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.