Former Economics Editor of the NZ Herald

Brian Fallow: More to living wage than meets eye

Lesieli Moua, one of Auckland Council cleaners paid below the living wage. Photo /  Michael Craig
Lesieli Moua, one of Auckland Council cleaners paid below the living wage. Photo / Michael Craig

The Treasury has dumped a monsoon bucketful of scorn on the campaign for a living wage. But the case for such a campaign withstands the deluge. In a report released last Friday, the Treasury argues the "living wage is not well targeted at the intended demographic of low-income families".

It thinks the $18.40 an hour figure the campaigners are calling for is too high, and says that if widely adopted, it would cost jobs, push up prices and require an increase in taxation.

The question is whether hard-working parents, working 60 hours a week between them, should be able to earn enough from their wages to give a couple of kids a minimally decent start in life.

Living Wage Aotearoa New Zealand defines a living wage as "the income necessary to provide workers and their families with the basic necessities of life".

It is transparent about how the $18.40 a week figure has been arrived at. It is spelled out at length in a report by the Family Centre Social Policy Research Unit, whose authors say "it embraces small but important things like being able to to pay for children to enjoy a school trip, having a computer in the home and being able to mix with friends recreationally, albeit modestly".

It allows, for example, $275 a week for the roof over their heads. That wouldn't stretch far in Auckland.

It is above the thresholds for hardship or poverty but below - though not much below, the Treasury contends - the median wage.

The Treasury says "adopting a living wage would rebalance the role of the employer and the welfare system towards work being the primary mechanism for people to support themselves".

Isn't that as it should be?

"It would, however, also move the focus of the support from young children to adults, particularly young adults. It would not change the income for those families that are solely dependent on welfare payments."

The living wage has been calculated on the basis of a family of two parents, with one and a half fulltime jobs between them, and two dependent children.

But the Treasury says that only 21 per cent of those earning less than the living wage have children. Of that group two out of seven are sole parents.

Another 16 per cent of those earning less than the living wage are in families consisting of two adults but no children.

Of course that may be because they can't afford children on the wages they earn. It's not self-evident that a living wage would be, so to speak, wasted on them.

Of the remaining 63 per cent of low-wage earners who are single and without dependants more than two-thirds are young.

"Almost all teenagers work for less than $18.40 per hour, as do about 70 per cent of those in their 20s. Together these make up 43 per cent of the people below the living wage," the Treasury says.

Given the normal life-cycle pattern, "raising the floor on wages will, therefore, always provide the greatest benefit to younger people and especially those in their teens and early 20s".

Two observations seem relevant here.

One is that the living wage is not the minimum wage. It is voluntary. And given current rates of youth unemployment you would not expect to see a lot of upward pressure on wages for that part of the labour force.

Secondly, New Zealand is bleeding young people in their 20s who look around them and then head for the international air terminal.

In any case, the Treasury acknowledges that "about a third of people aged between 30 and 65 earn below $18.40".

It goes on to argue that in most families with children but wage rates below the living wage level, the Government would pocket the lion's share of the increase in wages through tax and the abatement of means-tested income support.

It calculates that for a family of two parents and two children, where one partner works 40 hours a week for $16 an hour and the other 20 hours a week for the minimum wage of $13.75, and where they pay $380 a week to rent a three-bedroom house, the living wage would raise their take-home pay by $63 a week, or just over $1 an hour.

But it would leave the Government $126 a week better off through the tax and transfer system.

By contrast, a single adult working 40 hours a week on the minimum wage would be $75 a week better off.

"The proportion kept by the earner is particularly low for sole-parent families." That is the family type most at risk of persisting in the low-income bracket.

"Students on student allowances also keep only a small portion of the increase."

This line of argument assumes that abatement thresholds and rates for various kinds of income support, and the consequent zone of high effective marginal tax rates, stay where they are.

Parliament could always adjust them.

But even if it doesn't, the living wage would reapportion the cost of providing something like a decent standard of living to a significant number of New Zealanders away from the welfare state and on to the businesses that employ them.

Because another way of looking at the same figures would be to say that the status quo provides a subsidy from taxpayers to employers.

The tax and transfer system allows them to get away with paying less than a living wage.

It is similar to the argument that the $2 billion a year the Government pays in accommodation supplements is really a subsidy to some landlords, allowing them to decouple the rents they charge from what the incomes of their tenants would bear, and consequently to pay more for the properties they invest in.

Having concluded that the living wage is not well targeted at supporting low income families, the Treasury goes on to offer alternatives.

"However the Government has a range of interventions and services set up across the major sectors of health, education and welfare that are intended to assist families and individuals with low income.

"If Government were to improve these interventions to lift the living standards of low-income families, there are a number of possibilities including shifting Working for Families [tax credits] towards parents with younger children, targeting early childhood education subsidies more strongly and shifting the benefit abatement regime to incentivise three to five days of work."

As for the economy-wide implications, in the parlance of Facebook relationships, it's complicated.

A significant rise in the wage level would have all sorts of ramifications, some positive, some not.

It would depend on how widespread the adoption of a living wage was and in which sectors.

There is no sign in the Treasury report that it has put a higher wage level through a large model of the economy.

The effect of higher wages could be eroded by higher prices, it says. The Ministry of Business, Innovation and Employment has calculated an inflationary impact of 1.3 per cent.

"But this does not take into account some of the dynamic adjustment employers are likely to use to minimise the impact. We would therefore expect the actual figure to be lower than this," the Treasury says.

At the margin, to the extent it pushed up inflation it could have an effect on interest rates, the real exchange rate and the competitiveness of exporters and firms competing with imports.

On the other hand, as one firm's employee is another's customer, an increase in disposable income could be welcome in some sectors.

The impact on employment is also debatable. The living wage is voluntary, after all. A firm which expected to lose a material amount of business as a result just would not adopt it.

And if a firm could adopt it without a loss of output but at the expense of a drop in staff numbers, well that is an increase in productivity and the economy could do with more of that.

As for the impact on public finances, the upward pressure on expenditure from the Government's role as an employer and through the procurement of goods and services from the private sector would be offset to some degree by the very fiscal savings the Treasury cites when arguing that a living wage would be poorly targeted.

Debate on this article is now closed.

- NZ Herald

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Former Economics Editor of the NZ Herald

Brian Fallow is a former economics editor for the New Zealand Herald. A Southlander happily transplanted to Wellington, he has been a journalist since 1984 and has covered the economy and related areas of public policy for the Herald since 1995. Why the economy? Because it is where we all live and because the forces at work in it can really mess up people's lives if we are not careful.

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