The living wage may need an urgent look, but it needs to be a balanced one

In a story entitled "NZ living wage needs urgent look, Massey University and AUT researchers say", the New Zealand Herald reported today:

What could a New Zealand living wage look like?

A team of researchers have begun investigating the concept, which they say could help struggling, low-paid workers and tackle mounting challenges regarding poverty and productivity.

Massey University psychologist Professor Stuart Carr, who is co-leading the new three-year study, said living wages usually refer to higher minimum wage rates, derived from calculations of the material cost-of-living needs of a hypothetical household unit.

"However, the broader concept of living wages goes much further," he said...

The research team saw an urgent case to examine the area.

They said working poverty had "soared" due to low pay, insecure work that provided interrupted or insufficient hours of paid employment and rising housing, energy and food costs – all of which disproportionately affected women, younger and older people, and Maori and Pacific people in particular.

Researchers say that while a national minimum wage is a legal floor intended both to provide protection for workers and encourage fair competition among employers, minimum wages were now widely recognised as failing to provide sufficient cost-of-living income.

"This is due not only to the growth of informal work, poor awareness and weak enforcement of wage laws, but mainly to minimum wage rates not matching increasing living costs and the realities of precarious work," said Professor Jim Arrowsmith, of Massey's School of Management.

 Investigating the living wage is important, but it's difficult to see what canvasing four employers ("a city council; a public-sector Maori organisation; a Pacific social enterprise; and a local small or medium-sized enterprise") will tell us. Especially when there is already a wealth of research on the effect of higher minimum wages.

Much of the theoretical background (and some of the evidence) was summarised by Jim Rose (of the Taxpayers' Union) in an interesting report on the living wage earlier this year (full report here; summary here). While much of the report is a rebuttal of points made by the living wage movement (their report is available here), there are some general points that need to receive a bit more air, starting with:

The economics of a unilateral living wage policy by an individual employer is different to that of a minimum wage increase.

This is a point I have made before. The living wage may be good for employers, but not if all employers pay a living wage. That effectively increases the minimum wage, which is probably not a good idea.

The main reason that most people use to support imposing a living wage is to help reduce poverty, or especially child poverty. However, if you hold that view then you need to confront the fact that:

The Treasury (2013) estimated that 79% of households earning pay below the living wage rate have no children; 6% are sole parents; the remaining 15% of households are couples with children (see graphic below). Almost all teenagers and majority of adults in their twenties earn below the living wage; 29% of low income workers live in families whose income exceeds $60,000...

This is a point that Eric Crampton has made before too (see for example here). So, a living wage would not be well targeted, and as Eric has also pointed out, increasing Working for Families would be a better option than increasing minimum wages. The reason is that a lot of the increase in the living wage would be lost to tax. According to Rose:

The living wage increase has a much smaller effect on the take-home pay of employees with families because of a reduced Working for Families tax credit. In its 2015 Minimum Wage Review, the Ministry of Business, Innovation and Employment (2015) calculated that a couple working 60 hours between them on the minimum wage lose over 40% of a living wage increase to reduced Working for Families and to tax...

Ok, so let's leave the higher minimum wage aside, and consider individual employers (rather than all employers) paying a living wage:

Any employer who unilaterally introduces a living wage is simply raising their hiring standards. The workers who previously won the jobs covered by the living wage increase will not be shortlisted because the quality of the recruitment pool will increase. The Council must by law hire on merit so only those who currently earn $18- $20 in other jobs will be shortlisted for living wage vacancies. These recruits are on about the living wage now so they do not benefit from the living wage policy...

Workers who would not have previously applied for council jobs because they can earn more elsewhere will now apply because of the higher pay. These better paid applicants will crowd out the applicants of the minimum wage workers who currently win these jobs. Living wage advocates do not discuss what becomes of these low-paid workers who are no longer shortlisted. They should.

This is a point that we don't see raised nearly enough. A rational employer will employ labour up to the point where an additional hour of wages costs the same as the revenue it generates. So, if you pay a higher wage, then workers need to be more productive (see also this post). Rose's report addresses this point in some detail, providing a range of evidence (including New Zealand evidence) that suggests a living wage raises hiring standards. The key point is that employers want to be sure that the higher wages will be justified by higher worker productivity (as measured by higher revenues to offset the higher wages).

But what about public sector employers, where revenue is (arguably) less of a consideration? Rose writes about an Auckland Council proposal for a living wage:

Mayor Goff said he could pay for the living wage increase by cutting costs elsewhere... If these expenditures such as on better fleet management and group procurement are of low enough value to be reprioritised to fund a living wage policy for no loss of service, ratepayers are entitled to ask why the expenses were incurred in the first place.

Indeed, if there are cost savings that can be made (with no loss of service) in order to afford a living wage, then why are those cost savings not already being made? Was Auckland Council simply wasting ratepayers' money previously? In reality though, most 'cost savings' are mythical so I'm not sure we can really buy the argument that a living wage would be paid from cost savings anyway. Nevertheless, productivity is still a consideration for public sector services, and the New Zealand evidence in the report does seem to demonstrate that hiring standards increased when Wellington City Council became a living wage employer.

There's a lot of interesting points made in Rose's report, based on a range of theory and research in labour economics. If you're not familiar with the literature, it's well worth a read for that alone.

Coming back to the future research by Carr et al. that led this post, I'll be interested to see what they find. However, I'm not holding my breath that it will be a particularly balanced view, given how it has been reported so far.

Read more:

• Want a living wage for everyone? Raise productivity first
• The living wage is good for employers; unless lots of employers pay a living wage