (unemployment, sickness etc.). This departed from the principle established in the 1938 Act that all benefits would be set at the same level. This uniformity was part of the ambition of comprehensive coverage against all causes of income inadequacy, which was perhaps the most striking feature of the 1938 Act. Benefits were provided when income fell short of needs because of age, sickness, unemployment, widowhood or desertion, or 'other exceptional conditions'. In Sweden, separate systems governed benefit provision for each category of recipient, with the Poor Law remaining in the background, picking up those whom this ad hoc process did not cover. (In 1957 the Poor Law was reformed into social assistance.) In New Zealand there was no Poor Law, a factor which must have contributed to the preference for an all-encompassing scheme. In the deliberations prior to the passing of the 1938 Act, Labour considered the possibility of establishing an insurance system instead of a tax-financed system, but most of the party favoured benefits based on citizenship rather than on contributions. The insurance principle was associated with dull fiscal caution. Insurance benefits would take time to come up to their full level, which reduced their political appeal. One factor which may have contributed to the ease with which insurance was pushed aside was that there was little union-based insurance provision. The comparison with Sweden suggests that the absence of union-based schemes reduced the incentive for Labour to incorporate the insurance concept into its social security proposals, and it did not do so until the 1970s. The institutions in which personal insurance provision was made - friendly societies and both 250 government-owned and private insurance companies - had no affiliation or close association with the Labour Party. The principle of 'self-reliance' through own saving - whether in insurance or, of great importance in New Zealand, home ownership - was defended by the political right. The right-wing National Party had no inclination to 'nationalise' the insurance provision that had developed, and the implication of this was that, under National, government provision would be a safety net, rather than having a central role in providing financial security. Whereas the unions played little part in the social security debate in New Zealand, they exerted a strong influence in Sweden. Heclo's accounts of the development of unemployment insurance and the ATP scheme both reveal the unions to have played a pivotal role. Looking first at unemployment insurance, it is interesting to note that attention fell on the possibility of subsidising existing union schemes or incorporating them into a state scheme as a device for reducing the cost of the scheme - i.e., as a result of fiscal caution (Heclo, 1974, p.97). In New Zealand, the cost constraint led to the retention of means-testing, although universality was, as a matter of principle, preferred. In the case of unemployment insurance in Sweden, the use of union schemes meant that the state was committed only to subsidise benefits, not to meet the full cost, and also that coverage was incomplete, which also reduced the cost. With the benefit of a long historical perspective, one can say that these savings were not as great as might have been expected, because the unions pushed the government into higher levels of subsidy than planned, and because the exclusion of some groups became less tolerable in the course of time. In 1934 the Social Democratic Government introduced a subsidy for trade 251 union insurance funds, graded so as to provide the highest rate of subsidy to those groups of workers with the lowest pay and highest unemployment. The conservatives remained strongly opposed to the scheme. They argued that it was a subsidy to unions and a departure from state neutrality between employers and unions. At the other end of the spectrum, support from LO was strong and this galvanised the Social Democrats into proceeding despite their minority position in the Riksdag. (They were rebuffed once (in 1933) but then succeeded in 1934.) Heclo observes that while the Social Democrats sought to equalise benefits between stronger and weaker unions, "[t]here was no one to worry about those unemployed and not in unions" (ibid., p.103). The Government's attempt to promote equality across union members proved unsuccessful. Stronger unions did not join the state-subsidised system until after 1941, when they obtained an equal percentage state contribution, along with an increase in the duration of benefits and supplements for spouses and children (ibid., p.129). These changes put all unions on the same footing vis-a-vis the state, and they formed an interest organisation which imposed steady pressure for the improvement of benefits in the postwar years, as well as constituting an 'inertial force' against any reduction in the union role. In 1948 the unions defeated a proposal for the state to take over the organisation and administration of unemployment insurance in order to achieve complete workforce coverage - it was estimated that 28% of the workforce needing insurance did not have it (ibid., p.133). Not until 1974 was this gap plugged with the introduction of an unemployment benefit for those without insurance. 252 Turning to the age pension, the unions played little part in the introduction of a means-tested pension in 1913, nor its extension in 1937 and universalisation in 1946. However, the role of the unions in general, and LO in particular, in the establishment of ATP was central. The impetus to ATP was the recognition that, given rising living standards, an increasing proportion of waged workers would want to participate in earnings-related pensions schemes resembling those already found among salaried workers. Such schemes could be negotiated firm-by-firm or collective agreement-by-agreement. However to proceed by low-level negotiations would result in the introduction of diverse schemes with partial coverage, providing new differentiations among groups of workers. LO preferred a uniform scheme providing earnings-related coverage for all workers. LO's position vis-a-vis member unions would be enhanced if legislation was used to give a better scheme than local negotiations could achieve, for example by securing portability. However any legislation should not detract from the role of the unions in obtaining insurance for their members. The system advocated by LO (and eventually adopted) was clearly located in the union-employer bargaining arena despite the use of a legislated framework - for example, contribution rates were determined by bargaining. The Social Democratic Government did not respond enthusiastically to the unions' superannuation campaign. One explanation of the Government's response is that it hoped that LO and SAF would reach an agreement in the course of centralised wage bargaining, without legislative involvement. The difficulty for the Social Democrats was that the introduction of legislation so clearly based on the interests of the organised working class would disturb the somewhat broader electoral platform 253 that the party sought in order to achieve and maintain a majority in the Riksdag. The LO scheme "would virtually guarantee a break with the Farmers' party.... [and] large numbers of white-collar workers with private pension rights could be expected to oppose state superannuation" (Heclo, 1974, p.238). However LO was not to be denied such an important step forward in its representation of trade union members' interests. (It is interesting to note that this representation led not to egalitarian, universal provision but to contributory, earnings-related benefits.) LO's bargaining position vis-a-vis the Social Democratic Government rested on its role in achieving wage restraint within the recentlyestablished centralised wage-fixing system. LO chairman Geiger threatened bluntly that if the Riksdag did not approve the superannuation plan, the continued loyalty of the union movement to the goal of stable economic growth would necessarily be lessened (ibid, p.245). While no direct link between pension provision and wage restraint was claimed, an indirect link via the ability of LO to maintain peaceful industrial relations was implied. After an inconclusive referendum, the ATP scheme passed into law on the barest of parliamentary majorities. While the advent of the scheme ultimately rested on the achievement of electoral approval (or avoidance of disapproval), there seems little doubt that LO persuaded the Social Democrats to adopt the scheme and was able to mobilise sufficient electoral support for ATP among union members to avoid it becoming an electoral disaster. This can be contrasted with the situation in New Zealand, where the unions did not launch their own social security proposals and did not mobilise member 254 votes behind Labour Party initiatives which they supported. Two factors explain the union absence. Firstly the functions of the unions were restricted to 'industrial matters'. The provision of insurance services was prevented by the conditions of registration under the IC&A Act. (The third Labour Government's Labour Relations Act (1973) eased this legal constraint, but this reform came too late to influence the evolution of social security.) Secondly, union membership did not carry the same party loyalty and party connections as in Sweden. Again, the constraints of the IC&A system, the Arbitration Court's deterrence of attempts to form a central organisation (prior to 1936) and the distortions of compulsory union membership could be adduced as explanations. As discussed in Chapter 3, the deeper explanation of the dominance of political over industrial expression of working class interests might be found in the factors leading to the early extension of the franchise in New Zealand. 8.2. Interpretations of the Relationship Between Protectionism, Social Security and Social Welfare Olson's (1990) discussion of the Swedish welfare state focuses firmly on redistributive activities in favour of the worst-off. While acknowledging that some state expenditures, for example on education and training, may increase economic growth and enhance competitiveness, Olson claims that extra spending on education and skills is not the main factor in the relatively large size of the Swedish welfare state (1990, pp.4-5). The data in Table 8.1 more or less support this claim; certainly, 255 they do not refute it. However, the role of earnings-related social insurance suggests that not all of Sweden's social security expenditure is as redistributive as Olson assumes. (The redistributive effects of ATP are in fact the subject of some controversy; see Ståhlberg, 1987, and Eriksen and Palmer, 1992.) Olson argues that the 'implicit' redistribution of income through trade protection has more adverse effects on economic efficiency than the 'explicit' redistribution of income through social security. The reason is that the benefit of protection is received only by those who remain in the protected industry. The transfer is dependent on continued occupancy of a particular economic location. The dynamism of the economy is reduced because the incentive to change location is reduced. Social security transfers are (on Olson's assumptions) contingent on low income, and they thereby reduce incentives to increase income. However this negative effect on incentives is less damaging to productivity than in the case of protection, for a variety of reasons. Olson emphasises that the criteria for entitlement to social security transfers (e.g. age or disability) usually also imply low productivity, which means that the efficiency costs of the disincentives created will be small (ibid., p.80). One can also note that in the more difficult case of unemployment, the social security system has developed administrative rules and structures which are intended to counteract the disincentives facing recipients. Olson also argues that implicit redistribution is inherently more likely to cause incidental allocative distortions than explicit redistribution, although he admits that it is theoretically possible that the efficiency losses from taxation (needed to finance explicit redistribution) could exceed those 256 from protection (ibid., p.41). The conclusion Olson draws is that Sweden has been able to establish an extensive welfare state, without experiencing massive losses in economic efficiency, because the extent of implicit redistribution in Sweden is small. However Olson does not argue that the absence of implicit redistribution calls forth explicit redistribution. Indeed it would not logically do so, as the beneficiaries from implicit redistribution are an entirely different set of people to the beneficiaries from explicit redistribution, in Olson's model. Implicit redistribution is favoured by better-off citizens, who choose the least straightforward and least conspicuous routes to advancing their interests (ibid., p.61). By contrast, explicit redistribution favours low-income people and is assumed to be based on "popular moral, sympathetic and ideological motives" (ibid., p.79) which do not need to be disguised. Olson may be right to suggest that transfers conditional on low income alone are unlikely to attract the support of economic interest groups, which casts an interesting light on New Zealand's type IV system. However it was evident in s.8.1 that interest groups have played a large role in the development of the Swedish social security system, particularly its insurance provisions. Olson's insight that protection and welfare differ in the conditions attaching to transfers can be related directly to the organisation of interest groups. A craft-based interest group will seek transfers based on continued employment in the craft; an industry-based group on employment in the industry. A labour force-based group (an encompassing union organisation) will prefer transfers based on continuing labour force participation, and may also give support to transfers to those unable to work, provided these are 257 based on past labour force participation (social insurance). Olson argues that encompassing organisations will have more incentive to pursue efficient policies than small groups, but he does not acknowledge that the encompassing organisation may seek some types of redistribution for its own organisational ends, as was the case with LO's advocacy of ATP in Sweden. The importance of these ends arises from the pressures which can make encompassing organisations break down. The analysis of social security in Sweden shows not only that the unions were influential in shaping the system towards type III rather than type IV redistribution, but also that the structure of social security itself contributed to the organisational strength of the unions, and, in particular, consolidated the central influence of LO. It would seem, therefore that social insurance was both a cause and a product of union strength. Furthermore, the effect of gains made in social insurance was to deepen the 'encompassingness' of the Swedish labour market organisations. The political-industrial alliance was able to develop policies which strengthened and entrenched the alliance further. Political initiatives could help to fend off fractious tendencies at the grass roots of the union structure, preventing sectionalism. This pattern was also noted in previous chapters in the discussion of workplace codetermination and the active labour market policy. This suggests that a type II industrial policy and a type III social security policy will arise from the presence of large and powerful interest organisations, and will, in its turn, help to keep those organisations in existence. This is a rather different argument to Olson's, and has different implications. Certainly, inefficient protectionism is avoided, but high levels of government expenditure may arise 258 relative to a political system where large and powerful interest organisations are not present. This expenditure need not be directed towards the worst-off, although the beneficiaries will be a less select group than under protectionism. Katzenstein's argument is based in political theory rather than the economic analysis of interest groups, but his discussion of 'democratic corporatism' has some affinities with Olson's analysis of the consequences of 'encompassing' forms of organisation. Katzenstein proposes a two-step theory in which openness is related to high levels of employer and worker organisation, or, more specifically, corporatism. Corporatism is related to welfare state expansion. Thus openness is positively correlated with welfare state size through the medium of the political economy of corporatism. Katzenstein's theory would appear to be confirmed for Sweden by the evidence presented in previous chapters connecting the power of the peak union and employer organisations to the adoption of free trade policies, and by the discussion in this chapter of the role of the unions, and LO in particular, in the development of social insurance. However there are some differences between the connections found by Katzenstein and those discerned in this study. In particular, Katzenstein argues that corporatism is primarily a consequence of openness, where openness is a given and unavoidable condition of the economy (1985, p.24). The 'imperative' of openness would seem to neglect the maintenance of tariffs and quotas in some instances, such as the continuation of agricultural protection in Sweden and the debate between LO and SAP over the raising of tariffs in 1958-60 (chapter 4). 259 Furthermore, some of the causal links from openness to corporatism seem weak. Katzenstein's account of the development of centralised wage-fixing arrangements is particularly problematic, as protectionist countries such as New Zealand have also operated such arrangements. In the countries studied by Katzenstein, corporatist structures were established in the 1930s and 1940s. Katzenstein associates this timing with the international economic crisis of the Depression and the political instability leading to World War II (ibid., p.139 ff.), allowing him to infer that partnership and cooperation by the central organisations are responses to international vulnerability. "[U]nder economic stress, organisations have been ready to co-operate (...) The logic of economic vulnerability prevailed over the logic of worker militancy..." (ibid., p.96). These connections are appropriate to Katzenstein's approach to corporatism, which draws attention to the ideology of social partnership and co-ordination of conflicting objectives, which supplements the centralised institutional structure (ibid., p.87 ff.). However the 1930s and 1940s also saw governments make their first attempts at implementing full employment policies. Previous episodes which must have heightened the perception of international vulnerability, such as the depression of 1921, led to intensified conflict in the labour market. Full employment policies presented a concrete challenge to the labour market parties, because of the threat that governments committed to full employment would arrogate power over wage and price-setting in order to control inflation. In Sweden both the signing of the Basic Agreement and the establishment of centralised wage-fixing can be directly 260 related to the threat of government intervention if the parties did not achieve 'selfregulation'. Centralised wage-fixing arrangements would seem to be called forth more by the need to restrain inflation under full employment than by economic openness and international vulnerability. Although inflation and competitiveness are obviously related, a protectionist country will also have to restrain inflation. It is problematic for Katzenstein's argument that the export sector has not been a consistent supporter of centralised wage-fixing in Sweden (chapter 7). On the other hand, one could see the formation of SAF and its pursuit of labour market arrangements independent of government intervention as a product of the strategies of the large export sector employers. Insofar as the employers' strategies also contributed to the development of large industrial unions and a powerful encompassing organisation, openness did cause corporatism. Turning to the connections between corporatism and welfare expenditure, Katzenstein emphasises the consensual character of corporatist arrangements, such that a political environment is created which places a premium on egalitarianism and social stability. In this environment, a wide range of policy instruments have been developed to manage the consequences of international vulnerability. The terminology of 'compensation' suggests that these policies have the function of reducing the losses which would otherwise be experienced by groups in the competitive sector as a result of economic openness. A secondary function attributed to the policies is that they improve the flexibility of the economy, enabling it to 'roll with the punches' of international trade shocks. Katzenstein notes that the 261 functions of compensation and adjustment are not always compatible: "compensating for the costs of change ... can simply be another way of failing to adjust" (ibid., p.29). The need to combine adjustment with compensation means that compensation will not be 'exact', as it would be difficult to design a compensation scheme that encouraged changes in economic location while ensuring that no-one was made worse off by the trade shock. The active labour market policy (ALP) would appear to be an outstanding example of a policy which combines compensation and adjustment, with its emphasis on retraining and mobility. It conforms well to Katzenstein's theory in being the product of a cooperative tripartite relationship between LO, SAF and the government. The ALP reflects the centralised organisation of the trade union movement insofar as craft entry restrictions and demarcation issues have not impeded its operation. Furthermore, the ALP may have reduced the passion in any campaign by individual unions for protection to defend the wages and jobs of their members, by reducing the adjustment costs faced by displaced workers. However the ALP is far too small in expenditure terms to provide the basis for a theory of why economic openness is connected with a large public sector. Furthermore, the ALP has been unable to cope with the large declines in key areas of competitive sector employment which occurred in the 1970s and 1980s. The government was drawn into saving jobs in key sectors through the use of defensive industrial policies. Pontusson's analysis of these industrial policies suggests that corporatist cooperation did not extend to business acceptance of union involvement in investment decision-making. Firms in advancing sectors (those not reducing 262 employment and those not in financial difficulties) resisted any intervention, preventing the government developing an 'offensive' industrial policy to promote growth in advancing sectors (1991, pp.174-5). One consequence was the heavy reliance of successive governments on devaluation to remedy competitive problems. Another consequence was that defensive (type I) industrial policies were utilised instead of type II policies to promote adjustment. This leaves some doubt about whether Sweden managed to develop the industrial policies which Katzenstein suggests are necessary for small open economies. However Katzenstein's view of compensatory policies is very broad. It includes not only the ALP but also the expansion of public sector employment more generally (1985, pp.48-49). In chapter 6 it was argued that public sector employment made up for the loss of industrial employment in a rather curious way. So long as the government confined itself to the spheres of public sector activity marked out by the Myrdal-Lindahl model of the mixed economy (chapter 5), public sector activity could not really compensate for industrial decline. (This changed when defensive industrial policy was expanded under the bourgeois Government of 1976-82.) The public sector expansion did not primarily absorb labour from competitive industries, and it is hard to see how it has aided 'adjustment' or the maintenance of competitiveness. The public sector expansion was ineffective in absorbing displaced workers from the competitive sector because these workers had skills and work aspirations that did not match the jobs on offer. Specifically, the areas of public sector expansion were 'women's jobs'. While one of the first areas of competitive sector shrinkage, the textile and clothing industry, was 263 a large employer of women, subsequent rationalisations displaced many men. One effect was that the male labour force participation rate fell, primarily due to early retirement, whereas the female participation rate rose. One could argue that the policy was compensatory insofar as full employment was maintained, and that its apparent failure to provide direct or 'local' compensation reflected the high level of adjustment demanded of the labour force. The compensation/adjustment programme rested on a marked shift in the household division of labour, changes in the organisation of families and the collectivisation of household functions. A socially-conservative, right-wing government would prefer locally compensatory policies which did not lead to such substantial changes in the social order: this is why the bourgeois Government undertook defensive industrial policies. This argument stretches the concept of compensation very widely, and encounters further difficulties. Most notably, it is striking that the corporatist organisation of the labour market actually magnified the social change resulting from economic openness, by comparison with what might have been expected in a decentralised system. This happened because the wage policy of solidarity increased the extent of employment restructuring required to maintain international competitiveness. If low-waged sectors had survived, fewer jobs would have been cut, and fewer demands would have been made on the active labour market policy. In a decentralised system, the pace of restructuring is slowed by wage flexibility, which allows low-productivity employment to persist. This generates a high degree of inequality in primary or market incomes. 264 It seems, then, that to describe the ALP and public sector employment expansion as compensatory obscures a more remarkable feature of LO's strategy, which was to accelerate the pace of structural change resulting from international openness. It was argued in chapter 4 that LO's preferred policies of free trade and wage solidarity were intended to maximise real wage growth and enhance the organisational unity of the trade union movement. The role of the ALP was to enable full employment to be maintained in this trade and wage bargaining environment. Katzenstein's analysis would appear to overrate the complementarity between economic openness and welfare state expansion. One can think of LO as endeavouring to maximise workers' welfare along several dimensions: real wage growth, provision of security and promotion of equality. Free trade would maximise real wage growth, but part of the increase in real disposable incomes was given up through public sector expansion in order to enhance security and equality. Since workers differed in the importance they attached to each dimension, LO had to steer between different worker preferences in finding an outcome which satisfied its members. It may be that the imperative of organisational unity biased LO towards the promotion of equality, and in recent years a period of low real wage growth appears to have hardened the opposition of higher-paid workers to 'solidarity'. This suggests that the apparent harmony between economic openness and welfare state expansion, exhibited in the heyday of the Swedish model, rested on the organisational unity of LO and its cooperative relationship with the Social Democrats. Recently, a conflict between economic openness and welfare state 265 expansion has emerged, taking the forms of disunity within LO and a weakening of the relationship between LO and the Social Democrats. This conflict appears in the erosion of competitiveness due to wage pressure, which in its turn can be connected to the maintenance of full employment and the high levels of taxation that have accompanied expansion of the public sector. If the Swedish model of economic openness and welfare state expansion entailed a very rapid rate of social change, one would expect to find that protectionism and restricted welfare state growth in New Zealand were accompanied by social stability. In Castles' analysis of the Australian welfare model, policies of 'domestic defence' comprised the securing of minimum (for men, family) wages by the Arbitration Court, and the use of trade protection combined with some control on immigration (the White Australia Policy) to ensure the availability of employment at the family wage. Full employment at the family wage was the foundation of 'the wage-earners' welfare state'. The heavy use of policies to influence the factor distribution of income reduced the need for tax-benefit transfers to achieve the desired final distribution. According to Castles, it is at least an 'arguable proposition' that "[T]he Australian residual welfare state plus minimum wages system achieved the same degree of social protection as more universalist systems by other means." (1989, p.21) The first striking feature of Castles' theory is its departure from the 'sectional interests' theory of protection, advanced by Olson among others. By contrast with 266 Olson's analysis, trade protection is seen as having egalitarian effects in Castles' theory. Whereas Olson emphasises the differences between the beneficiaries of type I and type IV policies, Castles suggests that trade and social security policies are alternative ways of achieving the same direction of redistribution. The evidence reviewed in chapter 6 suggests that Castles is right to present Antipodean trade protection as defending the interests of weaker groups in the labour market, insofar as it was found that protection was negatively correlated with average wage levels in an industry. (A caveat is that the true level of effective protection of an industry may not always have been what policy-makers intended, due to the complexity of the effects of protection in a full input-output analysis.) It was also argued in chapter 6 that the government in New Zealand was not confined to 'welfare' interventions in the way that the Swedish government was. Through protection and state direction of investment, the government in New Zealand was able to prevent industrial employment from falling. While women's labour force participation increased and men's fell, these changes in the composition of the labour force were much less dramatic than in Sweden. However it seems quite misleading to suggest that protectionist policies generated "the same degree of social protection" as did public sector expansion in Sweden. The policies deployed in New Zealand were those of an interventionist but socially-conservative government - a 'dirigiste' right-wing government. Because business did not keep the government at arms-length in New Zealand the way it did in Sweden, the government was able to use trade protection and other interventions to defend the existing social order. Public services were not expanded as they were 267 in Sweden, particularly in areas such as pre-school education and non-acute care, where family-based provision could continue to be relied upon. Castles' argument places a great burden on the efficacy of protection in providing job security and suppressing demands for social security benefits, such as unemployment benefit. Workers still faced the risk of unemployment in protected industries, albeit more often because of domestic demand deficiency than competitive pressures. It is true that the benefit system did not have to accommodate the sharp reduction in the labour force participation of older men that occurred in Sweden, but for most workers the risks of income loss associated with old age, disability or sickness were unaffected by the level of exposure to international competition. Castles' argument would seem to apply most readily to welfare provision for the working-age population, in particular to income support for families (e.g. child benefit). If the family wage was maintained by trade protection, and the wage was set at a level which reduced the social security demands of families, then it would seem that protection could be connected with low levels of benefit provision. In Australia, protectionism and the family wage went hand-in-hand in the first decade of the twentieth century. The Harvester decision and its successors established a direct connection between payment of a family wage and the protection accorded to an industry. However, in New Zealand, the family wage was not explicitly connected with protection. Nor was the family wage connected with a low level of welfare expenditure. On the contrary, as noted in chapter 4, the establishment of the family wage was a pyrrhic victory for the unions, because high levels of child benefit 268 were used to reduce the wage level required to support a family. It has been argued in this study that the use of protection as a full employment policy in New Zealand reflected the ability of the government to manipulate real wages through the 'back door' policy of restricting or increasing the supply of imported goods. The unions did not play an important role in the introduction of protection, although sectional union interests developed in support of the maintenance of protection. The circumstances leading to the introduction of protection in New Zealand were, therefore, somewhat at variance with those in Australia, where the unions were more active in developing the 'new protectionism' prior to WWI. The higher union profile in Australia leads Castles to describe protectionism as a 'labourist' strategy, which enhanced the ability of the unions to alter the distribution of income within the labour market. However, as the Swedish example shows, unions in an open economy can also alter the distribution of factor income. The difference is that the industrial and occupational structure of employment will not be stable in the face of wage pressure in an open economy, whereas protection allows wage demands to be accommodated without employment effects. This accommodation is in the interests of individual unions which might otherwise experience losses in membership (employment reductions), but it is not in the interests of the working class as a whole, because protection reduces real wages by raising consumer prices. Castles' description of protection as a 'labourist' strategy is based on the view that the union movement was powerful, but exercised its power in a particular, rather limited, way. An alternative view is that the union movement under the 269 IC&A system was not powerful. Its fractured structure prevented the adoption of strategies which would advance the interests of the working class as a whole. Castles does acknowledge the limitations of the family wage, pointing out the defensive orientation and restricted ambitions of the unions in seeking a wage based on living standards attained in the previous century (1988, p.117). If the union movement was not powerful, and the labourist strategy was not really a coherant strategy for the working class as a whole, then Castles' explanation of the (under)development of social security also fails. Castles' explanation is that the unions failed to use their power to press governments for improved social security provision because they had succeeded in securing their members' interests through the family wage and trade protection; i.e., in developing the 'wage-earners' welfare state'. The corporatist strategy, by contrast, "accepts the logic of the market up to and including the point of the distribution of incomes and wealth, and seeks to modify it thereafter" (1988, p.106). It is difficult to reconcile this analysis with the Swedish emphasis on solidaristic wage bargaining, which clearly did constitute an attempt to alter the distribution of income generated by the market. It is hard to see on what criterion Sweden fails to be a 'wage-earners' welfare state', and Castles acknowledges that the Swedish labour movement has been very active in affecting the primary distribution of income (ibid.). Yet the Swedish labour movement also played a large role in the development of social security (particularly social insurance), whereas the Australian labour movement did not. The answer to this puzzle is that there is a much simpler explanation than 'labourism' of why the unions played little part in the development of social security 270 in Australia and New Zealand. This explanation also implies that protectionism and social security are not substitutes, and it will be shown that this is more consistent with the development of social security in New Zealand than Castles' model. The unions played little part in the development of social security because of their organisational limitations under the IC&A system. One limitation was that the unions had not developed insurance schemes for their members, and this contributed to the adoption of a tax-financed social security system by the Labour Government in 1938. After WWII, the unions in New Zealand were neither sufficiently politically influential, nor organisationally and strategically powerful, to emulate LO's campaign for ATP. The configuration of a strong state, a central role for electoral politics, and a union movement which exerted little influence on public policy, partly explains the absence of social insurance in New Zealand. (Other parts to the explanation include the preferences of a farming sector organised around small proprietors.) This political configuration produced protectionism and tax-financed social security. Tax-financed social security systems usually (but not invariably) lead to lower levels of benefit provision than social insurance systems, but for reasons which have nothing to do with protectionism. Higher expenditure may result when benefits are earnings-related rather than flat-rate or income-tested because of the strength of the political constituencies favoured by each structure. An insurance system supports some groups and excludes others on the basis of their work histories, and these exclusions may strengthen support for the system. Compared with a funded insurance system, a tax-financed system may be more vulnerable to government 271 expenditure constraints. Furthermore, beneficiaries rely on raising their profile at election time in order to obtain benefit improvements, whereas, in an insurance system with a corporatist management structure, benefit levels may be reviewed in the course of other negotiations with the labour market parties. The connections between corporatism, openness and social insurance on one hand, and statism, protectionism and tax-financed social security on the other, yield a broad scheme in which open economies have institutional welfare provision and closed economies have residual welfare provision. However, within this broad scheme, the intensification of protection may be connected with improvements in (tax-financed) benefits, and reductions in protection with reductions in benefits. In New Zealand, social security provision was at its most generous when the first Labour Government was in office and protection was at its most rigorous. In the 1980s, New Zealand has not moved towards more generous social provision as the economy has become more open. Instead it has moved towards a third model of laissez-faire, with decentralised wage bargaining, high unemployment, absence of industrial adjustment policies and minimal welfare provision. One explanation of this pattern is that protection has a positive effect on the fiscal capacity of the government, and openness a negative effect. The effect of this is to curtail social welfare expenditure under free trade and allow expansion under protectionism. A tax-financed social security system is more vulnerable to these effects than an insurance system. Traditionally, not much emphasis has been placed on fiscal capacity in the analysis of social policy, presumably because political pressures are seen as the most important determinant of revenue-raising by the 272 government. However, regardless of the political configuration, fiscal capacity will be adversely affected by unemployment, low output growth (particularly, a growth rate lower than the interest rate), and institutional problems such as a large informal economy. It was argued in chapter 4 that import licensing was an effective policy for reducing unemployment because it cut real wages while retaining the appearance of a fixed family wage. In chapter 5 it was shown that exchange controls enabled the government to operate a contracyclical demand-management policy, which it was otherwise constrained from doing. It is therefore possible to conclude that protectionism reduced both classical and Keynesian (demand-deficient) unemployment. By reducing unemployment, protection improved the fiscal capacity of the government. Under Labour, this capacity was utilised in the provision of social security. Under National, social security benefit levels were allowed to fall in relative terms, and import licensing was relaxed whenever possible. Politically, National's strategy was more resilient, perhaps because the social security system was highly redistributive, whereas National's approach to economic management tended to increase real incomes for all but the worst off. This changed in the late 1970s and early 1980s. In winning the 1975 election, National was drawn into lavish promises for old age pension provision, which quickly contributed to a deteriorating fiscal position. At the same time, the party became more and more 'dirigiste'. Despite its social conservatism, National was committed to the maintenance of full employment, and the full armoury of government powers was used to this end. Several years of low growth in real wages 273 created the political space for Labour to reappear in a new guise as the party of economic reform. The economic reforms initiated in the 1980s were intended to raise GDP and provide the basis for future GDP growth. Success would have enhanced the ability of the government to finance social security, insofar as growth in GDP enlarges the potential tax base. However, the immediate effect was unemployment, which worsened the fiscal position. As it happened, the reform process also coincided with a rise in world interest rates which further reduced the ability of the indebted government to finance social security, inserting a claim on tax revenue which took priority over social security. The reform process demanded a shift from implicit to explicit redistribution, but at the same time restricted the government's capacity to undertake redistributive policies. Conclusion Some conclusions can now be drawn about how New Zealand came to feature redistribution of types I and IV, and Sweden types II and III. It would seem that Olson is correct to suggest that a type IV system will not emerge from interest group activity. Instead such a system might be installed by a left-wing government able to mobilise popular support for redistribution through the ballot box, perhaps through a combination of voter risk-aversity, adherence to collective values of egalitarianism, and belief in the role of the state as the ultimate protector of the welfare of its citizens. Perhaps it is in the nature of such mobilisations that the resulting social security system is prone to residualisation, as the national emergency passes and the 274 collective perception of shared risks is replaced by a closer grasp of sectional differences. Contrary to Olsen's argument, however, the interest group approach also encounters some difficulties in explaining the use of type I protectionist policies. It has been argued in previous chapters that interest group activity was not the main reason for the introduction of import licensing in New Zealand. The willingness and ability of the state to assume powers of economic management was identified as the key feature of New Zealand trade policy. This explanation is consistent with the development of a type IV social security system by a popular left-wing government. The inability of Labour to obtain a firm grip on office in the postwar years left the social security system vulnerable to erosion through neglect, although electoral arithmetic could still product generous benefits, as for the aged in the late 1970s. The level and form of welfare provision in New Zealand would seem to be more connected with the exclusion of the labour market interest groups and the hegemony of the state than with protectionism as such, although clearly there is also a link between statism and protectionism. The New Zealand welfare state in the postwar years was based on a high level of government intervention in the economy, and a relatively small public sector and a limited benefit system, because this was the configuration preferred by the socially-conservative but interventionist rightwing government. The fourth Labour Government was possibly less socially conservative and more concerned to improve welfare provision, but its most distinguishing characteristic was that it was less interventionist. As the government's grip on the economy has weakened, so has its capacity to provide 275 social security. This has meant that the reduction in protectionism has been associated with a reduction in social security provision, contrary to the compensation/defence pattern. The failure of the fourth Labour Government in New Zealand to put 'compensatory' policies in place after opening-up and deregulating the economy suggests that the connections between economic openness and welfare state expansion are contingent on particular interest configurations and economic conditions. Fundamentally, there is no necessity for compensation to be provided. Katzenstein suggests that 'political eruptions' may arise if compensation is not provided, but it is also possible for groups experiencing adverse economic changes to be marginalised politically. Furthermore, it is far from clear that the provision of compensation for international vulnerability explains the extent of welfare activity in Sweden. This is not to say that economic openness and welfare state expansion are not connected; on the contrary, the political economy of corporatism provides a strong connection. But the connection does not take the form of compensation. LO sought extensions in social provision to enhance its organisational cohesion, which was not the same as ensuring that losers were compensated. Compensation would have perpetuated existing inequalities; interventions to promote 'solidarity' improved organisational cohesion. Solidarity led to much greater economic and social changes than would have occurred if compensation had been the objective. Katzenstein's analysis provides an interesting insight into the puzzle addressed by trade theorists, about why sectional interest groups lobby for 276 protection rather than compensation. Katzenstein is surely correct to argue that social insurance, retraining programmes and other social security arrangements are likely to be developed in a corporatist political environment. A sectionalist configuration of interests is itself an impediment of the establishment of comprehensive welfare provision. Small economic interest organisations will favour tightly-drawn transfers, contingent on economic location. These transfers can be contrasted with the different types of contingency used to select beneficiaries in social security systems. While social insurance is potentially more selective according to work history than type IV social security, insurance nonetheless puts claimants who have not experienced trade-related labour market dislocation on the same footing as those who have. Social insurance will therefore tend to be supported by larger and more encompassing interest organisations than those which support trade protection. The ironic implication is that 'compensatory' social security arrangements are more likely to be constructed in a corporatist political economy, but the large encompassing organisations of a corporatist system are not advocates of protectionism in any case, with or without compensation. In the absence of effectively-organised sectional interest groups in Sweden, it was not necessary to offer compensation to the working class for acceptance of free trade. Sectionalist organisations which are advocates of protection will reject compensation arrangements which cater for broader and less cohesive interests than their own. Politically, the strategy of preferring protection to compensation is rational for a small organisation, insofar as the lack of cohesiveness of the category receiving 277 compensation reduces its political influence and thereby reduces the levels of transfer which might be provided. Large organisations which favour comprehensive and universal policies will not generally support protectionism, although a central trade union movement might advocate protection if unemployment is high and it cannot coordinate a reduction in real wages by other means, nor persuade the government to implement employment-creation policies. (This would seem to be one explanation of why the central union confederation in New Zealand has advocated protection.) It has been argued that the labour force in Sweden has had to accommodate a much greater pace of restructuring than in New Zealand, with consequent geographical and occupational upheaval and change in the household structure and division of labour. Insofar as this restructuring has flowed from the free hand of capitalism, the implication is that economic openness reduces social welfare and creates demands for compensation. However the restructuring process has not been governed solely by capitalist imperatives. Instead the unions have shaped the restructuring process by their attempts to promote equality and maximise real wage growth. Furthermore, changes in the household structure and division of labour have been positively advocated and promoted by the political left. It is this positive promotion of social change in order to enhance welfare which makes it clear that protectionism and welfare expansion are not alternative routes to the same end. Protectionism in New Zealand was egalitarian in intent but also conservative, designed to maintain the existing gender division of labour as well as stabilising the occupational and geographical distribution of work. Free trade and welfare state 278 expansion in Sweden were accompanied by the construction of a thoroughly modern society in which old living patterns and traditional crafts and skills were respectfully but firmly consigned to museums. 279 Chapter 9 Conclusion This book has endeavoured to show that trade policy can give interesting insights into national political economy, by illustrating the complex interrelationships between trade policy choices and other aspects of economic structure and institutional arrangements. This complexity arises because interest groups operate in the economic sphere - in particular, in the labour market - as well as the political sphere. This means that trade policy becomes integral to such central problems of macroeconomic management as the maintenance of centralised wage restraint and the attainment of full employment. The trade policies of Sweden and New Zealand are interesting to compare because there were key common elements in the objectives of the social and economic policies operated by the two countries. Thus different trade policies were deployed in achieving similar, although not identical, outcomes. First among these outcomes was full employment. The attainment of full employment required putting in place policies to achieve wage restraint, on one hand, and to allow the conduct of contracyclical demand management policies, on the other. Free trade was consistent with the implementation of such policies in Sweden but not in New Zealand. According to the standard welfare economics analysis of trade policies, Sweden's choice of policy instruments was superior to New Zealand's. By expanding the welfare state and providing explicit transfer payments to achieve the 280 desired distribution of income, Sweden avoided the distortionary side-effects of implicit redistribution. This approach to the political economy of protection leads to explanations of protectionism based on the 'psychic costs' of explicit redistribution or the political advantages of disguising redistribution by keeping it implicit (Corden, 1974; Olson, 1990). This analysis offered by this book suggests that a somewhat different approach may be more fruitful. There are two strands to the argument. Firstly, implicit redistribution may be undertaken because the government is constrained from embarking on explicit redistribution by either political or economic considerations. Equally, explicit redistribution may have to be undertaken, not because it is more efficient, but because of constraints on implicit redistribution. Secondly, the outcomes from the two alternative types of intervention are similar, but not identical. Differences in objectives can provide part of the explanation of the choice of different instruments. Sweden was in a better position than New Zealand to expand aggregate demand in the Depression without imposing trade restrictions. However the Swedish Government was constrained to negotiate with domestic capitalists in order to avoid a capital outflow and thereby secure the 'international space' to implement a demand expansion. The product of that negotiation was a model of the mixed economy, in which the government refrained from direct intervention in business decision-making in the established sphere of private capitalist enterprise, but embarked on welfare and population policies which involved encroaching on areas previously organised by the household sector. In New Zealand, this negotiation did 281 not occur, which meant that the welfare state did not play a central part in Labour's economic policy. New Zealand's indebtedness in London, and the tense relationship between Labour and the British Government, meant that Labour had neither the means nor the inclination to achieve full employment while confining the government to a limited sphere of 'welfare' activity. The problem of means has perhaps a certain priority; indeed, in the development of the relationship between the Labour Government and London, one can see how the Government made a virtue of necessity, or adapted inclinations to means. Gustafson records how, after the introduction of exchange controls, Prime Minister Savage toured the country extolling the usefulness of controls in facilitating industrial development (1986, p.244). Labour's difficulties in borrowing in London were only partly political many borrowers faced constraints. But Labour then went on to reject international borrowing as a stabilisation policy on the basis that borrowing perpetuated a vulnerable, dependent relationship with London. Labour made a virtue of its refusal to accommodate its policies to capitalist interests. These being largely located offshore, Labour's policy had a highly nationalistic aspect. The relationship between capital and the state can therefore be seen to have a key place in explaining trade policy choices. In colonial New Zealand, the government was engaged in creating employment and nurturing small-scale capitalism. The weakness of the domestic capitalist class meant that, as the sovereignty of the government increased and its obeisance to London diminished, the government became more and more interventionist in economic policy. Political 282 independence became entwined with economic control. Sweden, for its part, developed as a thoroughly post-colonial modern economy, with political and economic power clearly separated, their boundaries explicitly negotiated. The relationship between capital and the state provides part of the explanation of the choice of trade policies in Sweden and New Zealand. The relationship between the unions and the state provides the other key part. Wage restraint was required if full employment was to be maintained. It has been shown that, in New Zealand, this restraint was effectively exercised by the government. In Sweden, LO played a key part in centralised wage restraint, and the choice of full employment policies was therefore influenced by the preferences of the central union confederation in a manner which did not arise in New Zealand. The analysis in this book of the relationship between LO and the Social Democrats has emphasised the potential for divergence between the objectives of the political and industrial wings of the labour movement. Broadly, it has been suggested that the necessity for the political wing to establish a broader constituency than the industrial wing leads the former to favour lower real wages, and therefore to be less opposed to protection. By the same reasoning, the political wing may prefer citizenship-based social security benefits, while the industrial wing may seek benefits based on labour force participation, and so on. Combining this approach with the designation of New Zealand as 'statist' and Sweden as 'corporatist', gives a fairly good fit to policy choices in Sweden and New Zealand. The preferences of the political wing dominated in New Zealand whereas the industrial wing exerted more influence in Sweden. 283 The discussion in this book suggests that economic openness will affect the bargaining pattern between the parties in the labour market, and that an open economy will tend to generate higher bargained real wages than a closed economy. In high income countries, the competitive sector will seek to maintain a high rate of technological innovation and change, generating ongoing increases in labour productivity which in turn drive wage demands in the competitive sector. In a centralised bargaining system, this will fuel wage pressure throughout the economy. In a closed economy, the rate of productivity increase is lower, leading to lower wage pressure. A government which foregoes protectionism is deprived of an easy technique for job saving, and must therefore find policies to create new jobs rather than maintain existing ones. Higher levels of geographical and occupational mobility of the labour force must be promoted than in a protectionist setting. While Sweden's active labour market policies were intended to achieve this mobility, some aspects of restructuring presented intractable problems. For example, when traditionally maledominated industries are in decline and new female-dominated areas of employment are expanding, the active labour market policy must either alter the gender division of labour or promote the labour force exit of men (e.g. through early retirement) and the entry of women. Such changes then rebound on other areas of social policy. Additional issues arise when openness is accompanied by corporatist labour market arrangements. In the Swedish case, centralisation was accompanied by a compression in wage differentials which entailed a loss of relative position for 284 competitive sector workers, generating further wage pressure. This compression can be seen as a consequence of the central union confederation's need to maintain organisational cohesion. In New Zealand's 'statist' regime, less compression occurred under centralisation, because state power was deployed in the place of internal union consensus and, therefore, the same degree of organisational cohesion was not required. Major changes in New Zealand's political economy began to occur as 'nontraditional' export producers, organised as large corporations and utilising wage labour, became more important. These producers believed their best interests to lie in rolling back the boundaries of the state both in trade and in the labour market. Furthermore, the negotiation between the state and capital which had produced the 'mixed economy' model in Sweden did not occur in New Zealand in the 1980s. While the government in power was notionally a Labour Government, the political pressures for the extension of social policy were not strong, and the financial pressures for restraint of government spending were more influential. The intellectual environment was also hostile. The ideas of Myrdal and Lindahl on the role of the state in facilitating the 'social reproduction' of labour had passed their time in Sweden without ever reaching New Zealand. While the expansion of the welfare sector proved to be a very effective means for creating new employment, the government in Sweden was unable to ensure that job creation in the competitive private sector proceeded at a sufficient rate. In the 1970s, pressure built up for more direct intervention in the capitalist sphere, for 285 example by the creation of employee investment funds. This change was accompanied by a deterioration in the performance of the centralised wage bargaining system. The Social Democrats became more and more closely involved in keeping the corporate compromise intact, while at the same time their political position was eroded. The relationship between political and industrial labour changed in the 1980s, departing from the scheme outlined above. The reason was that full employment ceased to be the key to constructing an electoral majority. It became possible to assemble a majority without maintaining full employment, by appealing to a constituency which believed itself to be at low risk of unemployment, and which sought to increase real wages and real disposable income (through tax cuts). With this change, the relationship between union and party objectives changed, and central union organisations sometimes seemed to show more concern with the interests of those with the highest risk of unemployment than the government. In New Zealand, this was reflected in the falling-out of the Labour Government and the trade unions, with the unions continuing to support protectionism while Labour embarked on deregulation. It was noted in the introduction to this chapter that there were differences in the objectives pursued by governments in Sweden and New Zealand. In particular, governments sought to maintain full employment in both countries, but full employment meant rather different things. Full employment in Sweden came to mean not only the elimination of open unemployment but also the elimination of 286 underemployment. As early as the 1930s, Wigforss was writing of "full employment at full steam" ("full maskin"), with the economy operating at the limits of productive possibilities (Lewin, 1967, p.99). Rehn pursued the analysis further, arguing that full employment meant the absence of persistent excess supply, either in the form of people not working seeking work, or in the form of people in work seeking better jobs (which they were qualified for). Rehn argued that unequal pay for equal work could not persist in conditions of full employment, strictly defined. This argument was related to the formulation of the solidaristic wage policy, with its emphasis on the 'creative destruction' of low-productivity jobs. Sweden's full employment policy was more ambitious than New Zealand's, and LO can be identified as the architect of these high ambitions, insofar as it was LO that pressed for policies that would maximise real wage growth and compress the wage structure. It could be argued that New Zealand's craft union structure contributed to a much greater emphasis on job security than in Sweden. A feature of protectionism, as was noted in chapter 8, is that it can provide job security, whereas many other employment policies demand some occupational flexibility from the workforce. The union structure in Sweden made unions more willing to forego job security. However, since that union structure was itself partly shaped by the strategies of competitive employers, who were not prepared to provide job security and who demanded flexibility from their workforces, it can be seen that union structure and trade policy are endogenously determined. New Zealand's craft union structure was as much a consequence as a cause of protectionism. One can devise a long list of historical factors which made the social 287 disruption of free trade more acceptable in Sweden than New Zealand. An environment of poverty and emigration was more fruitful ground for socioeconomic transformation than one of prosperity and immigration. The poverty of subsistence agriculture in Sweden can be contrasted with the romantic (and fanciful) attachment of New Zealanders to the ideal of self-sufficiency. Social conservatism in New Zealand meant that importance was attached to maintaining men's jobs, while public sector expansion in Sweden saw male employment decline and female employment expand. The differences in the economic position of women in the two countries have long and deep roots in the shortage of women in colonial New Zealand and the opposite situation in nineteenth century Sweden. The list could be extended, but it is long enough to show that the choice of different trade policies in Sweden and New Zealand derived from differences in the socio-economic structure that were quite fundamental. Both sets of trade and employment policies were coherant attempts to resolve the tensions and conflicts that arise in market economies with democratic political systems. It should be no surprise that neither model has proved to be indefinitely sustainable. So long as the distributions of political and economic power are different, contradictions will arise. Solutions may be formulated and compromises reached, but no permanent equilibrium is possible. 288 Appendix Labour Force Growth and Utilisation Changes in the level and structure of employment constitute the underlying dynamic in the development of the welfare systems of Sweden and New Zealand. Changes in labour productivity, household structure and external trade relationships are reflected in the sectoral structure of employment. In Sweden two distinct directions of change in the sectoral structure are readily discernible - the rise in industrial employment at the expense of agriculture from 1890 to 1960, and the rapid rise in service sector employment since 1960. Changes in the sectoral structure of employment in New Zealand have been much slighter, reflecting the slower pace of economic change (table 10.1). The same is true of the labour force participation pattern: it has been much more stable in New Zealand than in Sweden (table 10.2). Despite the importance of agriculture to the New Zealand economy, the proportions of the workforce engaged in agriculture, industry and services were roughly equal in 1881 (Table 10.1). The high and steadily rising proportion of employment provided by the service sector in New Zealand reflected the employment in commerce, finance, transport and communication generated by the agricultural export trade. It also reflected the general prosperity of the country, high per capita incomes generating strong demand for services. In Sweden service sector employment also grew in importance as the economy developed, but not as rapidly as industrial employment. The importance of industrial employment reached its peak at the beginning of the 1960s in both countries, with 46% of employment provided by industry in Sweden on the old classification (whereby repairing was included under industry). The corresponding peak for New Zealand was only 36%. The growth of the industrial sector is reflected in the pattern of labour force participation in Sweden (Table 10.2). Before the turn of the century rather low participation is recorded for both men and women. This reflected the large population in agriculture. Swedish statistics drew a distinction between those classified as economically active in agriculture and the population dependent upon agriculture. The latter group included wives, children, servants living-in, retired farmers, widows, paupers and others deriving support from agricultural households (Carlsson, 1966, pp 284-285). Table 10.1 shows that between 1880 and 1920 the workforce in agriculture and forestry rose by 58,000 or 5%. However the population aged 15+ rose by 36%, and employment in industry and services rose by 261%. There was thus a rapid fall in the size of the adult dependent population (i.e. an increase in the participation rate, for both men and women). This largely reflected the move out of agriculture, along with the expansion of waged work and the contraction of household-based activity in agriculture. The increase in the participation rate is partly the consequence of conventions which undercounted the agricultural workforce, by excluding wives, daughters and servants living-in. However insofar as the reorganisation from household labour to wage labour was accompanied by increased productivity, the statistics provide an 289 indication of the increased rate of labour force utilisation brought about by the growth of the industrial sector. In interpreting the labour force data, it must be noted that neither Sweden nor New Zealand used the activity principle in defining their labour forces until the 1960s. (The activity principle states that a person's labour force status should be determined on the basis of what the person was actually doing.) The designation of a person as a member of the labour force was based not on the hours of work done, but on a concept of status in Sweden and 'usual occupation' in New Zealand. This approach ruled out any systematic recording of part-time work. 290 Table 10.1 Sectoral Distribution of the Labour Force Sweden Men and women employed, in thousands, and total employment by sector as a percentage of total employment. Agriculture Industry % of % of Men Women Total Services % of Men Women Total 1880 742 333 66.2 154 1890 773 327 63.5 219 1900 782 328 57.2 339 1910 783 306 50.2 478 1920 806 327 43.5 655 1930 798 301 38.0 750 1940 768 153 30.7 877 1950 587 79 21.4 1056 1960 416 51 14.4 1210 (Figures revised in accordance with UN SNA: see notes) 1960 407 39 13.7 1140 1970 221 55 8.1 1114 1980 152 54 5.5 993 291 Men Women Total 17 30 51 96 154 187 207 223 291 10.5 14.4 20.1 26.5 31.1 32.4 36.1 41.2 46.3 137 164 203 275 347 430 518 625 644 92 112 142 191 289 407 444 509 621 14.1 15.9 17.8 21.5 24.4 28.9 32.0 36.5 39.0 257 260 264 43.1 40.3 33.5 730 871 998 670 891 1281 43.2 51.6 60.7 New Zealand Men and women employed, in thousands, and total employment by sector as a percentage of total employment. Agriculture % of Men Women Total 1881 54 1 29.2 1891 71 3 29.2 1901 90 4 27.6 1911 108 7 25.3 1921 130 9 26.2 (Sectoral classification revised: see notes) 1921 135 9 26.4 1936 157 6 25.3 1951 126 10 18.4 1961 119 10 14.4 1971 111 18 11.5 1981 112 32 8.4 Industry Men 58 76 103 128 127 107 140 213 272 315 325 292 Services % of Women Total 6 34.0 11 34.4 16 35.0 20 32.6 22 28.1 20 27 43 55 78 92 23.3 25.9 34.6 36.5 35.1 31.3 % of Men Women Total 33 17 26.6 56 28 33.4 76 43 34.9 118 60 39.2 144 80 42.3 150 185 226 275 351 411 78 98 117 158 232 314 41.7 43.9 46.5 48.4 52.1 54.4 Table 10.2 Participation Rates Sweden Population aged 15 + Men Women 1880 1890 1900 1910 1920 1930 1940 1950 1960 1970 1980 1463 1510 1660 1807 2016 2244 2497 2662 2892 3138 3292 1614 1681 1810 1964 2159 2373 2573 2729 2954 3195 3410 Labour Force Lab Force as % of Pop'n Men Women 1174 1254 1410 1572 1827 1997 2190 2285 2278 2206 2149 450 477 531 596 775 898 810 818 966 1207 1604 293 Men 80.3 83.0 84.9 87.0 90.6 89.0 87.7 85.8 78.8 70.3 65.3 Women 27.8 28.4 29.3 30.4 35.9 37.8 31.5 30.0 32.7 37.8 47.0 New Zealand Population Labour aged 15+ Force Men Women Men Lab Force as % of Pop'n Women Men 1881 165 117 163 25 1891 207 170 207 45 1901 275 240 275 66 1911 372 321 364 90 1921 429 408 416 114 (Sectoral classification revised: see notes) 1921 429 408 417 129 1936 562 549 505 139 1951 683 685 569 171 1961 805 811 670 225 1971 966 987 785 334 1981 1130 1166 877 456 Women 98.8 100.0 100.0 97.8 97.0 21.4 26.5 27.5 28.0 27.9 97.2 89.9 83.3 83.2 81.3 77.6 31.6 25.3 25.0 27.7 33.8 39.1 Notes: Participation rates are usually expressed in terms of the population aged 15-64; this has not been done because of deficiencies in the age/sex data for Sweden over the period covered. Furthermore, the concept of "working age" population has changed over the period with changes in retirement practices. Participation rates for the 1564 age group over recent years are given in chapter 8. In the early decades for which data are presented, adult participation rates in both countries are overstated to the extent that children under 15 were in the workforce. This factor, along with the small number of old people in the population, helps to account for the 99-100% participation rates recorded for adult males in New Zealand. Hours worked: Prior to 1950 hours worked are not specified in either country's source data. For New Zealand since 1950 and Sweden since 1970 data are for those working 20 hours or more per week. Data for Sweden in 1950 and 1960 are for those working at least half of normal working hours. No census was conducted in New Zealand in 1931, because of the depression, nor in 1941, because of the war. Maori were separately ennumerated until 1951. Neither Table 10.1 nor 10.2 include Maori before that date. The total Maori population was 44,000 in 1881, 50,000 in 1911, 82,000 in 1936 and 116,000 in 1951 (Bloomfield, 1984, p 42). Before 1951, most Maori would have been classified as engaged in agriculture or as "general labourers" 294 (see below). Sectoral breakdown: Agriculture includes forestry and fishing. Industry includes mining, manufacturing, construction and public utilities. Services include finance, commerce, transport and public and personal services. Percentages in each sector do not add to 100% because of unclassified workers. In Sweden some 149,000 workers or 9% of the labour force, mainly men, were unclassified in 1880. A similar situation arose in New Zealand, with 19,000 workers or 11% of the labour force classed as "general labourers" in the 1881 census. The number and proportion of unclassified workers then declined in both countries. In the 1921 census in New Zealand the classification was revised from an occupational to an industrial basis. The main effect of the revision appears to have been the discovery of 16,000 additional women workers - most of whom were, however, unclassified. The high participation generated appears to have been an aberrant result: in the 1926 census the participation rate dropped back to 28.1%. The 1921 census also saw a number of men classified in the occupational breakdown left unclassified in the industrial breakdown. The sectoral classification of the workforce was revised in Sweden in 1960 in accordance with the U.N. Standard System of National Accounts. As can be seen from the two sets of figures for 1960, the effect of the revision was to increase the number included in the service sector at the expense of industry and agriculture. The sectoral classification for New Zealand was revised in 1971 and had a similar effect. 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