Living Wage proposal would mainly help the Government, not low income families

Bill English has announced:

The “living wage” campaign claims a minimum hourly pay rate of $18.40 is necessary for a family of two adults and two children. But Treasury analysis shows that not just the figure, but the concept, is flawed, Mr English says.

“It might sound politically attractive to be able to dial up a pre-selected made-up wage rate, but for higher wages to be sustainable they have to be based on productivity and affordability in real workplaces,” he says.   

The “living wage” idea is based on a two-adult, two-child family, yet analysis shows that people in this situation make up only 6 per cent of families earning less than $18.40 an hour. 

This is the point I have been trying to make. It is a calculation for a particular type of family (which are just 6% of all households) and to have politicians lemming-like insist it must be a minimum wage for everyone is moronic.

Almost 80 per cent of those earning less than $18.40 are people without children, including young people and students.

When Labour says everyone must be paid the living wage, they are saying that a 16 year old starting his or her first job must be paid $18.40 an hour or over $38,000 a year!

The analysis shows that the “living wage” would least help low-income families whose welfare support would abate as their income rose. In those cases, the main beneficiary of the living wage would effectively be the Government because it would receive more in tax and pay out less through abated transfers.

It is quite legitimate to debate how to have higher wages. But the living wage is a slogan, not a policy.

The Treasury also notes that although New Zealand’s minimum wage has grown faster than the median or average wage over the past decade, it has not increased average incomes relative to other countries.

You raise wages through productivity, not through legislation.

The Treasury analysis is here. Some extracts:

• A low wage two parent family with two children would only gain $63 a week from the living wage while the Government would gain (via abatements and extra tax) $126 a week!
• Very low incomes tend to be temporary – only 24% of those in the bottom income decile in 2002 were in that decile seven years later
• 43% of those who earn below the living wage are aged under 30
• The living wage would only reduce the relative poverty rate by 0.3%!!

Treasury suggests four other measures which would help low income families without the bad consequences of the living wage:

1. Shifting Working for Families towards parents with younger children
2. Targeting Early Childhood Education subsidies more strongly
3. Shifting the benefit abatement regime to incentivise 3-5 days of work, and
4. Making our system of service interventions for children aged 0-5 years more 
   focused and integrated.

Treasury also point out that the calculation used for the living wage is basically not based on any empirical evidence such as need:

The figure chosen is essentially an average of  the estimated current expenditure of the lowest half of the income distribution, and close to two thirds of the national average expenditure of two adult, two child households. Thus it is a relative measure of income and not one based on 
estimating need.

So Labour and Greens have trumpeted the living wage as the amount calculated that a family needs to live on, and are basing their policies on it. But it isn’t based on what a family need to live on. It is simply based on a percentage of average expenditure (which of course is based on income).

Also you know how Labour and Greens say there is a crisis in manufacturing? Well guess what the living wage would do to that sector:

Manufacturing is the biggest industry to have experienced negative employment growth over the period. With 40 percent of its workforce earning below $18.40, adoption of the Living Wage could be expected to put further downward pressure on the industry’s growth.

And on the issue of our minimum wage:

In 2011 our minimum wage was 60% of the median earnings for full-time workers. This was amongst the highest ratios in the OECD, and well above the level found in most countries which is typically around 45%. For instance, the ratio was 45% in Australia, 38% in the United Kingdom, 40% in Canada, and 28% in the United States. Increasing the rate still higher to 88% of the median wage would take the minimum wage well outside the normal range. This is likely to make employment for people with low skills difficult in an internationally focused economy.

We already have one of the highest minimum wages in the world, relative to the median wage.

And the living wage compared to other countries:

The proposed $18.40 Living Wage is also high compared to the other Living Wage rates being proposed by similar groups overseas. Compared to Australia, Canada, USA, and the UK, it is the highest proposed Living Wage relative to GDP per capita

A great way to export jobs.

Also treasury says that only 12.5% of FT employees are paid less than 2/3rds of the median wage which is one of the lowest proportions in the OECD. The US is 24.8%, UK 20.6%, Canada 20.5% and Australia 14.4%.

Excellent analysis by Treasury. The data fatally undermines the policies being pushed by Labour and Greens. Only 6% of those who earn below the living wage are in the type of family the calculation is based on. Who would you set wages for 94% based on a situation which doesn’t apply to them?

Political commentator David Farrar posts at Kiwiblog