NZ Initiative's Eric Crampton says the living wage movement and pushes to increase the minimum wage to the living wage can easily do more harm than good

By Eric Crampton*

A funny thing happened in the last round of American minimum wage increases. The number of people in unpaid internships went up.

You might think that those would not be linked, but think it through. Kids starting out need to gain work experience. They need to prove that they are reliable and that they can behave professionally. Entry level positions paying the minimum wage are the traditional way of doing this.

In American data, minimum wages are low enough that they do not have substantial effects on overall employment. But what effects they do have are concentrated among younger and low-skilled workers.

And when young workers needing to prove themselves are priced out of the market because it is illegal to pay them what they are really worth in their first year on the job, they need to find other ways of doing that.

Working for low wages is illegal, even if it is sufficiently beneficial for young workers that they are willing to work for free. It might seem a bit perverse that a desire to help low income workers forces more people into unpaid work, but it should not be surprising.

High minimum wages knock the bottom rungs out of the employment ladder. Families that are rich enough can use internships to give their kids a boost on to the first remaining rungs. Others cannot. And calls to ban unpaid internships utterly miss the point.

It is easy to understand public support for high minimum wages. Too many low-skilled workers wind up for too long in low paying jobs, and it seems entirely unfair that people can work very hard for decades for so little reward. Part of the general social compact is that those who play by the rules and work hard should be able to afford to raise a family. Cue the living wage movement.

Kids starting out in their first jobs and low-skilled middle-aged workers trying to scrape together enough to raise families are in fundamentally different positions. There is no way of setting the minimum wage to help those most in need of assistance without killing opportunities for those starting out.

When AUT’s Gail Pacheco and Tim Maloney looked at the data, they found that a quarter of minimum wage workers came from households in the top four deciles, and only about 40% of minimum wage workers came from households in the bottom three deciles.

Because minimum wage work is not that strongly concentrated in low-income households, minimum wage hikes have little effect on overall household poverty rates. In their simulations, a 10% increase in the minimum wage reduced poverty rates by only 0.08 percentage points – under the assumption that nobody lost their job.

When potential job losses are factored in, the anti-poverty effects are even smaller. Pacheco elsewhere estimates that a 10% hike in the minimum wage reduces hours worked by young Maori by seven hours per week.

And one Canadian study found that increases in the minimum wage did more to push households below the Canadian Low-Income Cut-off line than it did to bring households out of poverty: second earners whose incomes were critical to keeping their families out of poverty lost their jobs.

The living wage movement, and pushes to increase the minimum wage to the living wage, can then easily do more harm than good. Plenty of workers need the experience that they would be denied when lower wage jobs are banned.

Even on its own grounds, the living wage figure fails. The hourly figure promoted is based on a set of assumptions about living costs, including that those on low incomes never shop around to find lower cost food outlets and never ever buy anything on coupon specials.

But there is a better way. And, we already have it.

Working for Families provides a boost to the wages of low income workers in lower income households supporting children. The burden of supporting those workers’ wages then falls, through the tax system, on the childless and on households on higher incomes.

Working for Families also means that a disproportionate part of any hike in minimum wages winds up going to the government through reduced WFF payments.

Where hikes in the minimum wage can discourage job creation and encourage firms to automate tasks that could be undertaken by lower skilled workers, WFF supports lower income households without killing jobs.

On Radio New Zealand’s Sunday Morning panel, Laila Harré argued that paying a living wage should be the employers’ responsibility. But not all tasks employers need to have done are valuable enough to warrant pay rates that are enough for a middle aged worker to raise a family.

Those jobs get killed under high minimum wages, along with the bottom rungs of the ladder that kids from disadvantaged backgrounds especially need to get into employment. The burden of high minimum wages falls on the employers of lower productivity workers, on their customers, and especially on lower skilled workers who lose the chance to have a job.

The burden of supporting lower income families is borne more equitably when shared through the tax system.

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*Eric Crampton is head of research at The New Zealand Initiative which provides a fortnightly column for interest.co.nz..

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24 Comments

Or in other words, we are a bunch of parasites who don't want to pay our workers, and would rather that our cronies in government robbed taxpayers in order to subsidise us, and we're so greedy and short-sighted that we are totally fine with collectively eliminating the disposable income of our customer pool. And look at that shiny thing over there and don't google to find the many studies that refute this and showed that a higher minimum wage boosts the economy.

Good article. And it doesn't even mention robots, which can work 24/7, seem not to have reached the point where they feel the need to join a Union, and have never been known to raise a PG....

When robots unionise there will be problems.

There's a lot of talk in the article about minimum wage, UBI isn't minimum wage. A separate debate altogether and in fact the original debate was in the mid 1800s. The concept of minimum wage would destroy jobs, the same as outlawing child labour, that was going to destroy jobs.

Fact is the jobs are already destroyed, get some spending to create more jobs. Instead of neoliberal propaganda articles.

Some reasonable points but overall an enumeration of all the negatives of minimum wage controls.
It indicates an apologetic approach or reverse engineering to support ones view.

BAsed on this, why don't we just do away with minimum wage altogether - surely the market will right itself and people will be paid fairly for the job they do. And if not, they can always use coupon books.

Exactly! the free market solved the housing shortage in Auckland, didn't it?

There has never been a 'free market'. The crisis is essentially caused by local regulation; strangling supply with rules driven by NIMBYism. All done over a very long time frame. It won't be easy to fix; too much embedded self-interest, too little 'good public policy'.

"There is no way of setting the minimum wage to help those most in need of assistance without killing opportunities for those starting out."
That is entirely wrong, one of the ways is through an apprenticeship or other work training leading to a recognised qualification or, perhaps just work experiance and a referance at the end of it. You start off on a low/non live-able wage and rise to a reasonable income as your value increases. We already have done this, what's the problem.
I started my apprenticeship in 1972 with $29 weekly take home pay, I think it was 40% of the minimum wage for a tradesman. Great system, no debts, everybody's happy.

Every argument against UBI so far has been an argument against the way we are already doing things. What is needed is change.

The whole basis of his argument is the same old debasement of labouring people as only worth what the market will pay, it took legislation in 1840 to get a 8 hour working day mandated does anyone now argue that this was a bad idea? In the last century and a half the increases in productivity have accrued upwards to the professionals and capital what we need a a new mandated working week, 32 hours, 4x8 hour days that would redistribute the benefits more fairly

It's as if they don't teach economic history during the economics lectures. Perhaps the NZ Initiative should burn their worthless degrees.

This is why people who vote for right wing parties and earn less than 200k are shooting themselves in the foot.

Don't understand why you think this argument opposes the points made by Crampton.

Your description of a system whereby young people have the opportunity of "an apprenticeship or other work training leading to a recognised qualification or, perhaps just work experience and a reference at the end of it" starting with a "low/non live-able wage" - is precisely what the "living wage" idea would make impossible.

"What's the problem" - it is that under a "living wage" it would be illegal to pay anybody a "low/non live-able wage".

It is pleasing that even the orthodox right wing arguments have moved to supporting a decent income for people, both because that is the morally correct thing to do, but just as importantly, for an economy to work well, there needs to be sufficient spending power across enough people to drive demand and keep the wheels fully turning. (When I first started visiting here WFF was vilified by rightwingers as a loony communist invention of Helen Clark).
Now there is a sensible debate about whether wages should be regulated to achieve this outcome, or whether the government/taxpayers should achieve it.
I suspect the right answer is a mix of both- a reasonable minimum wage to not only protect low wage workers, but also to support ethical businesses from lowest common denominator competitors; and also some government support for specific circumstances and needs.
In the UK, the government is pushing higher wages in order to get close to reducing its own deficit, rather than a real moral commitment, or even a compelling economic argument. In time we may get those pressures as well.
I still and increasingly believe the world's tax systems will evolve to be at least partly money printing funded government, to manage an evolution back to a slightly more equitable income mix, and also to fund infrastructure and other necessary outcomes, without formally taxing people at levels that will have other negative economic consequences.

No mention yet of the price setting mechanism in a free market. Increased incomes mean people can afford more and price levels rise. Back to square one. Yes, you can find empirical evidence of minimum wage rises followed by economic growth, just as you can find the opposite. I don't think we understand enough about the other factors at play which influence growth or otherwise, too much focus has been placed on the minimum wage being the driver.

Given much of the western world is entering a period of deflation, is pushing up the price of labour a wise idea? I think not...

It is a good article, but it is unbalanced. A core question to this debate must be what are the costs that the average person faces? If accomodation costs were reduced to more affordable levels, what would a living wage be? If trucking companies were not subsidised by all road users, what would the living wage be? Ifr banks and insurance companies were better regulated to be less parasitic, what woul;d a living wage be? If all the above were combined what would a living wage be? How does the TPPA impact on calls for a living wage? This question is too complex, because the whole of the economy needs to be scrutinised and many questions need to be asked, not least because there is only 4.4 million people to draw any tax from.

Does Crampton really understand supply and demand? Until the cost of labour becomes too much for the market to justify there will be demand. At that point a substitute for the demand will occur which can be paid for.
One example is $10 meals at Indian restaurants in Auckland. If because the tax and labour authorities chases them out the price will rise and punters will still buy a meal at $11>$12 etc until balance restores.
A few less buyers at higher prices does not kill the product.
These prognostications from Crampton are academic logic only and well divorced from the real world.

What about a system where wages (PAYE only) are set to annual house price inflation. And then, slap in a law where owning more than 3 properties (residential only) is illegal. That should even things out a bit?
Ohhh, and NO non residents allowed to purchase a damn thing!

System like that would work once housing inflation cools.

I do not myself see anything wrong with professional long term landlords owning say 20 houses that make a life long living at the business, ie 30+ years, in fact they are essential IMHO. What we need to do is have a CGT so the incentives for the speculators and casual tax dodging general public disappears. That should leave someone making a decent life long living via the income and some capital gain on retirement, perfectly fair and acceptable to me.

People like Eric advocate pumping up house prices and rents meanwhile paying lower and lower wages. It's sickening.

Agree, and then look where ACT is in the poles, 0.4% or something. So most NZers agree that the neo-liberal way is a disaster, yet we get this tripe from extremist right wing "think tanks" constantly thrown at us.

Oh look. Relevant anthropological study is relevant:

https://www.theguardian.com/science/2016/apr/04/study-shows-human-sacrif...