Welfare and economic impacts of Fair Pay Agreements in Aotearoa

This paper performs the first quantitative economic analysis of the proposed Fair Pay Agreement (FPA) and analyses the welfare (or wellbeing) implications and economic effects of the proposed FPA for Aotearoa New Zealand. The new FPA system is designed to address weaknesses of the labour market in Aotearoa. Using a standard dynamic macroeconomic model with labour market imperfections via search and matching frictions calibrated for Aotearoa New Zealand, we simulate the macroeconomic and welfare effects of the FPA. To be precise, we model an increase in worker's bargaining power. We find that this labour market reform will reduce overall welfare (or wellbeing) in the economy and will lead to increased unemployment, lower production and incomes, and higher inflation. In conclusion, while the reform will increase wages, it will reduce overall welfare and harm the economy and should, therefore, not be implemented.