By Jason Krupp*
Later this month the Wellington City Council is expected to require all council-owned businesses and contractors to pay their employees a living wage if they don’t already as part of the long term planning process.
To some, it may seem like a sensible measure to pay people on the bottom rung of the employment scale a minimum $18.40 an hour as a means helping low-income families in our society (the exact level is yet to be quantified). Certainly, the council bought into that logic in December 2013 when it voted to adopt the living wage for staff, giving 450 employees a significant boost in salary.
At the time, the council was applauded by Living Wage Aotearoa for adopting the measure, but the anti-poverty group was disappointed that it did not apply to contractors. That gripe now appears to have now been addressed, with eight councillors voting in favour of the proposal and five against in a preliminary vote.
This is problematic and concerning for three reasons. First, it ignored the economic reality of what happens when you boost pay levels in a way that is not linked to productivity. Second, the motion was passed with very little public consultation. And third, there is a very real prospect that Living Wage fever may spread to other government bodies.
Let us tackle each in turn.
It is well-established in economics that when you raise the price of a good, demand for it will fall. The same applies to labour, which is just another input into a business, and firms are likely to pass on these additional costs to customers where they are able, or reduce how much labour they use in their operations. It also distorts the labour market, particularly weighing on those marginal employees, such as young people entering the workforce with few skills or experience, who would be employable at $15 an hour but not $18.40.
Of course there will be some winners, namely those who receive the higher wage, but on a net basis it may do more harm than good when factoring in job losses.
But because Wellington City Council is not a business, it neatly sidesteps this tricky issue because it sells a product that the city’s residents are compelled to consume. But that does not mean it is a free lunch. It is the city’s businesses and residents who ultimately bear the costs of the Living Wage in the form of higher rates bills. They have to make tough decisions about what to cut back on to pay for the council’s wage bill largesse.
Now Wellington City Council is having another crack, this time by dictating what private businesses will pay their staff. Of course, those businesses that want to maintain their contracts with the council will either reduce their total labour costs or pass them onto the city. Either way, the net effect is broadly the same: fewer jobs or hours worked for those on the lowest pay scale even if the pay is higher for some.
Treasury has previously officially rubbished the Living Wage, saying it is an ineffective way of helping families on low incomes for all the reasons discussed above, and because the benefits of the scheme accrue to single people without children, not to the targeted group.
And that is what makes the council’s lack of public discussion on the topic so galling. The council has already chosen to ignore official advice and the mountains of economic evidence on the topic, and is instead doubling down on their ideology by not allowing those who are negatively affected by the measure to have their say.
But perhaps the biggest threat of all is that the ideological thinking that has gripped Wellington’s local politicians spreads. Auckland Council, for example, employs upwards of 11,000 people, including council-controlled organisations. How much would a Living Wage cost residents there, who have already had to swallow a double-digit increase to their rates bill?
Even worse, it could spread to central government, which employs over 36,000 people in core government services, never mind the private firms contracted to do work for the state. It is was only applied to the ministries of social justice, health, education and the Accident Compensation Corporation at a rate of $18.80 an hour, it would cost $541 million a year.
Extending the idea out to its fullest, if local councils and central government adopted the living wage across the board it would require a massive increase in taxes to pay for it. It would decrease the number of people able to pay tax while increasing the state’s welfare burden due to rising benefit costs. It would also severely distort pay levels in the private sector.
This is just one scenario, it may not play out this way exactly, but it would push up the costs of government services, which the Initiative’s head of research Eric Crampton has expounded on in more detail here.
Wellington City Council needs to unblock its ears on this issue and listen to the evidence at hand as to why the Living Wage is a bad idea.
In the end, there are no shortcuts, and if workers want to earn higher pay they have to lift their productivity. Of course, it is overly glib to simply say “increase your productivity” to the genuine working poor. But these groups are better serviced by targeted transfers, such as wage subsidy schemes like Working for Families, rather than the Living Wage, which may be well-meaning but may do more harm than good in the real world.
If there is a legitimate concern about why we have so many workers taking home an “unlivable wage” then our focus is better directed on the core of the problem: why is it that people going through the education system are not being equipped with marketable skills in the first place?
*Jason Krupp is a research fellow at the New Zealand Initiative. This is this week's NZ Initiative weekly column for interest.co.nz.