What is a living wage?

The first job I ever had was babysitting the neighbours’ children when I was 14.   My pay rate of $5/hr was almost 20% below the minimum wage, but that only applied to people over 20 anyway.   Besides, the kids generally weren’t any trouble, so I was happy to be paid $5/hr to basically do my homework and watch Beverley Hills 90210.

The essence of this story is that there was a voluntary transaction taking place.   I was offered work and told the pay rate and could take it or leave it.   I had little bargaining power but was not being forced to work.   I could choose to make do with my pocket money or improve my financial wellbeing by taking the work.

Ahead of the election, Labour is promoting a lift in the minimum wage from $13/hr to $15/hr.   Labour has also proposed bringing in different minimum wages across different industries.  These policies assume that workers have no bargaining power in their wage negotiations and need government or union assistance to ensure they are treated fairly.   But what do minimum wages actually achieve?

Minimum pay rates should provide workers with an incentive to contribute to the economy rather than living off welfare.  Work offers some intrinsic rewards, but few people are going to give up 40hours of leisure time if it does not significantly lift their income.   The current minimum wage is substantially above the unemployment benefit.   Before tax, a married couple can get $375 per week on the dole, or $520 if just one of the couple works a 40-hour week.   The financial rewards of working are even better for single people.

Historical comparisons are also revealing.   Relative to average consumer prices, the minimum wage reached its highest level on record in 2010.   Minimum wage workers are able to buy more than ever before.

Unite Union’s tagline around the $15minimum wage has been "campaign for a living wage", implying that this improved purchasing power is not enough.   Unite is unhappy that the minimum wage represents only 52% of the average wage – the union would like that ratio to be66%.   Yet relative to average wages, New Zealand’s minimum wage is already the highest in the OECD.   Only during the 1960s in Greece, the Netherlands, and New Zealand have minimum wages been above 66% of the average wage.

The record-high ratio between the minimum wage and consumer prices implies that minimum wage workers are better off, in absolute terms, than ever before.   But the comparison with average wages implies that minimum wage workers are worse off, relative to other people in society, than they were prior to 1978 (see Graph 2).   In other words, our perception of how appropriate the minimum wage is depends on whether we consider poverty to be an absolute measure, or whether the "poverty line “should adjust over time.   Certainly today’s poorest families would look relatively well-off by the standards of 100 years ago.

Proponents of a higher minimum wage will disagree, but increased wage costs do affect firms’ appetite to hire additional workers.   When unemployment is above average, a minimum wage increase improves the wellbeing of people already employed at the expense of those who are out of work.   Unions exist to look after their members.   If you don’t have work, you can’t be a member, and so you’re not their responsibility.

What about the idea of different minimum wages across different industries?   This arrangement could lead to the government or the Workplace Commissioner making moralistic judgements about what type of work is "worthy" of a higher minimum wage.   Supermarket workers could be paid less than cleaners who would be paid less than rest home workers.   Firms would be given little chance to target different segments of the market – fast food workers could be paid the same as waiters at high-end restaurants despite the dining experience and profit margins being much lower at the local burger bar.  And any cost increases that are passed on by firms will only reduce the newfound income boost of minimum wage workers.

Don’t get me wrong – there is a place for regulation around employment conditions.   There are undoubtedly many employers who care little for their workers’ wellbeing.   But current employment laws ensure minimum workplace standards, and our welfare system already provides safety net that gives people some latitude in demanding reasonable compensation for giving up their leisure time.

Labour believes it can raise New Zealand’s average living standards by artificially pushing up the people at the bottom.   In reality, the best solution is an improved economic performance that drives down the unemployment rate.   When that occurs, employers will have no choice but to pay more – for both high-skilled and low-skilled workers.

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