The Economics Behind the Living Wage

Labour's leadership competition has brought a renewed focus on the concept of a living wage and has created a clear difference between the National led Government and opposition parties.

The Government and many business interests claim that a living wage is unaffordable. Despite the unfair discrimination experienced by some groups (such as the female dominated sectors of care, cleaning and clerical work) it is claimed that in a supposed recession fairness is a luxury we can't afford. The fact that many of these underpaid women are also having to support families on their meagre wages (contributing to our shocking child poverty statistics) has become acceptable collateral damage while attempting to "balance the books".

According to the Herald and Statistics NZ almost 40% of all wage and salary earners are paid less than the living wage ($18.40). Over 700,000 workers are struggling on minimal wages and 270,000 children are being brought up in households experiencing poverty.

It was clearly revealed by the research supporting the The Spirit Level, that when great inequalities exist, everyone suffers. John Key estimated that establishing a living wage for all will cost the country $2.5 billion, this can be easily questioned when one considers the money that would be saved by introducing it.

Establishing a living wage for all would potentially save the Government:
  • $6 billion annually in child poverty related health and education costs.
  • $3 billion annual cost of the Working for families income supplement (or employer subsidy).
  • $1.2 billion annual cost of the accommodation supplement (or landlord subsidy).
  • $62 million in emergency food grants.
The total saved in government spending if most people earned a living wage could be over $10 billion dollars. Obviously when incomes increase so does the amount of tax paid. If 700,000 thousand people were each to earn $2 more per hour, it would contribute around $.5 billion in extra tax revenue. 

It is easy to work out where Key's $2.5 billion comes from because when I added $2 an hour to the incomes of 700,000 people, and estimated that they would work an average of 30 hours a week (given the number in part-time and casual jobs), I got a total figure of  about $2.2 billion. Obviously the cost of this increase will be shared by both the government and the private sector and businesses will benefit from increased spending in the domestic economy and the government will be paying less on benefits, and earning more in revenue. In the private sector the majority of workers paid the minimum wage are employed by large companies that are generally very profitable and increases in productivity over the years have not been reflected in wages. Many small and medium sized businesses already pay well above the minimum wage. A thorough cost benefit analysis of introducing a living wage may even produce a positive outcome.

The Government is prepared to spend $12 billion on roads that have failed economic analysis, yet is not prepared to even measure the extent and cost of poverty and what it would take to address it. Given that there would be huge benefits from establishing a living wage, and the economic costs are obviously not nearly as bad as claimed, it is clear that this Government has no real interest in improving the lives of struggling New Zealanders. 


Cassandra said…
This is not economics, it is arithmetic. It is also a classic example of static analysis. It completely ignores dynamic effects.

Why do employers employ people? They employ them to produce something a customer wants. No employer will pay an employee more than they are worth. So if you raise wages to $18.40 an hour you will effectively abolish any job that does not have a marginal productivity of $18.40 an hour or more. Such jobs will be automated or combined with others.

None of this applies to local authorities of course as they are totally sheltered from reality.

If you want to raise living standards, making NZ a richer country might be a good start.
bsprout said…
Cassandra, you are misguided on so many points.

"No employer will pay an employee more than they are worth."

This ignores the fact that many employers pay their employees far less than they are worth. If you take Ryman Health care as one example, they have lifted their underlying profits 11 years in succession and one of the ways they manage this is by keeping wage costs and training down. This may support profit but it undervalues the importance of providing quality care and paying staff accordingly. This has had disastrous consequences as was revealed in the Malvina Major Resthome.

"If you want to raise living standards, making NZ a richer country might be a good start."

Workers are not mere commodities and in a resource rich and relatively underpopulated country we should be able to pay living wages. We are actually already a rich country but there is increasing inequalities in how that wealth is distributed. The very rich have seen their collective wealth grow between 15-20% over the last three years while those in the bottom 25% are lucky to see a 2-3% increase and the median family income has dropped.

There is a case for saying that if a job is not worth paying a living wage, it is not a real job. It should not be the role of Government to provide income and accommodation supplements to effectively subsidise wages for an employer who can afford to pay more.

The minimum wage should be only for those who are starting out their working lives with little qualifications and productivity and yet we have around 30% of workers being paid near that rate and it is almost criminal when people still earn near the minimum wage after 20-30 years. Too many businesses pay the minimum rate just because they can and not because they can't afford to pay more. It makes sense to reduce costs where ever possible to maximise profits.

It upsets me when I see experienced teacher aids working with extremely difficult, high needs children (that no inexperienced young school leaver could possibly do) and yet they get paid the same as a 16 year old stacking shelves under supervision.

Paying Wanganui Collegiate $3.9 million to keep an elitist school open for 400 students of wealthy families is a luxury. Spending the exact same amount of money to lift 2,000 care workers into a living wage is a necessity.

This issue is more about priorities and will than affordability.
Anonymous said…
Dave Kennedy, here is the deal. For your suggestion to have ANY credence with us here is what you will have to do:

1. Start your own business (not just bludge of the missus as an ex primary school teacher)
2. Make a profit
3. Employ at least 2 people on the living wage.

Then you will get my vote.

Over to you.
bsprout said…
Nickynine, avert personal comment coming from someone hiding behind a nom de plume.

If running a business involves employing a number of staff, ensuring there is enough money to pay them, writing job descriptions and employment agreements, and undertaking appraisals-then I have some idea what it is like running a business. I have had a leading role in those very responsibilities while on the governing committees of the Anderson Park Art gallery and the Southern Farmers Market:

In both organisations are non profitable but we have had to do everything a business has to do and more. It involves market research, writing business plans and budgets, advertising, generating income and constant reviews of our effectiveness. Holding on to good staff and recognising and rewarding their work is a big part of that.

I would I be interested to know what your background is?

bsprout said…
I had difficulties writing the above in a transit lounge, the beginning of the first sentence should read "a very".
Anonymous said…
I don't know how you could have provided a worse answer, or one that was funnier.

Picture the scene - a greenie who openly despises all things capitalist, using his smartphone while waiting to hop on a plane - probably paid for by taxpayers. Hard to know what is bigger, your hypocrisy or your carbon footprint.

Who I am is none of your business. I am not the one proposing to interfere with everyones life because I think I know better.

And no, being in governance of a not-for profit is nothing like putting your own capital up and working it along with all the risk and twats like you sticking your oar in.

And if your concept of governance is to write job descriptions and advertising etc, you have no idea of the function of governance.

I would like to know if the farmers market and the andersons park trust all pay 'living wage', GST, Tax etc?

Just curious, as I am sure are both your other readers.

Do tell, it won't be hard to find out.
bsprout said…
Nickynine, You are demanding transparency and honesty from myself while remaining anonymous yourself. I am sorry to say that you have a very warped and narrow view of Green Politics and you appear to be using this to make some outlandish (and abusive) accusations.

Governance takes many forms depending on the size and capacity of the organisation in question. Perhaps management committee would be a more apt term. However you cannot say that I have no understanding of what it means to run a business and I'm sure many of the National Party cabinet have no direct business background either. A number of our Green MPs have run businesses and David Clendon, our business spokesperson, has an extensive background in business management.

In many ways running a not-for-profit organisation is more stressful than private enterprise because you have wider responsibilities than just your employees and many more constraints in obtaining capital and generating income.

You seem to have been sucked into the belief that Greens are effectively communists. This is utter nonsense and you obviously have not read our policies or listened to Russel's interviews or speeches.

The Greens support private enterprise except in areas such as public health and education where it doesn't necessarily create positive outcomes. The privatisation of our power generation and supply has been a particular disaster that has put unnecessary constraints on businesses where a reasonably priced electricty would provide a competitive advantage.

We believe however that businesses should be largely sustainable and a good example would be the Pure Advantage business alliance which largely reflects our approach. New Zealand has already missed out on many sustainable business opportunities that would be good for our economy over the long term due to poor leadership from our Government.

Business should be able to survive without subsidies and I am particularly concerned at how the Government is currently subsidising wages and landlord incomes to the tune of billions of dollars. I would suggest that anyone who supports capitalist values and allows this to happen is a hypocrite of the highest order.

Your implication that Greens should be like the Amish is pure nonsense and your accusation that my travel is taxpayer funded is bizarre and desperate. Your comments display a high level of contempt for myself and a determination to discredit me that is concerning. I have no idea what motivates you in this but making wild accusations (and many of a personal nature) with an complete lack of objectivity does not do you credit.

Anonymous said…
So that is a yes or a no to paying the 'living wage' you propose, for the companies your provide 'governance' for?

bsprout said…
In the two institutions that I am involved with, that employ staff, all employees are paid well above the minimum wage and the majority are being paid well above the living wage.

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