Living Wage fallacy destroyed by facts

The Treasury has destroyed the fallacy and fantasy that is the living wage. A number of people far more qualified than me to comment have written about it.

Lindsay Mitchell wrote a column in Truth about this and she republishes it:

The ‘living wage’  idea poses more questions than it answers.

Apparently the proposed non-compulsory hourly wage of $18.40 is based on the needs of a family with two children, with one full-time and one part-time worker.

But someone with dependent children who is earning less than the living wage will almost certainly be receiving  Working For Families assistance.

As well, someone without children might be receiving an accommodation supplement which helps with rent, board or a mortgage.

Because these are income-tested payments, they reduce as the employee’s salary or wage increases.

Under the living wage scenario then, an employer would pay more, but in many cases the worker’s income would remain the same as he progressively loses other government assistance, especially the accommodation supplement.  Who has gained? Neither of them. The gaining party would be the government. 

David Farrar has handily had someone from Bill English’s office give him some key points.

[T]reasury 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?

Eric Crampton though summarises the silliness of the policy.

I love this chart from Treasury’s advice on living wage proposals.

Living Wage

There’s a morbid part of me that wishes the thing would be implemented as a minimum wage – the resulting substantial increase in unemployment would do a good job of settling certain empirical debates about the effects of minimum wages. I don’t really want it implemented: some data points are just too expensive to acquire.

He then summarises the key points.

Other key points in the Treasury information release:

  • The group that produced the $18.40 figure based it on what would be needed to sustain a family of two adults and two children. Treasury notes that families with two adults and two children make up only 6% of families currently earning below the $18.40 living wage. Three-quarters of families earning below the living wage have no kids; sixty-three percent are single adults with no dependents. Twenty-nine percent of low-earners are in families with family income greater than $60,000.
  • After taking into account abatement of income-tested benefits for those with kids, the living wage would do far more to subsidise those without children. The biggest benefit would go to families with two low-earners with no children, conditional on both of them keeping their jobs.
  • The proposed living wage is just shy of the median wage. Employment effects are then likely to be large: MBIE reckoned 25,000 job losses. We would also expect reductions in staff benefits and reduced hours.
  • If the goal is to improve outcomes for low-earning families with young children, it is better to consider some mix of:The policy would further hinder manufacturing.
    • Shifting WFF towards parents with younger children
    • Targeting ECE subsidies more strongly (I agree entirely; see here)
    • Fix benefit abatement rates to encourage 3-5 days of work;
    • “Making our system of service interventions for children aged 0-5 years more focused and integrated.”
  • Minimum wage increases have substantially outpaced CPI but have not helped increase average wages; we shouldn’t expect this hike to do better.
  • We’d reduce the incentive to acquire skills because the policy would attenuate the returns to upskilling.

I love it when Treasury makes it very clear that some proposed policy is a very bad idea.


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As much at home writing editorials as being the subject of them, Cam has won awards, including the Canon Media Award for his work on the Len Brown/Bevan Chuang story.  And when he’s not creating the news, he tends to be in it, with protagonists using the courts, media and social media to deliver financial as well as death threats.

They say that news is something that someone, somewhere, wants kept quiet.   Cam Slater doesn’t do quiet, and as a result he is a polarising, controversial but highly effective journalist that takes no prisoners.

He is fearless in his pursuit of a story.

Love him or loathe him.  But you can’t ignore him.

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