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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  • Dick Brown

    Literally no one is surprised.

    I love it when pie in the sky is dismantled by mathematical reality.

    • blokeintakapuna

      Reality is for people who can’t handle their drugs… Or Labour Party propaganda.

  • thor42

    What I *love* about DPF’s article is that he’s said that the “living wage” proposal would help the *government* more than low-income families!

    This “living wage” proposal is a wonderfully-vulnerable point of Labour and the Greens. I hope they really push it in election year.

  • blokeintakapuna

    Well those facts will derail Labours policy just as much as Key did to Labours “buy an audience” campaign when he was mobbed In Christchurch giving free audiences everywhere yesterday.

    How horribly inconvenient for Labour. Stymied by facts and popularity. Looks like they will need to stick with inventing crisis’s and remaining unloved to The tune of $1500 per voter.

    • opusx

      Sheeze Labour, just come up with some viable policies that will make me want to tick your box…it’s not that fucking hard is it…don’t you want to run the country FFS?

    • James Growley

      Absolutely. The cretins never let facts, primary evidence or the truth get in the way of their tawdry pork barrelling. The really sad thing is some numpty’s believe every word that comes out of their lying mouths.

  • CheesyEarWax

    The living wage is a Nigerian scam, the only difference is the perpetrators lives in NZ. Its designed to increase union memberships at the cost of jobs, which ironically their member’s jobs. If its sounds to good to be true then its a scam.

  • BJ

    Despite this document absolutely killing their credibility the Labour Part will still be talking up the living wage along with the ‘desire’ for Gisborne rail reinstatement and a national power company – along with every other hair brained dishonest ‘policy’ at their ‘meeting’ this weekend

  • Almost all my staff are paid more than the living wage, with many earning considerably more. But if I was forced to pay the school leaver on her gap year who we took on this year $18.40/hr, wouldn’t I then be obliged to increase the pay of the admin girls on $19? Then the admin manager would want a pay rise too, and fair enough; she’s paid more than the other staff for a reason; the value she delivers to the business. And so it goes on, right to the top.

    I have done the sums on the living wage, and in our business of 50 staff, we’d be looking at an increase in the wage/salary bill in the order of $150,000 per annum. We don’t have anywhere near that amount of cash in the budget, so we would have to make economies elsewhere. What is our single biggest cost? Yep; wages and salaries.

    You can’t simply order businesses to pay more. That is where the living wage campaign, though well-intentioned is fatally flawed.

    • Tony

      An alternative to the pay relativity that you describe would be the fact that many other employers would be in a posn of getting rid of pay increases for the better performers. Everyone would tend to get paid at a rate which they do not deserve: the low productivity/low skill team would get more that they are economically worth while the better workers would get less than they were worth.

      In my business we use low-skill people but pay them much more than the proposed living wage (plus bonuses for great work) b/c they are working hard. If an increase in the minimum wage were to happen we would have little opportunity to increase the number of people we employed and would just make our current team work harder. So – increase the minimum wage will mean a lower overall tax take.

    • LabTested

      I have a business in eastern Europe which was once low wage. As wage pressure grows we have now reached a point where our mindset is to use technology if at all possible. We will jump through hoops not to just throw more staff at the problem.

      Business is growing, but we have woken up & cut head count

      • rockape

        If you have a business in east europe you should talk to purple square.

    • blokeintakapuna

      … And flawed because those proposing it have no real idea how to generate the funds required to actually pay for it.

  • Mr_Blobby

    Yes the only winner will be the Government. The hard done by cleaners, are just Pawns in a political game. Even if they get a pay rise with the abating of a multitude of assistance, they will be no better off. Assuming that they still have a job in the first place.

    Businesses in a competitive environment being limited in what they can charge will look to reduce costs, say clean the toilets only every 2nd day and reduce the full time job to part time or generally cut back the hours.

    This does not apply to Government and Councils as they can just pass the costs on.

  • emmess74

    I can’t understand why the left would want to give a cleric more power than even the clerics have in a theocracy like Iran in this area of the economy

    A minimum national wage applies to each sector of activity as defined by the Supreme Labor Council. In 2009 this was about $263 per month ($3,156 per year).

  • Col

    Yep it sure is showing that Labour/Green have no idea, they just pick a number and say we will do that, just haven’t done the HOMEWORK.

  • Meg

    Common sense from Bill Maher on the living wage.